As filed with the Commission on January 11, 2002 File No. ___________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
DBS INDUSTRIES, INC.
(Name of small business issuer in its charter)
Delaware 7389 84-1124675
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
100 Shoreline Highway, Suite 190A
Mill Valley, California 94941
Telephone: 415-380-8055
(Address and telephone number of principal executive offices)
Fred W. Thompson, President and CEO
DBS Industries, Inc.
100 Shoreline Highway, Suite 190A
Mill Valley, California 94941
Telephone: 415-380-8055
(Name, address and telephone number of agent for service)
With copies to:
Eric J. Stiff, Esq.
Bartel Eng & Schroder
300 Capitol Mall, Suite 1100
Sacramento, California 95814
Telephone: 916-442-0400
_________________
Approximate date of proposed sale to the public: As soon as practicable after
the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ x ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
Pursuant to Rule 429, this registration statement also relates to 545,000 shares
of Common Stock previously registered on Form SB-2 (Commission File No.
333-77687), 856,300 shares of Common Stock previously registered on Form SB-2
(Commission File No. 333-63513) and 4,178,051 shares of Common Stock previously
registered on Form SB-2 (Commission File No. 333-41690).
CALCULATION OF REGISTRATION FEE
===============================================================================================
Proposed Proposed
maximum maximum Amount of
Title of each class of Amount to be offering aggregate registration
securities to be registered registered (1) price per offering price fee
share (2) (2)
- -----------------------------------------------------------------------------------------------
Common Stock to be offered by 7,911,621 $ 0.24 (3) $1,898,789 $ 454
selling security holders
Common Stock (4) 2,380,952(4) $ 0.24 (3) $ 571,428 $ 137
Common Stock (5) 2,035,364(5) $ 0.24 (3) $ 488,487 $ 117
Common Stock (6) 5,364,461(6) $ 0.17 - $2.50 $2,992,408 $ 715
Common Stock (7) 545,000(7)
Common Stock (8) 856,300(8)
Common Stock (9) 4,178,051(9)
Total Registration Fee $1,423
===============================================================================================
(1) In the event of a stock split, stock dividend, or other transaction
involving our Common Stock, the number of shares registered shall
automatically be increased to cover the additional shares in accordance
with Rule 416(a) under the Securities Act of 1933, as amended ("Securities
Act").
(2) Estimated for the sole purpose of calculating the amount of the
registration fee pursuant to Rule 457(c).
(3) Fee calculated in accordance with Rule 457(c) of the Securities Act. Based
upon the average quotation of the bid and asked price per share of the
registrant's Common Stock on January 7, 2002, as reported on the OTC
Bulletin Board.
(4) Issuable upon the conversion of a convertible debenture in the principal
amount of $500,000. The debenture is convertible into shares of Common
Stock based on the five day average closing price immediately prior to the
conversion date.
(5) Issuable upon the conversion of series B convertible preferred stock. Each
share of preferred stock is convertible based on the three lowest closing
bid prices of our Common Stock for the 20-day trading period immediately
prior to the conversion date.
(6) Issuable upon the exercise of warrants to purchase Common Stock. The
exercise prices range from $0.017 per share to $2.50 per share.
(7) These shares have previously been registered on Form SB-2 (Commission File
No. 333-77687) and a fee of $2,741.00 was previously paid.
(8) These shares have previously been registered on Form SB-2 (Commission File
No. 333-63513) and a fee of $6,482.00 was previously paid.
(9) These shares have previously been registered on Form SB-2 (Commission File
No. 333-41690) and a fee of $3,004.00 was previously paid.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
1
PROSPECTUS Subject to Completion
January __, 2002
DBS INDUSTRIES, INC.
Common Stock
________________
This prospectus relates to the resale by the selling security holders of up
to 23,271,749 shares of Common Stock. The selling security holders may sell the
Common Stock from time to time in the principal market on which the stock is
traded at the prevailing market price or in negotiated transactions.
We will not receive any proceeds from the sale of shares by the selling
security holders. However, we have received proceeds from the sale of shares
that are presently outstanding and we will receive proceeds upon the exercise of
any warrants that may be exercised by the selling security holders.
Our Common Stock is traded in the over-the-counter market and quoted on the
OTC Bulletin Board under the symbol "DBSS.OB." On January 7, 2002 the average of
the bid and asked price of our Common Stock was $0.24 per share, as reported on
the OTC Bulletin Board.
Investing in the Common Stock involves a high degree of risk. You should
invest in the Common Stock only if you can afford to lose your entire
investment. See "Risk Factors" beginning on page 7 of this prospectus.
Neither the Securities Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
______________________
The date of this prospectus is January __, 2002.
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Please read this prospectus carefully. You should rely only on the information
contained in this prospectus. We have not authorized anyone to provide you with
different information. You should not assume that the information provided by
the prospectus is accurate as of any date other than the date on the front of
this prospectus.
The following table of contents has been designed to help you find important
information contained in this prospectus. We encourage you to read the entire
prospectus.
TABLE OF CONTENTS
Forward-looking Statements.....................................................3
Prospectus Summary.............................................................3
Risk Factors...................................................................7
The Offering..................................................................16
Use of Proceeds...............................................................19
Price Range of Common Stock...................................................19
Dividend Policy...............................................................20
Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................................21
Business......................................................................27
Management....................................................................43
Selling Security Holders......................................................55
Plan of Distribution..........................................................59
Certain Relationships and Related Transactions................................60
Description of Securities.....................................................61
Certificate of Incorporation..................................................63
Legal Proceedings.............................................................63
Legal Matters.................................................................63
Experts.......................................................................63
Where You Can Find Information................................................63
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, as that term is
defined in the Private Securities Litigation Reform Act of 1995. These
statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks in the
section entitled "Risk Factors," that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Except as required by applicable law,
including the securities laws of the United States, we do not intend to update
any of the forward-looking statements to conform these statements to actual
results.
As used in this prospectus, the terms "we," "us," "our," and "DBSI" mean
DBS Industries, Inc. and its subsidiaries, unless otherwise indicated.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this prospectus. This summary is not complete and does not contain
all of the information you should consider before investing in the Common Stock.
You should read the entire prospectus carefully, including the "Risk Factors"
section.
The Company
DBS Industries, Inc. is a development stage company dedicated to providing
low-cost and secure satellite/telecommunications solutions for remote
infrastructure monitoring and control of energy and its transportation. Through
our ownership interest in E-SAT, Inc., we are the only company currently
licensed by the Federal Communications Commission, or "FCC," to provide
commercial two-way data messaging using code division multiple access technology
and low-earth-orbiting Little LEO satellites. We plan to begin providing our
data messaging services on a commercial basis by early 2002, utilizing satellite
capacity we have contracted from Iridium Satellite, LLC for a period of seven
years. At the same time, we plan to continue to pursue development of our E-SAT
satellite system as a more permanent source of satellite capacity.
Financial difficulties in the satellite sector and sharp declines in
telecommunications and technology sectors have made it difficult for us to
attract the necessary system construction financing to complete the E-SAT
system. As a result, in 2001 we initiated a "show me" strategy, taking advantage
of the telecommunications downturn to purchase low-cost satellite capacity and
combine it with the energy communications technologies and expertise we
developed over the past ten years. To date, we have not recognized any
significant revenue and do not have any customers; however, our objective is to
both produce revenue and prove market demand for our services in early 2002.
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In June 2001, we completed a seven-year operator-to-operator agreement with
Iridium Satellite LLC, the purchaser of the Iridium system out of bankruptcy,
gaining low rates on satellite capacity and limited exclusivity through a
revenue sharing arrangement.
Also in June 2001, following the first successful demonstration of turning
on and off a 60-ton shopping mall air conditioner by satellite, before
representatives of the California governor's office and the media, we entered
into negotiations with the State of California to provide satellite-based energy
management services. In August 2001 we submitted a proposal to the California
State Consumer Power and Conservation Financing Authority, referred to as the
"Power Authority," for the use of a satellite-based voluntary command
conservation program designed to conserve significant electrical usage on demand
at peak or emergency times. Discussions are continuing as of the date of this
filing, and there can be no guarantee that the State of California will actually
enter into such an agreement with us . (See "Risk Factors--State of California
Contract").
To aid us in our ability to deliver load curtailment services, we have
engaged Arthur D. Little, Inc. to provide engineering services, Bechtel
Corporation to provide program management services for deployment, as well as
Iridium Satellite LLC for the satellite capacity.
We believe that our use of Iridium's L-Band satellite capacity will be
complementary to our ultimate VHF-Band E-SAT system. This is primarily because
the E-SAT system operates in the VHF spectrum that does not require a sky view
from the satellite to the remote device. The Iridium system operates in the
L-Band spectrum and does require a sky view, which prohibits the placement of
the devices inside buildings or in other locations where there is no direct view
of the satellite.
Both of these systems are low-earth-orbiting, or "LEO," satellite systems
that we believe offer significant advantages over competing systems and
alternative customer solutions, including:
Global coverage: Using a Little LEO satellite-to-internet system, we will
be able to provide reliable, global, two-way data and messaging
communications services.
Low cost: Unlike terrestrial systems, no incremental communications network
infrastructure is required for new locations, regardless of how remote they
are. In addition, both the Iridium System and the planned E-SAT system
require fewer ground stations than other satellite solutions. In Iridium's
case, this is because the system supports inter-satellite communications;
in E-SAT's case, this is because the system is store-and-forward which
allow satellites to store the information until a ground station is
reached.
Security: Our usage of both the Iridium system, which is also used by the
U.S. Department of Defense, and the planned E-SAT System should provide
security benefits through a virtual private network implementation--that
is, neither will utilize a public switched phone system. One of the reasons
this can be done is the restricted gateway structure described above.
Low-cost ground transceiver: As compared to geostationary satellites
operating at over 22,000 miles from earth, the Iridium and E-SAT LEO
systems operate less than 500 miles from earth and therefore can utilize
smaller and less expensive transceivers. In addition, in the case of the
E-SAT System, the use of spread spectrum, or "CDMA," communications
technology and an application specific integrated circuit, or "ASIC,"
technology, should allow us to produce smaller and lower-cost ground
transceivers than competing systems.
5
Our principal executive offices are located at 100 Shoreline Highway, Suite
190A, Mill Valley, California, 94941 and our phone number is 415-380-8055.
The Offering Summary
Total shares of Common Stock outstanding as of
December 31, 2001 24,810,817
Shares of Common Stock being offered for
resale by the selling security holders Up to 2,380,952 shares, assuming the
conversion of $500,000 principal amount of
convertible debentures and 2,035,364 shares
of Common Stock upon conversion of the
series B preferred and 18,855,433 shares
assuming the sale of all of the shares
registered in connection with the Common
Stock purchase agreements and exercise of
all warrants by the selling security
holders. Of the shares registered for
resale, 5,579,351 were previously registered
and are included to allow their resale under
this prospectus.
Offering price Market price or negotiated prices at the
time of resale.
Use of proceeds We will not receive any of the proceeds of
the shares offered by the selling security
holders. Any proceeds we receive from the
exercise of warrants will be used primarily
for costs associated with the construction
and launch of our satellite system, for
working capital and other general corporate
purposes.
OTC Bulletin Board Symbol DBSS.OB
6
Summary Consolidated Financial Data
This summary of consolidated financial data has been derived from our
annual and interim consolidated financial statements included elsewhere in this
prospectus. You should read this information in conjunction with those financial
statements, and notes thereto, along with the section entitled "Management's
Discussion and Analysis of Financial Condition."
Nine months April 25, 1990
Year Ended ended (Inception) to
December 31, September 30, September 30,
1999 2000 2001 2001
----------- ----------- ------------- -------------
(Unaudited) (Unaudited)
Revenue $ - $ - $ - $ 161,420
Loss from Operations (6,027,229) (6,496,009) (2,590,102) (26,707,908)
Net Loss (5,915,493) (6,557,549) (2,689,147) (22,294,811)
Net Loss attributable to
Common Stockholders (5,915,493) (6,557,549) (2,966,025) (22,571,690)
Loss per Share
Basic (0.45) (0.44) (0.15) -
Diluted (0.45) (0.44) (0.15) -
Working Capital (deficiency) (1,736,295) (2,216,321) (1,900,141) -
Total Assets 15,562,586 15,078,085 15,353,768 -
Stockholders' Equity 14,223,675 12,067,096 12,623,578 -
As of September 30, 2001
------------------------
(Unaudited)
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 136,484
Working capital (deficiency) (1,900,141)
Total assets 15,353,768
Total liabilities 2,248,312
Stockholders' equity 12,623,578
7
RISK FACTORS
An investment in shares of our Common Stock is very risky. You should carefully
consider the risks described below in addition to other information in this
filing. Our business, operating results and financial condition could be
seriously harmed due to any of the following risks. The trading price of the
shares of our Common Stock could decline due to any of these risks, and you
could lose all or part of your investment.
We are a development stage company and we do not have any customers.
We are a development stage company and as of December 31, 2001, we had no
customers. Although we previously recorded gains from the sale of interests in
entities which own direct broadcast satellites licenses, we have not earned any
significant operating revenues since our formation. Given our limited operating
history and lack of revenues, we cannot assure you that we will be able to
obtain customers for the Iridium system or any other system, or to construct and
implement the E-SAT system, and, if implemented, to develop a sufficiently large
customer base to be profitable.
The State of California may not contract for the Voluntary Command Conservation
Program.
We have been in discussions with the State of California for a
satellite-based load curtailment program, called the "Voluntary Command
Conservation Program," since June 2001. However, the California energy situation
is complex and involves significant political, regulatory and economic issues,
and we cannot assure you that the State will ultimately agree to such a
contract. Further, the State could agree to a contract but could be ultimately
unable to pay for services due to financial difficulties or regulatory issues.
In addition, the terms ultimately offered by the State may be substantially less
desirable than those currently under discussion.
We may be unable to sign up participants for the Voluntary Command Conservation
System, and our success in attracting participants may be harmed if blackout
exemptions are not provided by the State to the participants.
Even if we are successful in completing a contract with the State of
California, we may be unable to sign up participants who will voluntarily allow
us to curtail their electricity usage. We have received a preliminary indication
from the trade association representative for retail shopping mall participants
that are interested in joining our program. We believe that this is at least
partially based upon our belief that the State will exempt participants from
rolling blackouts in return for their participation. However, there is no
assurance that the State or Public Utilities Commission will concur with this
view or agree to provide this exemption from blackouts, and the failure to
provide an exemption from blackouts would make it difficult for us to sign up
participants.
The design, construction, and testing of the Voluntary Command Conservation
System has numerous risks.
The Voluntary Command Conservation System is a new application of the
Iridium system and a new approach to electricity load curtailment. The remote
curtailment units are new and will be subject to outside rooftop conditions
including heat, cold, and inclement weather, for which the failure rate of these
units cannot be assured. In addition, in using the Iridium system for data
transfer, we are using it in a manner different from voice telephony, which was
the intention of the original design. Further, the Iridium system may encounter
significant problems or the software controlling the exchange of data and
8
control instructions may fail. In addition, we may encounter unexpected delays
and expenses due to technical problems we have not foreseen. Should the system
fail or encounter significant deficiencies, our business and future success will
be adversely affected.
We may be unable to raise sufficient capital for implementation of the Voluntary
Command Conservation System.
We currently estimate that we may require up to approximately $18 million
to complete the engineering and deployment of the California Voluntary Command
Conservation System. Given the risks and uncertainties in this undertaking, we
cannot assure you that actual cash requirements will not exceed our estimates.
Further, the current state of capital markets is uncertain, and is even more
difficult for telecommunications companies, and we cannot assure you that we
will be able to raise the funds required to complete the development and
installation of the system, or that the timing and terms of any such financing
will be favorable to us. If we are unable to obtain a sufficient amount of
financing necessary to complete the system on commercially acceptable terms, our
business and future success will be severely and adversely affected. Unless and
until we begin to generate revenues, we will continue to generate further
operating losses and negative net cash flow both for engineering the system and
for our daily operations.
Future financings and strategic alliances will be required and will likely
result in significant stockholder dilution and/or significant liabilities and
may have restrictive conditions.
Our current plans are to raise capital through a combination of debt and
equity financing. Should we sell debt securities this would increase our
liabilities and future cash commitments and may subject us to restrictive
conditions on our growth and operations. However, we may be unable to obtain
debt financing, and we would then depend principally on equity financings to pay
for our systems, or even if we obtain debt financing, we may be required to
provide some form of equity in addition.
In order to execute our business plans, we plan to seek strategic alliances
with entities that can provide communications systems, engineering, deployment,
and distribution services and assets. Such alliances will likely require that we
provide such entities the ability to participate in our growth. Examples of such
participation may be, but are not limited to, revenue and profit-sharing and the
issuance of equity securities in us or our subsidiaries.
The issuance of additional equity securities by us may result in
significant dilution to the equity interests of the current stockholders. Other
types of growth participation arrangements may significantly lower the value of
the equity interests of our current stockholders by reducing the revenue,
profits, or other elements of the market value of the Company.
Regardless of how we structure our financings and strategic alliances, we
may be required to pledge our assets, including our ownership interest in E-SAT.
Other restrictive conditions may also be imposed on the conduct of our business.
In the event of a default on such pledges or conditions, it would be unlikely
that there will be any assets remaining to be distributed to our stockholders.
We have incurred significant losses to date and could continue to do so. Without
profit from delivery of services using the Iridium system, current circumstances
continue to raise substantial doubt about our ability to continue as a going
concern.
Without contracts for services utilizing the Iridium system, we will
continue to incur operating losses while we seek to construct our E-SAT system.
9
We recorded operating losses of approximately $6.6 million for 2000 and
approximately $6.0 million for 1999 and, without customers for services
utilizing the Iridium system, we do not anticipate any revenues during fiscal
2001 or 2002. Without significant revenue from the Iridium system, we will
continue to incur substantial and increasing operating losses and negative net
cash flows until our satellite system is developed, deployed and operating in a
profitable manner. As of September 30, 2001, we had current liabilities of $2.1
million and current assets of $200,000.
These circumstances raise substantial doubt about our ability to continue
as a going concern as discussed in the report of our independent accountants.
We currently estimate that we will require approximately $18.0 million in
additional capital for engineering and deployment of our Voluntary Command
Conservation System in California, and $60.0 million in additional capital
related to the construction and launch costs associated with our E-SAT satellite
system. Given the risks in undertakings of this nature, we cannot assure you
that actual cash requirements will not exceed our estimates. In particular,
additional capital, over and above amounts anticipated, will be required in the
event that we:
o incur unexpected costs in completing the design of our systems or
encounter any unexpected technical or regulatory difficulties;
o find that the power utilization of participants in our Voluntary
Command Conservation System is significantly lower than our estimates
and, as a result, additional participants are necessary;
o incur delays and additional expenses as the result of a E-SAT system
launch or satellite failure;
o are unable to enter into marketing agreements with third parties to
sell our services; or
o incur any other significant unanticipated expenses.
The occurrence of any of these events would adversely affect our ability to
meet our business objectives. If we are unable to obtain a sufficient amount of
financing to complete our systems and on commercially acceptable terms, our
business and future success will be adversely affected.
We are subject to development contract commitments for the E-SAT system.
In order to comply with development milestones required by E-SAT's FCC
license, we have entered into various development contracts including satellite
construction contracts with Alcatel Space Industries and Surrey Satellite and a
satellite launch contract with Eurockot. Entering into these and other
development and service contracts are critical to the overall development of the
E-SAT system. The Alcatel satellite construction and launch contract requires
progress payments of approximately $60.0 million over a 12 month period. We do
not, at this time, anticipate making these progress payments. Failure to
maintain these contracts would ultimately render them void and, if we are unable
to arrange acceptable alternatives, would adversely affect our ability to
construct the E-SAT system.
The contract with our prime contractor for the E-SAT system could be declared
void.
We have not made the necessary payments to our prime contractor, Alcatel,
and, as a result, that contract could be declared void. The agreement with
Alcatel required a payment at the end of 1999 of approximately $9.1 million in
cash and the equivalent of $5 million shares of our Common Stock. This payment
was necessary for Alcatel to continue work and to trigger an effective date for
the full system development schedule. As of December 31, 2001, this payment has
10
not been made, and Alcatel therefore has the right to consider this contract
void. Although Alcatel has verbally indicated that it does not intend to
terminate the contract, it has the right to do so. Until the effective date of
contract, or "EDC", we continue to have a direct satellite construction contract
with Surrey Satellite Technology Limited. At EDC, this contract would be
assigned to Alcatel. Any cancellation or termination of these contracts could
cause delay in construction of the E-SAT system which could result in the loss
of the FCC license. (See also "Risk Factor--The E-SAT system may experience
unscheduled delays that could harm our business or lead to the loss of the FCC
license.")
The technology, design and construction of our E-SAT system are subject to
numerous risks.
The design and construction of the E-SAT system are subject to a number of
risks associated with space-based communications systems. Although we believe
that the E-SAT system is based on sound technology, its design will contain
certain technology that has not been used in a commercial application. Although
we intend to engage contractors that are experienced in the satellite and
communications industry, we have no experience in developing, constructing, and
operating a satellite based data communications system. The failure of the E-SAT
system to be constructed, or to function as designed, or the failure of system
components to function with other components or to specification could result in
delays, unanticipated costs, and loss of system performance, thereby rendering
the E-SAT system unable to perform at the quality and capacity levels we
anticipate.
The E-SAT system may experience unscheduled delays that could harm our business
or lead to the loss of the E-SAT FCC license.
Our business is subject to both United States and international regulations
and licensing. The E-SAT license has several FCC milestones, including:
o the completion of construction of the first two satellites by March
2002,
o the launch of those satellites by September 2002, and
o the construction and launch of the remaining four satellites by March
2004.
Particularly the first milestone will be extremely difficult for us to
meet, however we intend to seek an extension to these milestone requirements if
one is necessary. However, we have very little control over whether any
extension will be provided and the failure to obtain an extension or meet the
milestones could result in the loss of E-SAT's FCC license.
The next milestones under the E-SAT license are to construct two satellites
by March 2002 and launch two satellites by September 2002. Given the delays in
construction due to our inability to obtain sufficient financing, these
milestones will be extremely difficult for us to meet. In addition, delays and
related increases in costs in the construction, launch and implementation of the
E-SAT system could result from a variety of causes, including:
o delays encountered in the construction, integration and testing of the
E-SAT system;
o launch delays or failures;
o delays caused by design reviews in the event of a launch vehicle
failure or a loss of satellites or other events beyond our control;
11
o further modification of the design of all or a portion of the E-SAT
system in the event of, among other things, technical difficulties or
changes in regulatory requirements;
o our failure to enter into agreements with marketing providers on terms
acceptable to us; and
o the failure to develop or acquire effective applications for use with
the E-SAT system.
While we intend to seek an extension to the time periods in our milestones,
as described above, we have no assurance that any extension will be granted. A
significant delay in the completion of our milestones could therefore erode our
competitive position and could result in cancellation of the FCC license, which
would have a material adverse effect on our financial condition and results of
operations.
We will face many risks associated with the launching of E-SAT satellites.
Satellite launches are subject to considerable risks, including the
possible failure of the launch vehicle, which may result in the loss or damage
to the satellite or its deployment into an incorrect or unusable orbit. Each
launch is expected to carry three Little LEO satellites. Consequently, an
unsuccessful launch could adversely affect one-half of our planned satellite
constellation. We intend to obtain a certain amount of insurance to cover some
of our potential losses in this area, but we cannot assure you that we will be
able to obtain adequate insurance to cover all incidents or in a sufficient
amount to cover the losses.
We have entered into a launch services agreement with Eurockot Launch
Services GmbH, headquartered in Bremen, Germany to provide for two payload
launches from a launch site in Plesetzk, Russia during specified periods.
Eurockot has limited experience in launching commercial satellites. Further, it
is anticipated that any launch must be approved by a governmental agency of the
Russian Federation. We do not know whether the launches will be approved by the
Russian Federation or if the launches will take place as planned. Various
political and military considerations, including as yet unknown factors
resulting from the September 2001 terrorist attacks on the United States, could
impact these launches. The failure of the launches or the occurrence of any
significant problems generally associated with satellite launches would have an
adverse effect on us and our ability to provide the services contemplated.
Our E-SAT satellites may malfunction or fail prematurely.
A number of factors will affect the useful lives of the E-SAT system's
Little LEO satellites, including the quality of construction, the expected
gradual environmental degradation of solar panels, the amount of fuel on board
and the durability of component parts. Random failure of satellite components
could result in damage to or loss of a satellite. In rare cases, satellites
could also be damaged or destroyed by electrostatic storms, high levels of
radiation or collisions with other objects in space. Any premature loss of
satellite performance or capacity could have a material and adverse effect on
the efficiency of the overall system and the operation of the E-SAT system.
We will only be able to obtain a limited amount of satellite insurance for our
E-SAT system.
We expect to obtain launch insurance for each of our satellite launches and
have engaged Frank Crystal & Co. and its subsidiary, International Space
Brokers, Inc. to provide risk management counsel in obtaining insurance coverage
for our planned Little LEO satellite constellation. This insurance would, in the
event of a launch failure, provide funds for replacement launch satellites. In
addition, we expect to obtain satellite replacement insurance, which we hope
12
will provide sufficient funds for rebuilding satellites damaged in construction,
shipment or launch. In the event a covered loss occurs, we will need to satisfy
the insurance underwriters that the technological or other problems associated
with the covered loss have been addressed prior to continuing the launch
process. The launch and replacement insurance marketplace is volatile and we do
not know whether launch or replacement insurance, or both, will be available to
us, or if available, will be available on terms acceptable to us. We will
continue to evaluate the insurance marketplace to determine the level of risk we
are willing and able to absorb internally as well as the amount of risk we may
be able to transfer to third parties.
Our E-SAT system is subject to governmental regulation that can be difficult to
satisfy.
We will need to secure "landing rights" in various countries where we hope
to do business. Failure to secure foreign landing rights would preclude us from
offering our full services in such countries, which would adversely affect our
anticipated results of operation. In addition, our international license,
LEOTELCOMM-2, is sponsored by the United States, and should we fail to maintain
our FCC license, our international license rights may be subject to challenge.
Further, we will be subject to varying export and communications regulatory
requirements for the U.S. and internationally, not only for construction and
launch of the E-SAT system, but also for the continuing operation of the system.
The services we intend to provide must be acceptable to the energy industry.
Our success is largely dependent on whether governments, utilities and
other related entities will contract for services utilizing the Iridium and/or
E-SAT systems. We cannot assure you that we will be successful in completing the
development and commercial implementation of our services. Governments and
utility companies typically go through numerous steps before making final
decisions. This process can be time consuming and take up to several years to
complete.
Further, utilizing satellite data messaging services is a relatively new
and evolving business. It is difficult to predict the future growth of the
market or the potential size of the market. There are a number of competing
products from entities providing various types of communication technologies.
The use of low-earth-orbiting satellites provides only one of many possible
solutions for data communications with remote sites, and potential customers may
choose other competing solutions. In the event that customers do not adopt our
technology, or do so less rapidly than expected, our future results, including
our ability to achieve profitability, will be materially and adversely affected.
Future advances in the industry could make our services obsolete.
Future advances in the telecommunications industry could lead to new
technologies, products or services competitive or superior to the products or
services we intend to provide. Such technological advances could also lower the
costs of other products or services that may compete with our systems, resulting
in pricing pressures on our proposed products and services, which could
adversely affect our business and results of operations.
Intense competition from existing and new entities could adversely affect our
business.
We will encounter competition from other satellite systems, as well as from
competitive terrestrial-based communication companies. The market for collection
and transmission of data from fixed devices and the potential market for other
applications of data messaging services have led to substantial and increasing
competition. Many of our present and future competitors using Little LEO
satellites have begun to address the collecting and transmitting of data from
13
fixed devices and at least one of these competitors has substantially greater
marketing, technical and manufacturing resources, name recognition, and
experience.
Such competitors may be able to respond more quickly to new or emerging
advancements in the industry and to devote greater resources to the development,
promotion and sale of their products and services. Our technology must be
competitive so that the systems can provide the data transmission service at a
cost lower than most of our competitors' systems. We cannot assure you that such
competitors will not succeed in developing better or more cost-effective data
transmission systems.
We face increased competition as a result of strategic alliances and other
consolidation in the industry.
Our current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties that
could increase their ability to reach commercial customers or subscribers of
data messaging services. Further, terrestrial-based wireless communication
systems are already providing data messaging services to the utility industry.
Such existing and future competition could affect our ability to form and
maintain agreements with utility companies and other customers. We cannot assure
you that we will be able to compete successfully against our current and future
competitors, and our failure to do so would have a material adverse effect on
our business.
The price of ground transceivers will affect the success of our service.
The development of low-cost ground transceivers to collect and transmit
data from fixed devices will be important in the development of a broad market
for our services. Ground transceivers must be manufactured and operated at a low
cost in order to make our data messaging services attractive to potential
commercial customers. It is expected that the cost of ground transceivers will
decline as the volume of units produced increases. We must develop a low-cost
ground transceiver which requires less power to operate and will be attractive
to utility and other companies. However, we cannot assure you that ground
transceivers can be developed at a cost and with the capabilities that will
attract a large enough commercial subscriber base for us to receive significant
revenues or achieve profitability.
We are dependent on third party vendors and consultants.
We have relied on, and will continue to rely on, vendors and consultants
that are not our employees to complete the design, construction and
implementation of ours services, to market and deploy our data messaging
services and for representation on regulatory issues. These vendors and
consultants must continue to provide the expertise necessary. We cannot assure
you that suitable vendors and consultants will be available in the future, and
if available, will be available on terms deemed acceptable to us.
We cannot assure you that these manufacturers of parts and equipment for
our systems such as transceivers, antennas, load curtailment equipment and other
devices, will be able to meet our needs in a satisfactory and timely manner or
that we will be able to obtain additional manufacturers when and if necessary. A
significant price increase, a quality control problem, an interruption in supply
or other difficulties with third party manufacturers could have a material and
adverse effect on our ability to successfully provide our proposed services.
Further, the failure of third parties to deliver the products, components,
necessary parts or equipment on schedule, or the failure of third parties to
perform at expected levels, could delay our deployment of our services. Any such
delay or increased costs could significantly harm our business and operating
results.
14
Failure to effectively manage our growth would harm our future business results.
As we seek to proceed from a development stage company to an operational
company, we may experience significant and rapid growth in the scope and
complexity of our business. We may need to rapidly engineer and deploy new
services across wide geographic areas and engage in significant and complex
business development and strategic alliance efforts. We will likely have an
increased need and opportunity to market our services, manage operations,
control the operations of our proposed systems, handle sales and marketing
efforts and perform finance and accounting functions. This growth is likely to
place a strain on our small management team and limited operational resources,
and there is a risk that we may not effectively manage this growth. To lessen
this requirement, and assist us in executing our business plan, we recently
signed agreements with Arthur D. Little, Inc. for engineering services, and with
Bechtel Corporation to provide program management services for the installation
and deployment of the proposed Voluntary Command Conservation System. However,
these organizations may terminate their contracts with us on short notice, and
further there is no assurance that we will effectively manage the
subcontractors. The failure to develop and implement effective systems, or the
failure to hire or subcontract and train sufficient personnel for the
performance of all of the functions necessary to effectively grow and manage our
potential customer base and business, or the failure to manage growth
effectively, could have a material adverse effect on our business and financial
condition.
We are dependent on key personnel.
Our success is substantially dependent on the performance of our executive
officers and key personnel and on our ability to retain and motivate our
personnel. The loss of any of our key personnel, particularly Fred W. Thompson,
our president, would harm our ability to manage operations and development of
our systems, and could have a material and adverse effect on our business,
financial condition, and operating results.
Substantially all of our assets consist of our capitalized satellite
construction costs and acquisition costs relating to the E-SAT license and these
assets may be significantly impaired if we are unable to obtain the necessary
financing or to maintain our FCC license.
We cannot assure you that we will be able to obtain financing in a
sufficient amount for the construction and deployment of our satellite
constellation. Our failure to obtain sufficient and timely financing will likely
result in our conclusion that the carrying amounts of the capitalized satellite
construction costs and the investment in E-SAT are not recoverable. Under
generally accepted accounting principles relating to the impairment of assets,
we would then be required to write off all or a portion of the capitalized
satellite construction costs and our acquisition costs relating to the E-SAT
license which would have a material and adverse effect on our business, results
of operations and financial position.
Our certificate of incorporation and Delaware law contain certain provisions
that could deter takeovers which may prevent you from receiving a premium for
your shares.
Provisions of our certificate of incorporation and Delaware law could
delay, defer or prevent a change in our control. Our certificate of
incorporation contains a fair price provision that requires a certain threshold
approval by our board of directors in the event of a merger, sale of assets or
other types of business combinations. In addition, our board consists of members
who serve staggered three year terms so that only a portion of our board can be
removed at the annual meeting of stockholders. Further, the board is authorized
to issue preferred stock, the classes and terms of which may be determined by
the board. We are also subject to the anti-takeover provisions of Section 203 of
15
the Delaware General Corporation law, which prohibits us from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner,
under Delaware law. These provisions in our certificate of incorporation and
Delaware law could have the effect of delaying, deferring or preventing a change
in control, even if doing so would be beneficial to our stockholders.
We have not paid dividends and are not likely to pay dividends on our Common
Stock in the future.
We have not declared or paid any dividends on our Common Stock, and do not
anticipate paying any dividends for the foreseeable future. In addition, the
holders of our shares of series A preferred stock and series B preferred stock
are entitled to receive, out of any legally available funds, annual cumulative
dividends equal to five percent and ten percent, respectively, of the
liquidation preference of their shares. All dividends must be paid on the series
A preferred stock and series B preferred stock before any may be declared or
paid on the Common Stock. It is also anticipated that if we obtain bond
financing or other financing facilities, we will be restricted in our ability to
declare future dividends on our Common Stock.
Our stock price is volatile.
Our Common Stock is quoted on the OTC Bulletin Board and is thinly traded.
In the past, our trading price has fluctuated widely, depending on many factors
that may have little to do with our operations or business prospects. In
addition, the OTC Bulletin Board is not an exchange and, because trading of
securities on the OTC Bulletin Board is often more sporadic than the trading of
securities listed on an exchange, such as NASDAQ, you may have difficulty
reselling any of the shares that you purchase.
The exercise of outstanding convertible securities may adversely affect our
Common Stock price and your percentage of ownership.
As of December 31, 2001, there were outstanding warrants and options to
purchase an aggregate of 14,287,262 shares of our Common Stock, of which
approximately 13 million are vested. Of these approximately 13 million vested
warrants and options, approximately 9 million have exercise prices of $1.00 or
less. In addition, the series B preferred stockholders have the option to
convert their shares into Common Stock at approximately 80% of the then current
market price. Further, if we do not redeem the convertible debenture in the
principal amount of $500,000 , then the holder has the option to convert the
debenture into shares of Common Stock. The debenture is initially convertible,
at the option of the holder, at a rate of $0.98 per share. After August 31,
2001, the conversion rate adjusts to 85% of the 5-day average closing price of
our Common Stock, but in no case may be less than $0.21 per share. Conversion of
both the series B preferred stock and the convertible debenture or the exercise
of the outstanding options and warrants may have a detrimental impact on the
terms under which we may obtain financing through a sale of our Common Stock in
the future since they may hinder our ability to raise capital at a higher market
price due to the dilutive effect to new investors. For these reasons, any
evaluation of the favorability of market conditions for a subsequent stock
offering must take into account any outstanding convertible securities.
16
THE OFFERING
The selling security holders are offering for resale up to 7,911,621 shares
of Common Stock and up to 9,780,777 shares of Common Stock assuming the
conversion of a debenture, the conversion of preferred stock and the exercise of
outstanding warrants. The manner and terms of the securities through which the
holders may receive Common Stock are described below.
Securities Purchase Agreement
Of the shares of Common Stock offered through this prospectus, 2,380,952
shares are registered for resale assuming the conversion of a convertible
debenture in the principal amount of $500,000, with interest accruing at the
rate of 6% per year, and 250,000 shares assuming the exercise of warrants. The
convertible debenture and warrants were issued together pursuant to a Securities
Purchase Agreement.
On August 31, 2001, we issued the convertible debenture along with the
warrant in a private placement to one accredited investor. The debenture is
initially convertible, at the option of the holder, at a rate of $0.98 per
share. The conversion rate adjusts to 85% of the 5-day average closing price of
our Common Stock, but in no case may be less than $0.21 per share. We may redeem
the debenture, in whole or in part, for 120% of the principal amount plus any
accrued and unpaid interest. Our right to redeem the debenture is subject to the
holder's right to convert the debenture into shares of our Common Stock within
ten days of our notice to redeem. This prospectus covers the resale of the
shares of Common Stock underlying the convertible debenture and the warrant.
Pursuant to a registration rights agreement, we are required to register
the shares of Common Stock underlying the debenture and the warrant. Further we
were required to file our registration statement with the SEC by October 15,
2001. The security holders have a right to assess liquidated damages for failure
to file the registration statement by October 15, 2001 and if the registration
fails to become effective by December 29, 2001. These liquidated damages are in
an amount equal to approximately 3% for each 30 days (pro-rata as to a period of
less than 30 days) of the outstanding principal amount of the debenture. The
maximum total liquidated damages penalty is $100,000. In addition, in the event
the registration statement is not declared effective by December 31, 2001, we
are required to pay liquidated damages in an amount equal to 3% for each 30 days
(pro-rata as to a period of less than 30 days) the registration statement is not
declared effective or the effectiveness of such registration statement or
related prospectus is suspended because such prospectus includes an untrue
statement of material fact or omits to state a material fact required to be
stated.
Series B Convertible Preferred Stock
Of the shares being registered, 2,035,364, shares of Common Stock are being
registered for resale upon conversion of our outstanding series B convertible
preferred stock and up to 787,322 shares of Common Stock assuming the exercise
of warrants that were issued at the same time as the series B convertible
preferred stock.
On October 6, 2000, we issued an aggregate of 400 units in a private
placement to two accredited investors. Each unit consisted of one share of our
series B convertible preferred stock and three warrants. The first two warrants
provides the holders with the right to purchase 418.31 shares of Common Stock at
$0.17 per share for each preferred share held and the third warrant provides the
holders with the right to purchase 1,250 shares of Common Stock at $0.17 per
share for each preferred share held. The shares of preferred stock have a
liquidation preference of $1,000 per share and are initially convertible, at the
option of the holder, into either (1) 1,045.75 shares of our Common Stock, or at
17
a rate of $0.95625 which was the closing bid price at the time of the purchase
or (2) 80% of the average of the three lowest closing bid prices of the Common
Stock for the 20-day trading period prior to the conversion date. The holders of
series B convertible preferred stock are also entitled to receive annual
cumulative dividends equal to ten percent of the liquidation preference. After
360 days following October 6, 2000, we may redeem the preferred stock, in whole
or part, for 108% of the purchase price plus any accrued and unpaid dividends.
Our right to redeem the preferred stock is subject to the holder's right to
convert their shares of preferred stock into shares of our Common Stock within
twenty-four days of our notice to redeem. This prospectus covers the resale of
the shares of Common Stock underlying the shares of preferred stock.
Pursuant to a registration rights agreement, we are required to register
the shares of series B convertible preferred stock and the shares of Common
Stock to be issued upon the conversion of the series B convertible preferred
stock and exercise of the warrants. We were required to file a registration
statement with the SEC by August 4, 2001. Our failure to file the registration
in a timely manner requires us to record a monthly accretion of 5% of the series
B preferred stock's liquidation amount of $400,000 beginning August 4, 2001 for
as long as the filing is delinquent. Further, the preferred stockholders have
the right to require redemption of the series B preferred stock amounts,
including accretions, beginning November 2, 2001, in the event that the
registration statement is not declared effective at that time.
In connection with the private placement of the series B convertible
preferred stock, we issued 40 units to the placement agent consisting of 40
shares of our series B convertible preferred stock and warrants to purchase
120,000 shares of our Common Stock at an exercise price of $0.17 per share. The
resale of the Common Stock issuable upon the conversion of the Series B
convertible preferred stock and warrants is included in this prospectus.
Units of Common Shares and Warrants
The selling security holders are also offering for resale up to 7,911,621
shares of Common Stock and up to 4,327,139 shares of Common Stock assuming the
exercise of outstanding warrants.
5,570,188 shares of Common Stock and warrants to purchase 1,331,846 shares
were issued in connection with our private placements of units. The units
consisted of shares of Common Stock and warrants with exercise prices ranging
from $0.29 per share to $1.00 per share.
Also included are warrants to purchase an aggregate of 880,000 that were
issued to three (3) finders in connection with our private placements of units,
consisting of shares of Common Stock and warrants to purchase Common Stock.
Other Shares Included in this Prospectus
This prospectus also relates to an aggregate of 5,579,351 shares which were
previously registered and are included to allow their resale under this
prospectus. Of these shares, 2,819,169 shares are registered in connection with
our Common Stock purchase agreement with Torneaux Ltd.
On June 2, 2000, we entered into a Common Stock purchase agreement and
related agreements with Torneaux Ltd., a private equity fund organized under the
laws of The Bahamas. Subject to the fulfillment of certain conditions, the
agreements provide us with a facility through which we may sell shares of our
18
Common Stock, at our option, to Torneaux Ltd. periodically over a 24-month
period. Our ability to request a draw down under the Common Stock purchase
agreement is subject to the continued effectiveness of a resale registration
statement filed with the Securities and Exchange Commission to cover the shares
to be issued. The amount of Common Stock to be sold at each draw down will not
be less than $100,000 nor more than $2.45 million. We have agreed to sell our
shares to Torneaux Ltd. at a price equal to the then current market price of our
Common Stock during the draw down period, less a discount of between 7.5% and
13% specifically determined based upon a formula related to the then current
market price of the stock. The number of shares that we may sell to Torneaux
Ltd. varies depending on certain factors, including the market price of the
Common Stock and the then current ownership interest of our Common Stock by
Torneaux Ltd. We have also agreed to issue to Torneaux Ltd. warrants to purchase
from 20% to 50% of the number of shares of Common Stock being purchased at the
time of each draw down. Torneaux Ltd. will either resell its shares of our
Common Stock in the open market, resell its shares of our Common Stock to other
investors in negotiated transactions or hold shares of our Common Stock in its
portfolio. This prospectus covers the resale by Torneaux Ltd. of Common Stock
purchased by Torneaux Ltd. and issuable upon exercise of the related warrants
either in the open market or to other investors.
In connection with the Common Stock purchase agreement, we issued a warrant
to purchase an aggregate of 250,000 shares of our Common Stock as a finder's fee
to a third party not affiliated with us or Torneaux Ltd. The warrant is
exercisable at an exercise price equal to the lesser of $1.5625 per share or the
fair market value of one share of our Common Stock on the date the registration
statement is declared effective by the SEC. The resale of the shares issuable
upon exercise of the warrant are included in this prospectus.
USE OF PROCEEDS
We will not receive any proceeds from the resale of shares of Common Stock
by the selling security holders. We will receive proceeds from any sales of
shares pursuant to the Common Stock purchase agreement with Torneaux Ltd., and
upon any exercise of warrants. In addition, we will receive relief from
liabilities on our books upon the conversion of the convertible debenture and
the conversion of the series B convertible preferred stock. We intend to use the
proceeds from such sales of shares to Torneaux or the exercise of warrants
primarily to pay for the costs associated with the construction and
implementation of our systems, for working capital and other general corporate
purposes.
19
PRICE RANGE OF COMMON STOCK
The following table sets forth the high and low bids quoted for our Common
Stock during each quarter for the past two fiscal year ends and until the
quarter ended December 31, 2001, as quoted on the OTC Bulletin Board. The
following quotations represent interdealer prices, without retail mark-ups,
mark-downs, or commissions, and may not represent actual transactions. The
information was obtained from Yahoo-Finance at http://finance.yahoo.com.
Common Stock
------------
Quarter Ended High Low
- -------------- ---- ---
December 31, 2001 $0.25 $0.22
September 30, 2001 1.07 0.38
June 30, 2001 0.63 0.20
March 31, 2001 0.80 0.31
December 30, 2000 1.06 0.31
September 30, 2000 1.69 0.81
June 30, 2000 3.06 1.09
March 31, 2000 5.45 1.66
As of December 31, 2001, we had 24,810,817 shares of Common Stock
outstanding and 427 stockholders of record. The number of stockholders does not
include those who hold our securities in street name.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our Common Stock since
our inception. The holders of our shares of series A preferred stock and series
B preferred stock are entitled to receive, out of any legally available funds,
annual cumulative dividends equal to five percent and ten percent, respectively,
of the liquidation preference of their shares. All dividends must be paid on the
series A preferred stock and series B preferred stock before any may be declared
or paid on the Common Stock. We currently intend to retain any additional future
earnings for use in the operation and expansion of our business. We do not
intend to pay any cash dividends on our Common Stock in the foreseeable future.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We were formed in Delaware in 1989 and our principal executive offices are
located in Mill Valley, California. We completed a share exchange reorganization
with DBS Network in 1992. Since 1994, our focus has been to pursue business
opportunities in satellite telecommunications. We began this pursuit originally
by purchasing interests in direct broadcast satellite licensees. During 1997, we
sold our last indirect interest in a direct broadcast satellite license.
We formed E-SAT, Inc., a Colorado corporation, in partnership with EchoStar
Communications Corp. in November 1994 for purposes of applying for a Little LEO
FCC license. On March 31, 1998, the FCC issued a license to E-SAT to launch and
operate a Little LEO satellite system. Pursuant to the agreement entered into
with EchoStar in July 1999, we now hold 80.1% of the capital stock of E-SAT and
EchoStar holds the remaining 19.9%.
On June 2, 2001 we signed a seven year operator-to-operator agreement with
Iridium Satellite LLC to provide remote monitoring and control services to the
energy industry. Through this agreement, we hope to begin providing specialized
satellite-based data services using Iridium's commercially available satellite
network by early 2002, significantly ahead of our planned satellite launch in
late 2002.
On June 14, 2001 we demonstrated to California state officials how a
satellite-based energy control system could curtail electricity consumption by
temporarily deactivating air conditioning units located on the rooftops of
California shopping malls. Shortly thereafter, we commenced negotiations with
the State of California to provide satellite-based energy management services.
If we are successful in our discussions with the State of California, we
hope to begin generating revenues as early as the first quarter of fiscal 2002.
Until then, and on a continuing basis if we are not successful, we will seek to
satisfy our short term cash requirements by raising new equity and debt capital,
as well as by seeking the exercise of previously issued third-party warrants and
stock options.
Plan of Operations
Bankruptcies in the satellite sector and sharp declines in
telecommunications and technology sectors have impeded our financing efforts and
required us to modify our business strategy. Our current strategy is to take
advantage of the telecommunications downturn to secure low-cost capacity on
existing satellite systems and combine it with the energy communications
technologies we developed over the past ten years, with an objective of
achieving profitability and proving our market potential in fiscal 2002.
Throughout the year, we have focused on this strategy, reducing operating
expenses and concentrating our efforts on raising short-term and strategic
financing, while establishing a current operating business utilizing the
existing satellite capacity held by Iridium.
At the same time, we have continued our efforts to reduce the overall cost
of the E-SAT system and to identify and commence negotiations with strategic
partners who may serve as both customers and financial partners for our proposed
satellite-based energy management systems. We continue our plan to construct and
deploy a low-cost global satellite system utilizing our E-SAT FCC and
international licenses.
21
The current circumstances in the satellite and telecommunications industry,
as well as in the financial markets, particularly in relation to technology
stocks, have led to delays in our ability to raise short-term operating capital.
Our right to raise capital by selling common shares to the Torneaux Fund has
been limited by our stock price, which, during the first three quarters of
fiscal 2001, has been below the contractual minimum threshold price of $1.00 per
share. Any sale of shares to the Torneaux Fund at prices below that threshold
price requires Torneaux's approval. As a result of deficiencies in short-term
capital raising, we have delayed payment to many of our vendors, and certain of
our employees. As of September 30, 2001, our cash and cash equivalents amounted
to $136,484 while our current liabilities, including amounts owed to employees,
amounted to $2,099,753. Throughout the year, we have continued to focus on
reducing operating expenses while concentrating our efforts on raising
short-term and strategic financing and establishing a current operating business
utilizing the existing satellite capacity held by Iridium.
Until we have begun to generate positive cash flow through our operations,
we will continue to seek to satisfy our cash requirements by raising new equity
and debt capital, as well as by seeking the exercise of previously issued
third-party warrants and stock options. The issuance of additional equity
securities by us will result in significant dilution of the equity interests of
the current stockholders.
Results of Operations
Three and Nine Months Ended September 30, 2001 Compared To The Three and Nine
Months Ended September 30, 2000
Revenues
We remain in the development stage and did not generate revenues in the
three and nine-month periods ended September 30, 2001 and September 30, 2000.
Operating Expenses
Total operating expenses for the quarters ended September 30, 2001 and
2000, were $1,206,049 and $2,800,420, respectively. Total operating expenses for
the nine months ended September 30, 2001 were $2,590,102 as compared to
$6,355,388 for the nine months ended September 30, 2000. The decrease is
attributable to the cost reduction plan put into effect in October 2000 and
continued through October 2001. This plan included the reduction of our
marketing and our research and development staff in November 2000 as well as a
significant reduction in general and administration expenses.
Marketing and Sales Expenses
Marketing and sales expenses are primarily the costs of personnel
(including non-cash stock compensation), consulting and travel. Marketing and
sales expenses for the three months ended September 30, 2001 and 2000 were
$79,463 (6.6% of operating expenses) and $235,288 (8.4% of operating expenses),
respectively. Marketing and sales expenses for the nine months ended September
30, 2001 and 2000 were $166,224 (6.4% of operating expenses) and $902,260 (14.2%
of operating expenses), respectively. The decrease of $736,036 was due to the
reduction of our marketing and sales group in the fourth quarter of fiscal 2000
in order to reduce our cash expenditures.
222
General and Administrative Expenses
General and administrative expenses include the costs of finance, legal,
administrative and general management functions of DBSI. General and
administrative expenses for the three months ended September 30, 2001 and 2000
were $1,126,586 (93.4% of operating expenses) and $2,383,578 (85.1% of operating
expenses), respectively. General and administrative expenses for the nine months
ended September 30, 2001 and 2000 were $2,422,746 (93.5% of operating expenses)
and $5,033,771 (79.2% of operating expenses), respectively. The decrease of
$2,611,025 was primarily due the cost reduction plan put in place in October
2000. The cost-savings measures adopted by us resulted in a decrease in
personnel and travel costs of $602,000, a decrease in legal fees of $184,000,
and a decrease in consulting fees of $1,850,000 during the nine months ended
September 30, 2001.
Research and Development Expenses
Research and development expenses represent the non-capitalized costs
incurred to develop our system. Research and development expenses for the
quarters ended September 30, 2001 and 2000 were $0 and $181,554, respectively.
Research and development expenses for the nine months ended September 30, 2001
and 2000 were $1,132 and $419,357, respectively. The decrease of $418,225 was a
result of the cost reduction plan put in place in October 2000.
Non-Cash Employee Stock Compensation
Prior to January 1, 2000, in order to attract and retain personnel, we
granted options to purchase 2,033,106 shares of Common Stock at exercise prices
ranging from $0.39 to $2.81 to several employees. Some of the exercise prices
were below the fair market value of the Common Stock at the time of grant,
resulting in deferred stock compensation of $2,490,337. This amount is being
amortized over the vesting periods of the granted options, and as a result,
$112,532 and $195,790 were recognized as non-cash employee stock compensation
expense in the quarters ended September 30, 2001 and 2000, respectively. For the
nine months ended September 30, 2001 and 2000, we recognized non-cash stock
compensation costs of $337,596 and $690,345, respectively.
In August 2001, in order to continue to retain and motivate employees,
non-plan, non-qualified stock options were granted to employees to purchase a
total of 2,362,505 shares of Common Stock at $0.77 per share. Because these
options were granted at an exercise price equal to the then current market
value, no non-cash stock compensation costs were recognized.
Net Loss
Our net loss for the quarters ended September 30, 2001 and 2000 was
$1,280,141 and $2,800,150, respectively. Net loss for the nine months ended
September 30, 2001 was $2,689,147 compared to a net loss of $6,354,912 for the
nine months ended September 30, 2000. The decrease in net loss was due to cost
reductions made by us while we continue to seek system construction financing.
Year Ended December 31, 2000 Compared to December 31, 1999
Revenues
We did not generate revenues in either the year ended December 31, 2000 or
the year ended December 31, 1999.
23
Operating Expenses
Total operating expenses for fiscal 2000 and fiscal 1999 were $6,496,009
and $6,027,229, respectively. These costs are related to marketing and sales
expenses, general and administrative expenses, and research and development
expenses.
Marketing and Sales Expenses
Marketing and sales expenses are primarily the costs of personnel
(including non-cash stock compensation), consulting and travel. Marketing and
sales expenses totaled $1,721,725 (26.5% of operating expenses) and $922,623
(15.3% of operating expenses) in fiscal 2000 and fiscal 1999, respectively. This
increase in expenses is due to the establishment of our dedicated marketing and
sales group in June 1999. The marketing group was terminated in the fourth
quarter of fiscal 2000 in order to reduce our cash expenditures.
General and Administrative Expenses
General and administrative expenses include the costs of finance, legal,
administrative and general management functions of DBSI. General and
administrative expenses for fiscal 2000 and 1999 were $4,037,509 (62.2% of
operating expenses) and $4,059,310 (67.4% of operating expenses), respectively.
Research and Development Expenses
Research and development expenses represent non-capitalized costs incurred
to develop our system. Research and development expenses for fiscal 2000 and
fiscal 1999 were $736,775 (11.3% of operating expenses) and $1,045,296 (17.3% of
operating expenses), respectively. Our research and development staff was
located in Toulouse, France. During the fourth quarter of fiscal 2000 we
terminated our research and development office in France in order to reduce our
operating expenses.
Non-Cash Stock Compensation
In order to attract and retain qualified personnel, we have granted options
to purchase Common Stock to several employees. Some of the exercise prices were
below the trading price of the Common Stock at the time of grant, resulting in
deferred stock compensation. The deferred stock compensation is being amortized
over the vesting periods of the granted options. We recognized a total of
$1,078,857 as non-cash stock compensation expense in fiscal 2000 compared to
$957,755 in fiscal 1999.
Other Income (Expense)
We experienced a non-operating loss of $59,940 during fiscal 2000 as
compared to a gain of $113,336 during fiscal 1999. The loss incurred in 2000 was
a result of increased interest expense due to ongoing cash shortages during the
year.
Net Loss
Our net loss for fiscal 2000 was $6,557,549 compared to $5,915,493 for
fiscal 1999.
24
Liquidity and Capital Resources
We have been in the development stage since inception and have not
recognized any significant revenues. Our monthly cash expenditures averaged
approximately $309,000 per month during the year ended December 31, 2000 and
$179,000 per month during the nine months ended September 30, 2001. However, if
we succeed in raising sufficient financing to implement our long-term business
strategies, our expenses will increase with the demands of increased efforts in
both systems and business development. Additional capital will be necessary to
expand operations or continue current operations, which will result in further
dilution to our stockholders.
During fiscal 2000, we received proceeds from the sale of common and
preferred stock totaling $3,225,442 before stock issuance costs of $636,576.
These transactions included a private placement of 35,897 shares of the our
Series A preferred stock at $30 per share for an aggregate amount of $1,076,910
before stock issuance costs of $226,809, a private placement of 166,298 shares
of our Common Stock at $1.00 per share for an aggregate of $166,298 before stock
issuance costs of $11,641, a private placement of 133,333 shares of our Common
Stock at $0.75 per share for an aggregate of $100,000, a draw down of Equity 1-A
for 84,490 shares of our Common Stock at $0.9863 for an aggregate of $83,333, a
draw down of Equity 1-B for 63,092 shares of our Common Stock at $0.88 for an
aggregate of $55,556, and proceeds in the amount of $254,530 from the exercise
of 271,870 options and warrants.
In addition to the above, we also received $10,851 from the sale of 7,451
shares of Common Stock to employees pursuant to the 1999 Employee Stock Purchase
Plan for the offering periods ended December 31, 1999 and June 30, 2000.
During the nine months ended September 30, 2001, we received proceeds from
the sale of Common Stock totaling approximately $1,967,000 before stock issuance
costs of approximately $88,200. These transactions included private placements
of 3,481,107 shares of our Common Stock for an aggregate amount of $1,510,000,
draw down of the equity line facility with the Torneaux Fund of 1,459,458 shares
of the Company's Common Stock for a total of $365,000, and proceeds in the
amount of approximately $64,000 from the exercise of 117,500 options and
warrants. The proceeds from these transactions were used primarily to fund our
ongoing operations and investing activities.
Also during the nine months ended September 30, 2001, we received proceeds
from the issuance of convertible debentures in the amount of $500,000.
We had cash and cash equivalents of $389,320 as of December 31, 2000 and
$282,945 as of December 31, 1999, and $136,484 as of September 30, 2001. We had
negative working capital of $2,216,321 as of December 31, 2000, $941,527 as of
December 31, 1999, and $1,900,141 as of September 30, 2001.
Net cash used in operating activities for the year ended December 31, 2000
was $2,385,941, as compared to $3,681,956 for the year ended December 31,1999,
and $2,181,801 for the nine months ended September 30, 2001. The net cash used
in operating activities in fiscal 2000 resulted from a net loss of $6,557,549
offset by depreciation costs of $16,866, the issuance of shares of Common Stock
for services rendered equal to $216,000, non-cash stock compensation of
$1,078,857, non-cash warrants issues of $1,694,718, an increase in accounts
payable and accrued liabilities of $1,324,107 due primarily to difficulties in
raising capital financing and a decrease in accounts receivable and other
current assets of $57,061 due to a reduction in prepaid insurance and employee
receivables. Net cash used in operating activities in fiscal 1999 resulted
primarily from a net loss of $5,915,493, offset by non-cash stock compensation
of $957,755, the issuance of options and warrants for services equal to
25
$774,298, the issuance of shares of Common Stock equal to $621,391 in connection
with the settlement of litigation and an increase in accounts payable of
$204,675. Net cash used in operating activities for the nine months ended
September 30, 2001 resulted from a net loss of $2,689,147 offset primarily by
Common Stock issued for consulting services in the amount of $460,000, non-cash
stock compensation of $337,596, warrants issued for services rendered in the
amount of $351,658, and increased by a reduction in accounts receivable and
other assets of $30,627 and a reduction in accounts payable and accrued
liabilities of $618,266.
Net cash used in investing activities for the year ended December 31, 2000
was $96,551 compared to $12,413,265 for fiscal 1999. This decrease of
$14,316,714 was as a result of a decrease in satellite construction costs.
Approximately $157,000 of the net cash used in investing activities during
fiscal 2000 was related to satellite construction payments made to our satellite
contractors in Europe. Net cash used in investing activities for the nine months
ended September 30, 2001 was $504,876. This resulted primarily from costs
incurred to develop the load curtailment system amounting to approximately
$500,000.
Net cash provided by financing activities for fiscal 2000 was $2,588,867
compared to $15,086,455 for fiscal 1999. Net cash provided by financing
activities during fiscal 2000 was related primarily to the net proceeds from the
sale of units of preferred stock and the exercise of options and warrants by our
stockholders. Net cash provided by financing activities for the nine months
ended September 30, 2001, was $2,433,842. Net cash provided by financing
activities during the nine months ended September 30, 2001 was related to the
net proceeds from the sale of units of our Common Stock, the exercise of options
and warrants by our stockholders, and to the issuance of convertible debentures
in the amount of $500,000.
In 1996, we received milestone payments under the terms of a $1.2 million
purchase order for 10,000 satellite radio units from ABB. Under this agreement,
we were eligible to receive up to $500,000 towards development costs upon
meeting the milestone requirements of the contract. We met the first four
milestones of the contract and have received $400,000 in cash. The parties
agreed to suspend all development under this agreement due to the expiration of
our agreement for the use of the Argos System on December 31, 1997, and the
subsequent limits placed on future commercial use of the Argos System.
Therefore, such milestone payments could be subject to refund, in whole or in
part.
While we continue the strategic fund-raising efforts (see "Plan of
Operations") that are necessary to our ultimate success, our continued cost of
operations significantly exceeds our short-term capital. We currently estimate
that we may require up to approximately $18 million to complete the engineering
and deployment of the system currently under discussion with the State of
California. Given the risks and uncertainties in this undertaking, we cannot
assure you that actual cash requirements will not exceed our estimates. Further,
the current state of capital markets is uncertain, and is even more difficult
for telecommunications companies, and we cannot assure you that we will be able
to raise the funds required to complete the development and installation of the
system, or that the timing and terms of any such financing will be favorable to
us. If we are unable to obtain a sufficient amount of financing necessary to
complete the system on commercially acceptable terms, our business and future
success will be severely and adversely affected. Unless and until we begin to
generate revenues, we will continue to generate further operating losses and
negative net cash flow both for engineering the system and for our daily
operations.
26
BUSINESS
Overview
The Company
DBS Industries, Inc. is a development stage company dedicated to providing
low-cost and secure satellite/telecommunications solutions for remote
infrastructure monitoring and control of energy and its transportation. Through
our ownership interest in E-SAT, Inc., we are the only company currently
licensed by the Federal Communications Commission, "FCC", to provide commercial
two-way data messaging using code division multiple access technology and
low-earth-orbiting Little LEO satellites. We plan to begin providing our data
messaging services on a commercial basis by the end of 2001, utilizing satellite
capacity contracted from Iridium Satellite, LLC for a period of up to seven
years. At the same time, we plan to continue to pursue development of our E-SAT
satellite system as a complementary source of satellite capacity.
Financial difficulties in the satellite sector and sharp declines in
telecommunications and technology sectors have made it difficult for us to
attract the necessary system construction financing to complete the E-SAT
system. So in 2001 we initiated a "show me" strategy, taking advantage of the
telecommunications downturn to purchase low-cost capacity satellites and combine
it with the energy communications technologies and expertise we developed by the
Company over the past ten years. To date, we have not recognized any significant
revenue and do not have any customers. Our objective has been to both produce
revenue and to prove market demand for our services in 2001.
In June 2001, DBSI completed a seven-year operator-to-operator agreement
with Iridium Satellite LLC, the purchaser of the Iridium system out of
bankruptcy, gaining low rates on satellite capacity and limited exclusivity
through a revenue sharing arrangement.
Following the first successful demonstration in June 2001 of turning on and
off a 60-ton shopping mall air conditioner by satellite before representatives
of the California governor's office and the media, the Company entered
negotiations with the State of California to provide satellite-based energy
management services. In August 2001, we submitted a proposal to the California
State Consumer Power and Conservation Financing Authority (the "Power
Authority") for the use of a satellite-based Voluntary Command Conservation
Program designed to conserve significant electrical usage on demand at peak or
emergency time. Discussions are continuing as of the date of this filing, and
there can be no guarantee that the State of California will actually enter into
such an agreement with us. (See "Risk Factors--State of California Contract").
To aid us in entering into the agreement with the Power Authority we have
engaged Arthur D. Little, Inc. to provide engineering services, Bechtel
Corporation to provide program management services for deployment, as well as
Iridium Satellite LLC for the satellite capacity.
We believe that our use of Iridium's L-Band satellite capacity will be
complementary to our ultimate VHF-Band E-SAT system. This is primarily because
the E-SAT system operates in the VHF spectrum that does not require a sky view
from the satellite to the remote device. The Iridium system operates in the
L-Band spectrum and does require a sky view, which prohibits the placement of
the devices inside buildings or in other locations where there is no direct view
of the satellite.
Both of these systems are low-earth-orbiting satellite systems that we
believe offer significant advantages over competing systems and alternative
customer solutions, including:
27
Global coverage: Using a Little LEO satellite-to-internet system, we will
be able to provide reliable, global, two-way data and messaging
communications services.
Low cost: Unlike terrestrial systems, no incremental communications network
infrastructure is required for new locations, regardless of how remote they
are. In addition, both the Iridium System and the planned E-SAT system
require fewer ground stations than other satellite solutions. In Iridium's
case, this is because the system supports inter-satellite communications;
in E-SAT's case, this is because the system is store-and-forward and so
satellites can store the information until a ground station is reached.
Security: Our usage of both the Iridium system, which is used by the U.S.
Department of Defense, and the planned E-SAT System should provide security
benefits through the virtual private network implementation--that is,
neither will utilize the public switched phone system. One of the reasons
this can be done is the restricted gateway structure described above.
Low-cost ground transceiver: As compared to geostationary satellites
operating at over 22,000 miles from earth, the Iridium and E-SAT LEO
systems operate less than 500 miles from earth and therefore can utilize
smaller and less expensive transceivers. In addition, in the case of the
E-SAT System, the use of spread spectrum (CDMA) communications technology
and an Application Specific Integrated Circuit, or "ASIC" technology,
should allow us to produce smaller and lower-cost ground transceivers than
competing systems.
Our principal executive offices are located at 100 Shoreline Highway, Suite
190A, Mill Valley, California, 94941 and our phone number is 415-380-8055.
Our Strategy
To achieve our business objectives, we have identified the following key
components to our business strategy:
Minimizing risk and entering into early commercial service by obtaining
communication capacity on existing satellite platforms. We believe such a
"show me" strategy can both reduce the initial capital required for the
Company to become operational, provide an ability for the Company to build
a customer base and market credibility, and demonstrate the market
opportunity to potential investors for the purpose of raising capital to
complete construction of its E-SAT system.
Providing a reliable, worldwide, two-way data communications network based
on existing technologies. We believe that the Iridium system, which is used
by the Department of U.S., has proven its technology. With regard to our
E-SAT system, we are incorporating existing and proven technologies such as
CDMA communications technology and a store-and-forward design. The
distribution of our E-SAT satellite constellation in low-earth polar orbits
is designed to provide us access to all of the earth's populated land mass
approximately every hour with each satellite, reducing the potential risks
from the loss or outage of one or more satellites.
Offering a low-cost service. We believe that low cost is of fundamental
importance to our clients. By obtaining existing satellite capacity from a
firm that has been purchased out of bankruptcy, we have been able to obtain
service at a significantly lower cost than we believe would otherwise have
been possible. With regard to our E-SAT system, we believe the relatively
lower costs involved in design, construction, launch and operations,
28
together with lower-powered, relatively inexpensive ground transceivers,
will allow us to provide data messaging services to customers in
hard-to-access or remote locations at substantially lower rates than
competing systems. We have designed the E-SAT system specifically for the
two-way communication of short messages, using fewer satellites than
competing near-real time low earth orbit systems and less complex and less
expensive components than those required for larger satellite systems
designed to carry voice, video and high-intensity data traffic. Competing
Little LEO systems using the older TDMA communications technology will
require more satellites and more gateway earth stations than the E-SAT
System.
Capitalizing on not being the first to market. We have learned a great deal
from earlier commercial satellite operators whose services have not
developed as they may have anticipated. We believe that this experience has
confirmed our focus on low-cost solutions for clearly targeted niche
markets.
Capitalizing on the barriers to entry for potential competitors to our
E-SAT System. The primary barrier to entry into the Little LEO satellite
service market in the United States is the acquisition of an operating
license from the FCC. Before the FCC issues any additional licenses, it
must allocate an additional portion of the frequency spectrum for use,
which we do not expect to happen in the near future.
Directly marketing to large industrial customers and governmental entities.
We believe that marketing directly to large industrial customers and
governmental entities will ensure greater customer service and support in
each geographic region or targeted market than will value-added resellers,
and will reduce our selling and administrative expenses for bringing the
E-SAT System to market. Outside of the United States, it will also aid us
in securing any necessary local regulatory and other approvals.
Capitalizing on the commitment and expertise of our strategic partners. We
have successfully allied ourselves with companies and investors who we
believe are highly qualified strategic partners. For our initial service we
have contracted with Iridium Satellite for satellite services, Arthur D.
Little Inc. for engineering, and Bechtel Corporation for program
management. For our E-SAT system, we have received a total investment
totaling $10 million from Eurockot Launch Services, our launch service
provider, and Surrey Satellite Technology Limited, our satellite
manufacturer.
Development Milestones - Voluntary Command Conservation Program
To develop the Voluntary Command Conservation Program, we have achieved the
following milestones to date:
Executed a seven-year operator-to-operator agreement with Iridium Satellite
LLC. In June 2001, DBSI completed a seven-year operator-to-operator
agreement with Iridium Satellite LLC, the purchaser of the Iridium system
from bankruptcy, gaining low rates and limited exclusivity through a
revenue sharing arrangement.
Conducted successful demonstration of Voluntary Command Conservation
Product. In June 2001, DBSI successfully demonstrated our Voluntary Command
Conservation Product by turning on and off a 60-ton shopping mall air
conditioner by satellite before representatives of the California
governor's office and the media.
29
Development Milestones - E-SAT System
The deployment of the E-SAT System's six Little LEO satellites is planned
to begin in 2002. If we are unable to deploy the system in 2002, we will seek an
extension on our FCC license milestones. To date, we have achieved the following
milestones:
Development of the system. We initially conducted research and testing to
develop our E-SAT System design and were successful in integrating our
satellite transmitter and antenna completely within a utility meter.
Completed proof-of-concept trials. We conducted proof-of-concept
demonstrations with 36 electric and natural gas utilities demonstrating
Little LEO satellite technology as a viable method to collect data from
hard-to-access locations. We conducted a proof-of-concept trial for Pacific
Gas & Electric Company, in which data from several natural gas wellhead
meters was collected and transmitted by Little LEO satellites to the
customer. This trial was completed in April 1995. Subsequently, a series of
proof-of-concept demonstrations were conducted in conjunction with ABB
Power T&D Company, Inc., commonly referred to as ABB, in which prototype
radio terminal units and electric meters were installed at 34 electric
utilities in the continental United States and two international utility
companies in South America and Canada. Typical trial demonstrations lasted
for a 30-day period, and the demonstrations were completed in late 1997.
These early trials utilized the Argos System, a satellite location and data
collection system operated and controlled by the Centre National d'Etudes
Spatiales (France) and the National Oceanic and Atmospheric Administration,
or NOAA.
Granting of FCC License. On March 31, 1998, E-SAT was issued a license by
the FCC to provide Little LEO satellite services in the United States.
Commenced construction of the satellites. On March 31, 1999, we signed a
contract with Surrey Satellite Technology Limited for the construction of
our constellation of six Little LEO satellites. Should we bring into effect
our prime contract with Alcatel Space Industries (see below in this
section, "Entered into an agreement with an end-to-end prime contractor for
the E-SAT System"), our contract with Surrey would be assigned to Alcatel.
Engaged a launch service provider to deliver our satellites into orbit. On
March 31, 1999, we signed a contract with Eurockot Launch Services GmbH,
for two launches, each for a set of three satellites.
Entered into an agreement with an end-to-end prime contractor for the E-SAT
System. On October 8, 1999, we signed a contract with Alcatel Space
Industries for the final design, construction and delivery to the launch
site of six Little LEO satellites. This agreement also includes the final
design, construction and delivery of the ground infrastructure, including
the gateway earth station, mission center, satellite control center, ground
communications network and ground-based transceivers to be installed into
devices, like utility meters. Alcatel is also responsible for providing
in-orbit testing of the E-SAT System. The total contract price for the
end-to-end system is $88.5 million. Either party has the right to terminate
this agreement under certain circumstances. We have paid $2 million in
construction payments to Alcatel, pursuant to which Alcatel completed the
preliminary engineering design review for the Company's system, including
the payload design and designs for the gateway earth station and tracking
facilities, as well as the satellite orbital analysis and communications
link margins to and from space. The agreement with Alcatel required a
payment at the end of 1999 of approximately $9.1 million in cash and the
30
equivalent of $5 million in Common Stock. This payment was necessary for
Alcatel to continue work and to trigger an effective date for our full
system development schedule. As of December 31, 2001 this payment, which
was originally due in November, 1999, has not been made and therefore the
agreement with Alcatel is not currently in effect. (See, "Risks--The
contract with our prime contractor could be declared void.")
Negotiated equity investments in us by all of our strategic partners. We
negotiated equity investments totaling $10 million by Eurockot Launch
Services and Surrey Satellite Technology Ltd. We also negotiated a
potential investment by Alcatel, but that is subject to making the
milestone payments necessary to establish the effective date of contract.
Organized our risk management through insurance. On July 14, 1999, we
engaged Frank Crystal and Co. and its subsidiary, International Space
Brokers as our exclusive risk management advisors and insurance brokers for
both space and ground segments.
Successfully launched and commissioned first satellite payload, bringing
our international license into service. On June 28, 2000, we launched our
first satellite payload aboard a SNAP-1 nanosatellite, and completed the
in-orbit commissioning in August and September. The satellite, which is not
being used for commercial service, has succeeded in its purpose of
validating critical design elements that we believe will lead to the
successful deployment of our E-SAT commercial satellite services in 2002.
Surrey Satellite Technology Ltd. completed the payload from design to
commissioning in only seven months. On October 20, 2000, the FCC informed
the International Telecommunications Union that this payload brought into
service the LEOTELCOM-2 international frequency license, under which the
Company operates.
Acquired controlling interest and obtained FCC approval of and completed
the transfer of controlling interest of E-SAT to us. On July 31, 1999, we
signed a contract with EchoStar Communications Corp. to increase our
ownership in E-SAT to 80.1%. EchoStar retains 19.1% of the ownership
interest in E-SAT, Inc. Pursuant to that agreement, EchoStar has the right
to use 20% of the E-SAT system's communication capacity. The transfer of
control was subject to FCC approval, which was subsequently granted on
November 21, 2000 and on December 29, 2000, we executed documents for the
formal transfer from EchoStar.
Target Markets - Voluntary Command Conservation Program
We believe that our satellite-based energy monitoring and control
technologies enable us to offer innovative solutions for protecting and
conserving vital energy infrastructure throughout the world. A key project
proposed and demonstrated to the State of California is a satellite-based
Voluntary Command Conservation Program to automatically curtail non-essential
power usage throughout California at peak usage and emergency times.
In our discussions with the State of California and the National Rural
Electric Cooperative Association, we believe that low-cost high-technology
solutions exist to address major issues such as conservation, metering, and grid
infrastructure. In particular, we focused upon the energy crisis in California
and identified that a significant percentage of all electrical consumption is
attributed to commercial air conditioning systems, and by providing automated
curtailing of these systems during critical time periods, we could offer the
following potential benefits:
Prevents blackouts. Through the identification and consolidation of
non-critical/ non-essential energy use across a state, a massive voluntary
prospective reserve of energy can be developed for automated conservation
31
on command. This automated conservation can be used to protect against
rolling blackouts and their potentially serious health, safety and short
and long-term economic consequences.
Protects consumers/business. Provides the user with a potent tool to have
much greater control over the regional energy spot market. To the extent
that the user finds that temporary energy bottlenecks or purposeful energy
company market manipulation or gouging of the ratepayers is taking place,
it has an effective tool to ratchet down energy use during spikes to
prevent excessive energy pricing. This could save retail customers,
businesses and government significant amounts from their power bills.
Energy conservation and protection of the environment. This program is the
first far-reaching voluntary command conservation program implemented in
the world and could be of record size when desirable/needed. This
technology will in addition facilitate significant energy conservation
through greater efficiency of the overall system. These increased
efficiencies and the ability to control power spike usage will reduce the
need to build some new generation and transmission facilities with their
heavy financial and environmental costs.
Grid infrastructure security. In the event of inadvertent or intentional
damage to a portion of our grid, our ability to execute command
conservation could be used to prevent a dramatic and cascading impact on
the regional grid, as illustrated by the Northeast blackout of 1977.
Target Markets - E-SAT System
We have designed the E-SAT system to provide low cost, two-way data
messaging services to industrial customers throughout the world who need
regular, but not real-time, information. By focusing on the non-real-time
market, where some delay between data collection and transmission to the
customer has insignificant business consequence, we are able to substantially
lower the costs of our system, and therefore lower the price to the customer. By
focusing on collecting data that is in remote or hard-to-access locations, we
reduce our competition from terrestrial technologies, such as cellular
communications, which cannot justify the infrastructure expense in each remote
location, and we increase the value offered to the customer as a result of their
higher costs in those areas.
Energy Meters
Our initial focus is on energy meters in remote locations. One of our
target markets is the United States electric and natural gas utility industries,
particularly their high-cost-to-read metering segment which historically
required such "meter reading" to be conducted by utility personnel. This labor
intensive activity presents logistical issues such as significant travel time to
a meter site, rugged terrain, physical risk, restricted sites, environmental
issues, and mis-reads requiring additional site visits, all of which can
contribute to higher costs for utilities.
Our proposed messaging services are designed to provide a reduction in the
cost to gather data from hard-to-access meters. We expect to charge
significantly less than the costs utility companies normally incur in sending
meter reading personnel out to each of those difficult to reach locations. This
provides several advantages including:
o Planning and decision-making is improved through greater and more
timely availability of their consumers' energy-related information.
32
o Estimated billing is eliminated.
o Service connects and disconnects can be scheduled and performed
automatically.
o Value added features are available such as meter diagnostics, tamper
detection, outage reporting, and power quality information.
o Two-way communication capabilities can substantially reduce customer
costs while enabling new customer applications such as initiating
remote diagnostics and remote turn-on/turn-off of electric meters.
In the United States, the emergence of automatic meter reading as an
accepted technology and the deregulation of the utility industry in a number of
states, which has forced utility companies to focus on all aspects of their
costs and, in some cases, to compete to retain the meter reading activity, has
provided a foundation for us to market our services.
There is also a significant potential market for our services in countries
that do not broadly monitor energy consumption. For those countries,
implementing or expanding coverage of metering is of significant strategic and
economic benefit both as a source of revenue and as a critical component of
implementing their energy infrastructure. By working with these countries as
they develop their services and providing them with a low-cost alternative to
traditional meter reading methods, we believe we can succeed in becoming an
integral part of their utility infrastructure.
Other Markets
We believe other significant markets for our data messaging services
include:
Propane tanks. Currently, most propane tanks are not metered and customers
can be invoiced only on fuel delivery. Automated meter reading enables
monthly billing based on actual consumption, which improves the
distributor's cash flow and, even more important, creates an opportunity
for fuel arbitrage. Since the consumer would not need to pay for fuel upon
delivery, the distributor can fill customer tanks in the summer or other
times, when fuel prices are lower. The consumer also avoids the
inconvenience of running out of fuel and enjoys a reduction in the safety
issues associated with re-lighting the pilots on their appliances.
Oil and gas wellheads. In the energy sector, data from particularly remote
and hard-to-access oil and gas wellheads can be collected electronically,
providing material savings in costs per read. Some of these wellheads are
located in areas that are not only extremely remote, but are also high-risk
and the physical safety of the meter reader is a real concern. In addition
to eliminating the personal safety risk this also will create an
opportunity to aggregate data internationally, if the service provider has
global coverage.
Gas pipelines. Monitoring for cathodic protection, flow control and leakage
from gas pipelines is another market appropriate for the periodic data
transmission from sensors located in isolated areas. Most of the cathodic,
flow control and leakage sensors around the world are read manually, which
is a tedious process, frequently using helicopters for typical pipeline
terrain. Given the cost of product flowing through the pipeline and the
ecological impact of a pipeline failure, energy companies are motivated to
quickly identify any failures as well as the sources of the problem.
33
Environmental and Agriculture. The waste disposal industry, faced with
increased public awareness of pollution problems, is required by federal,
state, and local governments to closely monitor air and water quality at
all waste disposal sites. Collecting data from these locations and
reporting it to both operating and regulatory agencies is well suited to
our proposed services. In addition, we believe that existing irrigation
systems can become more efficient through timely monitoring of usage data.
Technology: Voluntary Command Conservation Program
Our voluntary command conservation system is comprised of three principal
components: the LEO satellite network, the ground network and the user terminal
unit.
The following illustrates our program flow diagram.
[GRAPHIC OMITTED]
The Voluntary Command Conservation system, developed together with Arthur
D. Little, Inc., utilizes a proprietary master control system and remote
controller connected to the Iridium Satellite System to remotely monitor and
control roof-top air conditioning systems or other types of electricity-using
devices.
As of December 31, 2001, the Iridium satellite network consists of a
constellation of 73 satellites (66 are operational plus 7 on-orbit spares) and a
ground support network. The satellites are grouped into six polar planes, each
having eleven satellites functioning as switching nodes in the Iridium telephony
network. Each satellite weighs approximately 680 kg and travels in near-polar
orbits at an altitude of 485 miles (780 km) above the earth. Each satellite is
cross-linked to four other satellites; two satellites in the same orbital plane
and two in an adjacent plane. This constellation ensures that every region on
the globe is covered by at least one satellite at all times. The Iridium network
operates in the L, K and Ka frequency bands.
Planned aspects of our technology include:
o Universal control of virtually any Air Conditioning system - remote
operation shut-down
o Independent control of multiple AC units or other loads
o Security
o Automatic site identification when connection is initiated
o Remote status monitoring of the Air Conditioning system and the remote
controller
o Battery backup for several days without commercial power
34
o Weather-proof remote control unit is designed for simple installation
and trouble-free operation
Technology: The E-SAT System
The E-SAT system is designed to minimize infrastructure investment and
maximize efficiency by utilizing a small constellation of Little LEO satellites
with the ability to reach markets not readily accessible by terrestrial
technologies. We expect that the aggregate cost to construct and launch the
E-SAT system into commercial service will be approximately $60 million, in
addition to the approximately $12.2 million which has been spent through
December 31, 2001.
The E-SAT system's radio terminal units will attach to a customer's meter
or other device and transmit data to the satellites using CDMA technology. From
these Little LEO satellites, the data is transmitted to ground stations, which
sort the data and transmit the information to our customers via the Internet.
The two-way service also allows our customers to send instructions, messages,
and updates to their remote meters or other devices. The following illustrates
the data collection and dissemination process:
[GRAPHIC OMITTED]
Space Segment
The constellation to be launched will consist of six satellites. We plan to
initially launch three satellites on a single launch vehicle in a circular, near
polar orbit at an altitude of approximately 550 miles and a 99 degree
inclination angle. At this altitude, there will be fourteen revolutions per
satellite per day, taking about 100 minutes per orbit. After the initial three
satellites are deployed and become operational, and the system is established,
an additional three satellites will be deployed in a second near-polar orbital
plane within FCC guidelines. These Little LEO satellites, which will weigh about
110 kg each, will be almost constantly illuminated by the sun, thereby
significantly reducing battery usage. Supplemental battery power will be
required only for power load leveling, occasional brief eclipse periods and
contingencies. Based on the current design, we estimate that each satellite will
operate for a period of five years.
The satellites will consist of two functional segments, the platform and
the payload. Put simply, the platform is the structure part of the satellite.
The payload is the radio frequency equipment on board the satellite that allows
it to communicate with earth-based transceivers. The platform provides the
payload with power and thermal control, allowing it to operate and perform the
mission. The platform provides the altitude control in order to keep the payload
35
antenna pointing towards the earth. Orbit determination and control is performed
by the platform in order to maintain the proper constellation configuration.
The FCC license will allow us to operate from earth to the satellites in
the 148.0000 - 148.905 MHz band and from the satellites to the earth in the
137.0725 to137.9275 MHz band. The communications plan for our system will
utilize direct sequence spread spectrum multiple access transmission for service
links, from meter to satellite, and feeder links, from ground station to
satellite. This modulation technique is designed to allow the communications to
distinguish between messages and the background noise emanating into space.
Due to the continuing growth of electrical and electronic equipment, such
as personal paging systems that incorporate wireless communication technology,
the radio frequency spectrum has become crowded or "noisy." Commercial
applications demand reliable communication systems. This objective is harder to
achieve with conventional solutions because of numerous wireless systems
creating more noise in the frequency bands of operation. CDMA is designed to
enable our system to provide high functionality in a noisy radio frequency
environment and achieve those particular data transmission objectives.
With most conventional modulation techniques, energy concentration is
maximized for a narrowband transmission channel. While narrowband solutions opt
for a single carrier channel, the transmitted signal must be strong enough to be
recognized over the background noise. Therefore, terminals operating in a
narrowband technique must have relatively high power capability. CDMA spreads
the data signal over the entire band of operations reducing the power required
by a terminal unit to transmit data to a satellite. Through E-SAT, we are
presently the only commercial Little LEO system operator licensed in the United
States to implement CDMA in its communications protocol.
Ground Segment
Rather than using traditional technology that transmits the data to a
ground station as soon as it is received, the non-real-time nature of our
markets allows us to use a store-and-forward design. Our satellites are designed
to receive the information from terminals on the ground, store it in memory and
hold all of the data until they pass over a ground station. This allows us to
use fewer ground stations, reducing costs and radio frequency licensing and
coordination requirements. We currently intend to locate our initial ground
station on Svalbard Island in Spitzbergen, Norway, and are evaluating certain
sites in other countries for additional service.
The mission control center will manage the collection and retrieval of
data. It will interface with ground stations and a satellite control center. The
satellite control center will communicate directly with and provide overall
operational control of the satellites. The mission center location is currently
in review and the satellite control center is currently planned to be located in
the United Kingdom.
Secure Internet communication with customers is a crucial part of the E-SAT
System. Data collected or delivered will utilize the Internet as a global,
cost-effective vehicle to disseminate data and maximally automate the customer
servicing system. Data will lack meaningful descriptors or customer
identification and so should have no meaning if intercepted, but may also be
encrypted.
Terminals
The system is also comprised of remote terminal units that will connect to
a device such as an electric utility meter and allow that device to send and
receive signals to and from the system. The terminal will provide the
36
communication link between the meter and our satellites. A relatively low-cost
terminal is a key success factor for this business plan and, for that reason, we
intend to strictly control the development and manufacturing of the terminals.
The complete terminal unit will consist of two parts, the core engine and
the fixed asset interface module. The core engine will include a programmable
controller unit and will incorporate the cost-saving benefits of the ASIC
technology. This will allow us to manufacture the terminals at a lower cost. The
fixed asset interface module will be optimized for the specific application,
such as an electric meter, vending machine or propane tank, and will contain all
the application specific functions required to interface the device with the
core engine. The interface will also contain any necessary power conditioning
components to allow reliable communication between the terminal and the
satellites.
During 1998, we worked with SAIT Radio Holland SA to perform studies on
antennas for the proposed terminal units and to develop and test prototypes. The
development of terminal units was also included as an item under our agreement
with Alcatel. (See "Development Milestones--Entered into an agreement with an
end-to-end prime contractor for the E-SAT system".) We have not yet identified a
main subcontractor for the engineering, development and provision of hardware
and software for terminal units, or for the manufacture of terminals.
Regulatory Environment
United States
All commercial non-voice, non-geostationary mobile-satellite services, such
as Little LEO satellites, in the United States are subject to the regulatory
authority of the FCC. Little LEO operators must obtain authorization from the
FCC to launch and operate their satellites and to provide permitted services in
assigned spectrum segments.
In November 1994, E-SAT filed an application with the FCC for a license to
develop a commercial Little LEO satellite system for data collection and
transmission. E-SAT was one of five applicants requesting approval for
essentially the same frequency band but proposing a different use. The five
applicants mutually agreed upon a spectrum sharing plan which requires the
applicants to share an uplink and downlink frequency band with other satellite
systems. In October 1997, the FCC released a report and order which concluded
that with use of appropriate transmission techniques, proper system
coordination, the time-sharing of frequencies and the adoption of the spectrum
sharing plan, there was sufficient spectrum to license all five applicants.
Thereafter, E-SAT filed an amendment conforming its application to the
guidelines adopted by the FCC report and order.
On March 31, 1998, the FCC approved E-SAT's application for a Little LEO
satellite license. Under the license, E-SAT is authorized to launch and operate
six Little LEO satellites to provide a two-way, low-cost messaging service in
the United States in the 148 to 148.905 MHz for service and feeder uplinks, and
the 137.0725 to 137.9725 MHz frequency band for service and feeder downlinks.
For its uplink, E-SAT is licensed to utilize 500 kHz of contiguous spectrum in
the 148 to 148.855 MHz band that is not shared with the other United States
licensees. Some of this spectrum may be required to be operated co-frequency
with the French S-80 system, based on inter-governmental agreements between the
United States and France. In December 1998, we completed our coordination with
France on this shared use. E-SAT is licensed to utilize 148.855 to 148.905 MHz
for feeder uplinks. E-SAT will operate in the other 355 kHz of the 148 to
148.905 MHz band on a co-frequency basis with three other companies, Leo One USA
Corporation, Final Analysis Communication Services and Orbcomm Corp. In the
downlink direction, E-SAT will operate in the band 137.0725 to 137.9275 MHz
37
co-frequency with NOAA satellites, Orbcomm and Final Analysis. E-SAT is
obligated to coordinate with the other Little LEO licensees and NOAA, coordinate
internationally and engage in consultations as required by Article 14 of the
INTELSAT Agreement and Article 8 of the Inmarsat Convention.
In order to maintain the validity of the FCC license, E-SAT must comply at
all times with the terms of the FCC license, unless specifically waived or
modified by the FCC. The terms include, among other things, system construction
milestones. In order to comply with the milestone requirements of the FCC
license, E-SAT was required to commence construction of the first two satellites
by March 1999 and the remaining four satellites by March 2001. On March 31,
1999, we, on E-SAT's behalf, entered into an agreement with Surrey Satellite for
the construction of the Little LEO satellites, and we notified the FCC on April
8, 1999, that we had met the first milestone of the license, commencement of
satellite construction by March 1999. The FCC has neither confirmed nor denied
our assertion. Because of the competitive nature of the Little LEO market, the
other licensees may challenge in the future our timeliness or our ability to
meet the conditions of the license. The terms of the FCC license also require
that construction, launch and operation of the E-SAT system be accomplished in
accordance with the technical specifications set forth in the FCC application
and consistent with the FCC's rules, unless specifically waived. During the
process of constructing the E-SAT system, there may be certain modifications to
the design set forth in the FCC application that may necessitate regulatory
approval.
Assuming continued compliance, the FCC license will remain effective for
ten years from the date on which we certify to the FCC that the initial
satellites have been successfully placed into orbit and that the operations of
the satellites conform to the terms and conditions of the FCC license.
In addition, the FCC must approve the integration of E-SAT system's ground
transceivers with the fixed devices. If received, the approval would apply to
all transceivers to be operated in the United States.
International Regulations
Landing Rights. In addition to the FCC license for operation of the E-SAT
system in the United States, we will be required to seek certain "landing
rights" in each country in which our ground transceivers will be located. We
intend to utilize international clients, partners or affiliates in each country
we intend to operate in to obtain such authority. In the event we are
unsuccessful in obtaining a foreign license in a particular country, we will be
able to offer only one-way, broadcasting from the satellite, data and messaging
services in that country.
International Telecommunications Union Coordination. The E-SAT system
operates in frequencies that are allocated on an international basis under the
authority of the International Telecommunications Union, or ITU. The United
States, on behalf of various Little LEO service providers, pursued international
allocations of additional frequencies for use by Little LEO systems. In addition
to cooperation through the FCC, E-SAT will be required to engage in
international coordination with respect to other satellite systems, and in some
cases, with terrestrial communication systems. The purpose of this coordination
is to ensure, to the maximum extent feasible, that communication systems will be
able to operate without unacceptable radio frequency interference from other
communication systems. This process, called "satellite coordination," takes
place under the auspices of the ITU and is essentially a first come, first
served process. That is, earlier filings generally establish some priority over
later filings although the ITU encourages applicants to cooperate to enable as
many satellite systems as possible to be implemented.
38
Ownership Interest in E-SAT
E-SAT was incorporated in 1994 in partnership with EchoStar. In connection
with the formation agreement, we hold 80.1% of the outstanding shares of E-SAT
and EchoStar holds the remaining 19.9%. E-SAT was formed for the purpose of
acquiring an FCC license to develop, construct and operate a Little LEO
satellite system. In March 1998 the FCC issued the license to E-SAT. In July
1999, we entered into an agreement to acquire an additional 60.1% from EchoStar,
to bring our total ownership of E-SAT to 80.1%. The agreement and transfer of
control of E-SAT is subject to FCC approval, which was formally requested on May
2, 2000 and approved by the FCC on November 21, 2000. The transfer agreements
were executed in December 2000. The terms of the agreement granted EchoStar a
20% undivided interest in the satellite transmission capacity associated with
the FCC E-SAT license.
Competition
Load Curtailment Competition
Our Voluntary Command Conservation program falls in the general category of
electricity peak load curtailment services. For decades, when utilities had a
problem meeting their peak demand, they called (usually by phone) customers with
large concentrated loads to obtain voluntary reductions. These customers include
industrial corporations, government, and large institutions such as hospitals
and universities. Such reductions were generally voluntary but unpaid.
"Interruptible" electric rates emerged in the 1970s. Customers would pay low
power rates most of the time, but promised to cut back load by a defined amount
when called-or else pay a stiff penalty.
In the 1980s and early 1990s, some utilities offered residential and small
commercial customers lower electric rates in exchange for installing automated
demand control devices on electric hot water heaters and air conditioners. The
demand control devices would respond to radio signals from the utility. Many of
those programs, however, were either cut back or not pursued sufficiently to
make much of a difference. Since there was no easy way to verify which customers
had disabled the devices, questions were also raised regarding their sustained
impact.
During the late 1990's a combination of rapid load growth caused by a
sustained economic boom, a failure to build new power plants, and difficulties
with retail deregulation contributed to reductions in utility spare capacity and
increasing requirements for effective curtailment solutions. Curtailable load
programs often featured the following types of requirements:
o Minimum load reduction of 100 kW per customer
o Reduction must be available between 9 a.m. and 10 p.m. on any day of
the week
o Notification is usually at least 4 hours prior to curtailment
o Reduction commitment must be met within 1 hour of curtailment
o Customer must be able to receive and act upon the form of notification
(e.g., beeper, radio signal)
o Customer must have installed meters able to record integrated hourly
values for actual net generation
In these programs, meters measure and report load both before and after the
reduction request. Samples of several such tariffs may be found at the web sites
of a few utilities and some of the Independent System Operators.
39
Load curtailment differs from demand-side management (often referred to as
DSM), which typically focuses on permanent or continuous demand reduction,
unrelated to market-based pricing.
Many firms offer a wide variety of energy solutions for energy efficiency,
demand-side-management and load curtailment, including Comverge Technologies,
Retx.com, New West Energy, AES New Energy, Skytel, Silicon Energy, Circadian
Information Systems, and Energy Interactive. While the energy monitoring and
control marketplace is highly populated with competitors, we believe that these
competitors rely dominantly on fixed or wireless mobile terrestrial
communications technologies to implement their businesses. We believe that the
use of low-earth-orbiting satellites will provide improved access to customers
over large geographical regions at lower cost than our competitors.
For discussion of potential satellite competitors, see "Competition for our
E-SAT system," below.
Competition for our E-SAT System
Competition in the communications industry is intense, fueled by rapid and
continuous technological advances and alliances between industry participants
seeking competitive advantages on an international scale to capture greater
share of existing and emerging markets.
In addition to E-SAT, three other commercial entities have been licensed by
the FCC to provide Little LEO satellite services in the United States although
no other entity has been issued a license to use CDMA communication protocols:
Orbcomm Global, Leo One, and Final Analysis. The FCC also granted a license in
1998 to Volunteers in Technical Assistance to transmit health, research and
scientific data on a delayed basis between developing countries and the United
States.
Of the three commercial entities, only Orbcomm is currently in service.
Orbcomm failed to generate revenue sufficient to cover its debt and was
purchased out of bankruptcy protection in 2001. Over $800 million has been
invested to date in the Orbcomm service, which was initiated in 1996 and
consists of approximately thirty satellites, 5 gateway control centers, and 10
gateway Earth stations. Orbcomm aimed at serving on a near-real-time basis the
broad data markets of mobile asset tracking of trailers, containers, rail cars,
heavy equipment, autos, fishing vessels and barges and U.S. government assets;
fixed asset monitoring of oil and gas tanks, pipelines, chemical tanks, electric
utility meters, and environmental projects; two-way commercial and U.S.
government messaging; home and commercial security systems; and personal
messaging. Orbcomm uses time division multiple access (TDMA) narrow band
communication protocols.
Other than Orbcomm's existing TDMA based system, we do not believe that any
of the other proposed Little LEO systems will be commercially operational in the
near term. We believe that we hold an advantage over these potential competitors
by having obtained an FCC license for the only CDMA based store-and-forward
Little LEO system in the United States; by focusing on a low-cost and highly
targeted market; and by achieving international coordination of our designated
frequencies through the ITU. Over the course of the next several years, we
expect to obtain further advantages over these potential competitors by
demonstrating that a CDMA store-and-forward system can offer service at lower
cost than those offered by the competition.
Plans for Little LEO systems have also been announced in Australia, Brazil,
France, Russia, South Korea, Tonga and Uganda, although we believe that, without
additional allocations of spectrum in the United States, these systems will be
unable to offer services in the United States, and they will have to reach
coordination agreements with all countries who have prior ITU filings for the
same spectrum, namely the spectrum license filed by the FCC which it awarded to
us.
40
We expect that potential competitors will include other Little LEO systems,
certain geosynchronous or geostationary orbit, or GEO-based systems,
terrestrial-based communications systems, LEO satellite systems operating above
1GHz, often called Big LEO systems, and various medium earth orbit, or MEO,
systems.
We believe further that we will compete in certain of our market segments
with existing operators and users of certain GEO-based systems such as American
Mobile and Qualcomm, and companies providing services using the Inmarsat system.
American Mobile offers data services, both satellite only and dual-mode,
satellite and terrestrial, through a public data network that can reach both
densely populated urban areas and sparsely populated rural areas. In 1998,
American Mobile acquired Motorola's ARDIS two-way terrestrial-based wireless
messaging network, which complements American Mobile's existing satellite-based
voice and data communications services. This allows American Mobile to offer a
hybrid solution that has the ability, among other things, to serve urban areas
and to penetrate buildings. Qualcomm designs, manufactures, distributes and
operates a satellite-based, two-way mobile communications and tracking system
that provides messaging, position reporting and other services for
transportation companies and other mobile and fixed site customers using GEO
satellites. In addition, various companies using the Inmarsat system are
providing fishing vessel and other marine tracking applications. We believe that
the E-SAT System will have certain advantages over these other systems,
including worldwide coverage and lower equipment costs.
The Big LEO and MEO systems mentioned earlier are expected to provide real
time, uninterrupted service. These systems are designed primarily to provide
two-way voice services that require larger, more complex satellites than our
satellites and larger constellations to provide coverage. As a result, the cost
of the Big LEO and MEO systems is significantly greater than those of the E-SAT
System. However, the marginal cost on a per-message basis of providing services
similar to those we will offer could be relatively low for a Big LEO or MEO
system that is unable to sell its capacity for voice services. For example, the
satellite system operated by Globalstar, L.P. is expected to utilize a
multi-billion dollar constellation of 48 satellites--as compared with DBSI's
planned system of 6 satellites with an expected construction, marketing and
operating cost of approximately $110 million--with those system costs then
having to be allocated into each company's pricing structure and pricing
strategy.
We also face competition from a wide range of terrestrial technologies,
including paging, cellular, and power line carrier systems. Generally, our focus
is not to compete with existing and planned terrestrial-based communications
systems. However, in particular segments of our market, we believe we may
encounter certain of these systems. While providing cost-effective services
primarily in metropolitan areas where subscriber densities justify construction
of radio towers, terrestrial systems generally do not have sufficient coverage
outside metropolitan areas, which makes them less attractive to the
hard-to-access and remote location markets that we initially targeted. In
addition, we believe that the E-SAT system will present an attractive complement
to tower-based services because E-SAT can provide geographic gap-filler service
at affordable costs without the need for additional infrastructure investment.
Because of the inherent coverage limitations of a terrestrial-based
communications system, we believe that the E-SAT system will complement such
systems.
SkyTel, for example, provides paging messaging services in U.S. cities and
is using its messaging network to provide fixed location services, specifically
utility meter reading in urban areas. Hunt Technologies and Distribution Control
Systems provide power line carriers (PLC) solutions, using very low frequencies
to transmit messages over power distribution lines, typically transmit data
one-way and very slowly. Phone line carriers, which use a dedicated common
carrier telephone service, are constrained by industry infrastructure
transaction volume and addressability limitations. Cellemetry, which operates
within the control channel of common carrier cellular frequencies, and Cellular
41
Digital Packet Data, which uses common carrier cellular frequencies to send
messages in high speed bursts during the idle time in voice transmission,
require local infrastructures to operate. The triple shortcomings of these
systems - namely (1) lack of instantaneous, cross-continental data collection,
(2) "black holes" and lack of ubiquitous coverage, and (3) high incremental
infrastructure and per message costs outside concentrated population centers -
are all competitive advantages for the E-SAT system.
Employees
As of December 31, 2001, we had six full-time employees. None of our
employees is subject to a collective bargaining agreement, nor have we
experienced any work stoppages. We consider our relationship with our employees
to be good.
Properties
We have leased 3,550 square feet at a monthly rate of $12,353, for our
principal offices at 100 Shoreline Highway, Suite 190A, Mill Valley, California,
on a three-year lease which expires on July 31, 2003.
MANAGEMENT
Our directors and executive officers, their ages, positions held, and
duration as such, are as follows:
Name Position Age Period
- ---- -------- --- ------
Fred W. Thompson Chairman of the Board, 58 December 1992 - present
President, Chief Executive
Officer
Michael T. Schieber Director 62 December 1992 - present
Jerome W. Carlson Director 64 May 1997 - present
Jessie J. Knight, Jr. Director 50 February 1999 - present
Roy T. Grant Director 45 August 1999 - present
Stanton C. Lawson Director, Senior Vice 43 October 1999 - present
President of Finance, Chief
Financial Officer
Randy Stratt Senior Vice President, General 45 November 1999 - present
Counsel and Secretary
Frederick R. Skillman, Jr. Vice President, Operations 40 August 1995 - present
Business Experience
The following is a brief account of the education and business experience
during at least the past five years of each director, executive officer, and key
employee, indicating the principal occupation and employment during that period,
and the name and principal business of the organization in which such occupation
and employment were carried out.
42
Fred W. Thompson has served as Chairman of the Board, President and CEO
since 1992. Up until October 1999, Mr. Thompson also served as Chief Financial
Officer. Mr. Thompson has over 30 years of senior management experience in the
telecommunications industry, including more than 20 years with AT&T Bell Labs,
Western Electric Co. and the Long Lines Dept. As founder and Chief Executive
Officer of Inter Exchange Consultants, Inc., Mr. Thompson was responsible for
the successful management, design and engineering of the pioneering cellular
telephone operations in major world markets, including New York, San Francisco,
London and Tokyo. Mr. Thompson utilized his skills and experience in bringing
new communications technologies to market by founding DBS Industries, Inc. and
steering it through the FCC licensing process toward the operational phase. Mr.
Thompson received a BS degree in Electrical Engineering from California
Polytechnic.
Michael T. Schieber has served as a Director of the Company since December
1992. From 1987 to December 1992, Mr. Schieber was the Managing Partner of
Amador Telecommunications and since 1990 has been a partner in Columbia
Communications, both investors in nation-wide paging licenses. Mr. Schieber also
holds minority interests in two Illinois cellular telephone licenses. He retired
from the Department of Fisheries with the State of Washington in May 1993 where
he had served as a civil engineer since 1984. He is also a retired Air Force
Major and Command Pilot. Mr. Schieber received an MA degree in International
Relations and Government from the University of Notre Dame, a BS in Engineering
from the Air Force Academy, and a BA in Business from The Evergreen State
College.
Jerome W. Carlson, a Director appointed in May 1997, is currently President
of Raljer, Inc., a management consulting firm, and has held that position since
January 1995. Previously, from 1984 to 1995, Mr. Carlson was the Chief Financial
Officer, Vice President of Finance and Corporate Secretary for Triad Systems
Corporation in Livermore, California. Mr. Carlson has over twenty years
experience in both finance and general management positions with Hewlett
Packard. Since 1995 he has assisted a number of businesses in developing and
achieving certain strategic and tactical goals in their industries. Mr. Carlson
is a director of Valley Community Bank and Tri-Valley Business Council, as well
as director and advisor for several private companies. He holds a BS degree from
the University of California at Davis and an MBA from the Stanford Graduate
School of Business.
Jessie J. Knight, Jr., a Director appointed in February 1999, is President
and Chief Executive Officer of the San Diego Regional Chamber of Commerce. He
was a Commissioner of the California Public Utilities Commission from 1993
through December 1998. Appointed by former Governor Peter Wilson, he was one of
five individuals responsible for economic and regulatory oversight of
California's telecommunications, utility, trucking and rail industries. Before
his appointment to the Commission, he was Executive Vice President of the San
Francisco Chamber of Commerce, responsible for international operations,
economic development and attracting businesses to San Francisco. He also served
as Vice President, Marketing for the San Francisco Newspaper Agency, a
publishing operation encompassing the San Francisco Chronicle and the San
Francisco Examiner. Mr. Knight is a director of Blue Shield of California and
serves on the board of directors of Avista, Inc. Mr. Knight holds a BA degree
from St. Louis University and an MBA from the University of Wisconsin.
Roy T. Grant has served as a Director since August 1999. Mr. Grant is
currently an independent consultant. From January 2000 to April 2001, Mr. Grant
was Chief Financial Officer of Wayport, Inc. Prior thereto from November 1996
through April 1999, Mr. Grant was employed by Iridium, LLC, most recently as
Vice President and Chief Financial Officer. Subsequent to Mr. Grant's departure,
Iridium, LLC filed for protection under the bankruptcy laws in 1999. From 1992
to 1996, Mr. Grant served as Finance Director for Edison Mission Energy, the
largest independent power developer in the United States. Mr. Grant is a
director of e-tel Corporation and Groxis. Mr. Grant holds a BS in Administration
43
and Management Science, Mathematics and Economics from Carnegie Mellon
University and an MBA in Finance from the University of Chicago.
Stanton C. Lawson, a Director appointed in December 1999, has served as
Senior Vice President of Finance since October 18, 1999. Mr. Lawson has over 20
years of experience in international environments as a financial professional.
Before joining DBS Industries, Mr. Lawson worked for the Worldwide Information
Systems Division of Autodesk, Inc., in San Rafael, CA, where he was responsible
for budgeting, financial reporting and analysis, and contract management for the
information systems division and for corporate human resources. He was employed
by Olivetti from 1981 to 1990 managing the finance and accounting function of
Olivetti's Italian and U.S. divisions as an internal auditor, Controller and
Finance Director. Mr. Lawson was Finance Director from 1990 to 1992 for Jackson
Publishing Group in Milan, Italy. From 1992 to 1994, he was Director of Finance
for Francesco Cinzano, a world leader in the production of wines and spirits. He
returned to the U.S. in 1994 to assume the position of President of Lawsons'
Resort in Dillon Beach, CA. Mr. Lawson holds a BA degree in Business Economics
and Italian Literature from U.C. Santa Barbara.
Randy Stratt, Senior Vice President, General Counsel, joined the Company in
November 1999. Mr. Stratt has over 20 years of in-house counsel and global
business development experience with both public and private firms in the
finance and high technology industries. Prior to joining the Company, Mr. Stratt
was Director of Strategic Development and Communications with Dresdner RCM
Global Investors, an international investment firm with over $65 billion of
assets under management. From 1987 to 1993, Mr. Stratt was Senior Vice President
and General Counsel of Spear Financial Services, Inc., a California-based NASDAQ
NMS financial services firm with traditional and on-line broker-dealer
operations. Prior to that, Mr. Stratt was an executive with Source Telecomputing
Corporation, one of the first on-line consumer services, which was eventually
acquired by CompuServe and ultimately acquired by America On-line. Mr. Stratt is
a licensed attorney in California and three other states. He holds a BA from
Cornell University and received a JD from George Washington University law
school and an MS in Information Systems from George Washington University
Business School.
Frederick R. Skillman, Jr., joined the Company in August 1995 and serves as
Vice President, Operations for the Company. Mr. Skillman has been working in the
utility and the communication industries for 16 years. Prior to joining the
Company, Mr. Skillman was a Senior Electrical Engineer for Pacific Gas &
Electric Company, San Francisco, California, where he directed contract
management, engineering and construction personnel. Mr. Skillman has extensive
experience in product development and managing projects having international
scope. Mr. Skillman holds a BS degree in Electrical Engineering from California
Polytechnic State University and an MBA degree from the University of San
Francisco.
The members of our Board serve staggered terms. Mr. Thompson and Mr. Knight
will serve until the 2002 annual meeting of stockholders and Mr. Carlson, Mr.
Grant and Mr. Lawson will serve until the 2003 annual meeting. Mr. Schieber will
serve until our 2004 annual meeting.
Section 145 of the General Corporation Law of Delaware provides for the
indemnification of officers and directors under certain circumstances against
expenses incurred successfully defending against a claim and authorizes Delaware
corporations to indemnify their officers and directors under certain
circumstances against expenses and liabilities incurred in legal proceedings
involving such persons because of their being or having been an officer or
director. Our certificate of incorporation and bylaws provide for
indemnification of our officers and directors to the fullest extent authorized
by law.
44
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Committees of the Board
The Board has a Compensation Committee, an Audit Committee and a Nominating
Committee.
The Compensation Committee, consisting of Messrs. Schieber (Chairman),
Carlson, Knight and Grant, administers our various stock option plans and
approves compensation, remuneration and incentive arrangements for our officers
of the Company. The Compensation Committee held two meetings in 2000.
The primary functions of the Audit Committee, consisting of Messrs. Carlson
(Chairman), Schieber and Grant, are to review the scope and results of audits by
our independent auditors, our internal accounting controls, non-audit services
performed by the independent accountants and the cost of accounting services.
The Audit Committee held three meetings in 2000.
The Nominating Committee, consisting of Messrs. Knight (Chairman), Carlson
and Thompson, assists the Board in the process of officer and director
nominations. No meetings were held by the Nominating Committee in 2000.
Executive Compensation
The following table provides certain summary information concerning
compensation of our Chief Executive Officer and each of our employees or the
employees of subsidiaries who earned in excess of $100,000 for the year ended
December 31, 2000.
Columns regarding "Other Annual Compensation", "Restricted Stock Awards"
and "Long-Term Incentive Plan (LTIP) Payouts" are excluded because no reportable
payments were made to such executive officers for the relevant years.
45
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Securities
Name and Underlying All Other
Principal Position Year Salary(1) Bonus Options Compensation
- -----------------------------------------------------------------------------------------------------
Fred W. Thompson 2000 $250,000 - 0 - - 0 - $ 7,386(2)
President, CEO 1999 $215,000 $45,000 1,000,000 $ 16,761(3)
1998 $180,000 $20,000 - 0 - $ 245,663(4)
Stanton C. Lawson 2000 $180,000 - 0 - - 0 - $ 1,485(5)
Sr. Vice President 1999 $ 37,500 - 0 - 180,000 - 0 -
Chief Financial Officer
Randy Stratt 2000 $165,000 - 0 - - 0 - $ 1,017(6)
Sr. Vice President 1999 $ 24,433 - 0 - 160,000 - 0 -
General Counsel
Frederick R. Skillman, Jr. 2000 $135,000 - 0 - - 0 - $ 5,044(7)
Vice President 1999 $120,415 $54,500 150,000 $ 4,911(8)
Operations 1998 $110,000 - 0 - - 0 - - 0 -
H. Tate Holt* 2000 $189,102 $60,000(9) - 0 - $ 4,500(10)
Former President 1999 $100,000 $50,000 200,000 - 0 -
NewStar Ltd.
Gregory T. Leger* 2000 $110,000 - 0 - - 0 - $ 155,978(11)
Former Executive VP 1999 $126,000 $20,000 125,000 $ 57,583(12)
Engineering 1998 $ 93,230 $20,000 125,000 - 0 -
* Mr. Holt and Mr. Leger terminated their employment effective November 30,
2000.
(1) In order to support the Company's financing efforts, executives elected to
defer payment of salary earned in 2000 as follows: Mr. Thompson - $125,000;
Mr. Lawson - $45,000; Mr. Stratt - $41,250; Mr. Skillman - $33,750; Mr.
Holt - $89,102; Mr. Leger - $22,000. As of September 30, 2001 all fiscal
2000 salaries had been paid.
(2) Includes payment of life insurance premium of $2,586 and payment of
contribution to IRA Retirement Plan of $4,800.
(3) Includes payment of life insurance premium of $9,972 and payment of
contribution to IRA Retirement Plan of $6,789.
(4) Represents $27,691 of pay in lieu of vacation, payment of $208,000 of
compensation deferred in 1996 and 1997, and payment of life insurance
premium of $9,972.
(5) Includes payment of life insurance premium of $360 and payment of
contribution to IRA Retirement Plan of $1,125.
(6) Includes payment of life insurance premium of $284 and payment of
contribution to IRA Retirement Plan of $733.
(7) Includes payment of life insurance premium of $244 and payment of
contribution to IRA Retirement Plan of $4,800.
(8) Includes payment of life insurance premium of $244 and payment of
contribution to IRA Retirement Plan of $4,667.
(9) Mr. Holt deferred payment of $60,000 bonus earned during 2000. As of
September 30, 2001 this amount had been paid.
(10) Represents payment of contribution to IRA Retirement Plan.
(11) Represents payment of French Pension of $3,506, relocation expenses of
$20,234, payment of life insurance premium of $238, and $132,000 severance
compensation in accordance with Mr. Leger's employment agreement. The
46
relocation expenses of $20,234 and the $132,000 severance compensation were
deferred for payment in 2001.
(12) Includes $51,000 housing/car allowance for overseas living assistance,
payment of $5,259 French Pension, and payment of $1,324 life insurance
premium.
Employment Agreements
Mr. Thompson entered into an employment agreement with us on April 18,
1996, effective January 1, 1996. His annual salary under the agreement was
$180,000, and included non-qualified stock options to purchase 312,500 shares of
our Common Stock. In October 1998, we paid Mr. Thompson the amount of $208,000
related to his previously deferred compensation through December 31, 1997.
Effective July 1, 1999, Mr. Thompson's employment agreement was extended until
July 1, 2004. In connection with the extension, Mr. Thompson's annual salary was
increased to $250,000, and he was granted non-qualified options to purchase
1,000,000 shares of Common Stock at an exercise price of $1.3496 based on a
formula. Options to purchase 250,000 shares of Common Stock vest immediately and
the remaining options to purchase 750,000 shares of Common Stock vest in 250,000
increments beginning on January 1, 2000, and each year thereafter. Effective
August 1, 2001, Mr. Thompson's annual salary was increased to $280,000. If Mr.
Thompson is terminated without cause during the term of his employment
agreement, his salary will continue for 12 months following termination so long
as he does not compete with us. Upon termination without cause or in the event
of a change of control, all options granted to Mr. Thompson in connection with
his employment agreement will vest immediately. We maintain a key person
insurance policy on Mr. Thompson's life in the face amount of $2,000,000, and we
are the sole beneficiary of such policy.
Effective October 18, 1999, we entered into a three-year employment
agreement with Mr. Stanton C. Lawson to serve as our Senior Vice President of
Finance. Mr. Lawson's starting annual salary was $180,000. Mr. Lawson also
received a non-qualified option to purchase 180,000 shares of Common Stock at an
exercise price equal to $1.0952 per share based upon a formula. Effective August
1, 2001, Mr. Lawson's annual salary was increased to $205,000. If Mr. Lawson is
terminated without cause during the term of his employment agreement, his salary
will continue for 12 months following termination so long as he does not compete
with us. Upon termination without cause, all options granted to Mr. Lawson in
connection with his employment agreement will vest immediately.
Effective November 18, 1999, we entered into a three-year employment
agreement with Mr. Randy Stratt to serve as a Senior Vice President and our
General Counsel. Mr. Stratt's starting annual salary was $165,000. Mr. Stratt
also received a non-qualified option to purchase 160,000 shares of Common Stock
at an exercise price equal to $1.0797 per share based upon a formula. Effective
August 1, 2001, Mr. Stratt's annual salary was increased to $225,000. If Mr.
Stratt is terminated without cause during the term of his employment agreement,
his salary will continue for 12 months following termination so long as he does
not compete with us. Upon termination without cause, all options granted to Mr.
Stratt in connection with his employment agreement will vest immediately.
Effective July 28, 1999, DBSI entered into a one-year employment agreement
with Mr. Frederick R. Skillman, Jr., to serve as our Vice President, Operations.
Under this employment agreement, Mr. Skillman's annual salary was established at
$135,000. He also received $13,500 upon the execution of the agreement and an
additional $13,500 in November 1999 as a bonus. Mr. Skillman also received a
non-qualified option to purchase 150,000 shares of Common Stock at an exercise
price equal to $0.7573 per share based upon a formula. Mr. Skillman's agreement
was subsequently extended one year to July 28, 2001 and, effective August 1,
2001, extended two years to July 28, 2003 with an increase in annual salary to
$165,000. If Mr. Skillman is terminated without cause during the term of his
employment agreement, he will receive a lump sum cash payment of 12 months'
salary following termination so long as he does not compete with us. Upon
47
termination without cause, all options granted to Mr. Skillman in connection
with his employment agreement will vest immediately.
Stock Purchase Plan
We established the 1999 Employee Stock Purchase Plan, the "1999 Plan",
which was approved by the stockholders in June 1999 to serve as a vehicle to
attract and retain the services of key employees and to help such key employees
realize a direct proprietary interest in us. Under the 1999 Plan, employees,
including officers, who do not beneficially own stock and/or options totaling 5%
or more of our voting power, will be eligible to participate. However, no
participant may be granted rights to purchase more than $25,000 worth of Common
Stock (valued at the time the purchase right is granted) for each calendar year
in which the purchase rights are outstanding under any other stock purchase
plans. An aggregate of 50,000 shares of our Common Stock were reserved for
issuance under the 1999 Plan of which 29,378 were issued and outstanding as of
December 31, 2001. Employees electing to participate in the 1999 Plan are
allowed to deduct from 1% to 10% of their compensation to purchase shares of
Common Stock. Twice a year, the employees' accumulated payroll deductions will
be used to purchase shares of Common Stock at a price equal to 85% of the
closing price of the Common Stock on either the first business day or last
business day of the offering period, whichever is lower. The 1999 Plan is
administered by the Board of Directors and its Compensation Committee. The 1999
Plan may be amended, suspended, or terminated by the Board, but may not increase
the maximum number of shares issuable, increase the benefits accruing to
participants, or modify the eligibility requirement under the 1999 Plan without
stockholder approval.
Stock Option Plans
We established the 2000 Stock Option Plan, the "2000 Plan", that was
approved by the stockholders in May 2000 to serve as a vehicle to attract and
retain the services of key employees and to help such key employees realize a
direct proprietary interest in us. The 2000 Plan provides for the grant of up to
1,750,000 non-qualified and incentive stock options. Under the 2000 Plan,
officers, directors, consultants and employees are eligible for participation.
The exercise price of any Incentive Stock Option granted under the 2000 Plan may
not be less than 100% of the fair market value of our Common Stock on the date
of grant. The aggregate fair market value (determined as of the grant date) of
the shares for which Incentive Stock Options may first become exercisable by an
optionee during any calendar year under this Plan, together with that of shares
subject to Incentive Stock Options first exercisable by the optionee under any
other of our plans, cannot exceed $100,000. Shares subject to options under the
2000 Plan may be purchased for cash. Unless otherwise provided by the Board, an
option granted under the 2000 Plan is exercisable for a term of up to ten years.
The 2000 Plan is administered by the Board of Directors and its Compensation
Committee, which has discretion to determine optionees, the number of shares to
be covered by each option, the exercise schedule, and other terms of the
options. The 2000 Plan may be amended, suspended, or terminated by the Board,
but no such action may impair rights under a previously granted option. No
option is transferable by the optionee other than by will or the laws of descent
and distribution. As of December 31, 2001, options to acquire 1,248,381 shares
of Common Stock were issued and all remain outstanding.
We established the 1998 Stock Option Plan, the "1998 Plan", that was
approved by the stockholders in May 1998 to serve as a vehicle to attract and
retain the services of key employees and to help such key employees realize a
direct proprietary interest in us. The 1998 Plan provides for the grant of up to
500,000 non-qualified and incentive stock options of which 227,011 were issued.
Under the 1998 Plan, officers, directors, consultants and employees are eligible
for participation. The exercise price of any Incentive Stock Option granted
under the 1998 Plan may not be less than 100% of the fair market value of our
Common Stock on the date of grant. The aggregate fair market value (determined
48
as of the grant date) of the shares for which Incentive Stock Options may first
become exercisable by an optionee during any calendar year under this Plan,
together with that of shares subject to Incentive Stock Options first
exercisable by the optionee under any other of our plans, cannot exceed
$100,000. Shares subject to options under the 1998 Plan may be purchased for
cash. Unless otherwise provided by the Board, an option granted under the 1998
Plan is exercisable for a term of up to ten years. The 1998 Plan is administered
by the Board of Directors and its Compensation Committee, which has discretion
to determine optionees, the number of shares to be covered by each option, the
exercise schedule, and other terms of the options. The 1998 Plan may be amended,
suspended, or terminated by the Board, but no such action may impair rights
under a previously granted option. No option is transferable by the optionee
other than by will or the laws of descent and distribution. As of December 31,
2001, options to purchase 183,261 shares of Common Stock remain outstanding.
We previously established a 1996 Stock Option Plan, the "1996 Plan", to
serve as a vehicle to attract and retain the services of key employees and to
help such key employees realize a direct proprietary interest in us. The 1996
Plan provided for the grant of up to 1,650,000 non-qualified and incentive stock
options of which 1,062,528 were issued. As of December 31, 2001, options to
purchase 520,477 shares were outstanding. Under the 1996 Plan, officers,
directors, consultants and employees are eligible for participation. The
exercise price of any Incentive Stock Option granted under the 1996 Plan may not
be less than 100% of the fair market value of our Common Stock on the date of
grant. The aggregate fair market value (determined as of the grant date) of the
shares for which Incentive Stock Options may first become exercisable by an
optionee during any calendar year under this Plan, together with that of shares
subject to Incentive Stock Options first exercisable by the optionee under any
other of our plans, cannot exceed $100,000. Shares subject to options under the
1996 Plan may be purchased for cash. Unless otherwise provided by the Board, an
option granted under the 1996 Plan is exercisable for a term of up to ten years.
The 1996 Plan is administered by the Board of Directors and its Compensation
Committee, which has discretion to determine optionees, the number of shares to
be covered by each option, the exercise schedule, and other terms of the
options. The 1996 Plan may be amended, suspended, or terminated by the Board,
but no such action may impair rights under a previously granted option. No
option is transferable by the optionee other than by will or the laws of descent
and distribution.
We also previously developed three stock option plans to award certain
employees, directors, and consultants with the opportunity to purchase our
Common Stock. Under our 1993 Incentive Stock Option Plan, "1993 ISO Plan",
options to purchase up to 69,644 shares of Common Stock were issued to eligible
employees. Under the Non-Qualified Stock Option Plan for Non-Employee Directors,
"Director's Plan", options to purchase up to 48,750 shares of Common Stock were
granted to non-employee directors. Under the Non-Qualified Stock Option Plan for
Consultants, "Consultant's Plan", options to purchase up to 14,625 shares of
Common Stock were granted to certain consultants. As of December 31, 2001,
options to acquire 15,875, 42,500, and 14,625 shares of Common Stock were
outstanding under the 1993 ISO Plan, Director's Plan and Consultant's Plan,
respectively.
From inception through December 31, 2001, we have issued 5,335,005
non-plan, non-qualified stock options to employees to attract and retain the
services of key employees and to help such key employees realize a direct
proprietary interest in us. As of December 31, 2001, options to purchase
5,175,005 shares remain outstanding.
The table regarding "Options Grants in the Fiscal Year Ended December 31,
2000" is excluded because no options were granted to the named executive
officers in that fiscal year.
49
The following table shows, for the fiscal year ended December 31, 2000,
certain information regarding options exercised by and held at year-end by the
executive officers named in the Summary Compensation Table under "Executive
Compensation".
Aggregated Option/SAR Exercises in Last FY
And FY-End Individual Values
Number of Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Option/SARs at
FY-End FY-End(1)
Shares Value # $
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- ---- ------------ -------- ------------------- -------------
Fred W. Thompson, 6,875 $3,032 997,500/500,000 $0/$0
President, CEO
120,000/60,000 $0/$0
Stanton C. Lawson - 0 - - 0 -
Sr. Vice President
Chief Financial Officer
Randy Stratt - 0 - - 0 - 106,666/53,334 $0/$0
Sr. Vice President
General Counsel
Frederick R. Skillman, Jr. - 0 - - 0 - 275,000/25,000 $0/$0
Vice President-Operations
H. Tate Holt - 0 - - 0 - 270,570/-0- $0/$0
Former President,
NewStar Ltd.
Gregory T. Leger, - 0 - - 0 - 220,000/-0- $0/$0
Former Executive VP
Engineering
(1) The value of unexercised in-the-money stock options is based on a per share
price of $0.375 as quoted on the OTC Bulletin Board on December 31, 2000.
Compensation of Directors
On September 1, 1999, our board of directors adopted a directors'
compensation plan. Under the compensation plan, each non-employee director shall
receive an annual retainer of $12,000 plus a fee of $1,000 and reasonable travel
expenses for attendance at each Board meeting. Each committee chairman shall
receive $2,500 annually for each year of service as committee chairman, and each
committee member shall receive $500 for attendance at each committee meeting. In
lieu of cash compensation, non-employee directors may elect to receive either
our Common Stock or stock options to purchase Common Stock, the value of which
under either election, shall not exceed $20,000 annually. If either Common Stock
or stock options are elected, the price will be determined by the average
closing price for the five trading days of the Common Stock at the beginning of
a six-month period ending either June 30 or December 31. Further, with respect
50
to stock options elected as compensation, the cash equivalent number of stock
options will be determined based upon a number of factors including, but not
limited to, vesting periods, estimated growth rates and risk-free rates.
In addition, each non-employee director shall receive an annual grant of
non-qualified options to purchase 10,000 shares of Common Stock in accordance
with the 2000 Plan. The exercise price shall be determined by the closing price
of the Common Stock for the five trading days up to and including the date of
our annual stockholders meeting, subject to discounting pursuant to a formula
adopted by the Board. These options shall vest one year from date of grant.
Further, upon either the first-time appointment or election to the Board, a new
non-employee director shall receive options to acquire 10,000 shares of Common
Stock, the exercise price of which will be determined by a formula adopted by
the Board. These options shall vest immediately.
In 2000, Michael T. Schieber was awarded options to purchase 10,000 shares
of Common Stock at $1.1953 per share, options to purchase 5,625 shares of Common
Stock at $2.5875 per share, and options to purchase 7,591 shares of Common Stock
at $1.5687 per share; Jerome W. Carlson was awarded options to purchase 10,000
shares of Common Stock at $1.1953 per share, options to purchase 6,137 shares of
Common Stock at $2.5875 per share, and options to purchase 6,748 shares of
Common Stock at $1.5687 per share; Jessie J. Knight, Jr., was awarded options to
purchase 10,000 shares of Common Stock at $1.1953 per share, options to purchase
4,347 shares of Common Stock at $2.5875, and options to purchase 8,013 shares of
Common Stock at $1,5687 per share; and Roy T. Grant was awarded options to
purchase 10,000 shares of Common Stock at $1.1953 per share and was also awarded
10,047 shares of Common Stock.
The directors' compensation plan was prepared following a report by an
independent compensation firm. It was recommended by the compensation committee
and adopted by the Board.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our executive officers and directors, and persons who own more than 10% of our
Common Stock, to file reports of ownership on Form 3 and changes in ownership on
Form 4 or 5 with the Securities and Exchange Commission, the "SEC". Such
executive officers, directors and 10% stockholders are also required by SEC
rules to furnish us with copies of all Section 16(a) forms they file. Based
solely upon our review of copies of such forms received by us, or on written
representations from certain reporting persons that no other filings were
required for such persons, we believe that, during the year ended December 31,
2000, our executive officers, directors and 10% stockholders complied with all
applicable Section 16(a) filing requirements.
51
Principal Stockholders
The following table sets forth certain information as of December 31, 2001,
with respect to the beneficial ownership of our Common Stock for each director,
all directors and officers of the Company as a group, and each person known to
us to own beneficially five percent (5%) or more of the outstanding shares of
our Common Stock.
Name and Address of Beneficially and
Beneficial Owner Record Owned (1) Percent of Class
------------------- ----------------- ----------------
Fred W. Thompson (2) 2,845,322 (3) 10.5%
Stanton C. Lawson (2) 696,398 (4) 2.8%
Michael T. Schieber (2) 507,298 (5) 2.1%
Jerome W. Carlson(2) 348,616 (6) 1.4%
Jessie J. Knight, Jr. (2) 213,595 (7) *
Roy T. Grant (2) 72,771 (8) *
Officers and Directors as a Group 5,595,000 20.0%
(8 Persons)
Bradley N. Rotter 2,461,462 9.1%
1700 Montgomery Street #250
San Francisco, CA 94111
Astoria Capital Partners, L.P. 1,480,000 6.0%
6600 Southwest 92nd St., Suite 370
Portland, Oregon 97223
Eurockot Launch Services GMBH 1,333,334 5.4%
Hunefeldstrasse 1-5
D-28199 Bremen, Germany
Michael J. Apatoff 1,960,053 7.4%
11 Edwards Avenue
Sausalito, CA 94965
* Less than 1%.
(1) The persons named in the table have sole voting or investment power with
respect to all of the Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and the information
contained in the footnotes to this table.
(2) The address for each of these persons is: c/o DBS Industries, Inc., 100
Shoreline Highway #190A, Mill Valley CA 94941.
52
(3) Includes (i) 31,593 shares of Common Stock held by Mr. Thompson; (ii)
274,558 shares of Common Stock held in Thompson 1996 Revocable Trust; and
(iii) options to purchase 312,500 shares of Common Stock at $0.531 per
share expiring January 1, 2006, 185,000 shares of Common Stock exercisable
at $0.584 per share and expiring December 31, 2002, 1,000,000 shares of
Common Stock exercisable at $1.3496 per share expiring September 1, 2009,
104,166 shares of Common Stock exercisable at $0.49 per share expiring
February 6, 2011, and 937,505 shares of Common Stock exercisable at $0.77
per share expiring August 7, 2011.
(4) Includes (i) 28,898 shares of Common Stock held by Mr. Lawson; and (ii)
options to purchase 180,000 shares of Common Stock exercisable at $1.0952
per share expiring October 7, 2009, 37,500 shares of Common Stock
exercisable at $0.49 per share expiring February 6, 2011, and 450,000
shares of Common Stock exercisable at $0.77 per share expiring August 7,
2011.
(5) Includes (i) 250,625 shares of Common Stock held jointly with spouse,
Arlene Schieber, (ii) 7,505 shares of Common Stock held solely by Mr.
Schieber, (iii) 4,075 shares of Common Stock held solely by Ms. Schieber,
of which shares Mr. Schieber disclaims beneficial ownership, and (iv)
options to purchase 13,750, 12,534 and 37,500 shares of Common Stock all
exercisable at $1.4375 per share which expire on February 15, 2005,
February 15, 2006 and April 30, 2006, respectively, 22,500 shares of Common
Stock exercisable at $2.1875 per share which expire on May 12, 2008, 10,000
shares of Common Stock exercisable at $0.7235 per share expiring September
1, 2009, 4,391 shares of Common Stock exercisable at $2.8625 per share
expiring December 31, 2009, 10,000 shares of Common Stock exercisable at
$1.1953 per share expiring May 22, 2010, 5,625 shares of Common Stock
exercisable at $2.5875 per share expiring June 30, 2010, 7,591 shares of
Common Stock exercisable at $1.5687 expiring December 31, 2010, and 71,202
shares of Common Stock exercisable at $0.4156 per share expiring June 30,
2011; and (v) a warrant to purchase 50,000 shares of Common Stock
exercisable at $0.25 per share expiring May 1, 2003.
(6) Includes (i) 85,000 shares of Common Stock held by Mr. Carlson, (ii)
options to purchase 37,500 shares of Common Stock at $2.1875 per share
which expire May 12, 2008, 4,391 shares of Common Stock exercisable at
$2.8625 per share expiring December 31, 2009, 10,000 shares of Common Stock
exercisable at $1.1953 per share expiring May 22, 2010, 6,137 shares of
Common Stock exercisable at $2.5875 expiring June 30, 2010, 6,748 shares of
Common Stock exercisable at $1.5687 per share expiring December 31, 2010,
and 73,840 shares of Common Stock exercisable at $0.4156 per share expiring
June 30, 2011, and (iii) a warrant to purchase 125,000 shares of Common
Stock exercisable at $0.45 per share expiring June 29, 2003.
(7) Includes (i) 53,191 shares of Common Stock held by Mr. Knight, (ii) options
to purchase 37,500 shares of Common Stock exercisable at $5.50 per share
which expire February 19, 2009, 12,500 shares of Common Stock exercisable
at $2.8125 per share expiring August 25, 2009, 4,160 shares of Common Stock
exercisable at $2.8625 expiring December 31, 2009, 10,000 shares of Common
Stock exercisable at $0.7235 per share expiring September 1, 2009, 10,000
shares of Common Stock exercisable at $1.1953 per share expiring May 22,
2010, 4,347 shares of Common Stock exercisable at $2.5875 expiring June 30,
2010, 8,013 shares of Common Stock exercisable at $1.5687 per share
expiring December 31, 2010, and 68,565 shares of Common Stock exercisable
at $0.4156 per share expiring June 30, 2011, and (iii) a warrant to
purchase 5,319 shares of Common Stock exercisable at $0.47 per share
expiring August 16, 2005.
(8) Includes (i) 41,202 shares of Common Stock held by Mr. Grant, and (ii)
options to purchase 10,000 shares of Common Stock at $0.3897 per share
expiring September 1, 2009, 3,236 shares of Common Stock exercisable at
$2.8625 which expire December 31, 2009, 8,333 shares of Common Stock
exercisable at $0.7235 per share expiring September 1, 2009, and 10,000
shares of Common Stock exercisable at $1.1953 per share expiring December
31, 2010.
53
Limitation of Liability and Indemnification Matters
The General Corporation Law of the State of Delaware permits
indemnification of directors, officers, and employees of corporations under
certain conditions subject to certain limitations. Article XII of the our
certificate of incorporation states that the we may provide indemnification of
our directors, officers, employees and agents to the maximum extent permitted by
the General Corporation Law. Article VI of the our bylaws provides that we
shall, to the maximum extent and in the manner permitted, indemnify each of our
directors, officers, employees and agents against expenses, judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding arising by reason of the fact any such person is or was an
agent of ours.
SELLING SECURITY HOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock by the selling security holders as of
December 31, 2001, and the number of shares of Common Stock covered by this
prospectus. The number of shares in the table represents an estimate of the
number of shares of Common Stock to be offered by the selling security holders,
including shares that may be acquired upon the conversion of a debenture, in the
principal amount of $500,000, the exercise of warrants or other rights to
acquire shares.
Number of Number of Number of Common
Common Shares Common Shares Shares Beneficially
Beneficially Owned Offered Owned Following
Name of Stockholder Prior to the Offering Hereby(1) the Offering (1)
- ------------------- --------------------- ------------- --------------------
# of Shares % of Class # of Shares # of Shares % of Class
----------- ---------- ----------- ----------- ----------
Paul Fisher 64,500 (2) * 62,000 2,500 *
Ellen Coll 170,635 (3) * 163 170,472 *
Linda Eisel 46,640 (4) * 327 46,313 *
Roy T. Grant 72,771 (5) * 41,202 31,569 *
Stanton C. Lawson 696,398 (6) 2.8% 21,898 674,500 2.8%
R. Andrew Baldwin 75,327 (7) * 327 75,000 *
H. Tate Holt 382,000 (8) 1.5% 94,763 287,237 1.2%
Francoise Johnson 5,708 (9) * 708 5,000 *
James Stoutenberg 254,166 (10) 1.0% 3,333 250,833 1.0%
Brighton Opportunity Fund 450,000 1.8% 450,000 -0- -0-
Laurie A. Milburn 70,571 (11) * 70,571 -0- -0-
Capital Access 155,000 (2) * 155,000 -0- -0-
Brandon Norton 6,000 (11) * 6,000 -0- -0-
Donn Tice 6,000 (11) * 6,000 -0- -0-
Patrick Spada 9,722 (2) * 9,722 -0- -0-
Jim Watson 10,000 (11) * 10,000 -0- -0-
Stephen Wilkes 10,000 (2) * 10,000 -0- -0-
LBF, Inc. 10,000 (2) * 10,000 -0- -0-
Ted & Delores Landkammer 31,000 (12) * 31,000 -0- -0-
54
Number of Number of Number of Common
Common Shares Common Shares Shares Beneficially
Beneficially Owned Offered Owned Following
Name of Stockholder Prior to the Offering Hereby(1) the Offering (1)
- ------------------- --------------------- ------------- --------------------
# of Shares % of Class # of Shares # of Shares % of Class
----------- ---------- ----------- ----------- ----------
Delores Landkammer 25,000 (2) * 25,000 -0- -0-
Fairhills Capital Corporation 40,000 (2) * 40,000 -0- -0-
Richard Smithies 49,000 (2) * 49,000 -0- -0-
Regency Capital Partners 50,000 (2) * 50,000 -0- -0-
Lloyd & Dee Chelli 116,000 (13) * 56,000 60,000 *
Michael T. Schieber 507,298 (14) 2.0% 62,500 444,798 1.8%
Beacon Capital Corporation 250,000 (2) 1.0% 250,000 -0- -0-
Jerome W. Carlson 348,616 (15) 1.5% 162,500 186,116 *
Noel Benson 250,000 (2) * 250,000 -0- -0-
Joseph Regoli 600,000 (2) 2.4% 600,000 -0- -0-
Madison & Wall Worldwide 1,221,469 (16) 4.6% 1,221,469 -0- -0-
Heather Graham 75,569 (17) * 75,569 -0- -0-
Bradley N. Rotter 2,461,462 (18) 9.1% 2,221,718 239,744 1.0%
Camelot Capital 1,000,000 (16) 3.9% 1,000,000 -0- -0-
Michael Fitzsimmons 554,676 (19) 2.2% 554,676 -0- -0-
Pacific West Management 225,900 (20) * 225,900 -0- -0-
Rosana & Alon Miller Fam Tr 111,600 (21) * 111,600 -0- -0-
Nest Ventures 50,000 (2) * 50,000 -0- -0-
Michael Apatoff 2,210,053 (22) 7.4% 2,210,053 -0- -0-
HRT Holdings 500,000 (23) 2.0% 500,000 -0- -0-
Strome Hedgecap Fund 366,667 (24) 1.5% 366,667 -0- -0-
Catalysis Partners 18,332 (25) * 18,332 -0- -0-
Jessie J. Knight, Jr. 213,595 (26) * 58,510 155,085 *
Douglas Bosco 529,154 (27) 1.3% 529,154 -0- -0-
Daniel D. DeSandro 2,000 (2) * 2,000 -0- -0-
Gregory T. Leger 280,000 (28) 1.1% 150,000 130,000 -0-
Michael Sahl 250,000 (29) 1.0% 250,000 -0- -0-
Aspen International 1,065,985 (30) 4.1% 1,065,985 -0- -0-
Magellan International 1,863,778 (31) 7.0% 1,863,778 -0- -0-
Intercoastal Holdings LLC 384,597 (32) 1.5 384,597 -0- -0-
Azure Capital Holdings 2,630,952 (33) 9.6% 2,630,952 -0- -0-
Torneaux Ltd. -0- -0- 2,819,169 (34) -0- (35) -0-
Courtney Benham 121,718 * 121,718 -0- -0-
Codera Wine Group Profit
Sharing Plan 114,227 * 114,227 -0- -0-
Patrick Watt House
Living Trust 29,728 * 29,728 -0- -0-
55
Number of Number of Number of Common
Common Shares Common Shares Shares Beneficially
Beneficially Owned Offered Owned Following
Name of Stockholder Prior to the Offering Hereby(1) the Offering (1)
- ------------------- --------------------- ------------- --------------------
# of Shares % of Class # of Shares # of Shares % of Class
----------- ---------- ----------- ----------- ----------
Robert Michael House
Living Trust 104,920 (36) * 104,920 -0- -0-
Edward Pease 53,686 (36) * 53,686 -0- -0-
Gary Kremen 28,991 (36) * 28,991 -0- -0-
Rolland Mark House
Living Trust 29,728 * 29,728 -0- -0-
Michael B. Hill, M.D. 113,868 (36) * 113,868 -0- -0-
Alex Steinleitner 35,294 (36) * 35,294 -0- -0-
Jeanne A. Popadiuk 30,000 (36) * 30,000 -0- -0-
James H. Huelskamp 30,000 (36) * 30,000 -0- -0-
Paul Dupuis 54,135 (36) * 54,135 -0- -0-
SJ Capital 57,586 (2) * 57,586 -0- -0-
International Space Brokers 130,000 (2) * 130,000 -0- -0-
Barclays Bank Plc 100,000 (2) * 100,000 -0- -0-
Fourteen Hill Capital 333,333 (2) 1.4% 333,333 -0- -0-
High Peak Capital 83,333 (2) * 83,333 -0- -0-
Cyrrus Consulting 20,000 (11) * 20,000 -0- -0-
Cardinal Capital LLC 75,000 (2) * 75,000 -0- -0-
The Echelon Group 27,092 (37) * 27,092 -0- -0-
Tom Lobaugh 60,000 (2) * 60,000 -0- -0-
Coach House Group 300,000 (2) 1.2% 300,000 -0- -0-
Securities Trading
Services, LLC 150,000 (2) * 150,000 -0- -0-
Bartel Eng & Schroder 166,667 (23) * 166,667 -0- -0-
Barbara Drew 143,000 (17) * 143,000 -0- -0-
John L. Faessel 41,300 (2) * 41,300 -0- -0-
* Less than 1% of the outstanding Common Stock.
(1) Assumes the sale of the shares of Common Stock which have been offered
pursuant to the prospectus.
(2) Represents shares that may be acquired upon the exercise of warrants.
(3) Includes 170,472 shares that may be acquired upon the exercise of options.
Ms. Coll has worked for the Company for the last nine years as the Manager,
Corporate Administration.
(4) Includes 46,313 shares that may be acquired upon the exercise of options.
Ms. Eisel worked for the Company from June 15, 1993 to April 12, 2001 as
the Financial Administrator.
(5) Includes 31,569 shares that may be acquired upon the exercise of options.
56
(6) Includes 667,500 shares that may be acquired upon the exercise of options.
(7) Includes 75,000 shares that may be acquired upon the exercise of options.
Mr. Baldwin worked for the Company from September 30, 1999 to October 31,
2000 as the Vice President, Sales of NewStar, Ltd.
(8) Includes 270,570 shares that may be acquired upon the exercise of options.
Mr. Holt was a director of the Company from February 1996 until June 2001
and as president of NewStar, Ltd from June 1, 1999 until November 30, 2000.
(9) Includes 5,000 shares that may be acquired upon the exercise of options.
Ms. Johnson worked for the Company from September 15, 1999 to September 5,
2000 as the Executive Assistant of NewStar, Ltd.
(10) Includes 250,833 shares that may be acquired upon the exercise of options.
Mr. Stoutenberg has worked for the Company since May 1, 2000 as the Vice
President, Global Business & Government Relations.
(11) Includes shares that may be acquired upon the exercise of options.
(12) Includes 25,000 shares that may be acquired upon exercise of warrants.
(13) Includes 50,000 shares that may be acquired upon exercise of warrants.
(14) Includes 50,000 shares that may be acquired upon exercise of warrants and
195,093 shares that may be acquired upon exercise of options.
(15) Includes 125,000 shares that may be acquired upon exercise of warrants and
138,616 shares that may be acquired upon exercise of options.
(16) Includes 200,000 shares that may be acquired upon exercise of warrants.
(17) Includes 10,000 shares that may be acquired upon exercise of warrants.
(18) Includes 811,086 shares that may be acquired upon exercise of warrants.
(19) Includes 127,338 shares that may be acquired upon exercise of warrants.
(20) Includes 25,100 shares that may be acquired upon exercise of warrants.
(21) Includes 12,400 shares that may be acquired upon exercise of warrants.
(22) Includes 731,682 shares that may be acquired upon exercise of warrants.
(23) Includes 100,000 shares that may be acquired upon exercise of warrants.
(24) Includes 33,333 shares that may be acquired upon exercise of warrants.
(25) Includes 1,666 shares that may be acquired upon exercise of warrants.
(26) Includes 5,319 shares that may be acquired upon exercise of warrants and
155,085 shares that may be acquired upon exercise of options.
(27) Includes 275,377 shares that may be acquired upon exercise of warrants.
(28) Includes 130,000 shares that may be acquired upon exercise of options. Mr.
Leger was Executive Vice President of the Company from March 1, 1998 until
November 30, 2000.
57
(29) Includes 83,333 shares that may be acquired upon exercise of warrants.
(30) Represents 245,837 shares acquired upon conversion of series B preferred
stock, 569,902 shares that may be acquired upon conversion of Series B
preferred stock and 250,246 shares that may be acquired upon exercise of
warrants.
(31) Represents 245,837 shares acquired upon conversion of series B preferred
stock, 1,200,865 shares that may be acquired upon conversion of Series B
preferred stock and 417,076 shares that may be acquired upon exercise of
warrants.
(32) Represents 264,597 shares that may be acquired upon conversion of Series B
preferred stock and 120,000 shares that may be acquired upon exercise of
warrants.
(33) Represents 2,380,952 shares that may be acquired upon conversion of 6%
Convertible Debenture and 250,000 shares that may be acquired upon exercise
of warrants.
(34) Includes the resale of up to 2,819,169 shares of Common Stock which we have
the right to cause Torneaux Ltd. to purchase pursuant to the Common Stock
purchase agreement and the resale of up to 1,250,000 shares that may be
acquired upon the exercise of warrants. Under the Common Stock purchase
agreement we are required to issue warrants to purchase from 20% to 50% of
the number of shares we sell to Torneaux Ltd.
(35) Assumes the resale of shares to be acquired by Torneaux Ltd. pursuant to
the Common Stock purchase agreement or upon the exercise of warrants.
(36) Represents shares of Common Stock that may be acquired upon conversion of
series A preferred stock.
(37) Of the shares beneficially owned, one-half represents shares of Common
Stock owned and one-half represents shares that may be acquired upon the
exercise of warrants.
PLAN OF DISTRIBUTION
The selling security holders may, from time to time, sell all or a portion
of the shares of Common Stock on any market upon which the Common Stock may be
quoted, in privately negotiated transactions or otherwise, at fixed prices that
may be changed, at market prices prevailing at the time of sale, at prices
related to such market prices or at negotiated prices. The shares of Common
Stock may be sold by the selling security holders by one or more of the
following methods, without limitation,
o block trades in which the broker or dealer so engaged will attempt to
sell the shares of Common Stock as agent but may position and resell a
portion of the block as principal to facilitate the transaction,
o purchases by broker or dealer as principal and resale by such broker
or dealer for its account pursuant to this prospectus,
o an exchange distribution in accordance with the rules of such
exchange,
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers,
o privately negotiated transactions,
58
o market sales (both long and short to the extent permitted under the
federal securities laws), and
o a combination of any such methods of sale.
In effecting sales, brokers and dealers engaged by the selling security
holders may arrange for other brokers or dealers to participate. Brokers or
dealers may receive commissions or discounts from the selling security holders
(or, if any such broker-dealer acts as agent for the purchaser of such shares,
from such purchaser) in amounts to be negotiated which are not expected to
exceed those customary in the types of transactions involved. Broker-dealers may
agree with the selling security holders to sell a specified number of such
shares of Common Stock at a stipulated price per share, and, to the extent such
broker-dealer is unable to do so acting as agent for the selling security
holders, to purchase as principal any unsold shares of Common Stock at the price
required to fulfill the broker-dealer commitment to the selling security
holders. Broker-dealers who acquire shares of Common Stock as principal may
thereafter resell those shares of Common Stock from time to time in transactions
(which may involve block transactions and sales to and through other
broker-dealers, including transactions of the nature described above) in the
over-the-counter market or otherwise at prices and on terms then prevailing at
the time of sale, at prices then related to the then-current market price or in
negotiated transactions and, in connection with such resales, may pay to or
receive from the purchasers of such shares of Common Stock commissions as
described above. The selling security holders may also sell the shares of Common
Stock in accordance with Rule 144 under the Securities Act, subject to
satisfaction of the requirements under the rule, rather than pursuant to this
prospectus.
From time to time, the selling security holders may pledge their shares of
Common Stock under the margin provisions of customer agreements. Upon default by
the selling security holders, the broker may offer and sell the pledged shares
of Common Stock from time to time. Upon sales of the shares of Common Stock, the
selling security holders intend to comply with the prospectus delivery
requirements, under the Securities Act, by delivering a prospectus to each
purchaser in the transaction. We intend to file any amendments or other
necessary documents in compliance with the Securities Act which may be required
in the event a selling security holder defaults under any customer agreement
with brokers.
To the extent required under the Securities Act, a supplemental prospectus
will be filed, disclosing, the name of any broker-dealers, the number of shares
of Common Stock involved, the price at which the Common Stock is to be sold, the
commissions paid or discounts or concessions allowed to such broker-dealers,
where applicable, that such broker-dealers did not conduct any investigation to
verify the information set out or incorporated by reference in this prospectus,
as supplemented, and other facts material to the transaction.
We and the selling security holders will be subject to applicable
provisions of the Exchange Act and the rules and regulations under it,
including, without limitation, Rule 10b-5 and, insofar as the selling security
holders are distribution participants and we, under certain circumstances, may
be a distribution participant, Regulation M. All of the foregoing may affect the
marketability of the Common Stock.
59
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as otherwise indicated below, during 2001, 2000 and 1999, we have
not been a party to any transaction, proposed transaction, or series of
transactions in which the amount involved exceeds $60,000, and in which, to our
knowledge any director or executive officer, nominee, five percent beneficial
securityholder, or any member of the immediate family of the foregoing persons
have or will have a direct or indirect material interest.
In June 2001, the Company received a six-month loan from Jerome W. Carlson,
a director of the Company in the amount of $25,000. In consideration for the
loan, the Company will pay interest at the rate of 6.5% per annum, and has
issued a warrant to the director to purchase a total of 125,000 shares of
restricted Common Stock exercisable at $0.45 per share.
In May 2001, the Company received a six-month loan from Michael T.
Schieber, a director of the Company in the amount of $30,000. In consideration
for the loan, the Company will pay interest at the rate of 6.5% per annum, and
has issued warrants to the director to purchase a total of 50,000 shares of
restricted Common Stock exercisable at $0.25 per share.
During Fiscal Year 2000, several of our executives deferred receipt of
their salaries due. This includes our president, Fred W. Thompson ($125,000),
our Sr. Vice President & Chief Financial Officer, Stanton C. Lawson ($45,000),
our Sr. Vice President & General Counsel, Randy Stratt ($41,125) and our Vice
Presidents, Operations, Frederick R. Skillman, Jr. ($33,750).
On March 31, 1999, we entered into a launch services agreement with
Eurockot. Pursuant to that agreement, we paid Eurockot an initial payment of
$4.4 million under the launch services agreement. On April 8, 1999, Eurockot
purchased 1,333,334 shares of our Common Stock for a total purchase price of $4
million.
DESCRIPTION OF SECURITIES
Under our certificate of incorporation, we are authorized to issue
100,000,000 shares of Common Stock, $0.0004 par value, of which 24,810,817 were
outstanding as of December 31, 2001, and 10,000,000 shares of preferred stock of
which 35,897 shares have been designated as Series A Convertible Preferred Stock
and 550 shares have been designated as Series B Convertible Preferred Stock. As
of December 31, 2001, 25,899 shares of Series A Convertible Preferred Stock and
320 shares of Series B Convertible Preferred Stock were outstanding.
Common Stock
The holders of Common Stock are entitled to one vote for each share held of
record on all matters presented to stockholders. Holders of the Common Stock are
not entitled to cumulative voting rights. The Common Stock has no preemptive or
similar rights. Upon liquidation, dissolution or winding up of our affairs any
assets remaining after provision for payment of creditors and preferred
stockholders, if any, are distributable pro rata among the holders of Common
Stock. Holders of our Common Stock are entitled to receive dividends when and as
declared by the board of directors out of legally available funds. Any such
dividend may be paid in cash, property or shares of Common Stock. We have not
paid any dividends since our inception and do not presently anticipate that any
dividends on our Common Stock will be declared or paid in the foreseeable
future.
60
Preferred Stock
Series A Preferred Stock
The holders of Series A Preferred Stock are entitled to receive, out of
funds legally available, cumulative dividends of $1.50 per share. As of December
31, 2000, accrued dividends on Series A Preferred Stock totaled $31,510. We have
the right to redeem the Series A Preferred Stock if the average trading price
for our Common Stock is $6.00 or more for 20 consecutive days. The holders of
Series A Preferred Stock may choose to convert their shares within 20 days of
notice of our intention to redeem the Series A Preferred Stock. The redemption
price is $30 per share, plus any unpaid dividends. Each share of Series A
Preferred Stock is entitled to vote on each matter submitted to shareholders
equal to the number of full shares of Common Stock to which each share of Series
A Preferred Stock is convertible.
Series B Preferred Stock
The Series B Preferred Stock is convertible into Common Stock at the lesser
of (1) approximately $0.96 per share or (2) 80% of the average of the three
lowest closing bid prices of the Common Stock for the 20-day trading period
prior to the conversion date. Series B Preferred Stock itself is not entitled to
vote on any matters submitted to our stockholders.
Convertible Debenture
On August 31, 2001, we issued a convertible debenture in the principal
amount of $500,000 and incurring interest at a rate of 6% per year. The
debenture is initially convertible, at the option of the holder, at a rate of
$0.98 per share of Common Stock. The conversion rate adjusts to 85% of the 5-day
average closing price of our Common Stock, but in no case may be less than $0.21
per share. We may redeem the debentures, in whole or in part, for 120% of the
principal amount plus any accrued and unpaid interest. Our right to redeem the
debenture is subject to the holder's right to convert their debenture into
shares of our Common Stock within ten days of our notice to redeem.
Warrants and Options
As of December 31, 2001, we had outstanding warrants to purchase 7,106,763
shares of our Common Stock at exercise prices ranging between $0.17 and $4.00
per share, and we had outstanding options to purchase 7,180,499 shares of our
Common Stock at exercise prices ranging between $0.22 and $5.60 per share.
Transfer Agent
Computershare Trust Co., 12039 W. Alameda Parkway, Suite Z-2, Lakewood,
Colorado 80228 is the transfer agent for our Common Stock.
CERTIFICATE OF INCORPORATION
Certain provisions of our certificate of incorporation and bylaws have the
effect of deterring a change of control. Our certificate of incorporation
contains provisions requiring the approval of 80% of the our security holders
for certain mergers, sales of all or substantially all of our assets and certain
other corporate action unless the transaction is approved by 75% of the
disinterested board members or unless all security holders receive a price for
61
their shares of our capital stock which meets certain minimum price criteria. In
addition, our certificate of incorporation also contains a provision that
establishes a classified board of directors consisting of three classes, members
of which would serve staggered terms of three years. A vacancy of the board can
be filled only by vote of 75% of the continuing directors (as defined). Further
directors would be removable, for cause only, by either an 80% vote or by vote
of a majority of the continuing directors (as defined). Our certificate of
incorporation also requires the approval of 80% of our security holders in order
to amend the provisions.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
LEGAL MATTERS
The validity of the shares of Common Stock offered by the selling security
holders will be passed upon by the law firm of Bartel Eng & Schroder,
Sacramento, California. The firm and certain of its members own shares of Common
Stock representing less than 1% of our outstanding shares of Common Stock. In
addition, the firm holds a warrant to purchase up to 100,000 shares of Common
Stock.
EXPERTS
The consolidated balance sheets as of December 31, 1999 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended, included in this prospectus have been so
included in reliance on the report, which includes an explanatory paragraph
relating to our ability to continue as a going concern, as described in note 1
to the financial statements, of PricewaterhouseCoopers LLP, independent
accountants, given the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. Our Commission filings
are available to the public over the Internet at the SEC's Website at
http://www.sec.gov. You may also read and copy any document we file at the
Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling 1-800-SEC-0330.
We have filed with the Commission a registration statement on form SB-2
under the Securities Act with respect to the securities offered under this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement, certain items of which are omitted in accordance with the rules and
regulations of the Commission. Statements contained in this prospectus as to the
contents of any contract or other documents are not necessarily complete and in
each instance reference is made to the copy of such contact or documents filed
as an exhibit to the registration statement, each such statement being qualified
in all respects by such reference and the exhibits and schedules thereto. For
further information regarding DBS Industries, Inc. and the securities offered
under this prospectus, we refer you to the registration statement and such
exhibits and schedules which may be obtained from the Commission at its
principal office in Washington, D.C. upon payment of the fees prescribed by the
Commission.
F-1
FINANCIAL STATEMENTS, EXHIBITS AND REPORTS ON FORM 8-K
Financial Statements
The following financial statements pertaining to us are filed as part of this
prospectus:
Report of Independent Accountants............................................F-2
Consolidated Balance Sheets as of September 30, 2001 (unaudited)
and December 31, 2000 and 1999...............................................F-3
Consolidated Statements of Operations for the nine months ended
September 30, 2001 and 2000 (unaudited) and for the years ended
December 31, 2000 and 1999 and for the period from April 25, 1990
(date of inception) to September 30, 2001 (unaudited)........................F-4
Consolidated Statements of Stockholders' Equity for the period
from December 31, 1990 to December 31, 2000 and
from January 1, 2001 to September 30, 2001 (unaudited).......................F-5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2001 and 2000 (unaudited) and for the years ended
December 31, 2000 and 1999 and for the period from April 25, 1990
(date of inception) to September 30, 2001 (unaudited).......................F-13
Notes to Consolidated Financial Statements..................................F-14
F-2
Report of Independent Accountants
To the Board of Directors and Stockholders of
DBS Industries, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity, and of cash
flows present fairly, in all material respects, the financial position of DBS
Industries, Inc. and Subsidiaries (a development stage company) as of December
31, 2000 and 1999, and the results of their operations and their cash flows for
the years then ended and for the period from April 25, 1990 (date of inception)
to December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. 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 of these statements in accordance with auditing standards generally
accepted in the United States of America which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company has incurred losses and negative cash flows
from operating activities since inception and will require additional financing.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans as to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 15, 2001
F-3
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31, December 31,
2001 2000 1999
------------- ------------- -------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 136,484 $ 389,319 $ 282,945
Prepaid and other current assets 63,128 57,378 114,439
------------- ------------- -------------
Total current assets 199,612 446,697 397,384
------------- ------------- -------------
Furniture and equipment, net 29,559 32,393 48,211
Investments, license acquisition costs, and other 2,894,690 2,369,088 2,370,618
Satellite construction costs 12,229,907 12,229,907 12,072,873
Deferred stock offering costs - - 673,500
------------- ------------- -------------
15,154,156 14,631,388 15,165,202
------------- ------------- -------------
Total assets $ 15,353,768 $ 15,078,085 $ 15,562,586
============= ============= =============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,259,537 $ 1,482,476 $ 478,334
Customer advances 400,000 400,000 400,000
Accrued compensation 257,083 601,132 -
Related party loans 55,000 - -
Other accrued liabilities 128,132 179,410 460,577
------------- ------------- -------------
Total current liabilities 2,099,753 2,663,018 1,338,911
------------- ------------- -------------
Non-Current liabilities:
Convertible debentures 148,560 - -
------------- ------------- -------------
Total Liabilities $ 2,248,312 $ 2,663,018 $ 1,338,911
------------- ------------- -------------
Series B Mandatorily Redeemable Convertible Preferred
Stock, $0.0004 par value; 550 Shares authorized; 440
issued and outstanding at September 30, 2001 and
December 31, 2000 (liquidation preference $481,878) 481,878 347,971 -
------------- ------------- -------------
Stockholders' equity:
Series A Convertible Preferred stock, $0.0004 par
value; 35,897 shares authorized; 25,899 issued and
outstanding at September 30, 2001 and December 31,
2000; (liquidation preference $776,970) 11 11 -
Common Stock, $0.0004 par value; 100,000,000
shares authorized; 23,753,665 and 15,601,143
issued and outstanding at September 30, 2001 and
December 31, 2000, respectively 9,521 6,260 5,762
Capital in excess of par value 31,034,555 29,126,919 26,968,174
Warrants 3,986,835 2,989,698 1,890,436
Note receivable from stockholder - - (60,000)
Deferred stock-based compensation (112,532) (450,129) (1,532,582)
Deficit accumulated during the development stage (22,294,811) (19,605,664) (13,048,115)
------------- ------------- -------------
Total stockholders' equity 12,623,578 12,067,096 14,223,675
------------- ------------- -------------
Total liabilities, mandatorily redeemable
preferred stock, and stockholders' equity $ 15,353,768 $ 15,078,085 $ 15,562,586
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
April 25, 1990
Nine Months Ended Year Ended (Inception) to
September 30, December 31, September 30,
2001 2000 2000 1999 2001
------------- ------------- ------------- ------------ -------------
(unaudited) (unaudited) (unaudited)
Revenue $ - $ - $ - $ $ 161,420
Cost and operating expenses:
Cost of revenue - - - 127,580
Marketing and sales 166,224 902,260 1,721,725 922,623 2,810,572
General and administrative 2,422,746 5,033,771 4,037,509 4,059,310 19,181,255
Research and development 1,132 419,357 736,775 1,045,296 4,749,921
------------- ------------- ------------- ------------ -------------
2,590,102 6,355,388 6,496,009 6,027,229 26,869,328
------------- ------------- ------------- ------------ -------------
Loss from operations (2,590,102) (6,355,388) (6,496,009) (6,027,229) (26,707,908)
------------- ------------- ------------- ------------ -------------
Other income (expense):
Interest, net (97,845) 2,197 (59,940) 113,336 (753,908)
Equity in loss of investees, net - - - - (512,920)
Gain on sales of investments - - - - 5,829,218
Other, net - (1,721) - - (56,634)
------------- ------------- ------------- ------------ -------------
(97,845) 476 (59,940) 113,336 4,505,756
------------- ------------- ------------- ------------ -------------
Loss before provision for
income taxes and
minority interests (2,687,947) (6,354,912) (6,555,949) (5,913,893) (22,202,152)
Provision for income taxes (1,200) - (1,600) (1,600) (101,235)
------------- ------------- ------------- ------------ -------------
Loss before minority interests (2,689,147) (6,354,912) (6,557,549) (5,915,493) (22,303,387)
Minority interests in loss of
consolidated subsidiaries - - - - 8,575
------------- ------------- ------------- ------------ -------------
Net loss $ (2,689,147) $ (6,354,912) $ (6,557,549) $ (5,915,493) $ (22,294,811)
============= ============= ============= ============ =============
Series B Preferred Stock
dividends associated with
issued warrants and accretions $ (276,878) - - - $ (276,878)
------------- ------------- ------------- ------------ -------------
Net loss attributable to Common
Stockholders $ (2,966,025) $ (6,354,912) $ (6,557,549) $ (5,915,493) $ (22,571,690)
============= ============= ============= ============ =============
Basic and diluted net loss
per share $(0.15) $(0.44) $(0.44) $(0.45)
============= ============= ============= ============
Weighted average number of shares
of Common Stock, basic and
diluted 20,081,222 14,615,607 14,832,155 13,088,723
============= ============= ============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from April 25, 1990 (inception) to September 30, 2001
Deficit
Preferred Stock Common Stock Note Accumulated Total
--------------- -------------- Capital in Receivable Deferred During the Stock-
Par Par Excess of From Stock-Based Development holders'
Shares Value Shares Value Par Value Warrants Stockholder Compensation Stage Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December
31, 1990, of DBSN
as restated
pursuant to the
merger on
December 2, 1992 - - 301,000 $ 120 $ 46,375 $ - $ - $ - $ (219,990) $ (173,495)
Issuance of common
stock for professional
services at $1.01
to $2.14 per share - - 520,000 208 47,542 - - - - 47,750
Issuance of common
stock for cash
at $.01 to $1.00
per share - - 244,500 98 124,507 - - - - 124,605
Stock issue costs
for the twelve
months ended
December 31, 1991 - - - - (15,774) - - - - (15,774)
Net loss for the
twelve months ended
December 31, 1991 - - - - - - - - (115,339) (115,339)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1991 - - 1,065,500 426 202,650 - - - (335,329) (132,253)
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common
stock for cash
at $.01 to $1.00
- per share - - 1,317,290 527 538,998 - - - - 539,525
Issuance of common
stock for
professional
services at
$.01 to $.10
- per share - - 214,240 86 12,338 - - - - 12,424
Issuance of common
stock in payment
of stockholder
loans: June 1992
at $.01 per share - - 230,000 92 2,208 - - - - 2,300
Net loss for the
seven months ended
July 31, 1992 - - - - - - - - (90,750) (90,750)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1992 - - 2,827,030 1,131 756,194 - - - (426,079) 331,246
- ------------------------------------------------------------------------------------------------------------------------------------
Shares of Fi-Tek IV,
Inc. from
August 3, 1989
(inception) through
December 2, 1992 - - 817,540 327 155,450 - - - - 155,777
Issuance of common
stock for cash at
$.01 to $3.20 per share - - 1,313,926 527 998,088 - - - - 998,615
Issuance of common
stock for interest
at $5.00 per share - - 10,000 4 4,996 - - - - 5,000
Issuance of common
stock for JPS
common stock on
September 11, 1992
at $.80 per share - - 61,447 24 49,134 - - - - 49,158
Issuance of common
stock for professional
services on
September 11, 1992
at $.10 per share - - 6,679 3 665 - - - - 668
DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from April 25, 1990 (inception) to September 30, 2001
Deficit
Preferred Stock Common Stock Note Accumulated Total
--------------- -------------- Capital in Receivable Deferred During the Stock-
Par Par Excess of From Stock-Based Development holders'
Shares Value Shares Value Par Value Warrants Stockholder Compensation Stage Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Issuance of common
stock in exchange
for DBSC common
stock on
October 9, 1992,
at $2.00 per share - - 6,375 2 12,748 - - - - 12,750
Redemption of 97,450
common stock
warrants on
October 2, 1992, at
$8.00 per share - - - - (19,490) - - - - (19,490)
Issuance of common
stock December 2, 1992,
at closing of
acquisition of DBSN
as a finder's
fee at $.0004 per
share - - 25,000 10 - - - - - 10
Issuance of common
stock for Axion
common stock during
March 1993 at
$1.60 per share - - 50,000 20 79,980 - - - - 80,000
Issuance of common
stock for DBSC
common stock on
July 2, 1993, at
$1.60 per share - - 133,306 53 213,238 - - - - 213,291
Stock issue costs for
the period from
August 1, 1992
through July 31, 1993 - - - - (6,374) - - - - (6,374)
Net loss for the
twelve months ended
July 31, 1993 - - - - - - - - (755,040) (755,040)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
July 31, 1993 - - 5,251,303 2,101 2,244,629 - - - (1,181,119) 1,065,611
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from April 25, 1990 (inception) to September 30, 2001
Deficit
Preferred Stock Common Stock Note Accumulated Total
--------------- -------------- Capital in Receivable Deferred During the Stock-
Par Par Excess of From Stock-Based Development holders'
Shares Value Shares Value Par Value Warrants Stockholder Compensation Stage Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1993 - - 5,251,303 2,101 2,244,629 - - - (1,181,119) 1,065,611
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common
stock for cash
at $4.00 per
share(August 1993
through April 1994) - - 102,256 41 411,943 - - - - 411,984
Stock issued in
exchange for 46%
of JPS stock on
November 19, 1993 - - 3,379 1 10,137 - - - - 10,138
Stock issued for
professional
services:
January 28, 1994,
at $3.60 per share - - 5,331 2 19,188 - - - - 19,190
July 29, 1994,
at $2.00 per share - - 3,833 2 7,663 - - - - 7,665
Stock issued due
to exercise of
warrants, at $2.00
per share (March and
April 1994) - - 2,500 1 4,999 - - - - 5,000
Stock issued for
interest on
July 31, 1994,
at $2.00 per share - - 1,000 - 2,000 - - - - 2,000
Purchase of shares
of common stock on
January 28, 1994,
at $3.20 per share - - (1,563) - (5,000) - - - - (5,000)
Reacquisition of
common stock pursuant
to sale of investment
in Axion in May 1994,
at $1.60 per share - - (50,000) - (80,000) - - - - (80,000)
Net loss for the twelve
months ended July 31, 1994 - - - - - - - - (26,909) (26,909)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1994 - - 5,318,039 2,148 2,615,559 - - - (1,208,028) 1,409,679
- ------------------------------------------------------------------------------------------------------------------------------------
Stock issued for services:
November 30, 1994,
at $1.88 per share - - 10,000 4 18,796 - - - - 18,800
May 15, 1995,
at $2.00 per share - - 10,724 4 21,443 - - - - 21,447
July 15, 1995,
at $1.60 per share - - 11,373 5 18,192 - - - - 18,197
Net loss for the
twelve months ended
July 31, 1995 - - - - - - - - (1,284,558) (1,284,558)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1995 - - 5,350,136 2,161 2,673,990 - - - (2,492,586) 183,565
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common
stock for 1%
JPS common stock on
September 21, 1995
at $1.20 per share - - 9,450 4 11,336 - - - - 11,340
DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from April 25, 1990 (inception) to September 30, 2001
Deficit
Preferred Stock Common Stock Note Accumulated Total
--------------- -------------- Capital in Receivable Deferred During the Stock-
Par Par Excess of From Stock-Based Development holders'
Shares Value Shares Value Par Value Warrants Stockholder Compensation Stage Equity
Issuance of common
stock for 20%
Seimac Limited
common stock on
December 13, 1995
at $4.00 per share - - 165,519 66 662,010 - - - - 662,076
Issuance of common
stock for
professional services
at $5.60 per share - - 2,934 1 16,427 - - - - 16,428
Net loss for the five
months ended
December 31, 1995 - - - - - - - - (662,877) (662,877)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1995 - - 5,528,039 2,232 3,363,763 - - - (3,155,463) 210,532
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from April 25, 1990 (inception) to September 30, 2001
Deficit
Preferred Stock Common Stock Note Accumulated Total
--------------- -------------- Capital in Receivable Deferred During the Stock-
Par Par Excess of From Stock-Based Development holders'
Shares Value Shares Value Par Value Warrants Stockholder Compensation Stage Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1995 - - 5,528,039 2,232 3,363,763 - - - (3,155,463) 210,532
- ------------------------------------------------------------------------------------------------------------------------------------
Warrants issued on
January 13, 1996,
to purchase 75,000 shares
of common stock for
services rendered at an
exercise price of $7.30
per share - - - - - 112,500 - - - 112,500
Issuance of common stock
for cash January 15, 1996,
at $4.00 per share, less
noncash issuance cost of
$63,900 - - 200,000 80 736,020 - - - - 736,100
February 15, 1996, at $5.20
per share, less noncash
issuance cost of $19,999 - - 38,462 15 179,988 - - - - 180,003
Stock issued for services
January 1 - June 30, 1996,
at $3.75 per share - - 22,743 9 85,277 - - - - 85,286
August 15, 1996, at $4.80
per share - - 6,018 2 28,884 - - - - 28,886
September 21, 1996, at
$5.60 per share - - 4,821 2 26,996 - - - - 26,998
July 1 - December 31, 1996,
at $2.00 per share - - 7,605 3 15,207 - - - - 15,210
Placement fee associated
with January 15 and
February 15, 1996,
issuances settled through
issuance of common stock - - 19,821 8 83,891 - - - - 83,899
Net loss for the twelve months
ended December 31, 1996 - - - - - - - - (3,752,583) (3,752,583)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 - - 5,827,509 2,351 4,520,026 112,500 - - (6,908,046) (2,273,169)
- ------------------------------------------------------------------------------------------------------------------------------------
Stock issued for services
January 31, 1997, at $1.69
per share - - 5,088 2 8,586 - - - - 8,588
February 14, 1997, at $1.75
per share - - 4,701 2 8,225 - - - - 8,227
February 28, 1997, at $2.00
per share - - 7,918 3 15,834 - - - - 15,837
March 31, 1997, at $1.63
per share - - 302 - 491 - - - - 491
April 10, 1997, at $2.00
per share - - 7,500 3 14,997 - - - - 15,000
April 30, 1997, at $1.50
per share - - 332 - 498 - - - - 498
June 30, 1997, at $1.13
per share - - 14,578 6 16,394 - - - - 16,400
July 9, 1997, at $0.75
per share - - 15,000 6 11,244 - - - - 11,250
Net income for the twelve
months ended
December 31, 1997 - - - - - - - - 3,068,917 3,068,917
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 - - 5,882,928 2,373 4,596,295 112,500 - - (3,839,129) 872,039
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from April 25, 1990 (inception) to September 30, 2001
Deficit
Preferred Stock Common Stock Note Accumulated Total
--------------- -------------- Capital in Receivable Deferred During the Stock-
Par Par Excess of From Stock-Based Development holders'
Shares Value Shares Value Par Value Warrants Stockholder Compensation Stage Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 - - 5,882,928 2,373 4,596,295 112,500 - - (3,839,129) 872,039
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued for
cash, on April 16, 1998,
at $2.00 per share - - 102,000 41 203,959 - - - - 204,000
Common stock issued upon
exercise of options, on
June 11, 1998, at $1.44
per share - - 12,500 5 17,964 - - - - 17,969
Common stock issued
(voided) in connection
with services rendered
February 12, 1998, at
$0.53 per share - - 26,209 10 13,906 - - - - 13,916
April 1, 1998, at $3.25
per share - - 10,000 4 32,496 - - - - 32,500
May 14, 1998, at $3.75
per share - - 13,646 6 51,168 - - - - 51,174
May 14, 1998, at $3.75
per share - - (22,743) (9) (85,277) - - - - (85,286)
Common stock issued for
cash in August and
September 1998 at $2.00
per share net of
issuance costs of $485,826 - - 2,800,000 1,120 5,113,054 - - - - 5,114,174
Common stock issued upon
exercise of options at
$0.53 per share - - 17,202 6 9,128 - - - - 9,134
Fair value of Common Stock
warrants committed to
representing stock
issuance costs - - - - (973,000) 973,000 - - - -
Fair value of options
granted in connection
with services rendered - - - - 159,000 - - - - 159,000
Common stock issued for
exercise of options
$0.60 per share 10/1/98 - - 37,500 15 22,485 - - - - 22,500
Common stock returned to
investees at $2.00 per
share in October 1998 - - (400,000) (160) (799,840) - - - - (800,000)
Common stock issued upon
exercise of options $0.531
per share in October 1998 - - 94,375 38 50,075 - - - - 50,113
Common stock issued
representing stock
issuance costs - - 7,500 3 14,997 - - - - 15,000
Net loss for the year
ended December 31, 1998 - - - - - - - - (3,293,493) (3,293,493)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1998 - - 8,581,117 3,452 8,426,410 1,085,500 - - (7,132,622) 2,382,740
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from April 25, 1990 (inception) to September 30, 2001
Deficit
Preferred Stock Common Stock Note Accumulated Total
--------------- -------------- Capital in Receivable Deferred During the Stock-
Par Par Excess of From Stock-Based Development holders'
Shares Value Shares Value Par Value Warrants Stockholder Compensation Stage Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1998 - - 8,581,117 3,452 8,426,410 1,085,500 - - (7,132,622) 2,382,740
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued for
cash February 1999 at
$2.50, net of issuance
costs of $2,104 - - 50,000 20 122,876 - - - - 122,896
February 1999 at $3.00,
net of issuance costs
of $25,246 - - 500,000 200 1,474,554 - - - - 1,474,754
April 1999 at $3.00
per share - - 1,666,667 667 4,999,333 - - - - 5,000,000
Common stock issued upon
exercise of options
January, March, August,
and December 1999
at $0.53 per share - - 195,227 78 103,557 - - - - 103,635
February 1999 at $0.58 - - 12,625 5 7,368 - - - - 7,373
January and February 1999
at $0.60 - - 26,667 11 15,990 - - - - 16,001
February 1999 at $1.44 - - 37,500 15 53,891 - - - - 53,906
February and March 1999
at $1.45 - - 200,000 80 289,920 - - - - 290,000
January, February, and
March 1999 at $1.50 - - 195,084 78 292,548 - - - - 292,626
January 1999 at $2.80 - - 8,125 3 22,747 - - - - 22,750
Common stock issued upon
exercise of warrants
January 1999 at $0.50
per share - - 200,000 80 99,920 - - - - 100,000
January 1999 at $1.44
per share - - 11,080 4 15,923 - - - - 15,927
January and February 1999
at $1.50 per share - - 64,380 26 183,251 (86,707) - - - 96,570
March 1999 at $2.00
per share - - 7,500 2 24,673 (9,675) - - - 15,000
February and March 1999
at $2.10 per share - - 33,700 13 111,534 (40,777) - - - 70,770
January - March 1999 at
$3.00 per share, net of
issuance costs of $123,80 - - 2,452,000 983 7,239,689 (8,475) - - - 7,232,197
March 1999 at $3.50
per share net of issuance
costs of $3,344 - - 50,000 20 172,035 - - - - 172,055
Expiration of warrants - - - - 15,730 (15,730) - - - -
Deferred stock compensation - - - - 2,490,337 - - (2,490,337) - -
Options issued in connection
with services rendered - - - - 751,497 - - - - 751,497
Amortization of deferred
stock compensation - - - - - - - 957,755 - 957,755
Warrants issued in connection
with services rendered in
November and December 1999 - - - - - 22,800 - - - 22,800
Issuance of common stock in
connection with Litigation
settlement in March 1999
at $5.00 per share - - 63,239 25 324,391 - - - - 324,416
Fair value of Common Stock
warrants committed to
representing deferred
stock issuance costs
in December 1999 - - - - - 673,500 - - - 673,500
Warrant issued in connection
with stock issuance costs - - - - (270,000) 270,000 - - - -
Note Receivable from
Stockholder - - - - - - (60,000) - - (60,000)
Retirement of Treasury Stock - - - - - - - - - -
Net loss for the year ended
December 31, 1999 - - - - - - - - (5,915,493) (5,915,493)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 - - 14,354,911 5,762 26,968,174 1,890,436 (60,000) (1,532,582) (13,048,115) 14,223,675
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from April 25, 1990 (inception) to September 30, 2001
Deficit
Preferred Stock Common Stock Note Accumulated Total
--------------- -------------- Capital in Receivable Deferred During the Stock-
Par Par Excess of From Stock-Based Development holders'
Shares Value Shares Value Par Value Warrants Stockholder Compensation Stage Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1999 - - 14,354,911 5,762 26,968,174 1,890,436 (60,000) (1,532,582) (13,048,115) 14,223,675
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued
for cash
January 2000 under
Employee Stock Purchase
Plan at $1.83 - - 490 - 900 - - - - 900
July 2000 under Employee
Stock Option Plan at $1.43 - - 6,961 3 9,951 - - - - 9,954
June 2000 at $1.00 - - 166,298 67 166,231 - - - - 166,298
July 2000 at $.75 - - 133,333 53 99,946 - - - - 100,000
September 2000 at $.9863 - - 84,490 34 83,299 - - - - 83,333
October 2000 at $.8805 - - 63,092 25 55,531 - - - - 55,556
Common stock issued
upon exercise of options
February 2000 at $2.1875 - - 15,000 6 32,807 - - - - 32,813
March 2000 at $.531 - - 15,000 6 7,959 - - - - 7,965
March 2000 at $1.45 - - 50,000 20 72,480 - - - - 72,500
March 2000 at $1.50 - - 10,000 4 14,996 - - - - 15,000
April 2000 at $.5840 - - 5,500 2 3,210 - - - - 3,212
June 2000 at $.60 - - 37,500 15 22,485 - - - - 22,500
June and August 2000 at
$.7235 - - 10,000 4 7,231 - - - - 7,235
December 2000 at $.584 - - 1,375 1 802 - - - - 803
Cash received for common
stock to be issued - - - - 600,000 - - - - 600,000
Common stock issued
upon exercise of warrants
March 2000 at $1.50 - - 2,495 1 5,001 - - - - 5,002
September 2000 at $.70 - - 125,000 50 87,450 - - - - 87,500
Common stock issued in
connection with services
rendered January 2000 at
$2.2937 - - 4,687 2 10,748 - - - - 10,750
June 2000 at $1.50 - - 66,667 26 99,974 - - - - 100,000
September 2000 at $1.25 - - 200,000 80 249,920 - - - - 250,000
December 2000 at $0.5625 - - 65,569 26 36,856 - - - - 36,883
July 2000 at $2.5875 - - 3,672 1 9,500 - - - - 9,501
Series A Preferred Shares
issued January - July
2000 at $30.00 35,897 14 - - 1,076,896 - - - - 1,076,910
Series B Preferred
Shares issued in
October, 2000 as
Stock Issuance Costs - - - - 40,000 - - - - 40,000
Preferred B Warrants - - - - - 78,044 - - - 78,044
Dividends to Preferred
B Stockholders - - - - (26,016) - - - - (26,016)
Stock issuance costs -
January to December 2000 - - - - (636,576) - - - - (636,576)
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from April 25, 1990 (inception) to September 30, 2001
Deficit
Preferred Stock Common Stock Note Accumulated Total
--------------- -------------- Capital in Receivable Deferred During the Stock-
Par Par Excess of From Stock-Based Development holders'
Shares Value Shares Value Par Value Warrants Stockholder Compensation Stage Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Series A Preferred
Shares converted
September 2000
at $1.6812 (1,666) (1) 29,728 12 (11) - - - - -
Series A Preferred
Shares converted
October 2000
at $1.6812 (1,666) (1) 29,728 12 (11) - - - - -
Series A Preferred
Shares converted
November 2000
at $1.70 (3,333) (1) 58,817 24 (22) - - - - -
Series A Preferred
Shares converted
November 2000
at $1.6438 (3,333) (1) 60,830 24 (23) - - - - -
Options and Warrants
issued in connection
with services rendered - - - - 30,828 693,919 - - - 724,747
Warrants issued in
connection with
stock issuance costs - - - - - 327,299 - - - 327,299
Amortization of
deferred stock
compensation - - - - - - - 1,078,856 - 1,078,856
Cancellation of
deferred stock
compensation - - - - (3,597) - - 3,597 - -
Repayment of Note
Receivable from
Stockholder - - - - - - 60,000 - - 60,000
Net loss for the
year ended
December 31, 2000 - - - - - - - - (6,557,549) (6,557,549)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2000 25,899 11 15,601,143 6,260 29,126,919 2,989,698 - (450,128) (19,605,664) 12,067,096
- ------------------------------------------------------------------------------------------------------------------------------------
F-12
DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from April 25, 1990 (inception) to September 30, 2001
Deficit
Preferred Stock Common Stock Note Accumulated Total
--------------- -------------- Capital in Receivable Deferred During the Stock-
Par Par Excess of From Stock-Based Development holders'
Shares Value Shares Value Par Value Warrants Stockholder Compensation Stage Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2000 25,899 11 15,601,143 6,260 29,126,919 2,989,698 - (450,128) (19,605,664) 12,067,096
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued
for cash
January 2001 under
Employee Stock
Purchase Plan
at $0.32 (unaudited) - - 9,844 4 3,146 - - - - 3,150
January 2001 at $0.25
(cash received in
Dec. 2000) (unaudited) - - 2,000,000 800 (800) - - - - -
January 2001 at $0.50
(cash received in
Dec. 2000) (unaudited) - - 200,000 80 (80) - - - - -
January 2001 at $0.50
(unaudited) - - 500,000 200 249,800 - - - - 250,000
January 2001 at $0.3448
(unaudited) - - 290,000 116 99,884 - - - - 100,000
March 2001 at $0.44
(unaudited) - - 568,182 227 249,773 - - - - 250,000
July 2001 at $0.20
(unaudited) - - 1,459,458 584 281,640 82,642 - - - 364,865
July 2001 at $0.02
(unaudited) - - 450,000 180 9,820 - - - - 10,000
July 2001 at $0.60
(unaudited) - - 600,000 240 330,195 29,565 - - - 360,000
July 2001 under
Employee Stock
Purchase Plan
at $0.36 (unaudited) - - 12,083 5 4,345 - - - - 4,350
August 2001 at $0.47
(unaudited) - - 478,722 191 197,529 27,280 - - - 225,000
August 2001 at $0.50
(unaudited) - - 500,000 200 162,245 87,555 - - - 250,000
August 2001 at $0.69
(unaudited) - - 94,203 38 59,614 5,348 - - - 65,000
Common stock issued
upon exercise of
options March 2001
at $0.53 (unaudited) - - 118,875 48 64,955 - - - - 65,002
Cash received for stock
issued in fiscal 2000
(unaudited) - - - - 3,207 - - - - 3,207
Warrants issued in
connection with services
rendered by third parties
(unaudited) - - - - - 351,658 - - - 351,658
Common stock issued in
connection with services
rendered by third parties
(unaudited) - - 821,469 329 431,671 - - - - 432,000
Common stock issued in
connection with services
rendered by related parties
(unaudited) - - 49,686 20 27,980 - - - - 28,000
Warrants issued in
connection with stock
issuance costs (unaudited) - - - - (83,509) 83,509 - - - -
DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the period from April 25, 1990 (inception) to September 30, 2001
Deficit
Preferred Stock Common Stock Note Accumulated Total
--------------- -------------- Capital in Receivable Deferred During the Stock-
Par Par Excess of From Stock-Based Development holders'
Shares Value Shares Value Par Value Warrants Stockholder Compensation Stage Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Amortization of
deferred stock
compensation (unaudited) - - - - - - - 337,596 - 337,596
Stock issuance costs -
January to September 2001
(unaudited) - - - - (88,200) - - - - (88,200)
Beneficial conversion
feature on Convertible
Debentures (unaudited) - - - - 222,816 - - - - 222,816
Warrants issued in
connection with
Debentures (unaudited) - - - - - 134,581 - - - 134,581
Dividend relating to
the issuance of warrants
to Series B Preferred
Stockholders (unaudited) - - - - (195,000) 195,000 - - - -
Cumulative dividends and
penalties relating to
Series B Preferred Stock
(unaudited) - - - - (123,395) - - - - (123,395)
Net loss for the nine
months ended
September 30, 2001
(unaudited) - - - - - - - - (2,689,147) (2,689,147)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
September 30, 2001
(unaudited) 25,899 11 23,753,665 9,521 31,034,555 3,986,835 - (112,532) (22,294,811) 12,623,578
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
April 25, 1990
Nine Months Ended Year Ended (Inception) to
September 30, December 31, September 30,
2001 2000 2000 1999 2001
------------ ------------ ------------ ------------- -------------
(unaudited) (unaudited) (unaudited)
Cash flows from operating activities
Net loss $ (2,689,147) $ (3,554,762) $ (6,557,549) $ (5,915,493) $ (22,294,811)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 7,110 9,427 16,866 15,719 470,950
Minority interest's share of net loss - - - - (8,575)
Noncash charges 460,000 (60,000) 673,500 - 2,218,045
Amortization of deferred stock-based
compensation 337,596 494,558 1,078,857 957,755 2,374,208
Issuance of options and warrants for
services rendered 351,658 470,700 1,021,218 774,298 2,147,174
Issuance of common stock in connection
with litigation settlement - - - 324,391 324,391
Equity in loss of investees, net - - - - 529,972
Loss (gain) on sale of investments (125) - - - (5,829,343)
Allowance for losses on advances - - - - 216,932
Common stock issued as payment for
interest - - - - 7,000
Decrease (increase) in accounts
receivable and other assets (30,627) 45,463 57,060 (43,301) (68,801)
Increase (decrease) in accounts
payable and accrued liabilities (618,266) 1,164,998 1,324,107 204,675 1,315,756
Increase in customer advances - - - - 400,000
------------ ------------ ------------ ------------- -------------
Net cash used in operating activities (2,181,801) (1,429,616) (2,385,941) (3,681,956) (18,197,102)
------------ ------------ ------------ ------------- -------------
Cash flows from investing activities
Proceeds from sale of investment 2,546 - - - 1,102,486
Proceeds from Loral settlement - - - - 3,573,677
Purchase of furniture and equipment (6,698) (2,704) - (34,394) (152,139)
Satellite construction costs - (125,644) (157,034) (10,800,790) (12,229,907)
Organization costs - - - - (28,526)
Repayment (issuance) of note receivable
from stockholder - - 60,000 (60,000) (31,187)
Purchase of interest in Continental - - - - (2,292,409)
Investments, license acquisition costs
and other (500,723) - 482 (1,518,081) (3,227,048)
Net assets of purchased subsidiaries - - - - (147,500)
Cash transferred from Fi-Tek IV, Inc.
pursuant to the merger and reorganization - - - - 156,648
Cash of divested subsidiary - - - - (277)
Purchase of patents - - - - (18,251)
Proceeds from repayment of advances to
affiliate - - - - 152,500
Restricted cash on credit line - - - - 300,000
------------ ------------ ------------ ------------- -------------
Net cash used in investing activities (504,876) (128,348) (96,552) (12,413,265) (12,841,933)
------------ ------------ ------------ ------------- -------------
Cash flows from financing activities
Repayment of borrowing under credit line - - - - (300,000)
Issuance of debentures 500,000 - - - 5,317,501
Issuance of Common and Preferred Stock 1,967,042 1,410,395 3,225,442 15,240,555 28,583,781
Redemption of common stock warrants - - - - (19,490)
Stock issuance costs (88,200) (103,307) (636,575) (154,100) (1,378,611)
Purchase of shares - - - - (5,000)
Issuance (Payment) of debentures - - - - (1,168,445)
Proceeds from stockholders' loans 55,000 - - - 497,750
Payment of stockholders' loans - - - - (351,967)
------------ ------------ ------------ ------------- -------------
Net cash provided by financing activities 2,433,842 1,307,088 2,588,867 15,086,455 31,175,519
------------ ------------ ------------ ------------- -------------
Net increase (decrease) in cash (252,835) (250,876) 106,374 (1,008,766) 136,484
Cash and cash equivalents, beginning of period 389,319 282,945 282,945 1,291,711 -
------------ ------------ ------------ ------------- -------------
Cash and cash equivalents, end of period $ 136,484 $ 32,069 $ 389,319 $ 282,945 $ 136,484
============ ============ ============ ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
1. Organization and Basis of Presentation
These consolidated financial statements include the accounts of DBS
Industries, Inc. (the "Company"), and its wholly-owned subsidiaries, Global
Energy Metering Service, Inc. ("GEMS"), and NewStar Limited ("NewStar").
Intercompany transactions and balances have been eliminated in
consolidation.
The Company was organized as a Delaware corporation on August 3, 1989.
Since inception the Company has been in the development stage. The
Company's current business plan is to develop a data communication service
using a constellation of low earth orbit satellites and the Internet. The
Company's financial statements have been prepared assuming the Company will
continue as a going concern. Since inception, the Company has devoted
substantially all of its efforts to developing its business. The Company
has therefore incurred substantial losses and negative cash flows from
operating activities as reflected in these consolidated financial
statements. Accordingly, the Company has relied primarily upon obtaining
equity capital and debt financing to support its operations. The Company
does not expect revenue to exceed costs and expenses in 2001 and,
accordingly, will continue to incur losses and negative cash flows from
operating activities. To address financing needs, the Company is pursuing
various financing alternatives. These circumstances raise substantial doubt
about the Company's ability to continue as a going concern. These financial
statements do not reflect any adjustments that might result from the
outcome of this uncertainty.
During fiscal 2000, the Company raised approximately $2.5 million, net of
stock issuance costs, from warrant exercises and sale of shares of common
and preferred stock. However, the Company will need substantial additional
capital, at least $120 million, to construct its proposed satellite
constellation. Such financing is likely to result in a significant dilution
in the equity interests of the current stockholders. The construction of
the first two of the six planned satellites was required to commence by
April 1999 pursuant to the terms of the Federal Communications Commission
(FCC) license granted to E-SAT, Inc. ("E-SAT"). The Company notified the
FCC that it has achieved this milestone by entering into a construction
contract on March 31, 1999.
GEMS is a Delaware corporation in the development stage whose primary
activity has been the development of satellite and radio systems for use in
automating the control and distribution of gas and electric power by
utility companies. GEMS had no significant activity during fiscal 2000.
In January 1998, the Company created NewStar Limited, a wholly-owned
subsidiary organized under the Laws of the Republic of Bermuda to market
and sell its service to international customers.
The Company's investments in E-SAT, in which the Company has an ownership
interest of 80.1%, are accounted for using the equity method. The Company's
interest in Seimac Limited was disposed of during 1998.
F-15
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
2. Summary of Significant Accounting Policies
Hereafter, unless otherwise specified, all references to the "Company"
include DBS Industries, Inc. and its wholly-owned subsidiaries.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Such
estimates include the recoverability of satellite construction costs and
the investment in E-SAT. Actual results could differ from those estimates.
Cash equivalents
The Company considers all money market instruments and other highly liquid
investments with original maturities of three months or less to be cash
equivalents.
Depreciation
Furniture and equipment are depreciated over the estimated useful lives of
the assets ranging from five to seven years using the straight-line method
of depreciation. When assets are disposed of, the related cost and
accumulated depreciation are removed from the books and the resulting gain
or loss is recognized in the year of disposal.
Satellite construction costs
Satellite construction costs will be depreciated over the useful economic
lives of the satellites once they enter into service.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, Accounting for Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of. The Company reviews satellite construction costs
and other long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The amount of the impairment loss, if any, would be calculated
based on the excess of the carrying amount of the assets over their fair
market value.
F-16
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
Goodwill
Goodwill is amortized using the straight-line method over five years.
Amortization expense charged to operations for the nine months ended
September 30, 2001 and 2000 was $0 and $1,047, respectively. Amortization
expense charged to operations for the years ended December 31, 2000 and
1999 was $1,047 and $2,515, respectively.
Income taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Under
SFAS No. 109, deferred income tax liabilities and assets are determined
based on the difference between the financial reporting amounts and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future. Such amounts are based on enacted tax laws and rates
in effect for the years in which the differences are expected to affect
taxable income, net operating loss and tax credit carryforwards. Valuation
allowances are established when necessary to reduce deferred tax assets to
the amounts expected to be realized. Income tax expense is the tax payable
for the period and the change during the period in deferred tax assets and
liabilities.
Stock-based compensation
The Company accounts for stock-based employee compensation agreements in
accordance with the provisions of Accounting Principles Board Opinion
No.25, Accounting for Stock Issued to Employees (APB No. 25) and complies
with the disclosure provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123).
Under APB No. 25, compensation expense is based on the difference, if any,
between the fair value of the Company's stock and the exercise price of the
option on the measurement date, which is typically the date of grant.
In March of 2000, the Financial Accounting Standards Board ("FASB") issued
FIN 44, Accounting for Certain Transactions Involving Stock Compensation,
an interpretation of APB No.25. FIN 44 was effective July 1, 2000. The
implementation of FIN 44 did not have a material impact on the Company's
financial statements.
The Company accounts for options granted to non-employees under SFAS
No.123. Under SFAS No. 123, options are recorded at their fair value on the
measurement date, which is typically the date of grant.
Net loss per share
Basic earnings per share is computed based on the weighted average number
of common shares outstanding and excludes any potential dilution; diluted
earnings per share reflects diluted effects of all outstanding Common Stock
equivalents. Options and warrants are excluded from the EPS calculation in
loss years due to their antidilutive effect. Diluted net loss per share
does not include the effect of the following potential common shares:
F-17
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
Nine Months Ended Spetember 30, Year Ended December 31,
2001 2000 2000 1999
Shares issuable pursuant
to options and warrants 14,134,688 6,666,737 8,103,582 6,150,994
Recently issued accounting pronouncements
In July 2001, the FASB issued SFAS No. 141 Business Combinations and SFAS
No. 142 Goodwill and Other Intangible Assets SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles
will be evaluated against this new criteria and may result in certain
intangibles being subsumed into goodwill, or alternatively, amounts
initially recorded as goodwill may be separately identified and recognized
apart from goodwill. SFAS No. 142 requires the use of a nonamortization
approach to account for purchased goodwill and certain intangibles. Under a
nonamortization approach, goodwill and certain intangibles will not be
amortized into results of operations, but instead would be reviewed
annually for impairment and written down and charged to results of
operations only in the periods in which the recorded value of goodwill and
certain intangibles is more than its fair value. The provisions of each
statement, which apply to goodwill and intangible assets acquired prior to
June 30, 2001, will be adopted by the Company on January 1, 2002. The
Company does not expect the adoption of these accounting standards will
have a significant impact on its consolidated financial position, results
of operations or cash flows.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of and applies to all long-lived assets
(including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30 (APB 30), Reporting Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business.
SFAS No. 144 develops one accounting model (based on the model in SFAS No.
121) for long-lived assets that are to be disposed of by sale, as well as
addresses the principal implementation issues. SFAS No. 144 requires that
long-lived assets that are to be disposed of by sale be measured at the
lower of book value or fair value less cost to sell. That requirement
eliminates APB 30's requirement that discontinued operations be measured at
net realizable value or that entities include under "discontinued
operations" in the financial statements amounts for operating losses that
F-18
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
have not yet occurred. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and
(2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. SFAS No. 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001. The Company is
in the process of evaluating the potential impact the adoption of SFAS No.
144 will have on its consolidated financial position, results of operations
or cash flows.
Reclassifications
Certain prior period balances have been reclassified to conform to the
current year's presentation.
Segment reporting
We have determined that we have a single reportable operating segment as
defined by SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information.
Comprehensive income
The Company had no other comprehensive income or loss for any periods
presented.
3. Investments And License Acquisition Costs
In October 1994, the Company and EchoStar formed E-SAT for the purpose of
filing with the FCC for a license to operate a low earth orbit satellite
system. E-SAT filed with the FCC on November 16, 1994. The Company holds an
80.1% interest in E-SAT. The Company's total investments in, and advances
to, E-SAT as of December 31, 2000 and 1999 were $851,490 for both years.
The investment is accounted for using the equity method. The Company's
equity in losses of E-SAT for the years ended December 31, 2000 and 1999
were $0.
On March 31, 1998, the Federal Communications Commission approved E-SAT's
application for a low earth orbit satellite license. E-SAT is required to
meet certain milestones and other covenants in order to maintain its
license. On April 8, 1999, the Company notified the FCC that it had entered
into a construction contract for the first two satellites of the E-SAT
system on March 31, 1999.
On July 30, 1999, the Company entered into an agreement with EchoStar under
which it will receive 60.1% of E-SAT's shares from EchoStar in exchange for
consideration, including the grant of rights to use up to 20% of the
satellite capacity of the E-SAT system by EchoStar. As a result of this
transaction, which was subsequently approved by the Federal Communications
Commission, the Company now owns 80.1% of the E-SAT shares. In connection
with the negotiations of the share purchase agreement with EchoStar, the
Company paid $1,517,187 to a consultant during 1999 and capitalized such
costs in the E-SAT investment account.
F-19
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
4. Satellite Construction Costs
During the construction of its satellite system, the Company is
capitalizing all design, engineering, launch and construction costs. Such
costs amounted to approximately $12.2 million as of September 30, 2001. The
Company reviews capitalized satellite construction and FCC license costs
for impairment whenever events or changes in circumstances indicate that
their carrying amounts may not be recoverable. Lack of receipt of adequate
financing to build and prepare to launch two LEO satellites sufficiently in
advance of the required FCC launch date in September 2002 may represent an
impairment event and result in the write down of such capitalized costs to
their recoverable value.
On December 15, 1998, the Company and Alcatel Space Industries ("Alcatel")
entered into a Memorandum of Understanding and authorization to proceed
("MOU") pursuant to which Alcatel would become the General Contractor for
the design, construction and launch services for the Company's planned low
earth orbit satellites. Upon signing of the MOU, the Company made a $1
million advance payment to Alcatel. In January and February 1999, the
Company made additional payments to Alcatel totaling $1 million.
On March 31, 1999, the Company signed construction and launch contracts
with Surrey Satellite Technology Limited ("Surrey") and Eurockot,
respectively, and made advance payments of $7.8 million in April 1999 and
$2.0 million in July 1999. Total payments under these cancelable contracts
will amount to approximately $47 million. In July 1999, the Company, Surrey
and Eurockot reached agreements under which $3.2 million of the required
milestone payments due in July 1999 totaling $4.8 million were deferred to
yet to be agreed upon dates.
On October 8, 1999, the Company signed a contract with Alcatel for the
final design, construction and delivery to the launch site of six Little
LEO satellites. This agreement also includes the final design, construction
and delivery of the ground infrastructure, including the gateway earth
station, mission center, satellite control center, ground communications
network and ground-based transceivers to be installed into devices, like
utility meters. Alcatel is also responsible for providing in-orbit testing
of the NewStar System. The total contract price for the end-to-end system
is $88.5 million. Either party has the right to terminate this agreement
under certain circumstances. The Company paid $2 million in construction
payments to Alcatel, pursuant to which Alcatel completed the preliminary
engineering design review for the Company's system, including the payload
design and designs for the gateway earth station and tracking facilities,
as well as the satellite orbital analysis and communications link margins
to and from space. The agreement with Alcatel required a payment at the end
of 1999 of approximately $9.1 million in cash and the equivalent of $5
million in Common Stock. This payment was necessary for Alcatel to continue
work and to trigger an effective date for our full system development
schedule. As of September 30, 2001, this payment has not been made, and
Alcatel therefore has the right to consider this contract void as to
further work, and that the contract is therefore not currently in effect.
F-20
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
5. Customer Advances
The Company's wholly-owned subsidiary, GEMS, is party to a contract to
deliver 10,000 satellite radio units. The purchase order is for $1.2
million and under the terms of the purchase order, GEMS would receive a
total of $500,000 in advance payments on the contract, based on certain
milestone achievements. As of December 31, 1998, this purchase order had
been suspended by both parties when the Argos System became unavailable.
The $400,000 in milestone payments received is reported as customer
advances on the accompanying consolidated balance sheets. These milestone
payments could be subject to refund in whole or in part.
6. Convertible Debentures
On August 31, 2001, the Company sold to an accredited investor an aggregate
of $500,000 principal amount of convertible debentures due August 31, 2006,
together with warrants to purchase up to an aggregate of 250,000 shares of
Common Stock of the Company at an exercise price of $1.06 per share. The
Company shall accrue simple interest on the $500,000 at the rate of 6% per
annum. As of September 30, 2001, the Company has accrued $2,500 in interest
expense relating to these debentures. The principal and accrued interest
are convertible into shares of Common Stock of the Company at the lower of
(i) a fixed conversion price equal to $0.98 (maximum conversion price) or
(ii) a variable conversion price equal to 85% of the market price, but in
no event lower than $0.21 per share (minimum conversion price).
Emerging Issues Task Force (EITF) Issue No. 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios (EITF 98-5) as clarified by EITF 00-27,
Application of Issue No. 98-5 to Certain Convertible Instruments, requires
the Company to compute the Beneficial Conversion Feature (BCF) of the
convertible debt. Therefore a BCF of approximately $223,000 was recorded as
debt discount and is amortized as interest expense over the five-year life
of the debenture. Additionally, the Company estimated the fair value of the
warrant, using the Black-Scholes model, at approximately $134,000 and
recorded it as a debt discount. This amount will also be amortized over the
five-year life of the debenture. As of September 30, 2001, the Company has
recorded approximately $6,000 as interest expense relating to the
amortization of the value of the warrants and BCF.
F-21
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
7. Commitments
Operating leases
The Company and its wholly-owned subsidiaries lease their facilities under
noncancelable operating leases which run concurrently and expire in July
2003. Minimum future rental payments under the leases are as follows:
Year Ending December 31,
2001 $ 148,234
2002 148,234
2003 86,470
---------
$ 382,938
Total rent expense was $226,268 and $150,084 for the years ended December
31, 2000 and 1999, respectively.
Other
Refer to Note 4 for certain contract commitments.
8. Stockholders' Equity
Preferred Stock
The Company's Certificate of Incorporation, as amended in September 2001,
authorizes the issuance of 10,000,000 shares of preferred stock with a par
value of $0.0004 per share. The Board of Directors of the Company is
authorized to issue preferred stock from time to time in series. The Board
is further authorized to establish such series, to fix and determine the
variations in the relative rights and preferences, and to allow for the
conversion of preferred stock into Common Stock.
Common Stock
The Company's Certificate of Incorporation, as amended in September 2001,
authorizes the issuance of 100,000,000 shares of Common Stock with a par
value of $0.0004 per share. Each record holder of Common Stock is entitled
to one vote for each share held on all matters properly submitted to the
stockholders for their vote. Cumulative voting for the election of
directors is not permitted by the Certificate of Incorporation.
F-22
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
Equity Transactions with Non-Employees
Preferred Stock Transactions
During fiscal 2000, the Company sold to accredited investors an aggregate
of 35,897 shares of its Series A Convertible Preferred Stock at $30 per
share, for an aggregate placement of $1,076,910. The shares of preferred
stock have a liquidation preference of $30.00 per share and were initially
convertible, at the option of the holder, into ten shares of Common Stock,
or at a rate of $3.00 per common share. Per the conversion terms, the
conversion rate was adjusted to a range between $1.6438 and $1.8625, based
upon the 5-day average closing price of the Company's Common Stock three
months after the shares were issued, because the Company's Common Stock was
trading below $3.00 per share. Commissions were paid to one placement agent
in the aggregate amount of approximately $7,000, plus a warrant was issued
in July 2000 to the placement agent to purchase 57,586 shares of Common
Stock at the exercise price of $3.00 per share. As of September 30, 2001,
25,899 shares of Series A Preferred Shares remain outstanding. Accreted
dividends totaled $60,970 based on a 5% dividend rate per annum.
On October 6, 2000, the Company received from accredited investors proceeds
of $400,000 from the sale in a private placement of (1) 400 shares of
Series B Convertible Preferred Stock, (2) warrants to purchase 83,660
shares of Common Stock with an exercise price of $1.052 per share and (3)
warrants to purchase 83,660 shares of Common Stock with an exercise price
of $1.434 per share. During the first 180 days following October 6, 2000,
the Series B Preferred Stock could not be converted; and the Company had
the right to redeem these shares if the Company repaid the purchase price
plus an additional 5-7% depending on repayment date, plus dividends at a
rate of 10% per annum. After 180 days following October 6, 2000, the Series
B Preferred Stock are convertible into Common Stock at the lesser of (1)
approximately $0.96 per share which was the closing bid price at the time
of the purchase or (2) 80% of the average of the three lowest closing bid
prices of the Common Stock for the 20-day trading period prior to the
conversion date. The Company also has the obligation to register the Common
Stock underlying the warrants and, after 180 days, Common Stock underlying
any redeemed Series B Preferred Stock. For this transaction, an agent
received a fee of 40 shares of Series B Preferred Stock and warrants to
purchase 120,000 shares of Common Stock of the Company with an exercise
price of $1.052 per share. As of September 30, 2001, 440 shares of Series B
Preferred Shares remain outstanding. Accreted dividends totaled $43,878
based on a 10% dividend rate per annum.
On June 26, 2001, the Company's Series B preferred stockholders agreed to
modify their preferred stock agreement with the Company. As a result of the
modification, the Company's requirement to file a registration statement
for the Series B equity was delayed four months to August 4, 2001. The
Company has not filed such registration statement as of September 30, 2001
and therefore has recorded accretions of 5% monthly of the Series B
Preferred Stock's liquidation amount of $400,000. These accretions totaled
$38,000 in the quarter ended September 30, 2001.
F-23
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
The preferred stockholders have the right to require redemption of the
Series B Preferred Stock amounts, including accretions, 90 days subsequent
to August 4, 2001 in the event that the registration statement is not
declared effective at that time.
In conjunction with this modification, the Company agreed to reprice the
existing 287,322 warrants issued on October 6, 2000 to the Series B
preferred stockholders ranging in price from $1.0126 to $1.1342 to $0.17
per share. In addition, the Company issued to the Series B preferred
stockholders warrants to purchase 500,000 shares of the Company's Common
Stock at an exercise price of $0.17 per share. The fair value of $195,000
of such warrants was calculated using the Black-Scholes option pricing
model with the following variables: exercise price of $0.17, closing stock
price on June 26, 2001 of $0.44, life of warrants of 3 years, volatility of
150% and risk free interest rate of 5.5%. The value of such warrants was
deemed to be analogous to a dividend to the preferred stockholders as
prescribed under the provisions of EITF 98-5 and was recognized at the date
of issuance as the warrants were immediately exercisable.
Common Stock Transactions
In February 1999, the Company issued (a) 500,000 units each consisting of a
share of Common Stock at a price of $3.00 per share and a warrant to
purchase a share of Common Stock at an exercise price of $4.00, and (b)
50,000 units consisting of a share of Common Stock at a price of $2.50 per
share and a warrant to purchase a share of Common Stock at an exercise
price of $3.50. Sale of these units resulted in gross proceeds to the
Company of approximately $1.6 million. In connection with this offering,
the Company granted warrants to purchase 75,000 shares of the Company's
Common Stock at an exercise price of $3.75. Such grant represented stock
issuance costs and therefore, its fair value of $270,000 was recorded as an
offset against the proceeds of the offering.
In March 1999, the Company received proceeds of approximately $7.5 million
from the exercise of warrants to purchase 2.5 million shares of the
Company's Common Stock.
During April 1999, Surrey and Eurockot purchased 1,666,667 shares of the
Company's Common Stock for a total $5 million in cash.
During 1999, the Company granted options and warrants to purchase 347,273
shares of the Company's Common Stock at exercise prices ranging from $0.79
to $2.75 to several service providers. The fair value of such options and
warrants, which amounted to approximately $774,000, was recorded as an
expense during 1999. The following variables were used to determine the
fair value of such instruments under the Black-Scholes option pricing
model: volatility of 100%, expected life of 10 years for options and 2 to 3
years for warrants, risk free interest of 5% to 6% and underlying stock
prices equal to fair market value at the time of grant.
F-24
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
In December 1999, the Company granted warrants to purchase 500,000 shares
of the Company's Common Stock at an exercise price of $2.81 per share to a
financial institution as consideration for its efforts to help raise
capital. The fair value of such warrants of $674,000 was recorded as a long
term asset and will be offset against proceeds once they are received. The
fair value of the warrants was estimated on the date of grant using the
Black-Scholes model with volatility of 100%, expected life of 3 years,
risk-free interest rate of 5% and fair market value of the Common Stock of
$2.25 per share.
During 1999, the Company received proceeds of $598,526 from the exercise of
options to purchase 425,084 shares of the Company's Common Stock, and
proceeds of $320,768 from the exercise of warrants to purchase 324,160
shares of the Company's Common Stock.
On June 2, 2000, the Company entered into an agreement to sell shares of
its Common Stock, at the Company's option, to Torneaux Ltd., a corporation
organized in the Bahamas, an accredited investor. The Company issued a
Warrant to purchase 250,000 shares of its Common Stock at an exercise price
of $1.01 per share as a finder's fee. In September 2000, warrants for
125,000 shares of Common Stock were exercised at the reduced price of $0.70
per share and a new warrant to purchase an additional 125,000 shares of
Common Stock at an exercise price of $1.1875 per share was issued. The
transaction was exempt from registration in reliance upon Section 4(2) of
the Securities Act. In September 2000, the Company sold 84,490 shares of
Common Stock to Torneaux Ltd. in accordance with the agreement, resulting
in gross proceeds to the Company of $83,333 and issued a warrant to
purchase 42,245 shares of Common Stock at an exercise price of $1.1342 per
share. In October 2000, the Company sold 63,092 shares of Common Stock to
Torneaux Ltd. in accordance with the agreement, resulting in gross proceeds
to the Company of $55,556 and issued a warrant to purchase 31,546 shares of
Common Stock at an exercise price of $1.0126 per share.
On June 2, 2000, the Company sold an aggregate of 166,298 shares of its
Common Stock to three accredited investors. The stock was sold for $1.00
per share resulting in gross proceeds to the Company of $166,298. A
finder's fee of approximately $11,641 was paid in connection with these
transactions. The offers and sales during the three month period ended June
30, 2000 were made by the Company in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
In May 2000, the Company granted a warrant to purchase 300,000 shares of
its Common Stock to a consultant for past services. No commissions were
paid. The warrant has an exercise price of $0.6749 per share. The
transaction was exempt from registration in reliance upon Section 4(2) of
the Securities Act.
In July 2000, the Company received from an accredited investor $100,000
from a private placement of 133,333 shares of Common Stock and granted a
warrant to purchase 10,000 shares of Common Stock exercisable through July
2004 at an exercise price of $0.75 per share. No commissions were paid. The
transaction was exempt from registration in reliance upon Section 4(2) of
the Securities Act.
F-25
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
In August 2000, the Company granted warrants to purchase 49,000 shares of
Common Stock to a consultant for services rendered. The warrants are
exercisable through August 2003 at an exercise price of $0.9062 per share.
The fair value of such warrants of $36,309 was expensed and was estimated
on the date of grant using the Black-Scholes model with volatility of 150%,
expected life of 3 years, risk free interest rate of 6% and a fair market
value of the Common Stock of $0.90 per share. The transaction was exempt
from registration in reliance upon Section 4(2) of the Securities Act.
In September 2000, the Company issued 200,000 shares of Common Stock and a
warrant to purchase 200,000 shares of Common Stock to a consultant for
services rendered. The warrants are exercisable through September 2003 at
an exercise price ranging from $1.50 to $2.50 per share. The fair value of
such warrants of $194,500 was expensed and was estimated on the date of
grant using the Black-Scholes model with volatility of 150%, expected life
of 3 years, risk free interest rate of 6% and a fair market value of the
Common Stock of $1.25 per share. The transaction was exempt from
registration in reliance upon Section 4(2) of the Securities Act.
In October 2000, the Company granted a warrant to purchase 500,000 shares
of the Company's Common Stock at an exercise price of $1.31 per share to a
financial institution as consideration for its efforts to help raise
capital. Warrants to purchase the first 50,000 vested as of the grant date
and will expire in October 2004. The remaining warrants to purchase 450,000
shares shall vest upon the closing of transactions that provide cash to the
Company based on the success of the financial institution's efforts. The
transaction was exempt from registration in reliance upon Section 4(2) of
the Securities Act.
In December 2000, options to purchase 70,571 shares of the Company's Common
Stock that were previously issued to a Director at prices ranging from
$0.060 to $2.19, were transferred to his spouse in connection with his
divorce settlement. These warrants are fully vested and have expiration
dates ranging between December 18, 2004 and May 22, 2008.
In December 2000, the Company received from accredited investors proceeds
of $100,000 in exchange for 100,000 units, each unit consisting of two
shares of Common Stock at a price of $0.50 per share and a warrant to
purchase one-quarter of one share of Common Stock at an exercise price of
$1.00 per share. In connection with this transaction, a finder's fee of
$7,000.00 was paid and a warrant was issued to purchase 10,000 shares of
Common Stock exercisable at $1.00 per share. The 200,000 shares of Commons
Stock were issued in January 2001. The transaction was exempt from
registration in reliance upon Section 4(2) of the Securities Act.
In December 2000 the Company received from accredited investors proceeds of
$500,000 in exchange for 2,000,000 units, each unit consisting of one share
of Common Stock at a price of $0.25 per share and a warrant to purchase one
share of Common Stock at an exercise price of $0.50. In connection with
this transaction, a finder's fee of $35,000.00 was paid and a warrant was
issued to purchase 100,000 shares of Common Stock exercisable at $0.50 per
F-26
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
share. The 2,000,000 shares of Common Stock were issued in January 2001.
The transaction was exempt from registration in reliance upon Section 4(2)
of the Securities Act.
During fiscal 2000, the Company received proceeds of $87,500 from the
exercise of options to purchase 60,000 shares of the Company's Common
Stock, and proceeds of $5,805 from the exercise of warrants to purchase
3,870 shares of the Company's Common Stock.
During 2000, a total of 136,923 shares of Common Stock were issued for
services rendered to three consultants for a total fair value of $147,634
which was expensed during the course of the year. The transaction was
exempt from registration in reliance upon Section 4(2) of the Securities
Act.
In January 2001, the Company received proceeds in a private placement of
$200,000 from an accredited investor in exchange for 400,000 shares of
Common Stock and a warrant to purchase 100,000 shares of Common Stock
exercisable at $1.00 per share. In connection with this transaction, a
finder's fee of $14,000 was paid and a warrant was issued for 40,000 shares
of Common Stock exercisable at $1.00 per share. The fair value of such
warrants, which amounted to approximately $16,000, was recorded as stock
issuance costs. The following variables were used to determine the fair
value of such instruments under the Black-Scholes option pricing model:
volatility of 150%, expected life of 4 years, risk free interest of 6.5%
and underlying stock prices equal to fair market value at the time of
grant.. The transaction was exempt from registration in reliance upon
Section 4(2) of the Securities Act.
In January 2001, the Company received proceeds in a private placement of
$50,000 from three accredited investors in exchange for 100,000 shares of
Common Stock and warrants to purchase 12,500 shares of Common Stock
exercisable at $1.00 per share. In connection with this transaction, a
finder's fee of $3,500 was paid and a warrant was issued for 5,000 shares
of Common Stock exercisable at $1.00 per share. The fair value of such
warrants, which amounted to approximately $2,000, was recorded as stock
issuance costs. The following variables were used to determine the fair
value of such instruments under the Black-Scholes option pricing model:
volatility of 150%, expected life of 4 years, risk free interest of 6.5%
and underlying stock prices equal to fair market value at the time of
grant. The transaction was exempt from registration in reliance upon
Section 4(2) of the Securities Act.
In March 2001, the Company received proceeds in a private placement of
$250,000 from an accredited investor in exchange for 568,182 shares of
Common Stock and a warrant to purchase 113,636 shares of Common Stock
exercisable at $0.90 per share. An additional warrant to purchase 450,000
shares of Common Stock exercisable at $0.50 per share was issued to the
same accredited investor, relative to the same transaction, in April 2001.
In connection with this transaction, a finder's fee of $17,500 was paid and
a warrant was issued for 56,818 shares of Common Stock exercisable at $0.90
per share. The fair value of such warrants, which amounted to approximately
$19,000, was recorded as stock issuance costs. The following variables were
used to determine the fair value of such instruments under the
Black-Scholes option pricing model: volatility of 150%, expected life of 4
F-27
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
years, risk free interest of 6.5% and underlying stock prices equal to fair
market value at the time of grant. The transaction was exempt from
registration in reliance upon Section 4(2) of the Securities Act.
In March 2001, the Company issued 488,136 shares of Common Stock of the
Company to a consultant for services rendered for a total fair value of
$216,000. This amount was recorded as consulting expense. The transaction
was exempt from registration in reliance upon Section 4(2) of the
Securities Act.
On April 18, 2001, the Company granted to an accredited investor a warrant
to purchase 5,000 shares of Common Stock of the Company at an exercise
price of $0.50 per share in exchange for extending the period during which
the Company was required to file a registration statement with regard to
securities purchased by the investor on December 27, 2000. The transaction
was performed by the Company in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
In May 2001, the Company received six-month loans from three current
stockholders and a director of the Company in the amount of $30,000. In
consideration for the loans, the Company will pay interest at the rate of
6.5% per annum, and has issued warrants to said stockholders and director
to purchase a total of 150,000 shares of restricted Common Stock
exercisable at $0.25 per share. In June 2001, the Company received a
six-month loan from a director of the Company in the amount of $25,000. In
consideration for the loan, the Company will pay interest at the rate of
6.5% per annum, and has issued a warrant to the director to purchase a
total of 125,000 shares of restricted Common Stock exercisable at $0.45 per
share. The fair value of such warrants, which amounted to approximately
$41,000, is being amortized as interest expense over the term of the loans.
The following variables were used to determine the fair value of such
instruments under the Black-Scholes option pricing model: volatility of
150%, expected life of 6 months, risk free interest of 6% and underlying
stock prices equal to fair market value at the time of grant.
During July 2001, the Company issued a total of 1,909,458 shares of Common
Stock and warrants to purchase a total of 1,086,486 shares of Common Stock
as part of a private placement to five accredited investors, including
Torneaux Lt., for aggregate gross proceeds of approximately $375,000. Of
the shares issued, 486,486 shares were delivered upon the exercise of a
portion of the total warrants that were issued in the transaction. In
addition, the Company agreed to reprice certain existing Torneaux Ltd.
warrants to purchase an aggregate of 73,791 shares of Common Stock from
exercise prices ranging from $1.0126 to $1.1342 to $0.17 per share. The
transactions were exempt from registration in reliance upon Section 4(2) of
the Securities Act.
On July 9, 2001, the Company granted a warrant to purchase an aggregate of
500,000 shares of its Common Stock to two consultants as part of two
agreements dated July 9, 2001. The warrants have an exercise price of $0.38
per share. Of these 500,000 warrants, 175,000 vested upon performance of
service during the quarter ended September 30, 2001, while the vesting of
the remainder is contingent upon the occurrence of future events. The fair
F-28
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
value of such warrants, which amounted to approximately $54,250, was
recorded as an expense. The following variables were used to determine the
fair value of such instruments under the Black-Scholes option pricing
model: volatility of 150%, expected life of 3 years, risk free interest of
6.5% and underlying stock prices equal to fair market value at the time of
grant.
On July 27, 2001, the Company sold an aggregate of 600,000 shares of its
Common Stock to three accredited investors. The stock was sold for $0.60
per share resulting in gross proceeds to the Company of $360,000. In
addition, the Company issued warrants to purchase an aggregate of 59,999
shares of its Common Stock at $0.60 per share. These transactions were
performed by the Company in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act.
On August 1, 2001, the Company granted a warrant to purchase 62,000 shares
of its Common Stock to a consultant as part of an agreement dated August 1,
2001. The warrant has an exercise price of $0.77 per share. Of these 62,000
warrants, 25,000 vested upon performance of service during the quarter
ended September 30, 2001, while the vesting of the remainder is contingent
upon the occurrence of a future event. The fair value of the 25,000
warrants, which amounted to approximately $17,000, was recorded as an
expense. The following variables were used to determine the fair value of
such instruments under the Black-Scholes option pricing model: volatility
of 150%, expected life of 4 years, risk free interest of 6.5% and
underlying stock prices equal to fair market value at the time of grant..
On August 9, 2001, warrants to purchase 100,000 shares of Common Stock of
the Company exercisable at $0.62 per share were issued to two consultants
for services rendered. The fair value of such warrants, which amounted to
approximately $55,000, was recorded as an expense. The following variables
were used to determine the fair value of such instruments under the
Black-Scholes option pricing model: volatility of 150%, expected life of 4
years, risk free interest of 6.5% and underlying stock prices equal to fair
market value at the time of grant.
On August 10, 2001, warrants to purchase a total of 50,000 shares of Common
Stock of the Company exercisable at $0.67 per share were issued to two
consultants for services rendered. The fair value of such warrants, which
amounted to approximately $29,500, was recorded as an expense. The
following variables were used to determine the fair value of such
instruments under the Black-Scholes option pricing model: volatility of
150%, expected life of 4 years, risk free interest of 6.5% and underlying
stock prices equal to fair market value at the time of grant.
On August 16, 2001, the Company sold an aggregate of 425,531 shares of its
Common Stock to two accredited investors. The stock was sold for $0.47 per
share resulting in gross proceeds to the Company of $200,000. In addition,
the Company issued warrants to purchase 69,148 shares of its Common Stock
at $0.47 per share. These transactions were performed by the Company in
reliance upon the exemption from registration provided by Section 4(2) of
the Securities Act.
F-29
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
On August 19, 2001, a warrant to purchase 9,722 shares of Common Stock of
the Company exercisable at $0.59 per share was issued to a consultant for
services rendered. The fair value of such warrants, which amounted to
approximately $5,000, was recorded as an expense. The following variables
were used to determine the fair value of such instruments under the
Black-Scholes option pricing model: volatility of 150%, expected life of 4
years, risk free interest of 6.5% and underlying stock prices equal to fair
market value at the time of grant.
On August 20, 2001, the Company granted a warrant to purchase 250,000
shares of its Common Stock to a consultant for services rendered. The
warrant has an exercise price of $0.50 per share. The fair value of such
warrants, which amounted to approximately $150,000, was recorded as an
expense. The following variables were used to determine the fair value of
such instruments under the Black-Scholes option pricing model: volatility
of 150%, expected life of 4 years, risk free interest of 6.5% and
underlying stock prices equal to fair market value at the time of grant.
Also on August 20, 2001, the Company sold 500,000 shares of its Common
Stock to an accredited investor. The stock was sold for $0.50 per share
resulting in gross proceeds to the Company of $250,000. In addition, the
Company issued a warrant to purchase 300,000 shares of its Common Stock at
$0.50 per share. The transaction was performed by the Company in reliance
upon the exemption from registration provided by Section 4(2) of the
Securities Act.
On August 29, 2001, the Company sold 94,203 shares of its Common Stock to
an accredited investor. The stock was sold for $0.69 per share resulting in
gross proceeds to the Company of $65,000. In addition, the Company issued a
warrant to purchase 9,420 shares of its Common Stock at $0.69 per share.
The transaction was performed by the Company in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act.
On September 7, 2001, the Company issued 333,333 shares of Common Stock to
a consultant for services rendered for a total fair value of $216,000. The
Company recorded this amount as consulting expense.
Equity transactions with employees
Issuance of Common Stock to Employees
In January 2001, 6,375 shares of Common Stock of the Company, valued at
$10,000, were issued to a Director for service on the Board.
On July 9, 2001, the Company issued 43,411 shares of Common Stock valued at
$18,000 to two Directors as payment for service on the Board of Directors.
This amount was recorded as compensation expense.
F-30
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
On July 17, 2001, the Company received approximately $4,350 from the sale
of 12,083 shares of Common Stock to employees pursuant to the 1999 Employee
Stock Purchase Plan for the period ended June 30, 2001.
On August 16, 2001, the Company sold 53,191 shares of its Common Stock to a
Director. The stock was sold for $0.47 per share resulting in gross
proceeds to the Company of $25,000. In addition, the Company issued a
warrant to purchase 5,319 shares of its Common Stock at $0.47 per share.
Employee Stock Purchase Plan
The Company has established the 1999 Employee Stock Purchase Plan (the
"1999 Plan"), which was approved by the stockholders in June 1999 to serve
as a vehicle to attract and retain the services of key employees and to
help such key employees realize a direct proprietary interest in the
Company. Under the 1999 Plan, employees, including officers, who do not
beneficially own stock and/or options totaling 5% or more of the voting
power of the Company, will be eligible to participate. However, no
participant may be granted rights to purchase more than $25,000 worth of
Common Stock (valued at the time the purchase right is granted) for each
calendar year in which such purchase rights are outstanding under any other
stock purchase plans. An aggregate of 50,000 shares of Common Stock of the
Company were reserved for issuance under the 1999 Plan of which 17,295 were
issued and outstanding as of December 31, 2000. Employees electing to
participate in the 1999 Plan are allowed to deduct from 1% to 10% of their
compensation to purchase shares of Common Stock. Twice a year, the
employees' accumulated payroll deductions will be used to purchase shares
of Common Stock at a price equal to 85% of the closing price of the Common
Stock on either the first business day or last business day of the offering
period, whichever is lower.
In January 2001, the Company received approximately $3,150 from the sale of
stock to an employee pursuant to the 1999 Employee Stock Purchase Plan.
Employee Stock Option Plans
In February 1996, the Company adopted the 1996 Stock Option Plan (the 1996
Plan) to consolidate its three existing plans. In May 1998, the Company
adopted the 1998 Stock Option Plan (the "1998 Plan"), which provides for
the issuance of a maximum of 500,000 shares of the Company's Common Stock.
In May 2000, the Company adopted the 2000 Stock Option Plan (the "2000
Plan"), which provides for the issuance of a maximum of 1,750,000 shares of
the Company's Common Stock. Provisions of the 1996, 1998, and 2000 Plans
are substantially similar to those of the earlier plans. The overall
purpose of the 1996, 1998, and 2000 Plans is to advance the long-term
interest of the Company by attracting, motivating and retaining its
employees, directors and consultants with the opportunity to obtain an
equity interest in the Company.
F-31
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
Eligible employees, directors and consultants can receive options to
purchase shares of the Company's Common Stock at a price generally not less
than 100% of the fair market value of the Common Stock on the date of the
grant of incentive stock options. Nonqualified and nonplan options may be
granted at a price lower than fair market value. The options granted under
the 1996, 1998 and 2000 Plans are exercisable over a maximum term of ten
years from the date of grant and generally vest over (i) one year in the
case of directors and consultants, and (ii) up to a five-year period in the
case of employees. Shares sold under the 1996, 1998 and 2000 Plans are
subject to various restrictions as to resale.
Information with respect to plan and non-plan activity is set forth below:
Outstanding Options
------------------------------------------------------------
Weighted
Average
Number of Price per Aggregate Exercise
Shares Share Price Price
--------- ------------- ----------- --------
Balance, December 31, 1998 2,044,156 $0.40 - $5.60 $ 1,741,255 $0.85
Granted 2,149,700 $0.39 - $5.50 2,759,768 1.28
Exercised (280,144) $0.53 - $2.80 (203,695) 0.73
Terminated (10,340) $0.53 (5,491) 0.53
--------- -----------
Balance, December 31, 1999 3,903,372 $0.40 - $5.60 $ 4,291,837 $1.10
--------- -----------
Granted 218,461 $0.91 - $2.59 268,302 1.23
Exercised (83,000) $0.60 - $2.19 (73,724) 0.89
Terminated (95,571) $0.60 - $2.19 (145,065) 1.25
--------- -----------
Balance, December 31, 2000 3,943,262 $ 4,341,350 $1.10
--------- -----------
Granted 3,412,425 $0.22 - $0.77 2,308,797 0.68
Exercised (118,875) $0.53 - $0.60 (65,003) 0.55
Terminated (56,313) $0.531 (29,902) 0.53
--------- -----------
Balance, September 30, 2001 7,180,499 $ 6,555,242 $0.91
========= ===========
The following table summarizes information with respect to stock options
outstanding at December 31, 2000:
Options Outstanding Options Exercisale
-------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Price Outstanding (years) Price Exercisable Price
-------------- ----------- ----------- -------- ----------- ---------
$0.53 - $0.75 1,685,242 7.30 $ 0.59 1,542,065 $ 0.57
$1.08 - $1.67 2,054,449 9.49 1.31 1,401,115 1.31
$2.00 - $2.86 147,287 8.22 2.40 147,287 2.40
$5.50 - $5.60 56,284 8.07 5.51 56,284 5.51
----------- ----------
3,943,262 3,146,751
=========== ==========
F-32
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
The following table summarizes information with respect to stock options
outstanding at September 30, 2001:
Options Outstanding Options Exercisale
-------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Price Outstanding (years) Price Exercisable Price
-------------- ----------- ----------- -------- ----------- ---------
$0.22 - $0.49 1,013,607 9.44 $ 0.46 481,939 $ 0.47
$0.53 - $0.77 3,788,872 8.11 0.69 3,776,372 0.69
$0.91 - $1.75 2,174,449 7.82 1.29 1,771,115 1.30
$2.00 - $2.86 147,287 6.53 2.40 147,287 2.40
$5.50 - $5.60 56,284 6.37 5.51 56,284 5.51
----------- ------------
Balance, September 30, 2001 7,180,499 6,232,997
=========== ============
F-33
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
The stock based compensation for the twelve months ended December 31, 2000
and 1999 has been allocated across the relevant functional expense
categories within operating expense as follows:
Year Ended December 31,
2000 1999
----------- ---------
Marketing and sales $ 358,332 $ 153,324
General and administrative 593,871 756,035
Research and development 126,654 48,396
Total stock-based compensation $ 1,078,857 $ 957,755
The Company accounts for employee and board of director stock options in
accordance with the provisions of APB No. 25 and complies with the
disclosure provisions of SFAS No. 123.
Under APB No. 25, compensation expense is recognized based on the amount by
which the fair value of the underlying Common Stock exceeds the exercise
price of the stock options at the measurement date, which in the case of
employee stock options is typically the date of grant. For financial
reporting purposes, the Company has determined that the deemed fair market
value on the date of grant of certain employee stock options was in excess
of the exercise price of the options. This amount is recorded as deferred
compensation and is classified as a reduction of stockholders' equity and
is amortized as a charge to operations over the vesting period of the
applicable options. The vesting period is generally four years. The fair
value per share used to calculate deferred compensation was derived by
reference to the preferred stock values and the Company's initial public
offering price range. Consequently, the Company recorded deferred stock
compensation of $0 and $2,490,337 during the year ended December 31, 2000
and 1999, respectively. Amortization recognized for the years ended
December 31, 2000 and 1999 totaled $1,078,857 and $957,755, respectively.
The weighted average fair value of the options granted or modified for the
years ended December 31, 2000, and 1999 were $1.37 and $0.90, respectively.
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
2000 1999
Risk free interest rate 6.0% 5.7%
Expected life 4 years 4 years
Volatility 150% 100%
Dividend yield - -
F-34
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
The following pro forma net loss information has been prepared following
the provisions of SFAS No. 123:
December 31,
2000 1999
------------------------------
Net loss
As reported $ (6,557,549) $ (5,915,493)
Proforma $ (7,226,245) $ (6,252,010)
Net loss per share
As reported $ (0.44) $ (0.45)
Pro forma $ (0.49) $ (0.48)
9. Related Party Transactions
During fiscal 2000, several executives of the Company deferred receipt of
their salaries due. The executives included the President ($125,000), the
Chief Financial Officer ($45,000), the Chief Legal Counsel ($41,250) and
the Vice President of Operations ($33,750).
10. Income Taxes
The provision for income taxes for all periods presented relates to current
minimum taxes. The estimated tax effect of significant temporary
differences and carryforwards that gave rise to deferred income tax assets
as of December 31, 2000 and 1999, is as follows:
2000 1999
----------------------------- -----------------------------
Federal State Federal State
------------ ----------- ------------ -----------
Deferred tax assets:
Net operating loss carryforwards $ 5,325,000 $ 936,000 $ 3,439,000 $ 602,000
Research and development credit
carryforwards 177,000 - 147,000 -
Deferred compensation and other 35,000 6,000 64,000 12,000
------------ ----------- ------------ -----------
Deferred tax assets 5,537,000 942,000 3,650,000 614,000
Valuation allowance (5,537,000) (942,000) (3,650,000) (614,000)
------------ ----------- ------------ -----------
Net deferred tax assets $ - $ - $ - $ -
============ =========== ============ ===========
F-35
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
Due to the uncertainty of realization, a valuation allowance has been
provided to offset the net deferred tax assets. The increase in the
valuation allowance was $2,215,000 and $2,047,500 during the years ended
December 31, 2000 and 1999, respectively. The provision for income taxes
differs from the amount which would arise by applying the combined
statutory income tax rate of approximately 40% due to changes in the
deferred tax valuation allowance.
As of December 31, 2000, the Company has net operating loss carryforwards
of approximately $15,660,000 and $15,350,000 for federal income tax
purposes and California state franchise tax purposes, respectively. The
Company also has research and development credit carryforwards. Such
carryforwards expire in varying amounts between 2000 and 2020.
As a result of changes enacted by the 1986 Tax Reform Act, utilization of
net operating loss and tax credit carryforwards may be limited due to
equity transactions occurring on or after May 6, 1986.
11. Risks and Uncertainties
The Company periodically maintains cash balances at banks in excess of the
Federal Deposit Insurance Corporation insurance limit of $100,000.
12. Supplemental Disclosures of Non Cash Investing and Financing Activities
During fiscal 2000 the Company issued 132,236 shares of Common Stock in
lieu of cash for services rendered by two vendors. The total value of the
services provided was $ 138,882.
13. Subsequent Events
On October 2, 2001, the Company issued 75,298 shares of Common Stock to a
terminated employee in accordance with his termination settlement for a
total fair value of $37,649.
On November 12, 2001, the Company issued 2,000 shares of Common Stock to a
consultant for services rendered for a total fair value of $780. The
transaction was performed by the Company in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act.
On November 19, 2001, the Company issued 150,000 shares of Common Stock to
a terminated employee in accordance with his termination settlement for a
total fair value of $46,800.
On November 19, 2001, the Company sold 172,414 shares of its Common Stock
to an accredited investor. The stock was sold for $0.29 per share resulting
in gross proceeds to the Company of $50,000. In addition, the Company
issued a warrant to purchase 17,241 shares of its Common Stock at $0.29 per
share. The transaction was performed by the Company in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act.
F-36
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 2001 and 2000, and subsequent to December 31, 2000, is unaudited)
On November 30, 3001 the Company issued 441,176 shares of Common Stock to
two investors upon conversion of an aggregate of 120 shares of series B
preferred stock based upon $0.272 per Common Share. Additionally, a total
of 50,498 shares of Common Stock were issued to investors in lieu of
accrued and unpaid cash dividends at the same conversion price. The
transaction was performed by the Company in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act.
On December 13, 2001, the Company issued 166,667 shares of Common Stock to
an accredited investor. The stock was sold for $0.30 per share resulting in
gross proceeds to the Company of $50,000. In addition, the Company issued a
warrant to purchase 83,333 shares of its Common Stock at $0.30 per share.
The transaction was performed by the Company in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act.
II-1
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Officers and Directors
Section 145 of the General Corporation Law of Delaware provides for the
indemnification of officers and directors under certain circumstances against
expenses incurred successfully defending against a claim and authorizes Delaware
corporations to indemnify their officers and directors under certain
circumstances against expenses and liabilities incurred in legal proceedings
involving such persons because of their being or having been an officer or
director. The Certificate of Incorporation and Bylaws of DBS Industries, Inc.
provide for indemnification of its officers and directors to the full extent
authorized by law.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses payable by the
Company in connection with the issuance and distribution of the securities being
registered hereunder. No expenses shall be borne by the Selling Security
Holders. All of the amounts shown are estimates, except for the SEC Registration
and NASD Application Fees.
SEC registration fee $ 1,423
Printing and engraving expenses* $ 500
Accounting fees and expenses* $ 25,000
Legal fees and expenses* $ 25,000
Transfer agent and registrar fees* $ 6,000
Fees and expenses for qualification
under state securities laws $ -0-
Miscellaneous* $ 1,000
TOTAL $ 58,923
* estimated
Item 26. Recent Sales of Unregistered Securities
(a) On December 13, 2001, the Company issued 166,667 units to one
accredited investor, on November 19, 2001, the Company issued 172,414 units to
one accredited investor, on August 29, 2001 the Company issued 94,203 units to
one accredited investor, on August 20, 2001 the Company issued 500,000 units to
one accredited investor, on August 16, 2001 the Company issued an aggregate of
478,722 units to two accredited investors and on July 27, 2001 the Company
issued an aggregate of 600,000 units to three accredited investors. The
issuances were part of a private placement that raised aggregate gross proceeds
of approximately $1,000,000. The units were issued to nine accredited investors
and, generally, each unit consisted of one share of Common Stock and a warrant
to purchase one-tenth (1/10) share of Common Stock; however, the issuance on
December 13, 2001 included a warrant to purchase 1/2 share of Common Stock and
the issuance on August 16, 2001 included a warrant to purchase one fifth (1/5)
share of Common Stock instead of one tenth (1/10). The warrants have a term of
four years. No commissions were paid and the transactions were exempt from
registration in reliance upon Section 4(2) of the Securities Act.
II-2
(b) On November 30, 2001 the Company issued 441,176 shares of Common Stock
to two investors upon conversion of an aggregate of 120 shares of series B
preferred stock based upon a conversion rate of $0.272 per Common Share.
Additionally, a total of 50,498 shares of Common Stock were issued to investors
in lieu of accrued and unpaid cash dividends at the same conversion price. No
commissions were paid and the transaction was exempt from registration in
reliance upon Section 4(2) of the Securities Act.
(c) On November 19, 2001, the Company issued 150,000 shares of Common Stock
and on October 2, 2001 the Company issued 75,298 shares of Common Stock in
connection with termination settlements reached with two employees. No
commissions were paid and the transactions were exempt from registration in
reliance upon Section 4(2) of the Securities Act.
(d) On November 12, 2001, the Company issued 2,000 shares of Common Stock
and on September 7, 2001 the Company issued 333,333 shares of Common Stock to
two consultants for their past services. No commissions were paid and the
transactions were exempt from registration in reliance upon Section 4(2) of the
Securities Act.
(e) On August 31, 2001, the Company issued 500,000 units to one accredited
investor at a purchase price equal to $1.00 per unit. Each unit consisted of one
convertible debenture, with the principal amount of the convertible debenture
due August 31, 2006, together with a warrant to purchase one-half (1/2) share of
Common Stock at an exercise price of $1.06 per share resulting in gross proceeds
to the Company of $500,000. The convertible debentures accrue simple interest on
the principal amount at the rate of 6% per annum. The convertible debenture
principal and accrued interest is convertible into shares of Common Stock at the
lower of (i) a fixed conversion price equal to $0.98 (maximum conversion price)
or (ii) a variable conversion price equal to 85% of the market price, but in no
event lower than $0.21 per share (minimum conversion price). The warrants have a
term of five years. A structuring fee of $30,000 was paid to Azure Capital
Holdings, LLC and a finder's fee of $15,000 was paid to Madison & Wall
Worldwide, Inc. The transaction was exempt from registration in reliance upon
Section 4(2) of the Securities Act.
(f) On August 19, 2001, the Company issued a warrant to purchase 9,722
shares of Common Stock, on August 10, 2001 the Company issued a warrant to
purchase 50,000 shares of Common Stock, on August 9, 2001 the Company issued two
warrants to purchase a total of 100,000 shares of Common Stock, on August 1,
2001 the Company issued a warrant to purchase 62,000 shares of Common Stock and
on July 9, 2001 the Company issued two warrants to purchase a total of 500,000
shares of Common Stock. The warrants were issued to a total of 7 consultants for
their past services. Each warrant has a term of four years. No commissions were
paid and the transactions were exempt from registration in reliance upon Section
4(2) of the Securities Act.
(g) On July 17, 2001, the Company issued a total of 12,083 shares of Common
Stock to certain employees pursuant to the 1999 Employee Stock Purchase Plan for
the period ended June 30, 2001. The issuances resulted in aggregate gross
proceeds of approximately $4,350. No commissions were paid and the transaction
was exempt from registration in reliance upon Section 4(2) of the Securities
Act.
(h) On July 9, 2001, the Company issued 43,411 shares of Common Stock to
two Directors as payment for past service on the Board of Directors. No
commissions were paid and the transaction was exempt from registration in
reliance upon Section 4(2) of the Securities Act.
II-3
(i) During July 2001, the Company issued a total of 1,909,458 shares of
Common Stock and warrants to purchase a total of 1,086,486 shares of Common
Stock as part of a private placement to five accredited investors, including
Torneaux Ltd., for aggregate gross proceeds of approximately $375,000. Of the
shares issued, 486,486 shares were delivered upon the exercise of a portion of
the total warrants that were issued in the transaction. In addition, the Company
agreed to reprice certain existing Torneaux Ltd. warrants to purchase an
aggregate of 73,791 shares of Common Stock from exercise prices ranging from
$1.0126 to $1.1342 to $0.17 per share. The transactions were exempt from
registration in reliance upon Section 4(2) of the Securities Act.
(j) In June 2001, the Company issued to a director of the Company a warrant
to purchase 125,000 shares of Common Stock in connection with a six-month loan
to the Company in the amount of $25,000. The warrant has a term of two years. No
commissions were paid and the transaction was exempt from registration in
reliance upon Section 4(2) of the Securities Act.
(k) On June 26, 2001, the Company's Series B preferred stockholders agreed
to modify their preferred stock agreement with the Company, including a four
month postponement of the requirement to register their shares. In conjunction
with this modification, the Company agreed to reprice the existing 287,322
warrants issued on October 6, 2000 to the Series B preferred stockholders
ranging in price from $1.0126 to $1.1342 to $0.17 per share. In addition, the
Company issued to the Series B preferred stockholders warrants to purchase
500,000 shares of Common Stock at an exercise price of $0.17 per share. The
warrants have a term of five years. No commissions were paid and the transaction
was exempt from registration in reliance upon Regulation S.
(l) In May 2001, the Company issued warrants to purchase a total of 150,000
shares of Common Stock to three current stockholders and a director in
connection with six-month loans in the aggregate amount of $30,000. The warrants
have a term of two years. No commissions were paid and the transaction was
exempt from registration in reliance upon Section 4(2) of the Securities Act.
(m) On April 18, 2001, the Company issued a warrant to purchase 5,000
shares of Common Stock to one accredited investor in exchange for extending the
period during which the Company was required to file a registration statement
with regard to securities purchased by the investor on December 27, 2000. The
warrant has a term of four years. No commissions were paid and the transaction
was exempt from registration in reliance upon Section 4(2) of the Securities
Act.
(n) On March 6, 2001, the Company issued one unit to an accredited
investor. The unit consisted of 568,182 shares of Common Stock and a warrant to
purchase 113,636 shares of Common Stock at an exercise price of $0.90 per share
and an additional warrant to purchase 450,000 shares of Common Stock exercise
price of $0.50 per share resulting in gross proceeds to the Company of $250,000.
In connection with this transaction, a finder's fee of $17,500 was paid to
Capital Access. The transaction was exempt from registration in reliance upon
Section 4(2) of the Securities Act.
(o) In March 2001, the Company issued 488,136 shares of Common Stock of the
Company to a consultant for past services. No commissions were paid and the
transaction was exempt from registration in reliance upon Section 4(2) of the
Securities Act.
II-4
(p) On February 28, 2001, the Company issued 100,000 units to three
accredited investors, on January 23, 2001 the Company issued 200,000 units to
one accredited investor, on January 18, 2001 the Company issued 290,000 units to
one accredited investor, on December 27, 2000 the Company issued 500,000 units
to two accredited investors, and on December 18, 2000 the Company issued 100,000
units to two accredited investors. Each unit consisted of between two and four
shares of Common Stock and a warrant to purchase between one-eighth (1/8) and
one-half (1/2) share of Common Stock. The private placement resulted in
aggregate gross proceeds of $950,000. In connection with the issuance on
February 28, 2001 a finder's fee of $3,500 was paid to Capital Access and in
connection with the issuance on December 18, 2000 a finder's fee of $7,000 was
paid and a warrant to purchase 10,000 shares of common stock was issued. The
warrants have a term of four years. The transactions were exempt from
registration in reliance upon Section 4(2) of the Securities Act.
(q) In consideration for the cancellation of certain outstanding options
held by a director, on December 15, 2000, the Company issued a warrants to
purchase a total of 70,571 shares of Common Stock. The warrants have a term
ranging from five to eight years. No commissions were paid and the transaction
was exempt from registration in reliance upon Section 4(2) of the Securities
Act.
(r) On October 6, 2000, the Company issued 400 units to two foreign
investors in a private placement resulting in aggregate gross proceeds of
approximately $400,000. Each unit consisted of one share of Series B Convertible
Preferred Stock, 209.15 warrants to purchase Common Stock at an exercise price
of $1.052 per share and 209.15 warrants to purchase Common Stock at an exercise
price of $1.434 per share. The Series B Preferred Stock are convertible into
Common Stock at the lesser of (1) approximately $0.96 per share which was the
closing bid price at the time of the purchase or (2) 80% of the average of the
three lowest closing bid prices of the Common Stock for the 20-day trading
period prior to the conversion date. The Company also has the obligation to
register the Common Stock underlying the warrants and the Common Stock
underlying any redeemed Series B Preferred Stock. For this transaction,
Intercoastal Holdings LLC received a fee of 40 shares of Series B Preferred
Stock and warrants to purchase 120,000 shares of Common Stock at an exercise
price of $1.052 per share. The warrants have a term of five years. The
transaction was exempt from registration in reliance upon Regulation S.
(s) On October 4, 2000, the Company issued a warrant to purchase 500,000
shares of the Company's Common Stock to Regency Capital Partners as
consideration for its efforts to help raise capital. Warrants to purchase the
first 50,000 shares vested as of the grant date and expire on October 4, 2003.
The remaining warrants to purchase 450,000 shares were cancelled on April 1,
2001. The transaction was exempt from registration in reliance upon Section 4(2)
of the Securities Act.
(t) On December 12, 2000 the Company issued 65,569 shares of Common Stock,
on September 8, 2000, the Company issued 200,000 shares of Common Stock and a
warrant to purchase 200,000 shares of Common Stock, on August 1, 2000 the
Company issued a warrant to purchase 49,000 shares of Common Stock, on May 1,
2000 the Company issued a warrant to purchase 300,000 shares of Common Stock and
on January 13, 2000 the Company issued 4,687 shares of Common Stock. In
addition, on June 21, 2000 the Company issued 66, 667 shares of its Common Stock
to its outside legal counsel. The shares and warrants were issued to consultants
for past services. The transactions were exempt from registration in reliance
upon Section 4(2) of the Securities Act.
(u) On August 31, 2000, the Company repriced one-half (1/2) of certain
warrants previously issued and reduced their exercise prices to $0.70 per share
as incentive for the holder to exercise 125,000 shares of the Company's Common
Stock. The exercise resulted in gross proceeds to the Company of $87,500. In
addition, the Company issued additional warrants to purchase 125,000 shares of
the Company's Common. The warrants have a term of two years. No commissions were
paid and the transaction was exempt from registration in reliance upon Section
4(2) of the Securities Act.
II-5
(v) On July 25, 2000, the Company issued 133,333 shares of Common Stock and
a warrant to purchase 10,000 shares of Common Stock to one accredited investor.
The transaction resulted in gross proceeds to the Company of $99,999.75. The
warrant has a term of four years. No commissions were paid and the transaction
was exempt from registration in reliance upon Section 4(2) of the Securities
Act.
(w) On June 2, 2000, the Company entered into an agreement to sell shares
of its Common Stock, at the Company's option, to Torneaux Ltd., a corporation
organized in the Bahamas. On August 11, 2000, the Company issued a warrant to
purchase 250,000 shares of the Company's Common Stock to Beacon Capital Corp. as
a finder's fee. That transaction was exempt from registration in reliance upon
Section 4(2) of the Securities Act.
(x) On June 2, 2000, the Company sold an aggregate of 166,298 shares of its
Common Stock to three accredited investors resulting in gross proceeds of
$166,298. A finder's fee of approximately $11,641 was paid in connection with
this transaction. The transaction was exempt from registration in reliance upon
Section 4(2) of the Securities Act.
(y) From December 1999 through March 2000, the Company sold an aggregate of
35,897 shares of its Series A Convertible Preferred Stock to 12 accredited
investors. The stock was sold for $30 per share resulting in gross proceeds to
the Company of $1,077,000. In connection with certain of the transactions, a
commission of $69,090 was paid and warrants to purchase 57,586 shares of Common
Stock at an exercise price of $3.00 per share were issued to SJ Capital issued
on July 18, 2000. The warrants have a term of five years. The transactions were
exempt from registration in reliance upon Regulation D.
(z) From September through December 1999, the Company issued warrants or
options to purchase an aggregate of 260,000 shares of its Common Stock to
consultants for past services. No commissions were paid. No commissions were
paid and the transactions were exempt from registration in reliance upon Section
4(2) of the Securities Act.
(aa) On April 14, 1999, the Company issued 333,333 shares of its Common
Stock to Surrey Satellite Technology Limited for gross proceeds of $1 million.
No commission was paid and the transaction was exempt from registration in
reliance upon Regulation S.
(bb) On April 8, 1999, the Company issued 1,333,334 shares of its Common
Stock to Eurockot Launch Services GmbH for gross proceeds of $4 million. No
commission was paid and the transaction was exempt from registration in reliance
upon Regulation S.
(cc) On February 12, 1999, the Company issued 500,000 units to four
accredited investors and on February 1, 1999 the Company issued 50,000 units to
one accredited investor. Each Unit consisted of one share of Common Stock and a
warrant to purchase one share of Common and resulted in gross proceeds to the
Company of $1.625 million. The warrants have a term of three years. The
transaction was exempt from registration in reliance upon Regulation D. The
Company paid $75,000 and issued a warrant to purchase 75,000 shares of Common
Stock at $3.75 per share to Cardinal Capital, LLC as a commission in connection
with this transaction.
II-6
(dd) In March 1999, the Company issued 63,239 shares of its Common Stock to
Bridge Group (HK) International, Ltd. as part of a settlement of a legal claim
asserted by the Bridge Group against the Company's president. Such shares were
valued at $5.12 per share. No commission was paid and the transaction was exempt
from registration in reliance upon Section 4(2) of the Securities Act.
Item 27. Exhibits
(2.1) Plan and Agreement of Reorganization, dated September 30, 1992,
entered into with DBS Industries, Inc., Network, Inc, and certain of
its shareholders which was previously filed in, and is hereby
incorporated by reference to, the Company's Current Report on Form
8-K, date of report, December 2, 1991.(1)
(3.0) Restated Certificate of Incorporation, effective May 28, 1997.(1)
(3.1) Bylaws, effective February 19, 1999.(1)
(3.2) Certificate of Amendment of Certificate of Incorporation, effective
April 28, 1999.(1)
(3.3) Certificate of Designations, creating the Series A Convertible
Preferred Stock effective January 25, 2000.(8)
(3.4) Certificate of Designations, creating the Series B Convertible
Preferred Stock effective September 25, 2000. (10)
(3.5) Certificate of Correction to Certificate of Designations of Series B
Convertible Preferred Stock, effective October 10, 2000. (11)
(3.6) Certificate of Amendment to the Certificate of Designations of
Series A Convertible Preferred Stock effective March 6, 2001. (11)
(3.7) Certificate of Amendment to the Articles of Incorporation of E-SAT,
Inc. dated December 29, 2000. (11)
(3.8) Certificate of Amendment of Certificate of Incorporation, effective
September 4, 2001.
(4.1) Form of Unit Warrant Agreement, which was previously filed in, and
is hereby incorporated by reference to, the Company's Registration
Statement on Form S-18, No. 33-31868-D, effective May 11, 1990.(1)
(4.2) Specimen Stock Certificate.(1)
(4.3) Form of Warrant issued to SJ Capital.(8)
(5.1) Opinion of Bartel Eng & Schroder.
(10.6) 1993 Incentive Stock Option Plan for DBS Industries, Inc.(1)
(10.7) 1993 Non-Qualified Stock Option Plan for Non-Employee Directors of
DBS Industries, Inc.(1)
(10.8) 1993 Non-Qualified Stock Option Plan for Consultants of DBS
Industries, Inc.(1)
II-7
(10.9) Commercial Lease and Sublease and Consent pertaining to Mill Valley,
CA office space.(1)
(10.20) AXION Royalty Agreement incorporated by reference to the Company's
Current Report on Form 8-K dated May 16, 1994.(1)
(10.24) DBS Industries, Inc. $3,000,000, Three-Year Convertible Debenture
Series B due January 12, 1999, incorporated by reference to the
Company's Current Report on Form 8-K dated February 1, 1996.(1)
(10.25) Memorandum of Understanding between ABB Power T&D Company, Inc. and
Global Energy Metering Service, Inc. dated February 9, 1996.(1)
(10.26) Stock Purchase Agreement between Seimac Limited and DBS Industries,
Inc., comprised of Common Stock Exchange Agreement and Shareholders
Agreement both dated December 13, 1995.(1)
(10.30) DBS Industries, Inc., $640,000 Three-Year Convertible Debenture,
Series C due December 31, 1999.(1)
(10.31) Employment Agreement between Fred W. Thompson and the Company, dated
April 18, 1996.(1)
(10.32) Employment Agreement between Randall L. Smith and GEMS (the
Company's Subsidiary), dated March 1, 1996.(1)
(10.33) Employment Agreement between E.A. James Peretti and GEMS (the
Company's subsidiary) dated April 18, 1996.(1)
(10.34) 1996 Stock Option Plan.(1)
(10.36) 1998 Stock Option Plan.(1)
(10.37) Memorandum of Understanding Between DBS Industries, Inc. and Matra
Marconi Space.(2)
(10.38) Letter of Intent with SAIT-Radio Holland SA.(2)
(10.39) Purchase Agreement with Astoria Capital, L.P. and Microcap Partners,
L.P.(2)
(10.40) Warrant Agreement with Astoria Capital, L.P. and Microcap Partners,
L.P.(2)
(10.41) Employment Agreement between Gregory T. Leger and DBS Industries,
Inc. dated March 1, 1998.(3)
(10.42) Unit Purchase Agreement with Michael Associates.(4)
II-8
(10.43) Unit Purchase Agreement with Lodestone Capital Fund LLC, Fourteen
Hill Capital, LP, High Peak Limited and Michael Fitzsimmons.(3)
(10.44) Launch Services Agreement with Eurockot Launch Services GmbH dated
March 31, 1999.(4) (Redacted per Confidential Treatment Request)
(10.45) Satellite Construction Agreement with Surrey Satellite Technology
Limited dated March 31, 1999.(4) (Redacted per Confidential
Treatment Request)
(10.46) Amendment to Employment Agreement between Fred W. Thompson and DBS
Industries, Inc. dated September 1, 1999.(6)
(10.47) Amendment to Employment Agreement between Gregory T. Leger and DBS
Industries, Inc., dated September 1, 1999.(6)
(10.48) Employment Agreement between Frederick R. Skillman, Jr., and DBS
Industries, Inc., dated July 28, 1999.(6)
(10.49) Amendment to Employment Agreement between Frederick R. Skillman,
Jr., and DBS Industries, Inc. dated September 1, 1999.(6)
(10.50) Employment Agreement between H. Tate Holt and DBS Industries, Inc.
dated June 1, 1999. (6)
(10.51) Employment Agreement between Stanton C. Lawson and DBS Industries,
Inc. dated October 18, 1999. (6)
(10.52) Employment Agreement between Randy Stratt and DBS Industries, Inc.
dated November 8, 1999. (6)
(10.53) Prime Contract for E-SAT Communications System between DBS
Industries, Inc. and Alcatel Space Industries dated October 8, 1999,
and as amended on December 22, 1999. (6) (Redacted per Confidential
Treatment Request)
(10.54) Share Purchase Agreement between EchoStar DBS Corporation and DBS
Industries, Inc. dated July 30, 1999. (6) (Redacted per
Confidential Treatment Request)
(10.55) 2000 Stock Option Plan. (7)
(10.56) Common Stock Purchase Agreement between Torneaux Ltd. and DBS
Industries, Inc. dated June 2, 2000. (8)
(10.57) Amendment to Common Stock purchase Agreement between Torneaux Ltd.
and DBS Industries, Inc. dated June 30, 2000. (10)
(10.58) Stock Purchase Agreement between Courtney Benham and DBS Industries,
Inc. dated June 2, 2000. (11)
(10.59) Stock Purchase Agreement between Codera Wine Group Pension Plan and
DBS Industries, Inc. dated June 2, 2000. (11)
II-9
(10.60) Stock Purchase Agreement between Patrick Watt House Living Trust and
DBS Industries, Inc. dated June 2, 2000. (11)
(10.61) Stock Purchase Agreement between Barbara J. Drew and DBS Industries,
Inc. dated July 25, 2000. (11)
(10.62) Registration Rights Agreement between EchoStar DBS Corporation and
DBS Industries, Inc. dated December 29, 2000. (12)
(10.63) Voting Agreement between EchoStar DBS Corporation and DBS
Industries, Inc. dated December 29, 2000. (12)
(10.64) Operator-to-Operator Agreement between Iridium Satellite LLC and DBS
Industries dated May 24, 2001. (13)
(10.65) Amendment to Series B Preferred Stockholder Agreement dated June 26,
2001. (13)
(10.66) 1999 Employee Stock Purchase Plan (5)
(10.67) Securities Purchase Agreement between Azure Capital Holdings LLC and
DBS Industries dated August 31, 2001. (14)
(10.68) 6% Convertible Debenture between Azure Capital Holdings LLC and DBS
Industries dated August 31, 2001. (14)
(21.1) List of Subsidiaries of DBS Industries, Inc.
(23.1) Consent of PricewaterhouseCoopers LLP.
(23.2) Consent of Bartel Eng & Schroder is contained in Exhibit 5.1.
(1) Previously filed in, and incorporated by reference to, Form 10-KSB for
Fiscal Years July 31, 1993, July 31, 1994, July 31, 1995 and December 31,
1995, December 31, 1996, December 31, 1997, December 31, 1998, and December
31, 1999 or Form 8-K where indicated.
(2) Previously filed with Registration Statement on Form SB-2 filed on
September 16, 1998.
(3) Previously filed with Registration Statement on Form SB-2 filed on November
30, 1998.
(4) Previously filed with Registration Statement on Form SB-2 filed on May 3,
1999.
(5) Previously filed in the Proxy Statement on Schedule 14A filed on May 4,
1999.
(6) Previously filed in the Form 10-KSB for the Fiscal Year ended December 31,
1999.
(7) Previously filed in the Proxy Statement on Schedule 14A filed on April 11,
2000.
(8) Previously filed in the Form 8-K filed on June 15, 2000.
(9) Previously filed with Registration Statement on Form SB-2 filed on August
11, 2000.
(10) Previously filed with Form 10-Q for period ended June 30, 2000.
(11) Previously filed with Form 10-Q for period ended September 30, 2000.
(12) Previously filed with Form 10-KSB for the Fiscal Year ended December 31,
2000.
(13) Previously filed with Form 10-Q for period ended June 30, 2001.
(14) Previously filed with Form 10-Q for period ended September 30, 2001.
Reports on Form 8-K
None.
II-10
Item 28. Undertakings
The undersigned registrant hereby undertakes that it will:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) Include any additional changed material information on the plan
of distribution.
(2) For purposes of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
II-11
SIGNATURE
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Mill
Valley, State of California, on December 31, 2001.
DBS INDUSTRIES, INC.,
a Delaware Corporation
/s/ Fred W. Thompson
____________________________________
FRED W. THOMPSON,
President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Fred W. Thompson and Stanton C. Lawson or
either of them as his true and lawful attorneys-in-fact and agent, with full
power of substitution and re-substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agent or any of them, or of their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
Signatures Date
/s/ Fred W. Thompson December 31, 2001
- -----------------------------------------------
FRED W. THOMPSON
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Stanton C. Lawson December 31, 2001
- -----------------------------------------------
STANTON C. LAWSON
Chief Financial Officer, Vice President of
Finance and Director
(Principal Financial and Accounting
Officer)
II-12
/s/ Michael T. Schieber December 31, 2001
- -----------------------------------------------
MICHAEL T. SCHIEBER
Director
/s/ Jerome W. Carlson December 31, 2001
- -----------------------------------------------
JEROME W. CARLSON
Director
/s/ Jessie J. Knight, Jr. December 31, 2001
- -----------------------------------------------
JESSIE J. KNIGHT, JR.
Director
/s/ Roy T. Grant December 31, 2001
- -----------------------------------------------
ROY T. GRANT
Director