As filed with the Commission on November 27, 1998 File No. 333-63513
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Pre-Effective Amendment No. 1 to
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; 415-380-8055
(Address and telephone number of principal executive offices)
100 Shoreline Highway, Suite 190A, Mill Valley, California 94941; 415-380-8055
(Address of principal place of business or intended principal place of business)
Fred W. Thompson, President and CEO
DBS Industries, Inc.
100 Shoreline Highway, Suite 190A
Mill Valley, California 94941
415-380-8055
(Name, address and telephone number of agent for service)
Copy to:
Daniel B. Eng, Esq.
Bartel Eng Linn & 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 blocks 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. [ ]
i
CALCULATION OF REGISTRATION FEE
====================================================================================================
Proposed Proposed
maximum maximum Amount of
Title of each class of Amount to be offering price aggregate registration
securities to be registered registered per share offering price fee
- ----------------------------------------------------------------------------------------------------
Common Stock to be offered by Selling
Stockholders 3,088,435 $2.84(1) $8,771,155 $2,587
Common Stock for resale by holders of
Warrants assuming the exercise of such
Warrants 4,648,580 $2.84(2) $13,201,967 $3,895
Warrants to be offered by Selling
Warrantholders 1,250,000 (3) (3) (3)
Total 8,987,015 $21,973,122 $6,482
====================================================================================================
(1) Fee calculated in accordance with Rule 457(c) of the Securities Act of
1933, as amended ("Securities Act"). Estimated for the sole purpose of
calculating the registration fee and based upon the average quotation of
the high and low price per share of the Company's Common Stock on
September 10, 1998, as reported on the NASD OTC Bulletin Board.
(2) Assumes that the holder of the warrant has exercised such warrant.
Maximum offering price per share is based upon the average quotation of
the high and low price per share of the Company's Common Stock on
September 10, 1998, as reported on the NASD OTC Bulletin Board.
(3) The Warrants may be exercisable to purchase shares of Common Stock. The
number of shares of Common Stock that may be acquired upon the exercise
of the Warrants is included in the calculation of the number of shares
of Common Stock to be registered in note (2) above. No fee is required
pursuant to Rule 457(g).
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.
ii
DBS INDUSTRIES, INC.
CROSS-REFERENCE SHEET
Pursuant to Item 501 of Regulation S-B
Registration Statement
Item Number and Caption Prospectus Caption
1. Front of Registration Statement and Outside Front
Cover Page of Prospectus.................................... Outside Front Cover
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................................. Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors........................ Prospectus Summary; Risk Factors
4. Use of Proceeds............................................. Use of Proceeds
5. Determination of Offering Price............................. Plan of Distribution; Selling Stockholders and
Warrantholders
6. Dilution.................................................... Not Applicable
7. Selling Security Holders.................................... Selling Stockholders and Warrantholders
8. Plan of Distribution........................................ Plan of Distribution; Selling Stockholders and
Warrantholders
9. Legal Proceedings........................................... Legal Proceedings
10. Directors, Executive Officers, Promoters and Management; Principal Stockholders; Certain
Control Persons............................................. Relationships and Related Transactions
11. Security Ownership of Certain Beneficial Owners
and Management.............................................. Principal Stockholders
12. Description of Securities................................... Description of Securities
13. Interest of Named Experts and Counsel....................... Experts; Legal Matters
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.............. Management
15. Organization Within Last Five Years......................... Business
16. Description of Business..................................... Prospectus Summary; Business
17. Management's Discussion and Management's Discussion and Analysis of Financial
Analysis or Plan of Operation............................... Condition and Results of Operations
18. Description of Property..................................... Business
19. Certain Relationships and Related Transactions.............. Certain Relationships and Related Transactions
20. Market for Common Equity and Related
Stockholder Matters......................................... Price Range of Common Stock
21. Executive Compensation...................................... Executive Compensation
22. Financial Statements........................................ Consolidated Financial Statements
23. Change In and Disagreements With Accountants or
Accounting and Financial Disclosure......................... Not Applicable
iii
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
1
PROSPECTUS Subject to Completion
November 27, 1998
DBS INDUSTRIES, INC.
COMMON STOCK
WARRANTS TO PURCHASE COMMON STOCK
----------------
Certain stockholders of DBS Industries, Inc. ("DBSI" or the "Company")
("Selling Stockholders") are hereby offering up to 6,832,849 shares of Common
Stock in connection with (i) the resale of shares of Common Stock held by the
Selling Stockholders, and (ii) the resale of shares of Common Stock held by the
Selling Stockholders assuming the exercise of certain outstanding Warrants. In
addition, the Company is registering Warrants held by certain warrantholders
("Selling Warrantholders") to purchase up to 1,250,000 shares of Common Stock.
See "The Offering," "Selling Stockholders and Warrantholders."
The Company's Common Stock is traded in the over-the-counter market and
quoted on the OTC Bulletin Board under the symbol "DBSS." On November ___, 1998,
the average of the high and low quotation for one share of Common Stock of the
Company was $______, as reported on the OTC Bulletin Board.
The Company will not receive any proceeds from the resale of shares of
Common Stock by the Selling Stockholders or the resale of Warrants by the
Selling Warrantholders. Expenses of the offering will be paid by the Company.
The Warrants are not quoted or traded on any exchange or quotation system.
--------------------------------
AN INVESTMENT IN THE COMMON STOCK OR WARRANTS INVOLVES SIGNIFICANT RISKS. SEE
"RISK FACTORS" COMMENCING ON PAGE 5 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK OR WARRANTS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------------------
The date of this Prospectus is November 27, 1998.
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TABLE OF CONTENTS
PROSPECTUS SUMMARY...........................................................3
RISK FACTORS.................................................................5
THE OFFERING.................................................................13
USE OF PROCEEDS..............................................................13
PRICE RANGE OF COMMON STOCK..................................................14
DIVIDEND POLICY..............................................................14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................15
BUSINESS.....................................................................19
MANAGEMENT...................................................................27
PRINCIPAL STOCKHOLDERS.......................................................35
PLAN OF DISTRIBUTION.........................................................36
SELLING STOCKHOLDERS AND WARRANTHOLDERS......................................37
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................40
DESCRIPTION OF CAPITAL STOCK.................................................40
CERTIFICATE OF INCORPORATION.................................................41
LEGAL PROCEEDINGS............................................................42
LEGAL MATTERS................................................................42
EXPERTS .....................................................................42
AVAILABLE INFORMATION........................................................42
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PROSPECTUS SUMMARY
This Prospectus contains forward looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in those forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The following summary is qualified in its entirety by the more
detailed information and the Company's Consolidated Financial Statements and
notes thereto, appearing elsewhere in this Prospectus. Except as otherwise
specifically noted herein, all references to "DBSI" or the "Company" refer to
DBS Industries, Inc., a Delaware corporation, and its subsidiaries, Global
Energy Metering Service, Inc. ("GEMS"), Newstar Limited ("Newstar") and its 20%
interest in E-SAT, Corporation ("E-SAT").
The Company
DBS Industries, Inc. ("DBSI" or the "Company"), through its 20% interest
in E-SAT, proposes to construct, launch, and operate a system (the "E-SAT
System") utilizing six non-voice, non-geostationary mobile ("Little LEO")
satellites to provide a two-way, low-cost data messaging services worldwide. E-
SAT intends to launch Little LEO satellites to orbit the earth at an altitude of
approximately 550 miles, and with the Company's technology, are capable of
collecting and transmitting data at regular intervals from fixed devices in
hard-to-access locations and at a cost substantially less than manually
retrieving the information. The Company intends to initially provide data
messaging services for the energy industry including the gas and electric
utility and water industry, and other data messaging services for the vending
machine and environmental monitoring industries, worldwide. Prior to E-SAT
receiving its license to develop, construct and operate the E-SAT System, the
Company, through its subsidiary GEMS, was (i) developing hardware and software
for data collection and transmission; (ii) conducting proof-of-concept
demonstrations with several utility companies to determine the effectiveness and
accuracy of Little LEO satellites to collect and transmit data from fixed
devices such as meters; and (iii) evaluating rocket and satellite vendors in
anticipation of the license.
On March 31, 1998, the Federal Communications Commission ("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 U.S. in the 148-148.905 MHz
frequency band for service and feeder uplinks, and the 137.0725-137.9725 MHz
frequency band for service and feeder downlinks utilizing code division multiple
access ("CDMA") direct sequence spread spectrum ("CDMA/DSSS") technology.
Pursuant to E-SAT's license, unless extended by the FCC for good cause,
E-SAT must commence construction of the first two satellites by March 1999,
complete construction by March 2002 and launch by September 2002. The remaining
four satellites must commence construction by March 2001, complete construction
by March 2004 and launch by March 2004. See "Risk Factors - Regulatory Risks."
E-SAT intends to utilize six Little LEO satellites located approximately 550
miles above earth in near polar orbits of a 99 degree inclination angle. The
E-SAT System will initially consist of a constellation of three satellites in a
single orbit. Later, an additional set of three satellites shall be launched.
The latter three satellites shall be placed in a second near polar orbit from
the initial three satellites. The E-SAT System will provide coverage of the
world and will enable each satellite to see a given spot on the earth several
times during a twenty-four hour period.
The Company believes that its two-way, low cost data messaging services
will reduce costs for customers by providing a more efficient retrieval of data
because the E-SAT System (i) has a proposed lower infrastructure cost and (ii)
transmits data using CDMA/DSSS technology which provides greater capacity than
channelized systems and allows transmissions within the background noise in the
radio
4
frequency environment. See "Business." In addition, the E-SAT System will
provide a means of safely transmitting data which is superior to other methods
currently available. The Company's goal is to lead the low-cost, data messaging
service market using Little LEO satellites to enable businesses to economically
gather data from fixed devices located in remote and hard-to-access locations.
E-SAT is owned 20% by the Company and 80% by EchoStar Communications
Corp ("EchoStar"). The Company has devoted a substantial amount of time and
money developing a two-way, low cost data messaging services utilizing Little
LEO satellites. The Company and EchoStar have held numerous discussions whereby
the Company would acquire a majority interest in E-SAT, or an affiliate of the
Company would lease a part of or all of E-SAT's transmission capacity. No
assurance, however, can be given that the Company will be able to acquire a
majority interest in E-SAT or enter into a lease arrangement with E-SAT.
Further, any proposed acquisition of a majority interest in E-SAT by the Company
will be subject to FCC approval. See "Risk Factors - Minority Ownership in
E-SAT, Inc."
The Company is located at 100 Shoreline Highway, Suite 190 A, Mill
Valley, California, and its phone number is 415-380-8055.
Summary Of Risk Factors
An investment in the Company's Common Stock and Warrants involves
certain risks which should be carefully considered and evaluated, including but
not limited to, the Company's minority interest in E- SAT, the Company being a
development stage company, the need for additional capital, and the
technological risks in developing a data messaging service using Little LEO
satellites. For a discussion of considerations relevant to an investment in the
Common Stock and Warrants, see "Risk Factors."
The Offering
The Selling Stockholders are registering for resale shares of Common
Stock held by such stockholders and the resale of shares of Common Stock
assuming the exercise of outstanding Warrants. In addition, the Selling
Warrantholders are registering for resale Warrants to acquire up to 1,250,000
shares of Common Stock. The Selling Stockholders and the Selling Warrantholders
acquired their shares or Warrants in private placements. The Company will
receive no proceeds from the sale of Common Stock by the Selling Stockholders or
from the sale of Warrants by the Selling Warrantholders.
Summary Consolidated Financial Data
The unaudited summary consolidated financial data presented below should
be read in conjunction with the more detailed financial statements of the
Company and notes thereto which are included elsewhere in this Prospectus along
with the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
For the nine For the nine For the year For the year April 25, 1990
months ended months ended ended ended (Inception) to
September 30, September 30, December 31, December 31, September 30,
1998 1997 1997 1996 1998
Revenue $ - $ - $ - $ 11,420 $ 161,420
Loss from operations 1,884,841 1,373,055 1,682,277 3,323,765 (10,483,560)
Net Income (Loss) (2,201,902) 3,487,473 3,068,917 (3,752,583) (6,041,031)
Income (Loss) per Share(1) (0.35) .53 .49 (.65) -
Working Capital 3,300,170 190,851 (411,185) (6,130,815) -
Total Assets 5,316,558 2,095,978 1,785,543 4,629,177 -
Stockholders' Equity (Deficit) $ 4,177,044 $ 1,270,962 $ 872,039 $ (2,273,169) -
(1) Adjusted to reflect a 40 for one reverse stock split effected in February
1996.
5
RISK FACTORS
In addition to the other information presented in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the shares of Common Stock offered hereby.
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, ("Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended, ("Exchange
Act"). The Company's actual results may differ materially from the results
discussed in the forward-looking statements and involve risks and uncertainties.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors" and "Management's Discussion and Analysis,"
and elsewhere in this Prospectus.
Minority Ownership in E-SAT, Inc.
E-SAT has been granted a license to construct, launch and operate six
Little LEO satellites to provide two-way, low-cost data messaging services in
the U.S. E-SAT is owned 20% by the Company and 80% by EchoStar Communications
Corp. ("EchoStar"). In E-SAT's application to the FCC for a license to operate
the E-SAT System, EchoStar represented that it has the financial ability to meet
the estimated cost of construction, launch and first year operation of the first
two satellites of the E-SAT System. Although the Company has only a 20% interest
in E-SAT, the Company has spent a substantial amount of time and money
evaluating satellite and rocket manufacturers, performing proof-of-concept
demonstrations with utility companies, and developing hardware and software for
data collection and transmission in anticipation of E-SAT receiving its license.
The Company and EchoStar have held discussions whereby the Company would acquire
a majority interest in E-SAT, or an affiliate of the Company would lease all or
part of E-SAT's transmission capacity. No assurance, however, can be given that
the Company will be able to acquire a majority interest in E-SAT or enter into a
lease arrangement with E-SAT. Any proposed acquisition of a majority interest in
E-SAT will be subject to FCC approval. The Company's percentage of ownership in
E-SAT may be subject to dilution if it cannot meet future funding requirements
and no assurances can be given that the Company will have sufficient resources
to meet the financial requirements of E-SAT to maintain its current interest in
E-SAT. In the event that the Company is unable to obtain a majority interest in
E-SAT, and the E-SAT System is not built, or not built in a timely manner, such
circumstances will have a material adverse effect on the Company.
Development Stage Company
The Company is a development stage company with no commercial services
or operations and, therefore, does not currently generate any revenues. Although
the Company previously held interests in companies that had been granted by the
FCC licenses to construct and launch direct broadcast satellites, for the past
four years the Company has primarily focused on technology development, pursuing
regulatory approval for the E-SAT System, E-SAT System design and development,
contract discussions with satellite and launch vehicle contractors, strategic
planning regarding market rights and securing adequate financing for working
capital and capital expenditures. The completion of the E-SAT System design and
the construction and launch of the satellites will require significant
expenditures. These expenditures, combined with the Company's operating
expenses, will result in continued operating losses until the E-SAT System is
deployed and sufficient revenue-generating services are developed.
The Company's ability to provide commercial service in, initially, the
U.S., and, subject to regulatory approval, on a worldwide basis and to generate
positive operating cash flow will depend on its ability to, among other things:
(i) successfully construct and deploy the E-SAT System in a timely manner; (ii)
develop U.S. and international marketing arrangements permitting distribution of
the data messaging services inside and outside the U.S.; and (iii) construct the
necessary ground infrastructure inside and
6
outside the U.S. Given the Company's limited operating history, there can be no
assurance that it will be able to develop a sufficiently large customer base to
be profitable.
Lack of Revenues and Limited Operations
The Company and its subsidiaries have earned no substantial revenues
since their formation and have limited operating activity. In light of the
substantial costs involved to develop the E-SAT System and market its data
messaging services, the Company does not anticipate substantial revenues or to
be profitable in the near future. No assurance can be given that the Company
will ever achieve profitability. For the nine months ended September 30, 1998,
and the years ended December 31, 1997 and 1996, the Company has incurred net
(losses) or income of $(2,201,902), $3,068,917, and $(3,752,583), respectively.
During the year ended December 31, 1997, the Company had a net income due to
sales of indirect interests in direct broadcast satellite licenses.
The Company does not expect any revenues during 1998 or 1999, and it
expects to incur substantial and increasing operating losses and negative net
cash flows until the E-SAT System is developed, constructed, and operated in a
profitable manner.
Need for Future Capital and its Dilutive Effect
The Company currently estimates that it will require approximately $115
million in capital expenditures and development and operating costs through the
full deployment of the E-SAT System for the first five years. Given the risks in
an undertaking of this nature, there can be no assurance that actual cash
requirements will not exceed the Company's estimates. In particular, additional
capital will be required in the event that (i) the Company incurs unexpected
costs in completing the system design or encounters any unexpected technical or
regulatory difficulties, (ii) the Company incurs delay and additional expense as
the result of a launch or satellite failure, (iii) the Company is unable to
enter into marketing agreements with third parties, or (iv) the Company incurs
any significant unanticipated expenses. The Company has little control over any
of these events, and the occurrence of any of the above listed delays or
unanticipated costs could adversely affect the Company's ability to meet its
business plan.
There can be no assurance that capital will be available to the Company
for its purposes on terms acceptable to the Company, if at all, or on a timely
basis. A substantial shortfall in funding will delay or prevent the completion
of the design, construction, deployment or commencement of commercial operations
of the E-SAT System. If the Company is unable to obtain additional financing,
the Company's current plans will be adversely affected and its operations will
have to be curtailed, which will have a material adverse effect on the Company's
future success.
Further, the Company may finance its capital requirements through the
issuance of equity securities or obligations that may be converted into equity
securities. The issuance of such equity securities by the Company is likely to
result in a significant dilution in the equity interests of the current
stockholders.
Technological Risks and Risks of Technological Change
The design and construction of the E-SAT System are exposed to risks
associated with a space- based communications system. Although the Company
believes that the E-SAT System is properly designed, its design contains certain
technology that has not been applied in a commercial application. The Company
intends to engage contractors who are experienced in the satellite and
communications industry; however, the Company has no experience in developing,
constructing, and operating a data communications system. The failure of the
E-SAT System to function as designed, or the failure of system components to
function with other components or to specification could result in delays,
unanticipated
7
costs, and loss of system performance, thereby rendering the E-SAT System unable
to perform at the quality and capacity levels required for success.
In addition, future advances in the telecommunications industry could
lead to new technologies, products or services competitive with the products or
services to be provided by the Company. Such technological advances could also
lower the costs of other products or services that may compete with the
Company's products or services, otherwise resulting in pricing pressures on the
Company's products and services, and may adversely affect the Company's results
of operations.
Unscheduled Delays
Delays and associated increases in costs in the construction, launch and
implementation of the E- SAT System could result from a variety of causes,
including: (i) delays encountered in the construction, integration and testing
of the E-SAT System; (ii) launch delays or failures; (iii) delays caused by
design reviews in the event of a launch vehicle failure or a loss of satellites
or other events beyond the control of E-SAT; (iv) 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; (v) the
failure of E-SAT to enter into, at the times or on the terms expected by the
Company, agreements with space craft manufacturers and other technology provides
and with marketing providers; and (vi) the failure to develop or acquire
effective applications for use with the E-SAT System. There can be no assurance
that the E- SAT satellites or the E-SAT data messaging services will be
available on a timely basis, or at all, or that implementation of the E-SAT
System will occur. A significant delay in the completion of the E-SAT System
could erode the competitive position of the Company and could have a material
adverse effect on the Company's financial condition and results of operations.
See "Risk Factors - Regulatory Risks."
Launch Risks
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. The
failure of any launch vehicle selected by the Company could result in a delay in
the planned launch schedule. There can be no assurance that any of the Company's
satellite launches will be successful. The Company believes such risks are
insurable.
The demand for launch services for Little LEO satellites is expected to
increase as recently licensed or proposed geostationary and non-geostationary
satellite systems are built and deployed. While the Company believes there is an
adequate supply of launch vehicles of the class required by the proposed Little
LEOs, there can be no assurance that launch services will be available in the
required quantities or on economic terms acceptable to the Company. Any
additional expense associated with launch services or the inability to contract
for services on a timely basis will adversely affect the Company's business
operations. The Company has entered into a launch reservation agreement with
Eurockot Launch Services GmbH ("Eurockot"), a joint venture between Daimler-Benz
Aerospace AG and Khrunichev State Research and Production Space Service, whereby
Eurockot has reserved a launch opportunity on the launch vehicle Rockot at the
launch site Plesetzk, Russia during a specific period. It is anticipated that
any launch must be approved by a governmental agency of the Russian Federation.
No assurance can be given that the Company and Eurockot will enter into a Launch
Services Agreement to provide for a launch vehicle for E-SAT's Little LEO
satellites or that such launch will be approved by the Russian Federation.
8
Potential Satellite Malfunction
A number of factors will affect the useful lives of the E-SAT'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 adverse effect on the efficiency
of the overall system and the operations of the E-SAT System.
Limited Insurance
The Company expects to obtain launch insurance for each of its satellite
launches. This insurance would, in the event of a launch failure, provide funds
for the construction of a replacement satellite and for replacement launch
services. No assurance can be given that in the event of a launch failure, that
any insurance proceeds will be sufficient to cover the costs of the launch and
satellite. Further, the Company will attempt to negotiate with the rocket
manufacturer to pay for another launch in the event that the first launch is a
failure. Notwithstanding any insurance the Company may procure, in the event
there is a covered loss, prior to the next event that would be subject to any
such policy, the Company will need to satisfy the insurance underwriters that
the technological or other problems associated with the covered loss have been
addressed. In addition, the Company may obtain on-orbit insurance, which would
provide for replacement of failed satellites after the placement of satellites
into commercial service. The launch and on-orbit insurance marketplace is
volatile and there can be no assurance that launch or on-orbit insurance, or
both, will be available to the Company, or if available, will be available on
terms acceptable to the Company. The Company will continue to evaluate the
insurance marketplace to determine the level of risk the Company is willing and
able to absorb internally versus the amount of risk to be transferred to third
parties.
Regulatory Risks
United States License. As a U.S. licensee and a proposed provider of data
messaging services in the U.S., the E-SAT System is and will continue to be
subject to U.S. regulation. E-SAT's business may be significantly affected by
regulatory changes in the U.S. resulting from judicial decisions and/or adoption
of treaties, laws, regulations or policies, or by changes in the interpretation
or application of existing treaties, laws, regulations or policies.
In order to maintain the validity of its FCC license, E-SAT must comply at
all times with the terms of such FCC license, unless specifically waived or
modified by the FCC. These terms include, among other things, system
construction milestones. In order to comply with the milestone requirements of
the FCC license, E-SAT must commence construction of the first two satellites by
March 1999 and the remaining four satellites by March 2001. At this time, the
Company is currently negotiating with European space craft manufacturers for the
design, development and construction of the E-SAT satellites. However, no
contract has yet been entered into. Further, although E-SAT has every
expectation of meeting the milestone requirements, there can be no assurance
that these or any other requirements and conditions of the FCC license can be
met by E-SAT. In the event that E-SAT cannot meet these milestone requirements,
and the FCC does not waive or modify such requirements, E-SAT will lose its FCC
license. Such a loss would have an immediate and significant adverse effect on
the Company's financial position and results of operations. 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
E-SAT's FCC application, as amended, 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 E-SAT's FCC application
that may necessitate regulatory approval. There can be no assurance that such
modifications will be approved by the FCC.
9
The FCC license will be effective for ten years from the date on which
E-SAT certifies to the FCC that its initial satellite has been successfully
placed into orbit and that the operations of that satellite conform to the terms
and conditions of the FCC license. While the Company expects it will apply to
renew the FCC License beyond the initial 10-year license term, and expects the
FCC will grant such renewal, there can be no assurance that, if applied for,
such a renewal of license would be granted.
In addition, E-SAT's remote terminal units ("RTU") to be integrated with
the fixed devices must be type accepted (Part 15) by the FCC. E-SAT intends to
seek approval of the RTUs under a separate application with the FCC.
Foreign Licenses. Pursuant to its license from the FCC, E-SAT is
authorized to provide data messaging services in the U.S. In addition to the FCC
license, E-SAT will be required to seek certain "landing rights" in each country
in which its RTUs will be located. There can be no assurance that the required
regulatory authorizations will be obtained in any country in which the Company
proposes to offer its services, or that such authorizations will be obtained in
a timely manner or in the form necessary to implement the Company's proposed
operations. In the event the Company is not successful in obtaining a foreign
license in a particular country, E-SAT will be unable to offer its services in
such country. Depending on the number of proposed RTU's to be operating in such
country, the unavailability to offer E-SAT's data messaging services to such
country may materially adversely affect the Company's business plan.
International Telecommunications Union Coordination. All communications
satellite systems must be technically coordinated with 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 radiofrequency interference
from other communication systems. This process, called satellite coordination,
takes place under the auspices of the International Telecommunication Union
(ITU) and is essentially a first come, first served process. That is, earlier
filings generally establish some priority over later-filed systems although the
ITU encourages administrations to cooperate to enable as many satellite systems
as possible to be implemented. The process is initiated by the filing of
technical information about each system by the government of the country in
which the system is seeking a space segment license. For E-SAT, that country is
the United States of America. Through the filing of this information, other
counties have the opportunity to identify whether they seek to coordinate their
systems with the newly filed system. During coordination, some systems may be
required to revise their operating parameters or geographical coverage. In
E-SAT's case, two filings cover its system. One filing was originally made at
the request of another U.S. system which had certain transmission parameters
similar to E-SAT's. The other filing included the specific characteristics of
E-SAT, along with those of the other applicants in the FCC's second round Little
LEO licensing proceeding. The first filing has progressed in the ITU process
through successful coordination with a number of countries. When coordination is
successfully completed with all countries that requested coordination, the
system is "notified" to the ITU and is placed in the Master Register of
satellite systems. The FCC has advised E-SAT that it may use the earlier filing,
if it chooses, or may use the later filing. E-SAT is working with the FCC to
complete the necessary coordination as well as to update both the older and the
newer ITU filings that the filing of modified characteristics. While it is not
anticipated that the filing of modified characteristics will result in
additional technical coordination beyond those already completed or requested,
there can be no assurance that the system will successfully complete the
international coordination process. However, most countries seek to accommodate
satellite systems of other countries and historically, virtually all
coordination are ultimately successful. The United States
10
permits its licensed systems to be implemented even when the coordination
process has not been completed.
Utility Industry Acceptance
The Company's success is largely dependent on whether utility companies
will contract for E- SAT's data messaging services utilizing the E-SAT System.
Although E-SAT has other proposed uses of its data messaging services, utility
companies, such as gas, electrical, water and other utility companies, remain
the current focus of the Company's marketing and development efforts. The
Company has demonstrated the ability of Little LEO satellites to read data from
meters in proof of concept trials with utility companies. However, no assurance
can be given that unforeseen problems will not develop with respect to the
Company's technology, or services, or that the Company will be successful in
completing the development and commercial implementation of automatic meter
reading by use of the E-SAT System. The Company must complete a number of
technical developments and continue to expand and upgrade its capabilities on a
full commercial basis prior to implementing automatic meter reading services.
Utility companies typically go through numerous steps before making final
decisions. These steps, which can take up to several years to complete, may
include the formation of committees to evaluate the Company's proposal, the
review of various technical aspects, performance and cost evaluations,
regulatory reviews and the request for quotes and proposals from other vendors.
Further, the data messaging service such as automatic meter reading is a
relatively new and constantly evolving business. It is difficult to predict the
future growth of the market or the potential size of the market. Utility
companies are testing products from a number of entities developing various
communication technologies. The use of E-SAT satellites is but one possible
solution for hard-to-access meter sites. No assurances can be given that the
Company will be successful in achieving the adoption of the E-SAT System or to
what extent utilities will employ it. In the event the utility companies do not
adopt the Company's technology, or do so less rapidly than expected, the
Company's future results, including its ability to achieve profitability, will
be materially and adversely affected.
The development of low-cost RTUs to collect and transmit data from fixed
devices such as meters will be important in the development of a broad utility
market for E-SAT's data messaging services. RTUs must be manufactured and be
operated at a low cost in order to make E-SAT's data messaging services
attractive to utility companies. It is expected that the cost of RTUs will
decline as the volume of units produced increases. The Company believes that
because RTUs will be transmitting data in short burst of information packets
utilizing CDMA/DSSS technology, it can develop a low cost RTU which requires
less power to operate and will be attractive to utility and other companies that
may be interested in E-SAT's data messaging services. However, there can be no
assurance that RTUs can be developed at a cost that will attract the utility
company subscriber base necessary for the Company to achieve profitability.
Reliance on United States and International Distributors to Market Services
The Company intends to rely on third parties with existing distribution
channels targeted toward specific markets to sell E-SAT data messaging services
to subscribers in the United States and throughout the world. Such relationships
may take the form of a joint venture or by distribution license. The Company has
contributed significant time and resources in developing these potential
relationships and believes additional corporate opportunities may develop from
such business alliances. The ability and willingness of third parties to market
the Company's data messaging services will depend upon many factors, including
the technical capabilities of the E-SAT System, the wholesale price of the
service, the third party's ability to realize a margin on the service, the cost
of the RTU, and the competitive environment. There can be no assurance that the
Company will be successful in identifying value added
11
resellers ("VARs") for all of its target markets, or that those VARs that are
willing to resell the service will be successful in their sales efforts.
The Company intends to enter into international distribution license
agreements for countries other than the U.S. Each international distributor will
be responsible for obtaining all regulatory approvals in the local country and
marketing the services directly to subscribers or through sublicenses. There is
no assurance the Company will be successful in identifying international
distributors in each country in which the Company intends to operate, or that
the international distributors will be successful in obtaining regulatory
authorizations to offer E-SAT's data messaging services. Failure to do so may
preclude the Company from operating in those markets.
Reliance on Vendors and Consultants
The Company has relied on and will continue to rely on vendors and
consultants that are not employees of the Company or its affiliates to complete
the design, construct and implement the E-SAT System, to market its data
messaging services and for representation on regulatory issues. The Company has
no long-term contractual relationship with these vendors and consultants. While
the Company believes that vendors and consultants will continue to provide the
expertise necessary to complete the design and construction of the E-SAT System,
there can be no assurance that such vendors and consultants will be available in
the future, and if available, will be available on terms favorable to the
Company.
In addition, the Company relies and will continue to rely on outside
parties to manufacture technological equipment for its E-SAT System such as
meters, transmitters, antennas, and other Little LEO satellite based devices. No
assurances can be given that these manufacturers will be able to meet the
Company's needs in a satisfactory and timely manner or that the Company 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 adverse effect
on the Company's plan of business. Further, the failure of third parties to
deliver the requisite products, components, necessary parts or equipment on
schedule, or the failure of third parties to perform at expected levels, could
delay the Company's deployment of the E-SAT System. Any such delay or increased
costs could have a material adverse effect on the Company's business.
Development of Business and Management Growth; Key Personnel
The Company is in its development state has not yet commenced commercial
service. The Company expects to experience significant and rapid growth in the
scope and complexity of its business as it proceeds with the development of its
system. Currently, the Company does not have sufficient staff to manage
operations, control the operations of its satellites, handle sales and marketing
efforts or perform finance and accounting functions. See "Risk Factors -
Reliance on Vendors and Consultants." The Company will be required to hire a
broad range of additional personnel before it begins commercial operations.
Growth, including the creation of management infrastructure and staffing, is
likely to place a strain on the Company's management and operational resources.
The failure to develop and implement effective systems or to hire and train
sufficient personnel for the performance of all of the functions necessary to
effectively service and manage its subscriber base and business, or the failure
to manage growth effectively, would have a material adverse effect on the
Company.
The Company's performance is substantially dependent on the performance
of its executive officers and key personnel. The Company is dependent on its
ability to retain and motivate high-quality personnel. The loss of any of the
Company's key personnel, particularly Fred W. Thompson, President, could have a
material adverse effect on the Company's business, financial condition, and
operating results. The Company has "key person" life insurance policies on Mr.
Thompson in the amount of $2,000,000.
12
Competition
The Company will encounter competition from other Little LEO satellite
systems, as well as from an increasingly competitive terrestrial-based
communications industry. The market for collection and transmission of data from
fixed devices such as meters and the potential market for other applications of
data messaging services have led to substantial and increasing competition. Many
of the Company's present and potential future competitors using Little LEO
satellites have begun to address collecting and transmitting data from the fixed
devices such as the utility industry and vending machine industry and have
substantially greater financial, marketing, technical and manufacturing
resources and name recognition and experience than the Company. The Company's
competitors may be able to respond more quickly to newor emerging advancements
in the industry and to devote greater resources to the development, promotion
and sale of their products and services. While the Company believes that its
technology is competitive and that the E-SAT System has been designed to provide
a data transmission service at a cost lower than its competitors, no assurances
can be given that such competitors, in the future, will not succeed in
developing better or more cost effective data transmission systems.
In addition, 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 utility customers or
subscribers of data messaging services. Further, if the Company achieves
significant success it could increase the number of competitors in the market.
Such existing and future competition could affect the Company's ability to form
and maintain agreements with utilities and other customers. No assurances can be
given that the Company will be able to compete successfully against current and
future competitors, and any failure to do so would have a material adverse
effect on the Company's business.
Further, terrestrial-based wireless communication systems are providing
data messaging services to the utility industry. Terrestrial systems can offer
these services in urban and remote areas. However, due to the high cost of
establishing the infrastructure to support a terrestrial-based system, the
Company does not believe that a terrestrial-based system will be as cost
effective as the Company in providing a two-way, low cost data messaging service
in hard to access areas.
Penny Stock Regulations
The Securities and Exchange Commission (the "Commission") has adopted
regulations which generally define "penny stock" to be any equity security that
has a market price (as defined) less than $5.00 per share or an exercise price
of less than $5.00 per share, subject to certain exceptions. The Company's
securities may be covered by the penny stock rules, which impose additional
sales practice requirements on broker-dealers who sell to persons other than
established customers and accredited investors (generally, institutions with
assets in excess of $5,000,000 or individuals with net worth in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their
spouse). For transactions covered by this rule, the broker-dealers must make a
special suitability determination for the purchase and receive the purchaser's
written agreement of the transaction prior to the sale. Consequently, the rule
may affect the ability of broker-dealers to sell the Company's securities and
also affect the ability of purchasers to sell their shares in the secondary
market.
Certain Anti-Takeover Provisions
The Company's Certificate of Incorporation contains a fair price
provision that requires a certain threshold approval by the Company's board of
directors in the event of a merger, sale of assets or other type of business
combination. In addition, the Company's board consists of staggered three year
terms, and the board of directors is authorized to issue preferred stock the
terms of which may be determined by
13
the board of directors. These provisions may have the effect of deterring a
change in control of the Company. See "Certificate of Incorporation."
No Dividends
The Company has not declared or paid any dividends on its Common Stock
since its inception, and does not anticipate paying any such dividends for the
foreseeable future.
THE OFFERING
The Selling Stockholders are offering for resale up to 2,675,935 shares
of Common Stock and up to 4,156,914 shares of Common Stock assuming the exercise
of Warrants. Further, the Selling Warrantholders are offering for resale
Warrants to purchase up to 1,250,000 shares of Common Stock.
The shares of Common Stock and Warrants were issued in connection with a
private placement of up to three million Units to accredited investors at $2.00
per Unit. Each Unit consists of one share of Common Stock and a Warrant to
purchase one share of Common Stock at $3.00 per share. No assurance can be given
that any of the Selling Warrantholders will exercise their Warrants.
The shares of Common Stock offered for resale and the shares of Common
Stock to be issued upon the exercise of the Warrants, and Warrants held by the
Selling Warrantholders, may be sold in a secondary offering by the holders
thereof pursuant to this Prospectus. The Company will not receive any proceeds
from the resale of the Common Shares by the Selling Stockholders or the Warrants
by the Selling Warrantholders.
Pursuant to the terms of the private placement, the Company is
contractually required to register the shares of Common Stock which are part of
the Units and the shares of Common Stock to be issued upon the exercise of the
Warrants. Further under the terms of a purchase agreement with Astoria Capital
Partners, L.P. ("Astoria Capital") and Microcap Partners, L.P. ("Microcap"), the
Company is required to register with the Commission by December 4, 1998, shares
of Common Stock and Warrants and the shares of Common Stock to be issued upon of
the exercise of the Warrants together with any securities of the Company issued
with respect to the Common Stock, Warrants or shares of Common Stock to be
issued upon the exercise of the Warrants (collectively, "Registrable
Securities"). In the event the registration statement registering the
Registrable Securities is not declared effective by the Commission by December
4, 1998, the Company is required to refund to Astoria Capital and Microcap, in
the aggregate, an amount equal to the product of $2.5 million and 3% for each 30
days (pro-rata as to a period of less than 30 days) the registration statement
is not declared effective, subject to certain exceptions, 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.
USE OF PROCEEDS
The Company will not receive any proceeds from the resale of the shares
of Common Stock by the Selling Stockholders or Warrants by the Selling
Warrantholders. The Company is registering the shares of Common Stock, Warrants,
and shares of Common Stock upon the exercise of the Warrants for resale pursuant
to contractual terms under a private placement.
14
PRICE RANGE OF COMMON STOCK
The following table sets forth the high and low bids for the Company's
Common Stock during each quarter for the past two fiscal year ends and until the
quarter ended September 30, 1998, as quoted on the OTC Bulletin Board. The
Company's trading symbol is "DBSS." Subject to meeting The Nasdaq Stock Market,
Inc. requirements, the Company intends to apply to list its Common Stock on The
Nasdaq SmallCap Market.
Common Stock
Quarter Ended High Low
September 30, 1998 4.63 1.88
June 30, 1998 2.88 1.50
March 31, 1998 2.32 .50
December 31, 1997 1.38 .38
September 30, 1997 1.00 .53
June 30, 1997 1.94 .75
March 31, 1997 1.94 1.50
December 31, 1996 3.25 1.50
September 30, 1996 3.88 2.00
June 30, 1996 6.63 3.75
March 31, 1996 7.50 4.40
These quotations reflect inter-dealer prices, without retail markup,
mark-down or commission, and may not represent actual transactions. All per
share prices have been adjusted to reflect the Company's 40-to-1 reverse stock
split effected in February 1996.
As of October 31, 1998, the Company had 8,487,841 shares of Common Stock
outstanding and approximately 471 stockholders of record. This number does not
include stockholders who hold the Company's securities in street name.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends since its
inception. The Company currently intends to retain future earnings, if any, for
use in the operation and expansion of the business. The Company does not intend
to pay any cash dividends in the foreseeable future.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company, through its 20% interest in E-SAT, proposes to construct,
launch, and operate a two-way low-cost data messaging system (the "E-SAT
System") utilizing six low-earth orbit ("Little LEO") satellites. E-SAT's Little
LEO satellites will orbit the earth at altitudes of approximately 550 miles, and
with the Company's technology, are capable of collecting and transmitting data
at regular intervals from fixed devices such as meters in hard-to-access
locations and at a cost substantially less than manually retrieving and
transmitting the data. The Company intends to initially provide automated meter
reading services collecting and providing data from energy-related meters such
as electrical, natural gas, water or propane, but may provide other data
collection services in the areas of vending machines and environmental meters.
Results of Operations
Three and Nine Months Ended September 30, 1998 Compared to September 30, 1997
Revenues
The Company remains in the development stage and did not generate any
revenues or net interest income in either the three or nine months ended
September 30, 1998 or September 30, 1997.
Cost and Operating Expenses
Cost and operating expenses for the three months ended September 30,
1998, were $886,782 as compared to $459,507 for the three months ended September
30, 1997. During the three months ended September 30, 1998, cost and operating
expenses increased primarily in research and development because the Company
devoted substantial amounts of its financial and personnel resources on
developing its automatic meter reading business. In addition, the Company
incurred substantial costs, including travel, relocation and housing costs, to
establish relationships with potential contractors to construct the E-SAT System
and potential strategic alliances with utility companies to market E-SAT's
services in Europe. The Company also recognized approximately $104,000 in
severance expense and $106,000 in consulting expense in connection with the
grant of options for services rendered by non-employees. Cost and operating
expenses for the nine months ended September 30, 1998, were $1,884,841 as
compared to $1,373,055 for the nine months ended September 30, 1997. General and
administrative expenses for the nine months ended September 30, 1998, increased
from the same period during the prior year primarily due to an increase in
research and development related to the development of its automatic meter
reading service, allowance for losses on advances and, as discussed above, to
establish relationships in Europe. The increase in general and administrative
and research and development costs during the nine months ended September 30,
1998, as discussed above, were partially offset by a decrease in legal fees.
During the nine months ended September 30, 1997, the Company was involved in
litigation over an interest in a direct broadcast satellite license and incurred
substantial legal fees. This ligation was settled during 1997.
16
Other Income (Expense)
Other income for the three months ended September 30, 1998, was $2,478 as
compared to other expense of $1,095,992 for the three months ended September 30,
1997. During the three months ended September 30, 1998, the Company earned
interest income of $9,211, which was offset by net equity in losses of E-SAT of
$6,733. Interest income was earned on cash received in connection with the sale
of approximately 2.8 million units of the Company at $2.00 per unit. Each unit
consists of one share of Common Stock and a warrant to purchase one share of
Common Stock at $3.00 per share. The interest income earned of $9,211 during the
three months ended September 30, 1998 compared to interest expense of $52,304
for the three months ended September 30, 1997. During 1997, the Company had
debentures outstanding upon which it paid interest. The debentures were paid off
during the third quarter of 1997. In connection with the retirement during 1997
of debentures due to EchoStar in exchange for EchoStar Common Stock that
EchoStar held as collateral against the debentures, the Company incurred a loss
of approximately $1 million. In addition, during the three months ended
September 30, 1997, the Company incurred a loss of $39,974 attributed to its
equity interests in the results of operations of E-SAT and Seimac.
Other expense for the nine months ended September 30, 1998, was $317,061
as compared to other income of $ 4,860,528 for the nine months ended September
30, 1997. During the nine months ended September 30, 1997, the Company incurred
net interest expense of $317,054 due to debentures outstanding and recognized a
gain of approximately $6.2 million on the sale of marketable securities, which
was offset by a loss of approximately $1 million related to the retirement of
the debentures due to EchoStar in exchange for EchoStar Common Stock that
EchoStar held as collateral against the debentures. No similar net interest
expense or gain occurred during the nine months ended September 30, 1998.
Net Loss and Income
The Company's net loss for the three month period ended September 30,
1998, was $884,304 compared to a net loss of $1,555,499 for the three month
period ended September 30, 1997. Net loss for the nine months ended September
30, 1998, was $2,201,902 compared to a net income of $3,487,473 for the nine
month period ended September 30, 1997. During the nine month period ended
September 30, 1997, the Company's net income was due primarily to a one-time
gain on marketable equity securities of approximately $6.2 million offset by
operating and interest expenses.
Year Ended December 31, 1997 Compared to December 31, 1996
Revenues
The Company remains in the development stage and did not generate any
significant revenues or net interest income during 1997 compared to $11,420 in
1996. The $11,420 earned during 1996 was attributed to radio equipment sold by
GEMS.
Cost and Operating Expenses
Cost and operating expenses for 1997 were $1,682,277 as compared to
$3,335,185 for 1996. During 1997, cost and operating expenses decreased
primarily in research and development due to the Company's limited access to
capital during 1997. Selling, general and administrative expenses for 1997
decreased to $1,472,162 from $2,245,588 during 1996. During 1996, the Company
was involved in litigation over an equitable interest in a direct broadcast
satellite license and incurred substantial legal fees. This litigation was
settled in August 1997. Research and development expenses were $210,115 for 1997
as compared to $1,078,747 during 1996. Research and development expenses during
1996 were primarily related to GEMS conducting its satellite proof of concept
trial to utility companies and developing hardware and software in preparation
of E-SAT receiving its FCC license.
17
Other Income (Expense)
Other income for the year ended December 31, 1997, was $4,831,994 as
compared to other expenses of $427,218 for the year ended December 31, 1996.
During 1997, the Company had net interest expense of $308,094 compared to net
interest expense of $395,298 for the year ended December 31, 1996. During 1997,
the Company had debentures outstanding to EchoStar on which it accrued interest
expense. The decrease in interest expense was offset by the net equity in loss
in investees of $80,975. During 1997, the Company had a net gain on the sale of
investments of $5,221,063. The majority of the gain was attributed to
transactions involving EchoStar. In January 1997, the Company received shares of
EchoStar Common Stock in exchange for the Company's interest in Direct
Broadcasting Satellite Corporation recognizing a gain of approximately $6.2
million. This gain was offset by a loss of approximately $2.2 million in
connection with the retirement of debentures due to EchoStar in exchange for
EchoStar Common Stock that EchoStar held as collateral against the debentures.
In addition, during 1997, the Company recognized a gain of approximately $1.2
million upon the settlement of its litigation with Loral Aerospace Holdings,
Inc. ("Loral") regarding the Company's equitable interest in Continental
Satellite Corporation. No similar gains occurred during 1996.
Net Loss and Income
The Company's net income for the year ended December 31, 1997, was
$3,068,917 compared to a net loss of $3,752,583 for year ended December 31,
1996. During the year ended December 31, 1997, the Company's net income was due
primarily to gains on the sale of EchoStar Common Stock and from the settlement
of litigation involving Company's equitable interest in Continental Satellite.
Liquidity and Capital Resources
The Company has been in the development stage since its inception and
has not recognized any significant revenues or capital resources. The Company
anticipates monthly expenses to average approximately $170,000 to $200,000 per
month for the remaining calendar year 1998 which includes $125,000 per month for
operating, legal and consulting expenses, and $45,000 to $75,000 per month for
GEMS & E-SAT research & development. However, expenses will continue to increase
during 1999 with the demands of developing the E-SAT license and business
applications and additional capital will be necessary to expand operations or
continue current operations.
Traditionally, the Company has relied on equity and debt financings to
finance its operations. This financing was supplemented from the sale of the
Company's interest in entities that held direct broadcast satellite licenses.
The Company no longer has any interest in direct broadcast satellite licensees.
Currently, the Company is offering to accredited investors in a private
placement up to 3 million units for $6 million in the aggregate with each unit
consisting of one share of Common Stock and one warrant to purchase one share of
Common Stock at $3.00 per share. As of September 30, 1998, the Company had sold
approximately 2.8 million units for gross proceeds of approximately $5.6 million
before finder's fees and commissions of $442,500. In October 1998, at the
request of two stockholders due to changes in their financial condition, the
Company rescinded the stock purchase agreements relating to 400,000 units and
refunded $800,000 in proceeds to the two stockholders. The Company believes that
it has sufficient operating working capital for the next twelve months. However,
the Company will need substantial additional capital, at least $115 million, to
construct the E-SAT System. See "Risk Factors - Need For Future Capital."
Further, the construction of the first two of the six planned satellites is
required to commence by April 1999 pursuant to the terms of the FCC license
granted to E-SAT. See "Risk Factors Regulatory Risks."
18
The Company had cash and cash equivalents of $4,305,162 and $383,054 as
of September 30, 1998 and December 31, 1997, respectively. The Company had
working capital of $3,300,170 as of September 30, 1998, as compared to negative
working capital of $411,185 as of December 31, 1997. Until the Company is able
to develop, construct and operate its E-SAT System and derive revenues
therefrom, the Company will continue to use cash for its operations and
development of the E-SAT System.
Net cash used in operating activities was $1,205,423 for the nine months
ended September 30, 1998, as compared to $2,063,438 for the nine months ended
September 30, 1997. Net cash used in operating activities during the nine months
ended September 30, 1998, decreased from the same period during the prior year
due to the decrease in accounts receivable. Net cash used in operating
activities was $2,972,153 for the year ended December 31, 1997, compared to
$1,639,464 for the year ended December 31, 1996. Net cash used during the year
1997 increased due to the payment of accounts payable which accrued during 1996.
Net cash used in investing activities for the nine month period ended
September 30, 1998, was $211,072. This net cash used represents the difference
between the proceeds from the divestiture of Seimac of $199,940 less the
Company's advances to E-SAT of $407,292. Net cash provided by investing
activities was $4,183,565 for the year 1997 compared to net cash used in
investing activities of $2,596,694 during 1996. During 1997, the Company
received proceeds of $3,573,677 in connection with a settlement of a lawsuit
with Loral. Cash used during 1996 included the purchase of an equitable interest
in Continental in the amount of $2,292,409 and advances to E-SAT in an amount of
approximately $225,000.
Net cash provided by financing activities for the nine month period
ended September 30, 1998, was $5,338,603 compared to $1,338,445 used in
financing activities for the nine months ended September 30, 1997. Net cash
provided by financing activities during the nine months ended September 30,
1998, consisted entirely of the issuance of units representing gross proceeds of
$5.6 million offset by issuance costs of $442,500. Net cash used in financing
activities during the nine months ended September 30, 1997, consisted primarily
of the repayment of debentures and line of credit of approximately $1.3 million
in the aggregate. Net cash used in financing activities was $1,230,994 during
1997 compared to net cash provided by financing activities of $4,635,002 during
1996. During 1997, the Company repaid debentures in the amount of $1,043,445 and
stockholder's loans of $149,750. During 1996, the Company received $3,640,000
from the issuance of debentures and $1,000,002 from the issuance of Common
Stock.
In July 1996, the Company began to receive milestone payments under the
terms of a $1.2 million purchase order for 10,000 satellite radio units. Under
this agreement, the Company was eligible to receive up to $500,000 towards
development costs upon meeting the milestone requirements of the contract. The
Company met the first four milestones of the contract and has received $400,000
in cash. Currently, the Company and ABB Power T&D Company, Inc. ("ABB") have
suspended their development under this agreement due to the expiration of the
Company's agreement for the use of the Argos system on December 31 1997, and the
proposed limit placed on future commercial use of the Argos system. Therefore,
such milestone payments could be subject to refund, in whole or in part.
19
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's,
or its suppliers' and customers' computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing
disruptions of operations including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities. In the Company's assessment, because the Company and its
subsidiaries information systems are primarily comprised of recently purchased
personal computers and software, the Company does not believe that the Year 2000
Issue will materially affect its operations.
In addition, in developing the E-SAT System, the Company will be relying on
vendors to, among other things, manufacture the Little LEO satellites, launch
the Little LEO satellites, manufacture the RTU and build the E-SAT
infrastructure including the ground station. The Company has not yet entered
into contracts with any vendors to develop the E-SAT System, and, therefore, no
assessment has been made as to their Year 2000 compliance. As part of the
contract negotiations, the Company will request and determine the vendor's Year
2000 readiness. In the event that it is determined that a key vendor will not be
Year 2000 compliant, this may have an adverse effect on the Company's business
plans.
BUSINESS
The Company
DBS Industries, Inc., through its 20% interest in E-SAT, proposes to
construct, launch, and operate a two-way, low-cost data messaging system
utilizing six Little LEO satellites. E-SAT intends to launch six Little LEO
satellites to orbit the earth at altitudes of approximately 550 miles, and with
the Company's technology, are capable of collecting and transmitting data at
regular intervals from fixed devices such as meters in hard-to-access locations
at a cost substantially less than manually retrieving the information. The
Company intends to provide data messaging services initially for the energy
industry including the gas and electrical utility and water industry, and other
data messaging services for the vending machines and environmental monitoring
industries, worldwide.
The Company believes that its two-way, low cost data messaging services
will reduce costs for customers by providing a more efficient procedure to
collect and transmit data. The E-SAT System has been specifically designed to
collect data from fixed devices and will provide a means of safely transmitting
data which is superior to and less costly than methods currently available.
Little LEO satellites are particularly suited for the collection and
transmission of data from fixed devices such as meters, especially located in
hard-to-access and rural areas. Many automatic meter reading applications
require data transmission only at pre-scheduled intervals. This will allow
Little LEO satellites to retrieve the data from RTUs, store such data, and
forward the data at specified periods to the earth station to be processed,
validated and delivered to the customer.
Further, the capacity requirements for data collection and transmission
from fixed devices are relatively small compared to the requirements for the
transmission of voice or video. Little LEO satellites require less power to
operate than the larger geostationary satellites, such as direct broadcast
satellites, translating into lower capital costs and smaller radios that can be
integrated in the actual meter. A Little LEO satellite system is also generally
less expensive to place into service than a direct broadcast satellite system.
In addition, by collecting and transmitting data using CDMA/DSSS technology,
this will allow the Company's RTUs to transmit data and operate with relatively
less power, thereby reducing the cost of RTU.
20
The Company will initially focus its data collection and transmission
services to electric and gas utilities in the U.S., targeting their
high-cost-to-read metering segment. Since meter data has historically been
retrieved by utility personnel, logistical issues such as (i) significant travel
time to a meter site; (ii) rugged terrain; (iii) physical risk; (iv) restricted
sites; (v) environmental issues; and (vi) mis-reads requiring additional site
visits can contribute to higher costs for utilities. The Company's goal is to
lead the low-cost, data messaging service market using Little LEO satellites to
enable businesses to economically gather data from fixed devices located in
remote and hard-to-access locations.
Historically, the Company began by purchasing interests in direct broadcast
satellite licensees. The Company had an interest in Direct Broadcast Satellite
Corporation which was subsequently acquired by EchoStar. In addition, the
Company had an equitable interest in Continental Satellite Corporation. During
1997, the Company sold its last indirect interest in direct broadcast satellites
licensees and settled litigation involving its equitable interest in a direct
broadcast satellite licensee. The proceeds from the sale of, and settlement of
litigation involving, indirect interests in direct broadcast satellites
licenses, in addition to debt and equity financing, have assisted the Company in
financing its operations.
In August 1998, the Company and Matra Marconi Space France s.a. ("MMS")
entered into a non-binding memorandum of understanding to engage and appoint MMS
as prime contractor for the design, construction, delivery and launch support
services of six Little LEO satellites. Further, in August 1998, the Company and
SAIT Radio Holland SA ("SAIT") entered into a non-binding letter of intent to
explore an arrangement dealing with SAIT as the main contractor for the
engineering, development and provision of hardware and software for E-SAT's
earth station. In the latter part of September 1998, the Company and MMS
mutually agreed to terminate their non-binding memorandum of understanding. The
letter of intent with SAIT expired under its terms on November 23, 1998.
However, the Company has engaged SAIT to perform studies on antennas for the
proposed RTUs, develop and test RTU prototypes, and assist in RTU design in
anticipation of manufacturing RTUs for the Company. No assurance can be given
that the Company and SAIT will enter into a contract to manufacture the RTUs.
See "Risk Factors Regulatory Risk."
Currently, the Company is negotiating with other European space craft
manufacturers for the design, construction, delivery and launch support service
for the E-SAT satellites. Among additional items being discussed are marketing
rights of E-SAT's service in Europe. No assurance can be given that the Company
will be able to enter into any agreements regarding the manufacturing of the
E-SAT satellites and the marketing of E-SAT's services.
Ownership in E-SAT and Little LEO Satellite Industry Background
The technology of using Little LEO satellites to gather data has been in
existence for over 40 years and has been used extensively in weather satellite
applications worldwide. The commercial use of Little LEO satellites is in its
development stage. Competition will be likely driven by the ability of each
license holder to build and launch their Little LEO satellites and by the data
services they propose to provide.
E-SAT was incorporated in 1994 and is currently owned 20% by the Company
and 80% by EchoStar. 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 (the "Joint
Proposal") 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 Joint Proposal, there was sufficient spectrum to license all
five applicants. Thereafter, E-SAT filed an
21
amendment conforming its application to the rules and policies adopted by the
FCC Report and Order which, ultimately, resulted in the FCC's approval of
E-SAT's application. On March 31, 1998, the FCC approved E-SAT's application for
a Little LEO satellite license.
E-SAT is owned 20% by the Company and 80% by EchoStar. The Company has had
conversations with EchoStar to restructure E-SAT in an attempt by the Company to
acquire a majority interest in E-SAT. Another structure under consideration is
that the Company's wholly-owned subsidiary Newstar would lease a portion or all
of E-SAT's transmission capacity. Newstar would then resell the transmission
capacity through joint ventures with other partners. No assurance can be given
that the Company will be able to purchase a majority interest in E-SAT or enter
into a leasing arrangement with E-SAT. Further, any proposed acquisition of a
majority interest in E-SAT will be subject to FCC approval. In the event that
the Company cannot acquire a majority interest in E-SAT, the Company will
continue to have a minority interest in E-SAT. The Company's percentage of
ownership in E-SAT may be subject to dilution if the Company cannot meet future
funding requirements. No assurance can be given that the Company will have
sufficient resources to meet the financial requirements of E-SAT to maintain its
current equity interest in E-SAT.
Further, in the event that the Company is unable to acquire a majority
interest in E-SAT or the E- SAT System is not built or incurs substantial delays
in its construction, this will have an adverse effect on the Company.
The total capital requirements for E-SAT's proposed data transmission
system, including the anticipated six satellites and other start up costs, is
estimated to be approximately $115 million. For the nine months ended September
30, 1998 and for the year ended December 31, 1997, the Company funded E-SAT
expenses of $407,292 and $385,671, respectively, which represents greater than
20% of E-SAT's total expenses for the year and includes advances made on behalf
of EchoStar.
Prior to E-SAT receiving its license to develop, and construct and
operate the E-SAT System, the Company was developing hardware and software for
data collection and transmission, conducting proof-of- concept demonstrations
with utility companies to determine the effectiveness and accuracy of Little LEO
satellites to collect and transmit data from fixed devices, and evaluating
rocket and satellite vendors in anticipation of the E-SAT license.
The E-SAT System
The E-SAT System will consist of six Little LEO satellites, a telemetry,
tracking and control center, which may either be dedicated or leased, a network
control center ("earth station") and numerous RTUs. The E-SAT System has been
designed to provide low cost messaging services worldwide. The E-SAT System has
been designed to meet the projected data messaging requirements for industrial
customers. The E-SAT System is optimized for the projected service markets and
will enable the provision of low-cost and reliable service for those markets.
The primary service of collection and transmission of data from fixed
devices such as meters located in remote locations is accomplished by periodic
readings of utility company meters over a wide geographical region by E-SAT's
satellites. An RTU integrated with the utility meter electronically transmits
the relevant data in digital form to E-SAT's satellite which stores the
collected data to be forwarded to the earth station. A network control center
provides overall operational control of the space segment, and is interfaced
with the earth station for the satellites to facilitate, among other things, the
use of the orbital data from network operations. Based on the current design,
E-SAT estimates that its satellites will operate for a period of five years.
Although metropolitan and urban or suburban areas can benefit from the E-SAT
System, the E-SAT System will be especially advantageous in providing meter
22
reading functions in remote, rural and low population density areas, eliminating
the costly need of routine visits by utility personnel.
It is anticipated that each meter will be integrated with a RTU. The RTU
will then transmit certain information in a scheduled format sequence. Under
E-SAT's store and forward mode, the uplink data from the RTU is stored in a
memory device aboard the satellite for subsequent downlink transmission when the
satellite passes over the earth station. The store and forward method is
suitable when the earth station is located in high latitude which will minimize
interference in the radio frequency environment. The E-SAT System has been
designed for the collection and transmission of data from fixed devices,
therefore the store and forward method of gathering and transmitting data is
efficient and cost effective. Because the E-SAT will be transmitting non-voice
data in short information packets and will not be transmitting data that
requires real-time or near real-time communications, E-SAT's infrastructure is
simpler and less costly than those Little LEO systems offering real-time data
information services. The E-SAT System consists of up to six Little LEO
satellites and one primary earth station to be built in Norway. The E-SAT System
will validate, format, and deliver the data electronically to the customer. The
E-SAT System will also provide for emergency back up systems.
CDMA/DSSS Technology
The E-SAT System will utilize CDMA/DSSS transmission techniques to enable
the E-SAT System to make best use of the limited spectrum available as well as
to achieve high functionality in the noisy environment created by the numerous
radio systems in the frequency banks of operation. The growth of electrical and
electronic equipment has induced an explosion of electromagnetic interference
into the environment. In every industrial environment, the user requires a fast
and safe transfer of data. This constraint is very hard to achieve with the
usual radio solution because saturation of the available frequency bands. The
Company believes that CDMA/DSSS transmission technology answers this constraint.
While narrowband solutions opt for a single carrier frequency, CDMA/DSSS spread
the data over a wide band in order to minimize the impact of noise and
disturbance on the data to being transmitted. Further, under most conventional
transmissions, energy concentration is maximized for a given message. As a
result, greater power is required to complete transmission of data. Under the
CDMA/DSSS transmission technique to be employed by the Company, the data signal
is spread over the entire frequency band. This technique will minimize the
impact of noise and disturbance on the data being transmitted. CDMA/DSSS
converts data bits into a stream of code bits that look like noise. The receiver
on the Little LEO satellite combines the incoming code stream with a replica of
the RTU code and thus regenerates the original data stream. Background noise in
the radio frequency environment is not recognized as data by the receiver, and
is rejected.
The entire population of the RTUs is assumed to be suitably divided in a
number of groups, different groups accessing the satellite at a predetermined
schedule, in the CDMA/DSSS mode for the duration allocated to the group. This
schedule shall be controlled from the network's operation center so that each
satellite can receive new instructions as it passes over the earth station.
For the service downlink, the CDMA/DSSS signal is transmitted by the Little
LEO satellite in a broadcast mode and is received by one or more of the RTUs.
The service downlink CDMA/DSSS signal shall also update precise timing data to
each RTU to allow each meter to properly perform functions.
The total time of visibility of the satellite over the coverage region is
appropriately divided among the various groups, and the number of the time slots
allocated for each group is determined by the number of users in each group. The
CDMA/DSSS parameters are designed to provide effective and accurate retrieval of
the meter data reading even in the presence of potentially large interference
due to external sources such as thermal noise, as well as interference presented
by other users in the frequency bands.
23
E-SAT is the only commercial Little LEO operator to implement CDMA/DSSS in its
communications protocol.
Remote Terminal Units (RTUs). The CDMA/DSSS pattern of reading and data
retrieval is repeated periodically using the available passes of E-SAT's
satellites. E-SAT's various group of RTUs are activated to transmit in their
designated time slots during the visible periods of the passages of the
satellites over the service coverage area. The activation of the uplink data
transmission shall commence when the RTU integrated with the fixed device shall
be prompted by the satellite and given a precise time in which it shall be
required to transmit (uplink) the data to the satellite.
The utility meter providing the data reading, integrated with RTU, is
designed to generate the data in the prescribed electronic format. Through the
VHF antenna and transmitter, the data is transmitted from the RTU to the
satellite on a scheduled basis as called by the satellite as it passes overhead.
The Company has had preliminary discussions with companies to manufacture the
RTUs. However, no assurance can be given that the Company will enter into an
agreement to manufacture the RTUs. In addition, the RTUs must be manufactured at
a price that is attractive to have utility companies purchase the Company's
messaging services.
Earth Station. The earth station shall perform both telemetry, tracking and
control and feeder link functions. The data collected at the earth station can
be distributed through many standard means including over microwave links, land
lines, or the Internet to the data processing center. Because data will be
stored on the satellite to be forwarded to the earth station when the Little LEO
satellite passes over, E-SAT will require only one primary earth station with
one emergency backup. Tentatively, it is anticipated that the earth station will
be located in Norway since each E-SAT satellite will pass over that area
fourteen times during a twenty-four hour period. Because E-SAT system can
operate its system with one primary earth station, this will reduce the cost of
its services. The Company, of course, will have contingency plans in the event
of a shut down at the earth station.
Satellite Constellation
The initial satellite system will consist of three satellites in circular,
near polar single orbit at a 99 degree inclination angle. The three satellites
will be launched on a single Eurockot launch vehicle. E-SAT has entered into a
launch reservation agreement with Eurockot. Under the terms of the launch
reservation agreement, Eurockot reserved for E-SAT a launch opportunity on a
launch vehicle at the Plesetzk, Russia launch site for two dedicated, triple
satellite launches. No assurance can be given that E-SAT shall enter into a
launch service agreement with Eurockot, or if entered into, that it will be for
the requested launch period.
E-SAT satellite orbit altitude will be approximately 550 miles in a near
polar orbit at a 99 degree inclination angle. At this altitude, there will be
fourteen revolutions per day. After the initial three satellites are deployed
and become operational, and the market is established, an additional three
satellites will be deployed in a second near plane within FCC guidelines. The
Little LEO satellites will be almost constantly illuminated by the sun, thereby
significantly reducing the need for batteries. Batteries will be required only
for power load leveling, occasional brief eclipse periods and contingencies.
Potential Markets
The Company's goal is to provide low cost data messaging satellite services
worldwide. The Company believes that its two-way, low cost data messaging
services will reduce costs for customers by providing a more efficient retrieval
of data because the E-SAT System (i) has a lower infrastructure cost
24
and (ii) transmits data using CDMA/DSSS technology which provides greater
capacity than channelized systems and allows transmissions within the background
noise in the radio frequency environment. The Company should be able to offer
its data messaging services at cost lower than manual retrieval systems or other
Little LEO satellite operators who may have much greater capital cost
structures.
The Company's customer base will be comprised of investor owned utilities,
rural electric membership co-operatives, municipalities and other publicly owned
utilities, electric holding companies, meter data management agents, meter
manufacturers, local public works agencies and others that have dispersed
operations and may require aggregate billing services. It is the rural and
hard-to-access meter segment that the Company will initially market its
services. The Company will develop communication products to integrate into
metering equipment and will provide an associated automatic reading data service
to include remote data collection, validation, formatting and electronic
delivery to the customer.
Utility Meters. The utilities industry is faced with increasing
competition, strict regulation of power generation facilities, and an increasing
cost of operations. The Company believes that the E-SAT System will provide a
cost effective two-way communication path to hard-to-access gas and electric
meters. There are over 150 million electric meters in the U.S. and the 103rd
edition of the Directory of Electric Power Producers lists 198 investor-owned
electric utilities, 1,818 electric municipalities, 922 rural co-operatives and
numerous holding, governmental and public works, agencies. Three principal
objectives used by utilities when evaluating automatic meter reading services
include proficiency to reduce meter reading expense, ability to address
hard-to-read locations, and contribution to improving customer service. The
Company believes that its data messaging services will address these needs.
Natural Gas Wells. The natural gas industry is regulated by the United
State Department of Transportation. Many utilities have had to divest its
pipeline and wellhead assets. There are 111 investor owned natural gas companies
operating throughout the U.S. (Penwill Publications). It is estimated that more
than 285,000 well heads exist throughout the U.S. There is over 300,000 miles of
interstate pipeline connected to a 1.2 million-mile natural gas gathering and
distribution network serving over 160 million gas service meters throughout the
United States. Collecting data from these fixed locations is another service
E-SAT can provide.
Environmental and Agriculture. Environmental monitoring is becoming
increasingly important as foreign, U.S. federal, state, and local governments
are closely monitoring air, water, and waste disposal sites. The waste disposal
industry, faced with an increased public awareness of pollution problems, must
monitor the quality of its waste disposal efforts through readings of air
quality and water quality, temperature, and flow from multiple points. In
addition, the Company believes that existing irrigation systems for agricultural
and land management applications will benefit significantly from E-SAT
monitoring and remote control services.
Vending Machines. The E-SAT System is also designed to be able to
provide remote communications to stand-alone equipment, such as vending
machines. This remote communications capability is expected to increase the
efficiency of the personnel servicing the sites, and has the potential to
increase sales for those companies. As of 1995, in the U.S. there were
approximately 3.4 million vending machines owned and operated by independent
vending machine companies (Vending Time Census of Industry Issue 1995).
Competition
Competition in the communications industry is characterized by rapid
change with new technologies and entrants vying for a currently increasing
customer base. Industry participants are forming alliances and integrating
networks to provide a broad range of services to the marketplace. The
25
communications capabilities provided by the Little LEO industry will create a
low-cost source of global mobile data services. In addition to E-SAT, there are
three other commercial Little LEO satellite operators (Orbcomm, LeoOne, and
Final Analysis). A fourth Little LEO operator is Volunteers In Technical
Assistance ("VITA"), a non-profit organization.
The Company's competitors are all attempting to serve multiple markets such
as cargo and vehicle mobile asset tracking, monitoring and remote control,
emergency services and transaction processing. By choosing to address markets
requiring near real time inter-connectivity, E-SAT's competitors (excluding
VITA, a non-profit organization) will launch a constellation of between 26 to 48
Little LEO satellites and will have many earth stations located throughout the
U.S. and the world. These Little LEO systems are much more costly and complex as
compared to the E-SAT System. The RTUs designed for other Little LEO operators
are more expensive and require more power to operate than E-SAT's RTUs. The
Company believes that a lower uplink power requirement for an E-SAT RTU will
give E-SAT a cost competitive advantage when targeting fixed device
applications.
A number of competitors are currently developing proposals to implement
automatic meter reading ("AMR") services at electric and natural gas utilities
throughout the U.S. Other proposed AMR technology solutions include terrestrial
wireless radio technologies such as Specialized Mobile Radio, Cellular and
Multiple Address Service licenses, unlicenced radios operating under Part 15 of
the FCC Regulations, and hard wired technologies such as telephone, fiber
optics, cable and power line carriers. While terrestrial wireless technology may
be cost effective in the densely populated urban areas, it may not be cost
effective to automate rural and hard-to-access areas; and it is in these niche
market locations that the Company intends to compete effectively by utilizing
Little LEO satellite technology.
Global Energy Metering Services, Inc.
GEMS was incorporated in December 1994 to provide the service applications
of commercial Little LEO satellite technology developed through its predecessor
company JPS Systems, Inc. ("JPS"). In 1995, JPS was formally consolidated with
GEMS and dissolved as a corporate entity. During the two years prior to
consolidation, JPS developed the basic technology of collecting and transmitting
data remotely by Little LEO satellites and conducted a proof of concept trial
for Pacific Gas & Electric Co. ("PG&E") in California. Data from several natural
gas wellheads meters was collected and transmitted by Little LEO satellites.
This trial was completed in April 1995 and led to the development of a plan for
GEMS to provide automatic meter reading solutions for hard-to-access meters
owned by public utilities as well as collection and transmission of data from
other fixed devices. This plan is intended to provide suppliers and consumers of
the utility and petroleum industries worldwide with remote data collection and
transmission capabilities utilizing Little LEO satellite technology.
Subsequently, a series of proof of concept demonstrations conducted in
conjunction with ABB, in which prototype satellite radios (RTUs) and electric
meters were installed at 34 electric utilities in the continental U.S. 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.
The Company also had an agreement with North American CLS, Inc. ("NACLS"),
which provided a limited amount of Little LEO satellite capacity for trials of
the Company's automatic meter reading applications with 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 ("NOAA"). In 1996, GEMS received a purchase order for
Little LEO transmitters that could be used on the Argos System as part of its
overall development of a satellite transmitter integrated under the cover of an
electronic utility meter from ABB. The Company's agreement for use of the Argos
System expired on December 31, 1997, and NOAA has established new criteria which
limits future commercial use of the Argos System which, effectively, prohibits
the Company from using the Argos System.
26
The expiration of the NACLS agreement and the proposed future limits have caused
GEMS and ABB to suspend the purchase order. Although the Company and ABB intend
to pursue the use of the Company's technology for use in ABB's meters, no
assurances can be given that the purchase order will be reinstated or whether
the terms of any future purchase order will be acceptable to the Company.
FCC Regulations
All commercial non-voice, non-geostationary mobile-satellite service
"NVNG-MSS" or "Little LEO" such as E-SAT's satellites in the U.S. are subject to
the regulatory authority of the FCC. Little LEO operators must obtain
authorization form the FCC to launch and operate their satellites and to provide
permitted services in assigned spectrum segments.
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 U.S. in the 148-148.905 MHz for service and feeder uplinks, and the
137.0725-137.9725 MHz frequency band for service and feeder downlinks. For its
uplink, E-SAT is licensed to utilize 500 kHz of contiguous spectrum in the
148-148.855 MHz band that is not shared with the other U.S. licensees, LEO One,
Final Analysis and ORBCOMM. However, some of this spectrum may be required to be
operated co-frequency with the French S-80 system, based on prior coordination
between the U.S. and France. E-SAT is licensed to utilize 148-855-148.905 MHz
for feeder uplinks. E- SAT will operate in the other 355 kHz of the 148-148.905
MHz band on a co-frequency basis with Leo One, Final Analysis and ORBCOMM. In
the downlink direction, E-SAT will operate in the band 137.0725-137.9275 MHz
co-frequency with NOAA satellites, ORBCOMM and Final Analysis. E-SAT is
obligated to coordinate with the other U.S. 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.
Pursuant to E-SAT's license, unless extended by the FCC for good cause,
E-SAT must commence construction of the first two satellites by March 1999,
complete construction by March 2002 and launch by September 2002. The remaining
four satellites must commence construction by March 2001, complete construction
by March 2004 and launch by March 2004. The Company is currently negotiating
with European space craft manufacturers for the design, development and
construction of the E-SAT satellites. However, no contract has yet been entered
into. In the event E-SAT fails to meet certain conditions, E- SAT may lose its
license with the FCC. See "Risk Factors - Regulatory Risks."
International Regulations
The E-SAT System operates in frequencies that are allocated on an
international basis under the authority of the ITU. The U.S., on behalf of
various Little LEO service providers, pursued international allocations of
additional frequencies for the use of Little LEOs. In addition to cooperation
through the FCC, E-SAT will be required to engage in international coordination
with respect to other satellite systems under the auspices of the ITU. Further,
E-SAT must receive operational authority called "landing rights" from each of
the foreign countries in which it proposes to provide services. It will be the
responsibility of the international distributor or licensee of each country to
obtain such authority. In the event E-SAT is unable to obtain authority to offer
its service in a particular country or region, this may have a material adverse
affect on the Company's business plans and operations.
Employees
As of October 31, 1998, the Company had nine full-time employees. The
Company considers its relationship with its employees to be good.
26
Property
The Company and GEMS have leased 3,287 square feet at a monthly rate of
$8,574, for their principal offices at 100 Shoreline Highway, Suite 190A, Mill
Valley, California, on a three year lease which expires on March 1, 2000.
MANAGEMENT
Directors, Executive Officers and Key Employees of the Company
The present directors and executive officers of the Company, their ages,
positions held in the Company, and duration as such, are as follows:
Name Position Age Period
- ---- -------- --- ------
Fred W. Thompson Chairman of the Board, President, 55 December 1992 - present
Chief Executive Officer, and
Chief Financial Officer November 1993 - present
Michael T. Schieber Director 58 December 1992 - present
E. A. James Peretti Director, Chief Operating Officer 55 February 1996 - present
H. Tate Holt Director 46 February 1996 - present
Jerome W. Carlson Director 62 May 1997 - present
Gregory T. Leger Executive Vice President 43 March 1998 - present
Engineering
Fred R. Skillman, Jr. Vice President, Business 37 August 1995 - present
Development
The Company adopted staggered terms for its Board of Directors at its
1996 Annual Stockholders Meeting. Messrs. Thompson and Peretti will serve until
the 1999 annual meeting of stockholders or until their successors have been
elected and Mr. Carlson will serve until the 2000 annual meeting of stockholders
or until his successor has been elected, and Messrs. Schieber and Holt will
serve until the 2001 annual meeting of stockholders or until their successors
have been elected. The Board of Directors does not have a standard arrangement
for compensation, but has previously, and will continue to receive, stock
options as compensation.
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
28
circumstances against expenses and liabilities incurred in legal proceedings
involving such persons because of their being or having been an officer or
director. The articles of incorporation and the bylaws of the Company provide
for indemnification of its officers and directors to the full extent authorized
by law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company 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.
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.
Fred W. Thompson, serves as Chairman of the Board, President, and CEO of
the Company. He has over thirty years experience in the telecommunications
industry. From 1983 to 1986, Mr. Thompson managed Inter Exchange Consultants,
Inc., a company he founded, providing management, design and engineering
services for initial cellular telephone operations in New York City, San
Francisco, Los Angeles and other major cities in the U.S. From 1986 to 1990, Mr.
Thompson devoted his time to consulting on various telecommunication matters as
an independent contractor. His career of over 20 years with AT&T included
various management positions in the Long Lines Department, Western Electric
Company, Bell Labs and with several operating telephone companies. Mr. Thompson
received a BS degree in Electrical Engineering from California Polytechnic.
Michael T. Schieber, Director, 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.
E. A. James Peretti, Director, has served as Chief Operating Officer since
August 1998, and was appointed in February 1996, as President and Chief
Executive Officer of Global Energy Metering Service, Inc., a wholly-owned
subsidiary of DBSI. Previously, Mr. Peretti served as President of Westinghouse
Electric Supply Company (WESCO), a business unit of Westinghouse Electric Corp.
He also served as a Vice President and officer of Westinghouse Electric Corp.
During his 30 year tenure with WESCO, Mr. Peretti also held positions as Vice
President and General Manager of its Pacific Division. Mr. Peretti holds a BS
degree from Purdue University in Electrical Engineering and a MBA from the
University of Hawaii.
H. Tate Holt, Director, appointed in February 1996, is currently President
of Holt & Associates, a growth management consulting firm, and has held that
position since July 1990. Previously, from 1987 to 1990, Mr. Holt was a Senior
Vice President at Automatic Data Processing, Inc. in Roseland, New Jersey and
Santa Clara, California. Mr. Holt has over twenty years of experience in various
senior sales, marketing and general management positions with IBM, Triad
Systems, and ADP. He has participated in major restructuring and strategic
planning in these and other companies. Since 1990, Holt & Associates has
assisted its clients in developing and achieving aggressive growth targets, both
domestically as well
29
as internationally. Mr. Holt is also an active director of several private and
publicly traded companies including Onsite Energy and has been nominated to
serve on the Board of Directors of AremisSoft Corporation. Mr. Holt holds an AB
from Indiana University.
Jerome W. Carlson, Director, appointed in May 1997, is currently President
of Raljer, Inc., 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 also an active director and advisor in several private companies. He holds a
B.S. degree from the University of California at Davis and an M.B.A. from the
Stanford Graduate School of Business.
Gregory T. Leger, Executive Vice President Engineering, joined the Company
in March 1998. Mr. Leger is responsible for the design and construction of the
E-SAT System. Mr. Leger has over nine years' experience in engineering systems,
management, business planning, marketing and proposal preparation with strong
analytical and negotiating skills. Most recently and for the past five years,
Mr. Leger was employed by Seimac Limited, as its Product Development Manager,
where he combined business development activities with technical and project
leadership to provide customers with solutions encompassing electronics data
telemetry, software and packaging. Mr. Leger received his BS degree in Physics
at Dalhousie University, Canada, his MS degree in Oceanography at Dalhousie
University, and a degree in Master Space Systems Engineering at Technical
University of Delft, Netherlands.
Fred R. Skillman, Jr., Vice President Business Operations, joined the
Company in August 1995. Mr. Skillman also manages the marketing and the sales
activities for the Company. Mr. Skillman has been working in the utility
industry for 13 years, with extensive utility operating experience, contract
administration, product development, project management and direct line
supervision. Prior to joining the Company, Mr. Skillman worked for Pacific Gas &
Electric ("PG&E") for eleven years. During his tenure at PG&E, Mr. Skillman was
an electrical engineer for the initial AMR system installed for PG&E in Marin
County, California. Mr. Skillman holds a BS degree in Electrical Engineering
from California Polytechnical State University, and an MBA degree from the
University of San Francisco.
Committees of the Board
The Board has an audit committee consisting of Messrs. Schieber and
Peretti, a nominating committee consisting of Messrs. Holt, Carlson and
Thompson, and a compensation committee consisting of Messrs. Holt, Schieber and
Carlson.
The primary functions of the audit committee is to review the scope and
results of audits by the Company's independent auditors, the Company's internal
accounting controls, non-audit services performed by the independent accountants
and the cost of accounting services.
The nominating committee assists in the process of officer and director
nominations.
The compensation committee administers the Company's various stock option
plans and approves compensation, remuneration and incentive arrangements for
officers of the Company.
30
Executive Compensation
The following table provides certain summary information concerning
compensation of the Company's Chief Executive Officer and each employee of the
Company or its subsidiaries who earns in excess of $100,000 for the year ended
December 31, 1997.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
---------------------------------------------------- ----------------------
Securities
Name and Other Annual Underlying
Principal Position Year Salary Bonus Compensation(1) Options
- -------------------------------------------------------------------------------------- ----------------------
Fred W. Thompson 1997 $ 180,000(2) $ 6,705 185,000
Chief Executive Officer 1996 $ 180,000(3) $ 4,245 312,500
1995(4) $ 30,000 $ 2,577 6,875
E.A. James Peretti 1997 $ 155,000 $ 3,732 150,000
Chief Operating Officer 1996 $ 155,000 $ 971 375,000
Randall Smith 1997 $ 125,000 $ 2,385 87,500
Former Executive VP 1996 $ 125,000 $ 2,216 125,500(4)
GEMS
- --------------------------------------------------------------------------------------------------------------
(1) Consists entirely of payment of insurance premiums.
(2) $80,000 paid in cash, $100,000 deferred pursuant to his employment
agreement.
(3) $72,000 paid in cash, $108,000 deferred pursuant to his employment
agreement.
(4) For the transition period from August 1, 1995 to December 31, 1995.
Mr. Thompson entered into an employment agreement with the Company on
April 18, 1996, effective January 1, 1996. His annual salary under the agreement
is $180,000, and includes non-qualified stock options to purchase 312,500 shares
of the Company's Common Stock. In October 1998, the Company paid Mr. Thompson
the amount of $246,000 related to his previously deferred compensation through
September 1998. The Company has maintained a key person insurance policy on Mr.
Thompson's life in the face amount of $2,000,000, and is the sole beneficiary of
such policy. The Company also entered into employment contracts with E.A. James
Peretti, CEO of GEMS. Mr. Peretti's agreement includes an annual salary of
$155,000 and non-qualified stock options to purchase 375,000 shares of Common
Stock.
Effective March 1, 1998, the Company entered into a three-year
employment agreement with Mr. Gregory T. Leger to serve as Executive Vice
President Engineering. Under the employment agreement, Mr. Leger's annual salary
is $120,000. He also received $20,000 upon the execution of the agreement and
has the right to receive an additional $20,000 on March 31, 1999, as a bonus.
Mr. Leger also received an option to purchase 125,000 shares of DBSI Common
Stock subject to vesting requirements.
Stock Option Plans
The Company has established the 1998 Stock Option Plan (the "1998 Plan")
which 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 the Company. The 1998 Plan
31
provides for the grant of up to 500,000 non-statutory and incentive stock
options. Under the 1998 Plan, officers, directors, consultants and employees of
the Company will be 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 the Common Stock of the Company on the date of grant.
The fair market value for which an optionee may be granted incentive stock
options in any calendar year may not 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 Plan is exercisable for a term of ten years
(or for a shorter period 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. Each option is exercisable only so long as
the optionee remains employed by the Company. No option is transferable by the
optionee other than by will or the laws of descent and distribution. As of
October 31, 1998, options to acquire 112,500 shares of Common Stock were
outstanding.
The Company has 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 the Company.
The 1996 Plan provides for the grant of up to 1,650,000 non-statutory and
incentive stock options of which 1,018,778 are outstanding as of October 31,
1998. Under the 1996 Plan, officers, directors, consultants and employees of the
Company 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 the Common Stock of the Company on the date of grant. The fair
market value for which an optionee may be granted incentive stock options in any
calendar year may not exceed $100,000. Shares subject to options under the 1996
Plan may be purchased for cash. Unless otherwise provided by the Board, an
option granted under the 1996 Plan is exercisable for a term of ten years (or
for a shorter period up to ten years). The 1996 Plan is administered by the
Board of Directors and its Compensation Committee, which has discretion to
determine optionees, the number of shares to be covered by each option, the
exercise schedule, and other terms of the options. The 1996 Plan may be amended,
suspended, or terminated by the Board, but no such action may impair rights
under a previously granted option. Each option is exercisable only so long as
the optionee remains employed by the Company. No option is transferable by the
optionee other than by will or the laws of descent and distribution.
The Company also has developed three stock option plans to award certain
employees, directors, and consultants with the opportunity to purchase the
Company's Common Stock. Under the Company's 1993 Incentive Stock Option Plan
("1993 ISO Plan") options to purchase up to 67,471 shares of Common Stock were
issued to eligible employees. Under the Non-Qualified Stock Option Plan for
Non-Employee Directors ("Director's Plan") options to purchase up to 75,000
shares of Common Stock were granted to non-employee directors. Under the
Non-Qualified Stock Option Plan for Consultants ("Consultant's Plan") options to
purchase up to 112,500 shares of Common Stock were granted to certain
consultants. As of October 31, 1998, options to acquire 50,269, 42,500, and
14,625 shares of Common Stock were outstanding under the 1993 ISO Plan,
Director's Plan and Consultant's Plan, respectively.
32
OPTION GRANTS IN THE YEAR ENDED DECEMBER 31, 1997
INDIVIDUAL GRANTS
Number of % of Total Options
Securities Granted to Employees
Underlying Options in Fiscal Year Exercise or Base
Name Granted 1997 Price ($/SH) Expiration Date
- ----------------------------------------------------------------------------------------------------------
Fred W. Thompson, 185,000 27.9% $0.584 12/31/02
President, CEO
E.A. James Peretti, 150,000 22.6% $0.531 12/31/07
CEO GEMS
Randall Smith, 87,500 13.2% $0.531 12/31/07
Former Exec. VP
GEMS
- ----------------------------------------------------------------------------------------------------------
FISCAL YEAR-END OPTION VALUE
Number of Securities Underlying Value(1) of Unexercised In-the-
Unexercised Options/SARs at FY Money Options/SARs at FY End
End (#) ($)
Exercisable/Unexercisable Exercisable/Unexercisable
Name Options at December 31, 1997 Options at December 31, 1997
- -----------------------------------------------------------------------------------------------------
Fred W. Thompson, 169,971 / 347,029 $82,969 / $82,969
President, CEO
E. A. James Peretti, 225,000 / 300,000 $119,475 / $159,300
CEO GEMS
- -----------------------------------------------------------------------------------------------------
(1) The value of unexercised in-the-money stock options is based on a per share
price of $.531 as quoted on the OTC Bulletin Board on December 31, 1997.
The following table sets forth the repricing of options held by current
directors and executive officers of the Company during the last ten complete
fiscal years.
33
TEN YEAR OPTION REPRICINGS
Length of
Number of Exercise Original
Securities Market Price Price at Optional Term
Underlying of Stock at Time of New Remaining at
Effective Date Options Time of Repricing Exercise Date of
Name of Reprice Repriced (#) Repricing ($) ($) Price ($) Repricing
- -----------------------------------------------------------------------------------------------------------------------------
Fred Thompson December 31, 1997 4,375 $ .53 $1.58 $ .58 1 year
President December 31, 1997 3,750 .53 1.58 .58 1 year
December 31, 1997 4,500 .53 1.58 .58 2 years
December 31, 1997 6,875 .53 1.58 .58 3 years
December 31, 1997 312,500 .53 1.44 .53 8 years
February 13, 1997 4,375 1.44 3.20 1.58 2 years
February 13, 1997 3,750 1.44 3.20 1.58 2 years
February 13, 1997 4,500 1.44 2.40 1.58 3 years
February 13, 1997 6,875 1.44 6.00 1.58 4 years
February 13, 1997 312,500 1.44 5.20 1.44 9 years
- -----------------------------------------------------------------------------------------------------------------------------
Michael Schieber February 23, 1998 37,500 .60 1.00 .60 9 years
Director February 13, 1997 6,250 1.44 2.80 1.44 7 years
February 13, 1997 13,750 1.44 2.00 1.44 8 years
February 13, 1997 6,250 1.44 5.60 1.44 8 years
February 13, 1997 37,500 1.44 4.75 1.44 9 years
February 13, 1997 12,534 1.44 5.50 1.44 9 years
- -----------------------------------------------------------------------------------------------------------------------------
James Peretti December 31, 1997 375,000 .53 1.44 .53 8 years
Chief Operating February 13, 1997 375,000 1.44 5.20 1.44 9 years
Officer
- -----------------------------------------------------------------------------------------------------------------------------
Tate Holt February 23, 1998 37,500 .60 1.00 .60 9 years
Director February 13, 1997 7,808 1.44 5.50 1.44 9 years
February 13, 1997 75,000 1.44 4.75 1.44 9 years
- -----------------------------------------------------------------------------------------------------------------------------
Jerome Carlson February 23, 1998 75,000 .60 1.00 .60 9 years
Director
- -----------------------------------------------------------------------------------------------------------------------------
Report on Repricing of Stock Options
During calendar 1997 there was a substantial decrease in the market
price of the Company's Common Stock due, in part, to regulatory delays in the
approval of E-SAT's Little LEO satellite license application. As a result, the
Compensation Committee repriced stock options in February and December of 1997.
The repricing was done in an effort to retain the Company's quality employees
and directors who had lost a significant portion of their financial interest in
the Company because their options were "out of the money." In February 1997, the
Company completed the first stock option repricing program for the Company's
directors and employees in which stock options for 1,119,646 shares of Common
Stock, originally issued with exercise prices ranging from $1.60 to $6.00 per
share, were reissued with exercise
34
prices ranging from $1.44 to $1.58 per share, which approximated the fair market
value on the date of repricing. In December 1997, the Company completed a second
stock option repricing program for the Company's employees (including employee
directors) in which stock options for approximately 1,135,726 shares of Common
Stock, with exercise prices ranging from $1.44 to $1.58, were reissued with
exercise prices ranging from $0.53 to $0.58 per share, which approximated the
fair market value on the date of repricing. In February 1998, options to acquire
150,000 shares of Common Stock to non-employee directors were repriced from
their original exercise price of $1.00 per share to $.60 per share which
approximated the fair market value on the date of repricing.
Stock options are intended to provide incentives to the Company's
directors, officers and employees. The Board of Directors believes that such
equity incentives are a significant factor in the Company's ability to attract,
retain and motivate directors, officers and employees who are critical to the
Company's long-term success. In repricing the stock options, the Board of
Directors considered the fact that directors are not compensated for their
services other than through stock options. Further, many of the Company's
officers and employees are not being compensated in accordance with industry
standards, and have had to either defer their salary or were delayed in
receiving their salary at times during the current and prior calendar year due
to the poor financial condition of the Company. The Board of Directors believes
that the repricing of the options is a form of incentive to the directors,
officers, and employees of the Company and believes that it is in the best
interests of the Company and its stockholders.
Board of Directors
Fred W. Thompson H. Tate Holt
Michael T. Schieber Jerome W. Carlson
E. A. James Peretti
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 Company's
certificate of incorporation states that the Company may provide indemnification
of its directors, officers, employees and agents to the maximum extent permitted
by the General Corporation Law. Article VI of the Bylaws provide that the
Company shall, to the maximum extent and in the manner permitted in the
Corporations Laws, indemnify each of its 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 the Company.
35
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of October 15,
1998, with respect to the beneficial ownership of the Company's Common Stock for
(i) each director, (ii) all directors and officers of the Company as a group,
and (iii) each person known to the Company to own beneficially five percent (5%)
or more of the outstanding shares of the Company's Common Stock.
Name and Address of Beneficially and
Beneficial Owner Record Owned(1) Percent of Class
- -------------------- ----------------- ----------------
Fred W. Thompson 851,546(2) 9.9%
100 Shoreline Highway, Suite 190A
Mill Valley, CA 94941
Michael T. Schieber 328,989(3) 3.8%
100 Shoreline Highway, Suite 190A
Mill Valley, CA 94941
E.A. James Peretti 300,000(4) 3.5%
100 Shoreline Highway, Suite 190A
Mill Valley, CA 94941
H. Tate Holt 137,629(5) 1.6%
100 Shoreline Highway, Suite 190A
Mill Valley, CA 94941
Jerome W. Carlson 87,500(6) 1.0%
100 Shoreline Highway, Suite 190A
Mill Valley, CA 94941
Officers and Directors as a Group (5 persons) 1,702,871 19.6%
Eddie Barretto 500,000(7) 5.7%
21 Tamal Vista Blvd., #204
Corte Madera, CA 94925
Astoria Capital Partners, L.P. 2,000,000(7) 21.1%
6600 Southwest 92nd Street, Suite 370
Portland, OR 97223
Microcap Partners, L.P. 500,000(7) 5.7%
6600 Southwest 92nd Street, Suite 370
Portland, OR 97223
(1) The persons named in the table have sole voting and 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 the table.
(2) Includes (i) 2,793 shares held by Mr. Thompson; (ii) 599,558 shares held
in Thompson 1996 Revocable Trusts; and (iii) options to purchase 234,375
shares at $0.531 per share expiring January 1, 2006, and 4,375, 3,750,
3,750, 3,945 and 2,750 shares of Common Stock exercisable at $0.584 per
share and expiring February 8, 1999, February 8, 1999, February 15,
2000, and December 31, 2000, respectively.
36
(3) Includes (i) 205,625 shares held jointly with spouse, Arlene Schieber,
(ii) 6,505 held solely by Mr. Schieber, (iii) 3,075 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, and options to
purchase 37,500 shares of Common Stock exercisable at $0.60 per share
which expire May 13, 2007, and options to purchase 12,500 shares of
Common Stock at $2.1875 which expire on May 12, 2008.
(4) Options to purchase 300,000 shares of Common Stock exercisable at $0.531
per share, which expire January 1, 2006.
(5) Includes (i) 4,821 shares held solely by Mr. Holt, and (ii) options to
purchase 7,808 and 75,000 shares of Common Stock all exercisable at
$1.4375 per share which expire December 31, 2006 and April 30, 2006,
respectively, and options to purchase 37,500 shares of Common Stock
exercisable at $0.60 per share which expire May 13, 2007, and options to
purchase 12,500 shares of Common Stock at $2.1875 per share which expire
May 12, 2008.
(6) Includes 37,500 shares held by Mr. Carlson, options to purchase 37,500
shares of Common Stock exercisable at $0.60 per share which expire May
13, 2007, and options to purchase 12,500 shares of Common Stock at
$2.1875 per share which expire May 12, 2008.
(7) Of the shares of Common Stock beneficially owned, one-half represent
shares of Common Stock and the remaining one-half represent shares of
Common Stock that may be immediately acquired pursuant to Warrants.
PLAN OF DISTRIBUTION
The Selling Stockholders 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 Stockholders by one or more of the following
methods, without limitation, (a) 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, (b) purchases by broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus, (c) an exchange
distribution in accordance with the rules of such exchange, (d) ordinary
brokerage transactions and transactions in which the broker solicits purchasers,
(e) privately negotiate transactions, (f) market sales (both long and short to
the extent permitted under the federal securities laws), and (g) a combination
of any such methods of sale. In effecting sales, brokers and dealers engaged by
the Selling Stockholders may arrange for other brokers or dealers to
participate. Brokers or dealers may receive commissions or discounts from the
Selling Stockholders (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 Stockholders 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 Stockholders, to purchase as principal any unsold shares of Common Stock
at the price required to fulfill the broker-dealer commitment to the Selling
Stockholders. Broker-dealers who acquire shares of Common Stock as principal may
thereafter resell such 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 Stockholders may also sell the shares of Common
Stock in accordance with Rule 144 under the Securities Act, rather than pursuant
to this Prospectus.
The Selling Stockholders and any broker-dealers or agents that
participate with the Selling Stockholders in sales of the shares of Common Stock
may be deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales. In such event, any commissions received by
37
such broker-dealers or agents and any profit on the resale of the shares of
Common Stock purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
From time to time, the Selling Stockholders may pledge their shares of
Common Stock pursuant to the margin provisions of its customer agreements with
its brokers. Upon default by the Selling Stockholders, 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 Stockholders intend to comply with the
Prospectus delivery requirements, under the Securities Act, by delivering a
Prospectus to each purchaser in the transaction. The Company intends to file any
amendments or other necessary documents in compliance with the Securities Act
which may be required in the event a Selling Stockholder defaults under any
customer agreement with brokers.
In addition, the Company is registering Warrants to purchase up to
1,250,000 shares of Common Stock for resale by the Selling Warrantholders. The
Selling Warrantholders may sell all, some or none of its Warrants under the same
manner and methods as the Common Stock by the Selling Stockholders as discussed
above.
The Company is required to pay all fees and expenses incident to the
registration of the shares of Common Stock and Warrants, including fees and
disbursements of counsel to the Selling Stockholders and the Selling
Warrantholders. The Company has agreed to indemnify the Selling Stockholders and
the Selling Warrantholders, against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
SELLING STOCKHOLDERS AND WARRANTHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of shares of Common Stock by the Selling Stockholders as of
October 31, 1998, and the number of shares of Common Stock covered by this
Prospectus.
Number of Shares of Number of Common
Common Shares Number of Shares Beneficially
Beneficially Common Shares Owned Following
Name of Shareholder Owned Prior to the Offering Offered Hereby the Offering
- ------------------- --------------------------- -------------- ------------
# of Shares % of Class # of Shares # of Shares % of Class
----------- ---------- ----------- ----------- ----------
Paul Bakker 200,000(1) 2.3 200,000 -0- -0-
William R. Geery 80,000(1) * 80,000 -0- -0-
Ted Landkammer 12,000(1) * 12,000 -0- -0-
Lloyd & Dee Chelli 12,000(1) * 12,000 -0- -0-
David Sutherland 110,000(1) 1.3 110,000 -0- -0-
MJH Partners 250,000(1) 2.9 250,000 -0- -0-
Eddie Barretto 500,000(1) 5.7 500,000 -0- -0-
Friedman Family Partnership 250,000(1) 2.9 250,000 -0- -0-
Blaine Miller 20,000(1) * 20,000 -0- -0-
38
Number of Shares of Number of Common
Common Shares Number of Shares Beneficially
Beneficially Common Shares Owned Following
Name of Shareholder Owned Prior to the Offering Offered Hereby the Offering
- ------------------- --------------------------- -------------- ------------
# of Shares % of Class # of Shares # of Shares % of Class
----------- ---------- ----------- ----------- ----------
Viviana Partners L.P. 400,000(1) 4.6 400,000 -0- -0-
Mallory Hill 140,000(1) 1.6 140,000 -0- -0-
H & N Partners 333,334(2) 3.8 333,334 -0- -0-
Coach House Group 100,000(2) 1.2 100,000 -0- -0-
Securities Trading Services, Inc. 400,000(2) 4.5 400,000 -0- -0-
Bartel Eng Linn & Schroder 200,000(2) 2.3 200,000 -0- -0-
The Genesis Group 43,000(3) * 43,000 -0- -0-
William Arthur & Joyce Appling 20,000(1) * 20,000 -0- -0-
Vivian L. Schneider 25,000(1) * 25,000 -0- -0-
Caryl Hogan 10,000(1) * 10,000 -0- -0-
Paul Schoos 50,000(1) * 50,000 -0- -0-
Jerome Rossel 20,000(1) * 20,000 -0- -0-
Michael J. & Barbara Stoiber 55,000(1) * 55,000 -0- -0-
Astoria Capital Partners L.P. 2,000,000(1) 21.1 2,000,000 -0- -0-
Microcap Partners L.P. 500,000(1) 5.7 500,000 -0- -0-
Performance Programming 200,000(1) 2.3 200,000 -0- -0-
Cardinal Capital L.P. 250,000(4) 2.9 250,000 -0- -0-
Zimmerman Revocable Trust 50,000(1) * 50,000 -0- -0-
Yelina Investments 150,000(2) 1.1 150,000 -0- -0-
Barbara Drew 215,000(4) 2.3 215,000 -0- -0-
Paul Dix 11,080(2) * 11,080 -0- -0-
Leslie Taylor Associates 97,068 1.1 58,392 38,676 *
Randall Smith
Former Executive Vice President 10,321 * 10,321 -0- -0-
Karen Haddad 6,881 * 6,881 -0- -0-
Sierra Delta Corp. 13,640 * 13,640 -0- -0-
George DiCostanzo 4,701 * 4,701 -0- -0-
39
Number of Shares of Number of Common
Common Shares Number of Shares Beneficially
Beneficially Common Shares Owned Following
Name of Shareholder Owned Prior to the Offering Offered Hereby the Offering
- ------------------- --------------------------- -------------- ------------
# of Shares % of Class # of Shares # of Shares % of Class
----------- ---------- ----------- ----------- ----------
W. L. Pritchard 7,500 * 7,500 -0- -0-
John L. Faessel 75,000(2) * 75,000 -0- -0-
Jerome W. Carlson(6)
Director 87,500 1.0 37,500 50,000 *
Michael Schieber(7)
Director 328,989 3.8 12,500 316,489 3.8
* Less than 1% of the outstanding Common Stock.
(1) Of the shares of Common Stock beneficially owned, one-half represent
shares of Common Stock owned and one-half represent shares of Common
Stock that may be immediately acquired pursuant to Warrants.
(2) Represents shares of Common Stock that may be immediately acquired
pursuant to Warrants.
(3) Includes 35,000 shares of Common Stock that may be acquired pursuant to
Warrants.
(4) Includes 200,000 shares of Common Stock that may be acquired pursuant to
Warrants.
(5) Includes options to acquire 50,000 shares of Common Stock.
(6) Includes options to acquire 138,784 shares of Common Stock.
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Warrants held by the Selling
Warrantholders as of October 15, 1998. The Warrants were sold pursuant to a
purchase agreement dated August 27, 1998, which was part of a private placement
of three million Units with each Unit consisting of one share of Common Stock
and a Warrant to purchase one share of Common Stock at $3.00 per share. Pursuant
to a contractual agreement, the Selling Warrantholders are registering Warrants
to purchase up to 1,250,000 shares of Common Stock. The Company is also
registering the 1,250,000 shares of Common Stock underlying the Warrants owned
by the Selling Warrantholders disclosed in the table above. The Selling
Warrantholders may sell some, all or none of their Warrants.
Warrants
Warrants Beneficially Owned Warrants to Beneficially Owned
Name of Warrantholder Prior to Offering be Offered After Offering
- --------------------- ----------------- ---------- --------------
Number Percent(1) Number Percent
------ ---------- ------ -------
Astoria Capital Partners, L.P. 1,000,000 40.0 1,000,000 0 0
6600 Southwest 92nd Street, Suite 370
Portland, OR 97223
Microcap Partners, L.P. 250,000 10.0 250,000 0 0
6600 Southwest 92nd Street, Suite 370
Portland, OR 97223
(1) Based upon approximately 2.5 million Warrants outstanding that were sold
pursuant to a private placement.
40
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During past fiscal years 1997 and 1996, the Company has not been a party
to any transaction or proposed transaction involving of the Company any director
or executive officer, five percent beneficial shareholder, or any member of the
immediate family of the foregoing persons, and in which the amount involved
exceeds $60,000, except as follows.
Pursuant to a purchase agreement among the Company, Astoria Capital and
Microcap, the Company is obligated to register with the Commission the
Registrable Securities acquired by Astoria Capital and Microcap in a private
placement. The registration statement must be declared effective by the
Commission by December 4, 1998. In the event the registration statement is not
declared effective by the Commission by December 4, 1998, the Company will be
obligated to refund to Astoria Capital and Microcap, in the aggregate, an amount
equal to $2.5 million times 3% for each 30 days (pro-rata as to a period of less
than 30 days) the registration statement is not declared effective, subject to
certain exceptions, or the effectiveness of such registration statement or
related prospectus is suspended because such prospectus includes an untrue
statement of a material fact or omits to state a material fact required to be
stated.
In addition, upon request by the holders owning a majority of the
Registrable Securities, the Company will file, not more than once, a
registration statement under the Securities Act, registering the Registrable
Securities. Further, if the Company files a registration statement registering
securities other than the Registrable Securities, the holders of the Registrable
Securities will have the right to include their Registrable Securities in such
registration statement.
All expenses of the registration statement including, but not limited
to, legal, accounting, printing and mailing fees will be borne by the Company.
The Company has agreed to indemnify Astoria Capital and Microcap against certain
liabilities under the Securities Act. The Company's registration obligations to
Astoria Capital and Microcap will cease upon disposition of the Registrable
Securities by such holders.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, $.0004 par value, and 5,000,000 shares of Preferred Stock, $.0004
par value. As of October 31, 1998, there were outstanding 8,487,841 shares of
Common Stock held of record by stockholders and no shares of Preferred Stock
outstanding.
Common Stock
Each stockholder is entitled to one vote for each share of Common Stock
held on all matters submitted to a vote of stockholders. Cumulative voting for
the election of directors is not provided for in the Company's certificate of
incorporation, which means that the holders of a majority of the shares of
Common Stock voted can elect all of the directors then standing for election.
Subject to such preferences as may apply to any Preferred Stock outstanding at
the time, the holders of outstanding shares of Common Stock are entitled to
receive dividends out of assets legally available therefor at such times and in
such amounts as the Board of Directors may from time to time determine. The
Common Stock is not entitled to preemptive rights and is not subject to
conversion or redemption. Upon the liquidation, dissolution, or winding up of
the Company, the holders of Common Stock and any participating Preferred Stock
outstanding at that time would be entitled to share ratably in all assets
remaining after the payment of liabilities and the payment of any liquidation
preferences with respect to any outstanding Preferred Stock.
41
Preferred Stock
The Board of Directors is authorized, subject to any limitations
prescribed by the General Corporation Law of the State of Delaware, to provide
for the issuance of additional shares of Preferred Stock in one or more series,
to establish from time to time the number of shares to be included in each such
series, to fix the powers, designations, preferences and rights of the shares of
each wholly-unissued series and any qualifications, limitations or restrictions
thereon and to increase or decrease the number of shares of any such series (but
not below the number of shares of such series then outstanding) without any
further vote or action by the stockholders. The Board of Directors may authorize
the issuance of Preferred Stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of Common
Stock. Therefore, the issuance of Preferred Stock may have the effect of
delaying, deterring or preventing a change in control of the Company. There are
no shares of Preferred Stock outstanding.
Warrants
In connection with its private placement of Units, the Company, pursuant
to a purchase agreement among the Company and Astoria Capital and Microcap, has
issued Warrants to purchase 1,250,000 shares of Common Stock at $3.00 per share.
The Warrants may be exercised as to all or any lesser number of shares of Common
Stock during a three year period ending August 27, 2001, and may be subject to
redemption upon 30 days' notice by the Company in the event that the trade price
of a share of Common Stock exceeds $4.50 per share for fourteen consecutive
days. The redemption price is $.01 per Warrant. The exercise price and number of
shares of Common Stock that the Selling Warrantholders will receive upon
exercise of the Warrants are subject to adjustment to protect the Warrantholder
against dilution in certain events. The Company is registering Warrants held by
the Selling Warrantholders to purchase up to 1,250,000 shares of Common Stock.
In addition, as part of its private placement, the Company has issued Warrants
to purchase up to 1,259,500 shares of Common Stock. The Warrants have
essentially the same terms as the Warrants issued to Astoria Capital and
Microcap except they are not being registered hereby.
Other Warrants
As of October 31, 1998, the Company has other Warrants outstanding
providing for the purchase of an aggregate of 1,647,414 shares of Common Stock.
The exercise price of the Other Warrant range from $.50 to $3.00 per share, and
the Other Warrants expire on dates ranging from January 28, 1998, to January 13,
2006.
CERTIFICATE OF INCORPORATION
Certain provisions of the Company's Certificate of Incorporation and
bylaws have the effect of deterring a change of control of the Company. The
Company's Certificate of Incorporation contains provisions requiring the
approval of 80% of the Company's stockholders for certain merger, sales of all
or substantially all of the Company's assets and certain other corporate action
unless the transaction is approved by seventy-five percent of the disinterested
board members or unless all stockholders receive a price for their shares of the
Company's capital stock which meets certain minimum price criteria. In addition,
the Company's Certificate of Incorporation also contains a provision with
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 a 80% vote or by vote of
a majority of
42
the Continuing Directors (as defined). The Company's Certificate of
Incorporation also requires the approval of 80% of the Company's stockholders in
order to amend the provisions.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
LEGAL MATTERS
The validity of the shares of Common Stock and Warrants offered by
Selling Stockholders and Warrantholders will be passed upon by the law firm of
Bartel Eng Linn & Schroder, Sacramento, California. Certain members of the firm
own shares of Common Stock of the Company representing less than 1% of the
outstanding shares of Common Stock. In addition, the firm has a Warrant to
purchase up to 200,000 shares of Common Stock which are being registered by this
registration statement.
EXPERTS
The consolidated balance sheets as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the years then ended and for the period from April
25, 1990 (date of inception) to December 31, 1997, included in this Prospectus
have been included herein in reliance on the report which includes an
explanatory paragraph regarding certain factors raising substantial doubt about
the Company's ability to continue as a going concern, of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of that firm, as experts in
accounting and auditing.
AVAILABLE INFORMATION
A Registration Statement on Form SB-2 (the "Registration Statement"
including amendments and exhibits thereto) relating to the shares of Common
Stock and Warrants offered hereby has been filed by the Company with the
Commission under the Securities Act. This Prospectus, which constitutes a part
of the Registration Statement, does not contain all of the information set forth
in the Registration Statement and the exhibits thereto. Statements contained in
this Prospectus as to the contents of any contract or other document referred to
are not necessarily complete and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Company is subject to the informational requirements of the
Exchange Act and in accordance therewith files periodic reports with the
Commission. Such reports and the Registration Statement concerning the Company
may be inspected at the Commission's public reference facilities located at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of the Company's periodic reports and all or any
part of the Registration Statement and the exhibits thereto may be obtained from
those offices upon the payment of certain fees prescribed by the Commission. The
Commission maintains a Website (address http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DBS INDUSTRIES, INC.
Page
Report of Independent Accountants..........................................F-2
Consolidated Balance Sheets as at September 30, 1998
(unaudited) and December 31, 1997 and 1996.................................F-3
Consolidated Statements of Operations for the nine
months ended September 30, 1998 and 1997 (unaudited)
and for the years ended December 31, 1997 and December
31, 1996, and for the period from April 25, 1990 (date
of inception) to September 30, 1998........................................F-4
Consolidated Statements of Stockholders' Equity (Deficit) for
the period from December 31, 1990 to September 30, 1998....................F-5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 (unaudited) and for the
years ended December 31, 1997 and December 31, 1996, and for
the period from April 25, 1990 (date of inception) to
September 30, 1998.........................................................F-10
Notes to Consolidated Financial Statements.................................F-12
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
DBS Industries, Inc. and Subsidiary:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit), and of
cash flows present fairly, in all material respects, the financial position of
DBS Industries, Inc. and Subsidiary (a development stage company) as of December
31, 1997 and 1996, 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, 1997, in conformity with generally accepted accounting
principles. 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 generally accepted auditing standards 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 expressed
above.
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.
COOPERS & LYBRAND L.L.P.
March 13, 1998, except for the last paragraph of Note 3 as to which the date is
April 1, 1998
F-3
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
September 30,
1998 December 31, December 31,
(Unaudited) 1997 1996
------------------- ------------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,305,162 $ 383,054 $ 402,588
Restricted Cash - - 300,000
Prepaid and other current assets 134,522 119,265 68,944
------------- -------------- -------------
Total current assets 4,439,684 502,319 771,532
------------- -------------- -------------
Furniture and equipment (at cost) 76,997 73,277 73,277
Less accumulated depreciation 55,804 47,828 34,406
------------- -------------- -------------
21,193 25,449 38,871
------------- -------------- -------------
Other assets:
Investments and advances, net 851,490 1,248,649 1,496,524
Goodwill, net of accumulated amortization of
$86,799, $81,864 and $61,149, respectively 4,191 9,126 29,841
Other assets - - 2,292,409
------------- -------------- -------------
855,681 1,257,775 3,818,774
------------- -------------- -------------
Total assets $ 5,316,558 $ 1,785,543 $ 4,629,177
============= ============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Convertible debentures $ - $ - $ 4,640,000
Line of credit - - 295,000
Accounts payable 380,550 152,485 960,277
Customer advances 400,000 400,000 400,000
Accrued liabilities 112,964 145,019 499,070
Deferred compensation 246,000 216,000 108,000
------------- -------------- -------------
Total current liabilities 1,139,514 913,504 6,902,347
------------- -------------- -------------
Stockholders' equity (deficit)
Common stock 3,556 2,373 2,351
Capital in excess of par value 9,214,019 4,681,295 4,605,026
Warrants 1,085,500 112,500 112,500
Deficit accumulated during the development stage (6,041,031) (3,839,129) (6,908,046)
Treasury stock (85,000) (85,000) (85,000)
------------- -------------- -------------
Total stockholders' equity (deficit) 4,177,044 872,039 (2,273,169)
------------- -------------- -------------
Total liabilities and stockholders' equity
(deficit) $ 5,316,558 $ 1,785,543 $ 4,629,177
============= ============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
April 25,
April 25, 1990
Nine Months Ended 1990 (Inception) to
September 30, Year Ended (Inception) to September 30,
(Unaudited) December 31, December 31, (Unaudited)
----------- ------------ ------------ -----------
1998 1997 1997 1996 1997 1998
---- ---- ---- ---- ---- ----
Revenue $ - $ - $ - $ 11,420 $ 161,420 $ 161,420
--------------- ------------- ------------ ------------ ------------- ------------
-
Cost and operating expenses:
Cost of revenue - - - 10,850 127,580 127,580
General and administrative 1,339,069 1,078,219 1,472,162 2,245,588 6,462,988 7,802,057
Research and development 545,772 296,836 210,115 1,078,747 2,169,571 2,715,343
-------------- ------------- ------------ ----------- ------------- ------------
1,884,841 1,373,055 1,682,277 3,335,185 8,760,139 10,644,980
-------------- ------------- ------------ ----------- ------------- ------------
Loss from operations (1,884,841) (1,373,055) (1,682,277) (3,323,765) (8,598,719) (10,483,560)
-------------- ------------- ------------ ----------- -------------- -------------
Other income (expense):
Interest, net 11,405 (317,054) (308,094) (395,298) (741,880) (730,475)
Equity in loss of investees, net (100,143) (39,974) (80,975) (31,920) (412,777) (512,920)
Gain (loss) on sale of
investments (228,323) 5,217,556 5,221,063 - 6,057,541 5,829,218
Other, net - - - - (56,634) (56,634)
-------------- ------------- ------------ ----------- ------------- ------------
(317,061) 4,860,528 4,831,994 (427,218) 4,846,250 4,529,189
-------------- ------------- ------------ ------------ ------------- ------------
Income (loss) before provision
for income taxes and
minority interests (2,201,902) 3,487,473 3,149,717 (3,750,983) (3,752,469) (5,954,371)
Provisions for income taxes - - 80,800 1,600 95,235 95,235
--------------- ------------- ------------ ----------- -------------- ------------
Income (loss) before minority
interests (2,201,902) 3,487,473 3,068,917 (3,752,583) (3,847,704) (6,049,606)
Minority interests in income of
consolidated subsidiaries - - - - 8,575 8,575
--------------- ------------- ------------ ----------- ------------- ------------
Net income (loss) $ (2,201,902) $ 3,487,473 $ 3,068,917 $(3,752,583) $ (3,839,129) $ (6,041,031)
=============== ============= ============ =========== ============= ============
Basic net income (loss) per share $ (0.35) $ 0.59 $ 0.52 $ (0.65)
=============== ============= ============ ===========
Diluted net income (loss)
per share $ (0.35) $ 0.53 $ 0.49 $ (0.65)
=============== ============= ============ ===========
Weighted average number of shares
of common stock, basic 6,220,861 5,872,416 5,863,261 5,787,185
=============== ============= ============ ===========
Weighted average number of shares
of common stock, diluted 6,220,861 6,635,102 6,235,144 5,787,185
=============== ============= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
Deficit
Common Stock Accumulated Total
Capital in During the Stockholders'
Par Excess of Treasury Development Equity
Shares Value Par Value Warrants Stock Stage (Deficit)
------ ----- ----------- -------- -------- ----------- ------------
Balance at December 31, 1990,
of DBSN as restated pursuant
to the merger on December 2, 1992 301,000 $ 12 $ 46,375 - - $ (219,990) $ (173,495)
Issuance of common stock for
professional services at $.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
F-6
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
Deficit
Common Stock Accumulated Total
Capital in During the Stockholders'
Par Excess of Treasury Development Equity
Shares Value Par Value Warrants Stock Stage (Deficit)
------ ----- ----------- -------- -------- ----------- ------------
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
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 on 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 133,307 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
Issuance of common stock for cash at
$4.00 per share (August 1993 through
April 1994) 102,257 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
F-7
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
Deficit
Common Stock Accumulated Total
Capital in During the Stockholders'
Par Excess of Treasury Development Equity
Shares Value Par Value Warrants Stock Stage (Deficit)
------ ----- ----------- -------- -------- ----------- ------------
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 2,700,559 (85,000) (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 2,758,990 - (85,000) (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
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
F-8
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
Deficit
Common Stock Accumulated Total
Capital in During the Stockholders'
Par Excess of Treasury Development Equity
Shares Value Par Value Warrants Stock Stage (Deficit)
------ ----- ----------- -------- -------- ----------- ------------
Net loss for the five months ended
December 31, 1995 - - - - - (662,877) (662,877)
--------- ------- ----------- --------- -------- ----------- -----------
Balance at December 31, 1995 5,528,039 2,232 3,448,763 - (85,000) (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 4,605,026 112,500 (85,000) (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
F-9
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
Deficit
Common Stock Accumulated Total
Capital in During the Stockholders'
Par Excess of Treasury Development Equity
Shares Value Par Value Warrants Stock Stage (Deficit)
------ ----- ----------- -------- -------- ----------- ------------
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 4,681,295 112,500 (85,000) (3,839,129) 872,039
Common Stock issued for cash, on
April 16, 1998, at $2.00 per share
(unaudited) 102,000 41 203,959 - - - 204,000
Common Stock issued upon exercise of
options, on June 11, 1998, at $1.44
per share (unaudited) 12,500 5 17,964 - - - 17,969
Common Stock issued (voided) in
connection with services rendered
(unaudited):
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 $442,500
(unaudited) 2,800,000 1,120 5,156,380 - - - 5,157,500
Common Stock issued upon exercise of
options at $0.53 per share (unaudited) 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 - - 106,000 - - - 106,000
Net loss for the nine month period ended
September 30, 1998 (unaudited) (2,201,902) (2,201,902)
--------- ------- ----------- --------- -------- ----------- -----------
Balance at September 30, 1998
(unaudited) $8,841,742 $ 3,556 $ 9,214,019 $1,085,500 $(85,000) $ (6,041,031) $ 4,177,044
========== ======= =========== ========== ======== ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended April 25, 1990 April 25, 1990
September 30, Year Ended (Inception) to (Inception) to
(Unaudited) December 31, December 31, September 30,
(Unaudited)
1998 1997 1997 1996 1997 1998
---- ---- ---- ---- ---- ----
Reconciliation of net income (loss)
to net cash used in operating
activities:
Net income (loss) $ (2,201,902) $ 5,872,416 $ 3,068,917 $ (3,752,583) $ (3,839,129) $ (6,041,031)
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Depreciation and amortization 43,860 95,240 126,989 124,086 358,128 401,988
Minority interest's share of net loss - - (8,575) (8,575)
Noncash charges 196,468 76,293 76,293 268,878 510,546 707,014
Equity in loss of investees, net 100,143 39,974 80,875 31,920 429,829 529,972
Loss (gain) on sale of investments 228,323 (5,217,556) (5,221,063) - (6,057,541) (5,829,218)
Allowance for losses on advances 216,932 - - - - 216,932
Common stock issued as payment for
interest - - 7,000 7,000
Decrease (increase) in accounts
receivable and other assets (15,257) (847,529) (50,320) 49,416 (115,299) (130,556)
Increase (decrease) in accounts payable
and accrued liabilities 226,010 (2,080,331) (1,053,843) 1,238,819 528,748 754,758
Increase in customer advances - - 400,000 400,000 400,000
------------ ------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (1,205,423) (2,061,493) (2,972,153) (1,639,464) (7,786,293) (8,991,716)
F-11
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Nine Months Ended April 25, 1990 April 25, 1990
September 30, Year Ended (Inception) to (Inception) to
(Unaudited) December 31, December 31, September 30,
(Unaudited)
1998 1997 1997 1996 1997 1998
---- ---- ---- ---- ---- ----
Cash flows from investing activities:
Proceeds from sale of investment 199,940 - - - 900,000 1,099,940
Proceeds from Loral settlement - 3,573,677 3,573,677 - 3,573,677 3,573,677
Purchase of fixed assets (3,720) - - (20,499) (105,524) (109,244)
Organization costs - - - - (28,526) (28,526)
Advances to officer - - - - (31,187) (31,187)
Purchase of interest in Continental - - - (2,292,409) (2,292,409) (2,292,409)
Investments and advances (407,292) - 309,888 (283,786) (801,434) (1,208,726)
Net assets of purchased subsidiaries - - - - (147,500) (147,500)
Cash transferred from Fi-Tek IV, Inc.
pursuant to the merger and
reorganization - - - - 156,648 156,648
Cash of divested subsidiary - - - - (277) (277)
Purchase of patents - - - - (18,251) (18,251)
Proceeds from repayment of advances to
affiliate - - - - 152,500 152,500
Restricted cash on credit line - 300,000 300,000 - 300,000 300,000
------------ ----------- ------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities $ (211,072) $ 3,873,677 $ 4,183,565 $ (2,596,694) $ 1,657,717 $ 1,446,645
------------ ----------- ------------ ------------ ------------ ------------
Cash flows from financing activities:
Repayment of borrowing under credit line - (295,000) (295,000) (5,000) (300,000) (300,000)
Issuance of debentures - - 107,501 3,640,000 4,817,501 4,817,501
Issuance of common stock 5,781,103 - - 1,000,002 3,153,516 8,934,619
Redemption of common stock warrants - - - - (19,490) (19,490)
Stock issue costs (442,500) - - - (57,235) (499,735)
Purchase of shares - - - - (5,000) (5,000)
Payment of debentures - (1,043,445) (1,043,445) - (1,168,445) (1,168,445)
Proceeds from stockholders' loans - 2,000 149,750 - 442,750 442,750
Payment of stockholders' loans - - (149,750) - (351,967) (351,967)
------------ ----------- ------------ ------------ ------------- ------------
Net cash provided by (used in) financing
activities 5,338,603 (1,338,445) (1,230,994) 4,635,002 6,511,630 11,850,233
------------- ------------- ------------- ------------ ------------- ------------
Net increase (decrease) in cash 3,922,108 473,739 (19,534) 398,884 383,054 4,305,162
Cash and cash equivalents, beginning of
period 383,054 402,588 402,588 3,743 - -
------------- ------------- ------------- ------------ ------------- ------------
Cash and cash equivalents, end of period $ 4,305,162 $ 876,327 $ 383,054 $ 402,588 $ 383,054 $ 4,305,162
============= ============= ============= ============ ============== ============
F-12
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Nine Months Ended April 25, 1990 April 25, 1990
September 30, Year Ended (Inception) to (Inception) to
(Unaudited) December 31, December 31, September 30,
(Unaudited)
1998 1997 1997 1996 1997 1998
---- ---- ---- ---- ---- ----
Supplemental Disclosures of Non-Cash
Financing activities:
Stock sale proceeds used to pay service
providers not received by the Company $ 50,000 $ - $ - $ - $ - $ 50,000
Supplemental Disclosures of Cash Flow
information:
Interest $ - $ - $ 11,456 $ 40,695 $ 57,651 $ 57,651
============== ============= ============ ============ ============== ============
Income taxes $ 4,265 $ 800 $ 1,600 $ 3,200 $ 15,955 $ 15,955
============== ============= ============ ============ ============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
DBS INDUSTRIES, INC. AND SUBSIDIARY (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 1997 and 1998 and subsequent to December 31, 1997,is unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
These consolidated financial statements include the accounts of DBS
Industries, Inc. (the "Company"), and its wholly-owned subsidiary, Global Energy
Metering Service, Inc. ("GEMS"). 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
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 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 1998
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. During the nine
month period ended September 30, 1998, the Company raised approximately $5.7
million from the sale of shares of Common Stock. However, the Company will need
substantial additional capital, at least $115 million, to construct its proposed
E-SAT 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 is required to
commence by April 1999 pursuant to the terms of the Federal Communications
Commission license granted to E-SAT. Non-compliance with such terms may result
in the loss of the E-SAT license and such loss would have an immediate and
significant adverse impact on the Company's financial position and results of
operations. These financial statements do not reflect any adjustments that might
result from the outcome of this uncertainty.
On January 13, 1996, the Company's Board of Directors approved a
one-for-forty reverse stock split of the Company's common stock. The reverse
stock split was consummated in February 1996. All shares and per share amounts
have been restated to retroactively reflect the reverse stock split.
In 1996, in connection with the reverse stock split, the Company amended
its Articles of Incorporation to decrease its authorized shares of common stock
and preferred stock to 100,000,000 and 5,000,000 shares, respectively.
Additionally, the par values of the common and preferred stock were increased
from $.00001 to $.0004 per share. These changes have also been retroactively
reflected in these financial statements. In May 1997, the Company amended its
Articles of Incorporation to decrease its authorized shares of common stock to
20,000,000.
The Company changed its fiscal year-end from July 31 to December 31,
effective January 1, 1996.
F-14
DBS INDUSTRIES, INC. AND SUBSIDIARY (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 1997 and 1998 and subsequent to December 31, 1997,is unaudited)
(CONTINUED)
On September 11, 1992, the Company's subsidiary, DBSN (dissolved in May
1995), acquired 51% of the voting shares in JPS Systems, Inc. (JPS) pursuant to
a Stock Exchange Agreement in exchange for shares of DBSN's common stock which
equated to 61,447 shares of the Company's common stock (the fiscal 1993
transaction). In November 1993, the Company acquired, from its president,
additional shares of JPS common stock representing 46% of the issued and
outstanding stock of JPS, pursuant to a stock exchange agreement in exchange for
3,379 shares of the Company's common stock (the fiscal 1994 transaction). In
January 1994, DBSN transferred its 51% interest in JPS to the Company. In
January 1995, JPS repurchased shares of its common stock representing 2% of the
issued and outstanding common stock of JPS. In May 1995, JPS was dissolved, and
all of its assets and liabilities were transferred to a newly created
wholly-owned subsidiary of the Company, GEMS. In November 1995, the Company
repurchased shares of the common stock of JPS representing the remaining 1% of
the issued and outstanding common stock of its dissolved subsidiary in exchange
for 9,450 shares of common stock of the Company. GEMS is a Delaware corporation
in the development stage whose primary activity is the development of satellite
and radio systems for use in automating the control and distribution of gas and
electric power by utility companies.
The Company's investments in E-SAT Corporation and Seimac Limited, in which
the Company has ownership interests of 20% each, are accounted for using the
equity method. The Company's investment in EchoStar Communication Inc.
(EchoStar) and interest in Continental Satellite Corporation were disposed of
during 1997 (see Notes 3 and 6).
In January 1998, the Company created Newstar Limited, a wholly-owned
subsidiary organized under the Laws of the Republic of Bermuda.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hereafter, unless otherwise specified, all references to the "Company"
include DBS Industries, Inc. and its wholly-owned subsidiary.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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. 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.
F-15
DBS INDUSTRIES, INC. AND SUBSIDIARY (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 1997 and 1998 and subsequent to December 31, 1997,is unaudited)
(CONTINUED)
Depreciation and Amortization
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.
Goodwill
Goodwill is amortized using the straight-line method over five years.
Amortization expense charged to operations for the years ended December 31, 1997
and 1996, was $20,715 and $9,606, respectively, and for the nine months ended
September 30, 1998 and 1997, was $4,935 and $20,715, respectively.
Income Taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109). 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.
Net Earnings (Loss) Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share,
which establishes standards for computing and presenting earnings (loss) per
share. Under the new standards, 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. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, and earlier
adoption is not permitted. The financial statements presented have been prepared
in accordance in SFAS No. 128 and earnings per share data for all prior periods
presented have been restated to conform with current year presentation. Options
to purchase 1,144,036 shares of common stock with exercise prices ranging from
$1.60 to $6.00 were outstanding as of December 31, 1996, and were excluded from
the loss per share calculation for the year ended December 31, 1996, as they
have the effect of decreasing loss per share. Options and warrants to purchase
6,018,531 (unaudited) shares of common stock with exercise prices from $.40 to
$5.60 were outstanding as of September 30, 1998, and were excluded from the loss
DBS INDUSTRIES, INC. AND SUBSIDIARY (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 1997 and 1998 and subsequent to December 31, 1997,is unaudited)
(CONTINUED)
per share calculation for the quarter and the nine month period then ended as
they have the effect of decreasing loss per share. Options and warrants to
purchase 1,330,116 (unaudited) shares of common stock with exercise prices from
$.40 to $5.60 were outstanding as of September 30, 1997, and were included in
the earnings per share calculation for the nine month period ended September 30,
1997.
Recently Issued Accounting Pronouncements
In March 1997, Statement of Financial Accounting Standards No. 129,
Disclosure of Information About Capital Structure, was issued and has been
implemented by the Company for the year ended December 31, 1997. In June 1997,
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income and Statement of Financial Accounting Standards No. 131, Disclosures
About Segments of an Enterprise and Related Information were issued and are
effective for the year ending December 31, 1998.
The Company has not determined the impact of the implementation of these
pronouncements.
Interim Financial Information
The consolidated financial statements as of September 30, 1998, and for
the nine months ended September 30, 1998 and 1997, are unaudited and include all
adjustments consisting of only normal recurring adjustments which are, in the
opinion of management, necessary for the fair presentation of the interim
periods in conformity with generally accepted accounting principles. The results
of operations for the interim periods presented are not necessarily indicative
of expected results for the full fiscal year.
Reclassifications
Certain prior period balances have been reclassified to conform to the
current year's presentation. Such reclassifications had no impact on net loss or
stockholders' (deficit) equity as previously reported.
NOTE 3. INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES
Following is a summary of the Company's significant investment
activities:
Direct Broadcasting Satellite Corporation (DBSC)
DBSC is one of nine permittees of the Federal Communications Commission
(FCC) for Direct Broadcast Satellite (DBS) services. As of December 31, 1996,
the Company owned approximately 25% of the common stock of DBSC. The Company
accounted for its investment using the equity method. The Company's net equity
investment in DBSC as of December 31, 1996, was $539,080.
F-17
DBS INDUSTRIES, INC. AND SUBSIDIARY (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 1997 and 1998 and subsequent to December 31, 1997,is unaudited)
(CONTINUED)
On December 21, 1995, DBSC and EchoStar agreed to a merger, subject to
government approval. Under the terms of the merger agreement, (1) both parties
agreed to merge DBSC into a wholly-owned subsidiary of EchoStar, and (2) DBSC
stockholders would be entitled to receive at their option, $7.99 in cash or
.67417 shares of EchoStar common stock for each of the 973,148 DBSC shares not
already owned by EchoStar. At December 31, 1996, the Company owned 401,107
shares of the common stock of DBSC. The requisite government approvals were
obtained and the merger consummated on January 8, 1997. On January 23, 1997, the
Company elected to exchange all of its 401,107 DBSC shares for 270,414 shares of
EchoStar common stock which was valued at $25.00 per share as of January 8,
1997, the effective date of the merger. In connection with this transaction, the
Company recorded a gain of approximately $6.2 million in its first quarter of
1997.
On August 29, 1997, the Company transferred the 270,414 shares back to
EchoStar in exchange for the retirement of certain debentures (Note 6) and
recognized a loss on such transfer of approximately $2.3 million.
Following is a summary of DBSC's financial position as of December 31,
1996:
December 31,
1996
(Unaudited)
------------
Current assets $ 20,046
Other assets 52,373,192
------------
Total assets $ 52,393,238
============
Current liabilities $ 186,748
Long-term debt 50,887,763
Stockholders' equity 1,318,727
------------
Total liabilities and stockholders' equity $ 52,393,238
============
DBSC's losses for the year ended December 31, 1996 (unaudited) amounted
to $310,172.
The Company's equity in losses of DBSC was $76,922 for the year ended
December 31, 1996, and was recorded in December 1996 when financial information
became available.
F-18
DBS INDUSTRIES, INC. AND SUBSIDIARY (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 1997 and 1998 and subsequent to December 31, 1997,is unaudited)
(CONTINUED)
E-SAT Corporation (E-SAT)
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 a 20%
interest in E-SAT. The Company's total investments in E-SAT were $127,265 as of
December 31, 1997 and 1996. The investment is accounted for using the equity
method. The Company's equity in losses of E-SAT for the years ended December 31,
1997 and 1996, were $66,469 and $385, respectively. The equity in losses for the
years ended December 31, 1997 and 1996, were recorded in December 1997 and 1996,
when financial information became available. As of December 31, 1997, the
Company had a receivable of $632,865 from EchoStar which represents the excess
of advances to date to E-SAT in excess of its proportionate 20% share of its
investee's financing requirements.
The Company's total investments in E-SAT were $127,265 (unaudited) as of
September 30, 1998. The investment is accounted for using the equity method. The
Company's equity in losses of E-SAT for the nine months ended September 1998
were $100,143 (unaudited). As of September 30, 1998, the Company had a net
receivable of $724,225 (unaudited) from EchoStar which represents the excess of
advances to date to E-SAT in excess of its proportionate 20% share of its
investee's financing requirements.
Seimac Limited
On November 30, 1995, the Company acquired 232,829 shares representing
20% of the voting shares of common stock of Seimac Limited, a Canadian company,
pursuant to a stock purchase and exchange agreement in exchange for 165,519
shares of common stock of the Company, valued at $662,010. The Company's
investment of $662,010 was $464,255 in excess of the Company's proportionate
share of the net book value of Seimac as of November 30, 1995. This excess is
being amortized over a period of five years. The amortization of this excess
book value amounted to $92,851 for the years ended December 31, 1997 and 1996.
This investment is accounted for using the equity method.
For the years ended December 31, 1997 and 1996, the Company has recorded
its proportionate share of Seimac Limited's net (loss) income of $(14,506) and
$45,387, respectively. The Company's investment in Seimac Limited as of December
31, 1997 and 1996, was $510,689 and $618,046, respectively.
Following is a summary of Seimac's unaudited financial position as of
December 31, 1997 and 1996, and its unaudited results of operations for the
years ended December 31, 1997 and 1996:
F-19
DBS INDUSTRIES, INC. AND SUBSIDIARY (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 1997 and 1998 and subsequent to December 31, 1997,is unaudited)
(CONTINUED)
December 31, December 31,
1997 1996
-------------------- -------------------
(Unaudited)
Current assets $ 1,037,165 $ 1,201,477
Other assets 974,888 1,352,364
------------- -------------
Total assets $ 2,012,053 $ 2,553,841
============= =============
Current liabilities $ 329,887 $ 469,421
Long-term debt 733,973 597,407
Stockholders' equity 948,194 1,487,013
============= =============
$ 2,012,053 $ 2,553,841
============= =============
Net sales $ 1,569,043 $ 1,607,128
============= =============
Net income (loss) $ (72,527) $ 226,935
============= =============
On April 30, 1998, the Company sold its entire interest consisting of
232,829 Seimac shares in exchange for $200,000 in cash and $51,417 in forgiven
debt. The Company recorded a loss of approximately $228,000 in connection with
this transaction (unaudited).
Continental Satellite Corporation (Continental)
On January 12, 1996, the Company entered into a stock purchase agreement
with a third party (the Seller) to acquire 72,030 shares of common stock of
Continental in exchange for approximately $2,300,000 in cash. A $50,000 advance
was paid to the seller in December 1995. Continental has received one of the
nine DBS licenses awarded by the FCC.
In connection with this agreement, the Company issued a three-year,
Series B convertible debenture (Note 6) to EchoStar on January 12, 1996, for
proceeds of $3,000,000.
On January 22, 1996, Loral Aerospace Holdings, Inc., a Continental
common shareholder (the plaintiff), filed a complaint in the Superior Court of
the State of California against Continental and its stockholders alleging that
the common shares purchased by the Company were improperly issued and,
therefore, should be voided. On May 16, 1996, the Court ruled that the
Continental shares were invalidly issued. However, the Court also ruled that the
Company was not without equitable remedy and allowed the Company to commence an
action against Loral.
On April 21, 1997, the Superior Court of Santa Clara County awarded the
Company damages of approximately $4.1 million, plus 50 percent annual interest.
On August 17, 1997, the Company and Loral formally completed an agreement
wherein the Company received a cash payment of approximately $3.5 million from
Loral in exchange for dismissals of appeals by both parties.
F-20
DBS INDUSTRIES, INC. AND SUBSIDIARY (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 1997 and 1998 and subsequent to December 31, 1997,is unaudited)
(CONTINUED)
The agreement provides that the Company return the Continental stock the
Company acquired, that the Company acknowledge that all Continental stock held
by the Company owned is invalid, and that the Company has no objection to the
cancellation of that stock by Continental. The parties to the agreement released
one another from all present or future claims connected with the allegations
related to the action which give rise to the agreement.
The excess of the settlement payment over the Company's carrying value
for its interest in Continental of $1.2 million was recorded as a gain on sale
of investment for the year ended December 31, 1997.
On March 31, 1998, the Federal Communications Commission approved
E-SAT's application for a Low Earth Orbit Satellite license.
NOTE 4. CUSTOMER ADVANCES
The Company's wholly-owned subsidiary, Global Energy Metering Services,
Inc. (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 September 30, 1998, this purchase
order had been suspended by both parties due to the Company's limited access to
the Argos System. The $400,000 in milestone payments received are reported as
customer advances on the accompanying balance sheet. These milestone payments
could be subject to refund in whole or in part.
NOTE 5. LINE OF CREDIT
The Company maintained a $300,000 line of credit with a bank. The line
was collateralized by a $300,000 certificate of deposit. As of December 31,
1996, the Company had outstanding borrowings of $295,000 under this line of
credit. As of December 31, 1997, $295,000 had been repaid and the credit
facility was discontinued.
NOTE 6. CONVERTIBLE DEBENTURES
On July 1, 1995, the Company issued Convertible Debenture 1995 Series A
to the majority shareholder of E-SAT, EchoStar, and received $1,000,000 in
proceeds pursuant to this issuance in August 1995. Interest on the debt accrued,
and was payable, quarterly at prime plus 2% for a period of three years. As
collateral for the loan, EchoStar held a security interest in 125,000 shares of
DBSC common stock and 2,000 shares of E-SAT common stock held by the Company.
On January 12, 1996, the Company issued a three-year Series B Convertible
Debenture to EchoStar for proceeds of $3,000,000. Interest terms were similar to
those of the Series A Convertible Debenture discussed above. As collateral for
the loan, EchoStar has a security interest in 72,030 shares of common stock of
Continental and 200,000 shares of common stock of DBSC held by the Company.
F-21
DBS INDUSTRIES, INC. AND SUBSIDIARY (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 1997 and 1998 and subsequent to December 31, 1997,is unaudited)
(CONTINUED)
On December 5, 1996, the Company issued a three-year Series C
Convertible Debenture to EchoStar for proceeds of $640,000. Interest terms were
similar to those of the Series A Convertible Debentures discussed above. As
collateral for the loan, EchoStar held a security interest in the remaining
76,107 shares of common stock of DBSC held by the Company.
As of December 31, 1996, the Company classified all borrowings under the
above convertible debentures as current liabilities due to the Company's default
in connection with the required quarterly payment of accrued interest.
The interest payable to EchoStar under the aforementioned debentures
amounted to $405,794 as of December 31, 1996.
On August 29, 1997, the Company completed an agreement with EchoStar to
retire three convertible debentures, Series A, Series B, and Series C, issued to
EchoStar with accrued interest of $722,811 and certain legal fees and other
expenses related to the transaction. In exchange for EchoStar's retirement of
the debt, the Company transferred back to EchoStar 270,414 shares of EchoStar
Class A common stock and made a cash payment of approximately $936,000 from the
proceeds of its settlement with Loral (Note 3). The value of the EchoStar shares
was determined based on a per share price of $16.57 which represented the
closing bid price on August 27, 1997, the date the parties initially agreed to
the terms of the transaction.
NOTE 7. COMMITMENTS
Operating Leases
The Company and its wholly-owned subsidiary, GEMS, lease their
facilities under noncancelable operating leases which run concurrently and
expire in March 2000. Minimum future rental payments under the leases, are as
follows:
Year Ending December 31,
1998 $ 68,130
1999 68,130
2000 11,355
-----------
$ 147,615
Total rent expense was $66,592 and $74,808 for the years ended December
31, 1997 and 1996, respectively.
F-22
DBS INDUSTRIES, INC. AND SUBSIDIARY (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 1997 and 1998 and subsequent to December 31, 1997,is unaudited)
(CONTINUED)
NOTE 8. STOCKHOLDERS' EQUITY
Common Stock
The Company's Certificate of Incorporation, as amended in May 1997,
authorizes the issuance of 20,000,000 shares of common stock with a par value of
$.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.
Preferred Stock
The Company's Certificate of Incorporation, as amended in May 1997,
authorizes the issuance of 5,000,000 shares of preferred stock with par value of
$.0004 per share. The Board of Directors of the Company is authorized to issue
preferred stock from time to time in series and is further authorized to
establish such series, to fix and determine the variations in the relative
rights and preferences as between the series, and to allow for the conversion of
preferred stock into common stock. No preferred stock has been issued by the
Company as of December 31, 1997.
Nonemployee Stock Options and Warrants
On January 13, 1996, the Company issued warrants for the purchase of
75,000 shares of the Company's common stock at an exercise price of $7.30. On
December 31, 1997, the Company replaced these with new warrants at an exercise
price of $1.44. These warrants were issued for services rendered and are
exercisable through January 2006. As of December 31, 1997, none of these
warrants have been exercised.
On July 9, 1997, the Company issued warrants for the purchase of 200,000
shares of the Company's common stock at an exercise price of $0.50 per share.
These warrants were issued in connection with a $100,000 short-term loan made by
a stockholder of the Company. As of December 31, 1997, the loan had been repaid.
None of the non-employee stock warrants were exercised as of December
31, 1997.
In April 1998, the Company granted options to two consulting firms to
purchase 400,000 and 300,000 shares of the Company's Common Stock at prices of
$1.45 and $1.50 per share, respectively. These options have terms of five years
and vest over a one year period (unaudited).
In June 1998, the Company issued 102,000 shares of its Common Stock at a
price of $2.00 per share. In connection with this stock offering, the Company
issued warrants to purchase 102,000 shares of the Company's Common Stock at an
exercise price of $3.00 per share through June 30, 2001 (unaudited).
F-23
DBS INDUSTRIES, INC. AND SUBSIDIARY (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 1997 and 1998 and subsequent to December 31, 1997,is unaudited)
(CONTINUED)
During the three months ended September 30, 1998, the Company issued
2,800,000 units each consisting of a share of common stock at a price of $2.00
per share and a warrant to purchase a share of common stock at an exercise price
of $3.00. In connection with this stock offering, the Company incurred the
following stock issuance costs: (i) cash payments of $442,500 and (ii)
commitments to issue warrants to purchase 728,000 shares of the Company's common
stock at exercise prices varying from $1.50 to $3.00. The fair value of such
warrants amounted to $973,000 and was recorded as a separate element of the
Company's equity.
Under the terms of a stock purchase agreement, the Company is to
register a certain number of shares and warrants by December 4, 1998. In the
event that the related registration statement is not declared effective by the
Securities and Exchange Commission by December 4, 1998, the Company is required
to pay certain stockholders the amount of $2,500 for each subsequent day the
registration statement is not declared effective.
Employee Stock Options and Warrants
On February 15, 1996, the Company adopted the 1996 Stock Option Plan
(the 1996 Plan) to consolidate its three existing plans. Provisions of the 1996
Plan are substantially similar to those of the earlier plans. The overall
purpose of the 1996 plan is to advance the long-term interest of the Company by
motivating its employees, directors and consultants with the opportunity to
obtain an equity interest in the Company and to attract and retain such persons
upon whose judgments the success of the Company largely depends.
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% and 85% of the fair market value of the common stock on the date of the
grant of incentive stock options and nonstatutory stock options, respectively.
The 1996 Plan allows for the issuance of a maximum of 1,650,000 shares of the
Company's common stock. This number of shares of common stock has been reserved
for issuance under the 1996 Plan. The options granted under the 1996 Plan 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 Plan are subject to various restrictions as to resale.
Information with respect to activity under these plans as consolidated in
the 1996 Plan is set forth below:
F-24
DBS INDUSTRIES, INC. AND SUBSIDIARY (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 1997 and 1998 and subsequent to December 31, 1997,is unaudited)
(CONTINUED)
Outstanding Options and Warrants
Weighted
Average
Number of Price Per Aggregate Exercise
Shares Share Price Price
--------- --------- ---------- ----------
Balance, January 1, 1996 16,281 $0.40-$6.00 $ 52,476 $ 3.40
Granted 1,017,535 $4.75-$5.60 5,241,115 $ 5.15
Exercised - - - -
Terminated - - - -
------------ ------------
Balance, December 31, 1996 1,180,116 $0.40-$6.00 5,793,591 $ 4.91
Granted 1,373,843 $0.53-$1.44 980,835 $ 0.71
Exercised - - - -
Terminated (1,135,726) $0.40-$6.00 (5,502,778) $ 4.83
------------ ------------
Balance, December 31, 1997 1,418,233 $0.40-$5.60 1,271,648 $ 0.90
Granted (unaudited) 300,000 $0.53-$2.19 400,875 $ 1.34
Exercised (unaudited) (29,702) $0.53-$1.44 (27,117) $ 0.91
Terminated (unaudited) - - - -
------------ ------------
Balance, September 30, 1998 (unaudited) 1,688,531 $0.40-$5.60 $ 1,645,406 $ 0.97
============ ============
The following table summarizes information with respect to stock options
and warrants outstanding at December 31, 1997:
Options and Warrants Outstanding Options and Warrants Exercisable
Weighted
Average Weighted
Number Remaining Average Number Weighted Average
Range of Outstanding Contractual Life Exercise Exercisable Exercise
Exercise Price at 12/31/97 (years) Price at 12/31/97 Price
- -------------- ----------- ---------------- --------- ----------- ---------------
$0.53-$1.44 1,342,949 8.19 $0.73 879,887 $0.79
$1.60-$2.80 36,875 6.55 $2.39 36,875 $2.39
$3.00-$5.60 38,409 8.06 $5.23 38,409 $5.23
--------- -------
1,418,233 955,171
========= =======
F-25
DBS INDUSTRIES, INC. AND SUBSIDIARY (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 1997 and 1998 and subsequent to December 31, 1997,is unaudited)
(CONTINUED)
The following information concerning the Company's stock option plans is
provided in accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123). The Company accounts for
such plans in accordance with APB No. 25 and related interpretations.
The weighted average fair value of the options and warrants granted or
modified for the years ended December 31, 1997 and 1996, was $0.90 and $4.62,
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:
1997 1996
-------------- --------------
Risk free interest rate 5.70 6.11%
Expected life 8.2 years 5.5 years
Volatility 80% 104%
Dividend yield - -
The following pro forma net income (loss) information has been prepared
following the provisions of SFAS No. 123:
December 31, December 31,
1997 1996
------------ ------------
Net income (loss) As Reported $3,068,917 $(3,752,583)
Pro forma $1,793,791 $(5,916,026)
Net income (loss) As Reported $0.49 $(0.65)
per share Pro forma $0.29 $(1.02)
In February 1997, the Company completed a stock option repricing program in
which 1,119,646 stock options, originally issued with exercise prices ranging
from $1.60 to $6.00 per share, were reissued with an exercise price of $1.44 per
share, which approximated fair market value.
In December 1997, the Company completed a second voluntary stock option
repricing program in which approximately 1,135,726 stock options, originally
issued with an exercise price of $1.44 per share were reissued with exercise
prices ranging from $0.53 to $0.58 per share. These repriced options are
generally exercisable over four years and the Company has maintained the vesting
schedule from the original grants.
In September 1998, the Company issued 17,202 shares of its Common Stock as
a result of the exercises of the related options.
F-26
DBS INDUSTRIES, INC. AND SUBSIDIARY (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 1997 and 1998 and subsequent to December 31, 1997,is unaudited)
(CONTINUED)
NOTE 9. RELATED PARTY TRANSACTIONS
In August 1995, the Company entered into consulting agreements with two
directors of the Company. The Company incurred approximately $29,000 in
consulting expenses in connection with these agreements during the year ended
December 31, 1996.
In January 1997, the Company began to defer payment of a portion of all
future compensation of the Company's president. The deferred compensation
balances were $216,000 and $108,000 as of December 31, 1997 and 1996,
respectively.
On April 28, 1997, the Company's president provided a bridge loan to the
Company for $47,750 representing collateral funds pledged to Pacific Bank for
the Company's bank overdraft. As of December 31, 1997, both the bank overdraft
and the bridge loan have been repaid.
During 1997, the Company borrowed $100,000 under a loan agreement with a
stockholder. Borrowings under the agreement were unsecured and bore interest at
8% per annum. All borrowings and accrued interest were repaid as of December 31,
1997.
Refer to Notes 3 and 6 (DBSC and E-SAT) for disclosures regarding
related party transactions with EchoStar.
NOTE 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,
1997 and 1996, is as follows:
December 31, 1997 December 31, 1996
----------------------- -------------------------
Federal State Federal State
----------- ----------- ------------- -----------
Deferred tax liability - - - -
Deferred tax assets:
Net operating loss carryforwards $ 706,000 $ 108,000 $ 1,700,000 $ 165,000
Research and development credit carryforwards 95,000 - 79,000 35,000
Excess of tax over book basis of investments,
and other deferred compensation 12,000 2,000 300,000 55,000
----------- ----------- ------------ ----------
Net deferred tax assets 813,000 110,000 2,079,000 255,000
Valuation allowance (813,000) (110,000) (2,079,000) (255,000)
----------- ----------- ------------ ----------
Net deferred tax $ - $ - $ - $ - -
----------- ----------- ------------- -----------
F-27
DBS INDUSTRIES, INC. AND SUBSIDIARY (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 1997 and 1998 and subsequent to December 31, 1997,is unaudited)
(CONTINUED)
Due to the uncertainty of realization, a valuation allowance has been
provided to offset the net deferred tax assets. The (decrease) increase in the
valuation allowance was approximately $(1,411,000) and $1,402,000 during the
years ended December 31, 1997 and 1996, 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, 1997, the Company has net operating loss
carryforwards of approximately $2,078,000 and $1,758,000 for federal income tax
purposes and California state franchise tax purposes, respectively. The Company
has also research and development credit carryforwards of $95,000 and $0 for
federal income tax purposes and California state franchise tax purposes,
respectively. Such carryforwards expire in varying amounts between 1998 and
2012.
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.
NOTE 11. CONCENTRATION OF CREDIT RISK
The Company periodically maintains cash balances at banks in excess of
the Federal Deposit Insurance Corporation insurance limit of $100,000.
Sales to one customer represented all Company sales in the year ended
December 31, 1996.
NOTE 12.SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES
During the years ended December 31, 1996 and 1997, the following noncash
activities occurred:
o The Company issued 41,187 of its shares of common stock to
certain individuals in consideration for services rendered. These
shares were valued at $ 156,380.
o The Company issued warrants to certain individuals in considera-
tion for services rendered. These warrants were valued at
$112,500.
o The Company issued 19,821 shares of common stock to certain
individuals for services rendered in connection with the
placement of the January and February 1996 sales of the Company's
common stock. These services were valued at $83,899 and were
offset against the proceeds.
o The Company issued 55,419 of its shares of common stock to
certain individuals in consideration for services rendered. These
shares were valued at $76,293.
F-28
DBS INDUSTRIES, INC. AND SUBSIDIARY (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the nine month periods ended
September 30, 1997 and 1998 and subsequent to December 31, 1997,is unaudited)
(CONTINUED)
o On January 23, 1997, the Company elected to exchange all of its
401,107 DBSC shares for 270,414 shares of EchoStar common stock
which were valued at approximately $539,000 and $6,760,000,
respectively.
o On August 29, 1997, the Company settled all principal and accrued
interest balances outstanding under its convertible debentures
(Note 6), in exchange for 270,414 shares of EchoStar common stock
and a cash payment of approximately $936,000.
NOTE 13. OTHER MATTERS (unaudited)
In July 1998, the Company's president was named as a defendant in a
lawsuit filed by a firm claiming that it was promised shares of the Company's
common stock valued at $100,000.
In July 1998, the Company agreed to a severance package with one of its
former employees which consists of $125,000 in cash payments to be made through
June 1999 and the acceleration of vesting of all of the former employee's
unvested options.
In August 1998, the Company and Matra Marconi Space France SA ("MMS")
entered into a non-binding memorandum of understanding to engage MMS as prime
contractor for the design and construction of six little low earth orbit
satellites. Further, in August 1998, the Company and SAIT Radio Holland SA
("SAIT") entered into a non-binding letter of intent to explore an arrangement
with SAIT as the main contractor for the engineering, development and provision
of hardware and software for E-SAT's earth station. In the latter part of
September 1998, the Company and MMS mutually agreed to terminate their
non-binding memorandum of understanding. The letter of intent with SAIT expired
under its terms on November 23, 1998.
In October 1998, the Company paid its president the amount of $246,000
related to his deferred compensation through September 1998. The president also
received a cash bonus of $20,000 in connection with his efforts in securing the
E-SAT license.
In October 1998, at the request of two stockholders due to changes in
their financial condition, the Company rescinded stock purchase agreements
relating to 400,000 units and refunded $800,000 in proceeds to the two
stockholders.
II-1
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
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 Articles of Incorporation and the Bylaws of the Company 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 Stockholders or
Warrantholders. All of the amounts shown are estimates, except for the SEC
Registration and NASD Application Fees.
SEC registration fee $ 6,482
Printing and engraving expenses * $ 2,000
Accounting fees and expenses * $ 20,000
Legal fees and expenses * $ 30,000
Transfer agent and registrar fees * $ 500
Fees and expenses for qualification
under state securities laws $ -0-
Miscellaneous * $ 1,000
TOTAL $ 59,482
*estimated
Item 26. Recent Sales of Unregistered Securities.
(a) On September 10, 1998, a former employee exercised his options to
acquire 17,202 shares of Common Stock at $.53 per share. No commission was
issued in connection with the transaction. The transaction was exempt from
registration upon reliance of Section 4(2) of the Securities Act.
(b) During the period from May 22, 1998 to October 1998, the Company sold
2,509,500 Units at $2.00 per Unit to 23 accredited investors. Each Unit
consisted of one share of Common Stock and a Warrant to purchase one share of
Common Stock at $3.00 per share. In connection with the sale of 1,250,000 Units,
the Company paid a commission of $125,000 to Strome Susskind Securities L.P.,
who served as placement agent for such sale. In addition, the Company has paid
an aggregate of $355,500 and Warrants to purchase 293,000 shares of Common Stock
to three entities as finders' fees. The transactions were exempt from
registration upon reliance of Rule 506 of Regulation D.
(c) On June 15, 1998, a director exercised an option to purchase 12,500
shares of Common Stock at $1.44 per share. No commission was issued in
connection with the transaction. The transaction was exempt from registration
upon reliance of Section 4(2) of the Securities Act.
II-2
(d) On May 15, 1998, the Company issued 10,000 shares of Common Stock at
$1.94 per share; (ii) March 4, 1998, 26,209 shares of Common Stock at $.53 per
share; (iii) November 3, 1997, 14,578 shares of Common Stock at $1.13 per share;
(iv) May 20, 1997, 7,605 shares of Common Stock at $2.00 per share; (v)
September 26, 1996, 22,743 shares of Common Stock at $3.75 per share; and (vi)
May 1, 1996, 2,933 shares of Common Stock at $5.60 per share to an attorney for
legal services. No commissions were paid in connection with these transactions.
These transactions were exempt from registration upon reliance of Section 4(2)
of the Securities Act.
(e) On August 1, 1997, the Company issued 15,000 shares of Common Stock
valued at $.56 per share to one individual in consideration of such individual
making a $100,000 loan to the Company. No commission was paid in connection with
the transaction. This transaction was exempt from registration upon reliance of
Section 4(2) of the Securities Act.
(f) The Company issued (i) 5,088 shares of Common Stock at $1.69 per share
on January 31, 1997; (ii) 7,918 shares of Common Stock at $2.00 per share on
February 28, 1997; (iii) 301 shares of Common Stock at $1.63 per share on March
31, 1997; and (iv) 332 shares of Common Stock at $1.50 per share on April 30,
1997, to a corporation in exchange for consulting services. No commission was
paid in connection with this transaction. This transaction was exempt from
registration upon reliance of Section 4(2) of the Securities Act.
(g) On April 16, 1997, the Company issued 4,701 shares of Common Stock at
$1.75 per share to a corporation for consulting services. No commission was paid
in connection with this transaction. This transaction was exempt from
registration upon reliance of Section 4(2) of the Securities Act.
(h) On April 15, 1997, the Company issued 7,500 shares of Common Stock
valued at $2.00 per share, and on September 20, 1996, the Company issued 6,018
shares of Common Stock at $4.80 per share to an individual for consulting
services. No commission was paid in connection with this transaction. This
transaction was exempt from registration upon reliance of Section 4(2) of the
Securities Act.
(i) On February 15, 1996, the Company sold 38,462 shares of Common Stock at
$5.20 per share to four accredited investors. No commissions were paid. However,
the Company issued 3,846 shares of Common Stock as a finder's fee. The Company
relied on Rule 506 of Regulation D and Section 4(2) of the Securities Act as an
exemption from registration.
(j) From January 5, 1996 to February 5, 1996, the Company sold 200,000
shares of Common Stock at $4.00 per share to twenty accredited investors. No
commission was paid in connection with this transaction. However, the Company
issued 15,975 shares of Common Stock as a finder's fee. The Company relied on
Rule 506 of Regulation D and Section 4(2) of the Securities Act as an exemption
from registration.
(k) On November 30, 1995, the Company acquired 232,829 shares of Seimac
Limited, a Canadian company, pursuant to a stock purchase and exchange agreement
for 165,519 shares of Common Stock of the Company valued at $662,010. No
commission was paid in connection with this transaction. The Company relied on
Section 4(2) of the Securities Act as an exemption from registration.
(l) On November 15, 1995, the Company issued 9,450 shares of Common Stock
at $1.80 per share to an entity in exchange for a 1% interest in JPS, the
predecessor to GEMS. The Company controlled the other 99% of JPS. No commission
was paid in connection with this transaction. This transaction was exempt from
registration upon reliance of Section 4(2) of the Securities Act.
II-3
Item 27. Exhibits.
*(2.1) Plan and Agreement of Reorganization, dated September 30, 1992,
entered into with DBS Network, Inc. and certain of its stockholders
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, 1992.
*(3.0) Certificate of Incorporation, which was previously filed in, and is
hereby incorporated byreference to, the Company's Registration
Statement on Form S-18, No. 33-31868-D, effective May 11, 1990.
*(3.1) Bylaws, 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.
*(3.2) Restated Certificate of Incorporation, as adopted on August 8, 1996.
*(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.
*(4.2) Specimen Stock Certificate.
(5.1) Opinion of Bartel Eng Linn & Schroder.
*(10.2) Employment Agreement between Fred W. Thompson and DBS Network, Inc.,
dated September 1, 1992.
*(10.3) Employment Agreement between Randall L. Smith and JPS Systems, Inc.,
dated July 1, 1993.
*(10.4) Employment Agreement between Ellen D. Coll and DBS Industries, Inc.,
dated March 1, 1993.
*(10.5) Stockholder Line of Credit and Investment Agreement between DBSN and
Direct Broadcasting Satellite Corporation, dated January 24, 1993.
*(10.5A) Promissory Note January 29, 1993, executed by Direct Broadcast
Satellite Corporation issued pursuant to Stockholder Line of Credit
and Investment Agreement.
*(10.5B) Promissory Note April 19, 1993, executed by Direct Broadcast Satellite
Corporation issued pursuant to Stockholder Line of Credit and
Investment Agreement.
*(10.5C) Promissory Note August 1, 1993, executed by Direct Broadcast Satellite
Corporation issued pursuant to Stockholder Line of Credit and
Investment Agreement.
*(10.6) 1993 Incentive Stock Option Plan for DBS Industries, Inc.
*(10.7) 1993 Non-Qualified Stock Option Plan for Non-Employee Directors of DBS
Industries, Inc.
*(10.8) 1993 Non-Qualified Stock Option Plan for Consultants of DBS
Industries, Inc.
II-4
*(10.9) Commercial Lease and Sublease and Consent pertaining to Mill Valley,
California office space.
*(10.12) Satellite Construction Contract, dated as of March 12, 1990, between
Direct Broadcast Satellite Corporation and Martin Marietta as
successor to General Electric Company, Astro-Space Division.
*(10.13) Contract Modification No. 1, dated as of March 30, 1992, to Exhibit
10.12.
*(10.14) Contract Modification No. 2, dated as of November 12, 1992, to
Exhibits 10.12 and 10.13.
*(10.15) Contract Modification No. 3, dated as of April 2, 1993, to Exhibits
10.12, 10.13 and 10.14.
*(10.16) Contract Modification No. 4, dated as of June 10, 1993, to Exhibits
10.12, 10.13, 10.14 and 10.15.
*(10.17) Contract Modification No. 5, dated as of July 30, 1993, to Exhibits
10.12, 10.13, 10.14, 10.15 and 10.16.
*(10.18) DSAT Sale Agreement incorporated by reference to the Company's Current
Report on Form 8-K dated July 21, 1994.
*(10.19) AXION Sale Agreement incorporated by reference to the Company's
Current Report on Form 8-K dated May 16, 1994.
*(10.20) AXION Royalty Agreement incorporated by reference to the Company's
Current Report on Form 8-K dated May 16, 1994.
*(10.21) Burlingame Bank Line of Credit Agreement comprised of Business Loan
Agreement and Promissory Note, both dated September 6, 1994.
*(10.22) Burlingame Bank Line of Credit Change in Terms Agreement.
*(10.23) Stock Purchase Agreement between Intraspace Corporation and DBS
Industries, Inc. incorporated by reference to the Company's Current
Report on Form 8-K dated 2/01/96.
*(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 2/01/96.
*(10.25) Memorandum of Understanding between ABB Power T&D Company, Inc. and
Global Energy Metering Service, Inc. dated February 9, 1996.
*(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.
*(10.27) DBS Industries, Inc. $1,000,000, Three Year Convertible Debenture,
Series A due July 1, 1998.
*(10.28) NACLS Contract No. 95/2475 and Schedule A dated 12/01/95.
II-5
*(10.29) Letter dated November 8, 1996, to Donald H. Gips, Chief, International
Bureau, Federal Communications Commission, from William L. Fishman,
Corporate Counsel to Direct Broadcasting Satellite Corporation.
*(10.30) DBS Industries, Inc. $640,000 Three Year Convertible Debenture, Series
C, due December 31, 1999.
*(10.31) Employment Agreement between Fred W. Thompson and the Company, dated
April 18, 1996.
*(10.32) Employment Agreement between Randall L. Smith and GEMS (the Company's
subsidiary), dated March 1, 1996.
*(10.33) Employment Agreement between E.A. James Peretti and GEMS (the
Company's subsidiary) dated April 18, 1996.
*(10.34) 1996 Stock Option Plan.
*(10.36) 1998 Stock Option Plan.
(10.37) Memorandum of Understanding Between DBS Industries and Matra Marconi
Space.**
(10.38) Letter of Intent with SAIT-Radio Holland SA.**
(10.39) Purchase Agreement with Astoria Capital, L.P. and Microcap Partners,
L.P.**
(10.40) Warrant Agreement with Astoria Capital, L.P. and Microcap Partners,
L.P.**
(10.41) Employment Agreement with Gregory T. Leger.
(21.1) List of Subsidiaries of DBS Industries, Inc.**
(23.1) Consent of PricewaterhouseCoopers LLP (included on page II-7).
(23.2) Consent of Bartel Eng Linn & Schroder is contained in Exhibit 5.1.
*Previously filed in, and incorporated by reference to, Form 10-K for Fiscal
Years July 31, 1993 July 31, 1994, July 31, 1995, and December 31, 1995,
December 31, 1996, December 31, 1997 or Form 8-K where indicated.
**Previously filed with Registration Statement on Form SB-2 filed on September
16, 1998.
Item 28. Undertakings
The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose 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
II-6
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination 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 Company pursuant to the foregoing provisions, or otherwise, the Company 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 Company of expenses incurred or paid
by a director, officer or controlling person of the Company 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
Company 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.
For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus 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.
II-7
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2 of our
report dated March 13, 1998, except for the last paragraph of Note 3 as to which
the date is April 1, 1998, which report included an explanatory paragraph noting
substantial doubt over the Company's ability to continue as a going concern, on
our audits of the financial statements of DBS Industries, Inc. and Subsidiary.
We also consent to the reference to our firm under the caption "Experts."
PricewaterhouseCoopers LLP
San Francisco, California
November 25, 1998
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 this Pre-Effective Amendment No. 1 to Form SB-2
and authorized this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Mill Valley, State of
California, on November 4, 1998.
DBS INDUSTRIES, INC.,
a Delaware Corporation
/s/ Fred W. Thompson
FRED W. THOMPSON,
President
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
Signatures Date
/s/ Fred W. Thompson November 4, 1998
FRED W. THOMPSON,
President, Director, Chief Executive
Officer, Chief Financial Officer
(Principal Executive Officer; Principal Financial
and Accounting Officer)
/s/ E. A. James Peretti November 4, 1998
E.A. JAMES PERETTI
Director
/s/ Michael T. Schieber October 30, 1998
MICHAEL T. SCHIEBER
Director
/s/ H. Tate Holt November 2, 1998
H. TATE HOLT
Director
/s/ Jerome W. Carlson November 4, 1998
JEROME W. CARLSON
Director