SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-QSB Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 ---------------------------------------------------- For Quarter Ended: March 31, 1997 Commission File No. 0-24034 SKYSAT COMMUNICATIONS NETWORK CORPORATION ------------------------------------------------------------ (Exact name of small business issuer as specified in its charter) Delaware 13-3722117 ------------------------------------------------------------ (State of Incorporation) (I.R.S. Employer Identification No.) 405 Lexington Avenue, 33rd floor New York, New York 10174 ------------------------------------------------------------ (Address of Principal Executive Office) (Zip Code) Issuer's telephone number, including area code (212) 972-0070 Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. March 31, 1997 -------------- Class A Common Stock 2,271,883 Class B Common Stock 855,367 Transitional Small Business Disclosure Format (check one): Yes |_| No |X| PART I - FINANCIAL INFORMATION Item 1. Financial Statements SKYSAT COMMUNICATIONS NETWORK CORPORATION (a development stage company) Condensed Balance Sheet at March 31, 1997 (unaudited) ASSETS ------ Current Assets: Cash and cash equivalents 100,153 Prepaid research and development costs (Note F) 3,492 Prepaid expenses & other current assets 26,830 ---------- Total current assets 130,475 Equipment, at cost (net of $1,782 accumulated depreciation) 3,028 Patent costs (net of $11,175 accumulated depreciation) 87,444 Other 11,425 ---------- TOTAL 232,372 ========== LIABILITIES ----------- Current Liabilities: Accrued expenses 172,598 ---------- Contract settlement due after one year (Note H) 15,000 ---------- STOCKHOLDERS' EQUITY -------------------- (Notes B, C, D E and H) Preferred stock, par value $0.01 per share, 5,000,000 shares authorized, none issued Class B common stock, par value $0.001 per share, 2,000,000 shares authorized; 1,523,117 shares issued, including 872,125 forfeitable shares and 667,750 treasury shares 1,523 Class A common stock, par value $0.001 per share, 18,000,000 shares authorized, 2,271,883 shares issued and outstanding, including 127,875 forfeitable shares 2,272 Capital in excess of par value 7,443,671 Deficit accumulated during the development stage (7,833,425) ---------- Sub-total (385,959) Add: stock to be issued in settlement of contract (Note H) 25,313 stock subscribed and paid, not yet issued (Note C) 415,000 Less: 667,750 Class B shares held in the Treasury, at cost (Note D[3]) (9,580) ---------- Total stockholders' equity 44,774 ---------- TOTAL 232,372 ========== See notes to condensed financial statements. 2 SKYSAT COMMUNICATIONS NETWORK CORPORATION (a development stage company) Condensed Statements of Operations (unaudited) For the Period from Commencement For the Three Months Ended of Operations March 31, (January 1, ------------------------------ 1993) to 1996 1997 March 31, 1997 ---- ---- -------------- Operating Expenses: Research and development expenses (Note D[1]) 90,112 208,452 5,148,359 General and administrative expenses (Note D) 169,442 202,775 2,386,903 ------------------------------------------------ Total operating expenses 259,553 411,227 7,535,263 ------------------------------------------------ Loss from Operations (259,553) (411,227) (7,535,263) ------------------------------------------------ Financing Costs (Income): Interest (income) (6,597) (145,405) Interest expense 83,317 Amortization of deferred financing costs 299,000 Amortization of debt discount 61,250 ------------------------------------------------ Total financing costs (income) (6,597) 0 298,162 ------------------------------------------------ NET LOSS (252,956) (411,227) (7,833,425) ================================================ Net loss per share of common stock $ (0.11) $ (0.19) $ (4.13) ================================================ Weighted average number of common shares and common share equivalents outstanding 2,369,396 2,127,250 1,897,942 ================================================ See notes to condensed financial statements. 3 SKYSAT COMMUNICATIONS NETWORK CORPORATION (a development stage company) Condensed Statements of Cash Flows (unaudited) For the Period from Commencement For the Three Months Ended of Operations March 31, (January 1, -------------------------- 1993) to 1996 1997 March 31, 1997 ---------- ---------- -------------- Cash flows from operating activities: Net loss (252,956) (411,228) (7,833,425) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,575 3,165 27,237 Write off of fixed assets 1,353,945 Write off of patents 95,000 Stock to be issued in settlement of contract 25,313 Rent recorded as capital contribution 22,000 Amortization of debt issuance costs 360,250 Changes in operating assets and liabilities: Organization costs (12,000) Prepaid expenses 40,086 61,108 (3,419) Accounts payable and other liabilities 6,374 10,722 187,600 ----------------------------------------------- Net cash (used in) operating activities (202,921) (336,233) (5,777,499) ----------------------------------------------- Cash flows from investing activities: Purchase of fixed assets (1,367,414) Patent costs (1,526) (193,620) Deposits (9,625) ----------------------------------------------- Net cash (used in) investing activities (1,526) 0 (1,570,659) ----------------------------------------------- Cash flows from financing activities: Proceeds from notes payable 2,151,000 Repayment of notes payable (2,450,000) Net proceeds from sale of common stock 991,547 415,000 7,752,311 Purchase of treasury stock (5,000) ----------------------------------------------- Net cash provided by financing activities 991,547 415,000 7,448,311 ----------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 787,100 78,767 100,153 Cash and cash equivalents - beginning of period 259,868 21,386 ----------------------------------------------- CASH AND CASH EQUIVALENTS - END OF PERIOD 1,046,968 100,153 100,153 =============================================== Supplemental disclosures of cash flow information Taxes paid 9,503 8,472 46,846 Interest paid 83,317 Fixed assets exchanged for treasury stock Supplemental disclosures of non-cash financing activities: Warrants issued 61,250 See notes to condensed financial statements. 4 SKYSAT COMMUNICATIONS NETWORK CORPORATION (a development stage company) NOTES TO FINANCIAL STATEMENTS NOTE A - Basis of Presentation The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 1997, are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. For further information, refer to the financial statements and footnotes thereto included in the Registrant Company annual report on Form 10-KSB for the year ended December 31, 1996. NOTE B - The Company Skysat Communications Network Corporation (the "Company") is a development stage company incorporated in Delaware in July 1992. The Company is engaged in the research and development of a high altitude unmanned aircraft system (the "Skysat System" or the "System") for commercial application in the telecommunications industry. The Company has incurred significant losses to date and anticipates substantial additional losses before completion of Phase I of the Skysat System. There is no assurance that necessary financing will be available for completion of Phase I or that the Company will be in a position to proceed with Phase II. As of May 15, 1997, the Company has nominal operating capital. These factors raise substantial doubt about the ability of the Company to continue as a going concern. The Company is currently seeking additional financing or other arrangements to complete its planned activities. The accompanying financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary if the Company is unable to continue as a going concern. NOTE C - Sale of Common Stock In February 1997 the Company commenced selling, in a private placement, unregistered shares of Class A common stock. Through March 31, 1997, 830,000 Class A common shares had been subscribed to at $.50 per share for a total of 5 SKYSAT COMMUNICATIONS NETWORK CORPORATION (a development stage company) NOTES TO FINANCIAL STATEMENTS NOTE C - Sale of Common Stock (cont.) $415,000 (930,000 shares for a total of $465,000 through May 15, 1997); two officers of the Company participated in this private placement. For each share of stock issued, each purchaser also will receive two warrants to purchase Class A common shares; the warrants will be exercisable at $1.00 and $1.50, respectively. After this transaction, the Company will have 4,057,250 shares outstanding. NOTE D - Related Party Transactions [1] Research and development expense includes the following payments to related parties for the periods indicated: January 1, 1996 - March 31, 1996 ...........$ 40,833 ========= January 1, 1997 - March 31, 1997 ...........$ 22,500 ========= January 1, 1993 - March 31, 1997 ...........$ 545,484 ========= General and Administrative expenses for the three-month periods ended March 31, 1996 and March 31, 1997, and for the period from January 1, 1993 through March 31, 1997 includes $55,000, $55,000 and $718,250, respectively, paid to three officers/stockholders and three director/stockholders. [2] The Company had occupied its headquarters on a rent-free basis in the offices of a stockholder from January 1, 1993 through October 31, 1994. The Company has reflected $22,000, the fair value for such space, as a capital contribution for the period from January 1, 1993 through September 30, 1996. [3] In November 1996 the former president of the Company surrendered 667,750 shares of Class B common stock in return for certain fixed assets with a net book value of $4,580 plus payment of attorney fees of $5,000. This stock has been recorded at a cost of $9,580 and is being held as treasury shares. 6 SKYSAT COMMUNICATIONS NETWORK CORPORATION (a development stage company) NOTES TO FINANCIAL STATEMENTS NOTE E - Stock Option Plan Through December 31, 1996, the Company had granted incentive stock options under the Stock Option Plan to certain Company directors, officers and employees to purchase, at $6.00 per share, an aggregate of 70,000 shares and to purchase, at $1.00 per share, an aggregate of 42,500 shares of Class A common stock. During 1995 and 1996, the Company also granted an aggregate of 13,500 and 54,730 nonqualified options, respectively, to consultants to the Company at exercise prices ranging from $1.00 to $6.00 per share. During the three-month period ended March 31, 1997, the Company granted 8,340 nonqualified stock options exercisable at $1.00 per share to a consultant to the Company. NOTE F - Jet Propulsion Laboratory Agreement The Company has entered into an agreement (the "JPL Agreement") under which the Jet Propulsion Laboratory ("JPL") has developed a preliminary design of the Skysat System and determined its technical feasibility. Under the JPL Agreement, the Company paid JPL $2,493,000 through March 31, 1997, for development work. The Company is charging research and development expense as JPL utilizes the funds. JPL commenced its work with respect to the initial contract in April 1994 and substantially completed it in 1996. In addition, during 1996 JPL was tasked by the Company to do research work on telecommunications payload development with regard to conventionally-powered and mocriwave-powered platforms; the Company paid JPL $50,000 in 1996 for this research which was substantially completed in early 1997. NOTE G - Av-Intel Inc. Agreement In April 1996 the Company entered into an agreement with Av-Intel Inc. ("Av-Intel"), a research and development company based in Ottawa, Canada, which has developed lighter-than-air technology (stratospheric satellite vehicles) ("SSV's") that could be applied to airborne platforms. The agreement provides that Skysat and Av-Intel will work together to test the viability and cost-effectiveness of the SSV. In conjunction with this agreement, the Company incurred research and development expenses of $130,357 in the three- month period ended March 31, 1997. 7 SKYSAT COMMUNICATIONS NETWORK CORPORATION (a development stage company) NOTES TO FINANCIAL STATEMENTS NOTE H - Settlement of Construction Agreement with B & R Designs, Inc. In March 1997 the Company and B & R Designs, Inc. settled the amount payable under a construction contract at $20,000 plus 30,000 shares of the Company's Class A common stock upon receipt by the Company of a comprehensive report detailing the research and development done at B & R Designs. The Company has not yet received such a report. 8 ITEM 2. MAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (A) Management's Discussion and Analysis of Financial Condition and Results of Operations: Safe Harbor Statements: Any statements contained herein by the Company with regard to its expectations as to financial results and other aspects of its business may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company makes such statements based on assumptions which it believes to be reasonable, the Company's business is subject to significant risks and there can be no assurance that actual results will not differ materially from the Company's expectations. Accordingly, the Company hereby identifies the following important factors, among others, which could cause its results to differ from any results which might be projected, forecasted or estimated by the Company in any such forward-looking statements: (i) the timely development and acceptance of the Company's product, (ii) the achievement of development milestones by the Company, (iii) the timely receipt of regulatory clearances required to market the Company's proposed product, and (iv) the Company's ability to enter into arrangements with corporate partners. Results of Operations: The Company is a development stage company. Since its inception in July 1992, the Company's efforts have been principally devoted to research and development of the Skysat System and raising capital; the Company has sustained losses of $7,833,425 of which $252,956 and $411,227 were incurred during the three-month periods ended March 31, 1996 and 1997, respectively. These losses have resulted from expenditures specifically in connection with an increased level of effort under the JPL Agreement (discussed below) which commenced during 1994, the construction and development of a conventional engine-powered prototype aircraft (the "Platform"), commencement of the development of the flight management system related to the Skysat System and general and administrative activities, including legal and professional activities relating thereto and salaries to officers and employees which are continuing to date. Research and development expenses have aggregated $5,148,359 since inception, of which $90,112 and $208,452 were incurred during the three-month periods ended March 31, l996 and l997, respectively. The Company's research and development agreement (the "JPL Agreement") with the Jet Propulsion Laboratory ("JPL"), an operating division of the California Institute of Technology which operates JPL under contract from NASA, commenced in April 1994. JPL 9 incurred expenses aggregating $53,218 during the three-month period ended March 31, 1997. General and administrative expenses were $2,386,903 since the Company's inception in July 1992, of which $169,442 and $202,775 were expended during the three-month periods ended March 31, 1996 and 1997, respectively. The Company's research and development and general and administrative expenses will be substantial in the forseeable future, including substantial expenses for the payment of salaries, consulting fees and expenses, the development and construction of the Platform and other related vehicles and the development of the flight management system and other related activities. In April 1996, the Company entered into an agreement with Av-Intel, Inc. ("Av-Intel"), a research and development company which has developed lighter-than-air technology that could be applied to airborne platforms with a capability to fly at 70,000 feet altitude for periods of several months (the "Av-Intel Agreement"). These "stratospheric satellite vehicles" ("SSV's") have certain characteristics that would make them effective as communications platforms. Skysat and Av-Intel have worked together since the inception of the agreement to verify the viability and cost-effectivemess of the SSV. Under the Av-Intel Agreement, the Company and Av-Intel will develop a comprehensive design leading to a telecommunications prototype. The Av-Intel Agreement expires in June 1997. The Company will use its best efforts to extend the agreement. Liquidity and Capital Resources: The Company has had no revenue and has incurred a cumulative loss through March 31, 1997 of $7,833,425. The Company currently does not have the necessary liquidity and capital resources to sustain planned operations for the one year period following March 31, 1997 unless it obtains additional financing. The Company raised $435,000 from a private placement in early 1997 and expects to raise an additional $200,000 during May 1997. There can be no assurances as to the availability or terms of such additional financing. At May 15, 1997, the Company has nominal operating capital. In the event that the Company fails to raise the funds it requires, it may be necessary for the Company to cease operations or severely limit growth. (B) Plan of Operation: During the one-year period following March 31, 1997, the Company intends to continue to conduct significant additional research, development and testing activities in connection with the development of the Skysat System, including the completion of, and/or the acquisition and testing of, a platform, and the exploration of the technical and economic feasibility and viability of additional and alternative aerial vehicles, which, together with 10 other general and administrative expenses, are expected to result in substantially higher operating losses. The Company does not expect to generate any revenues until such time as the Skysat System becomes commercially available, which cannot occur until it has, among other things, obtained substantial additional funds and completed development of the Skysat System. 11 SKYSAT COMMUNICATIONS NETWORK CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 20, 1997 By: /s/ Martin D. Fife ------------------- Martin D. Fife, Chief Executive Officer Date: May 20, 1997 By: /s/ Martin D. Fife ------------------- Martin D. Fife, Chief Financial Officer 12