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As filed with the Securities and Exchange Commission on May 21, 2001
Registration No. 333-44214
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Post-Effective Amendment No. 4 to Form S-1)
ESAT, INC.
(Name of registrant as specified in its charter)
Nevada 7370 95-0344604
(State or Jurisdiction of (Primary Standard Industrial (IRS Employer
Organization or Incorporation) Classification Code Number) Identification Number)
10 Universal City Plaza, Suite 1130
Universal City, California 91608
818-464-2670
(Address and telephone number of principal executive
offices and principal place of business)
Mark Basile, Chief Financial Officer
eSat, Inc.
10 Universal City Plaza, Suite 1130
Universal City, California 91608
818-464-2670
(Name, address and telephone number of agent for service)
Copy to:
David R. Decker
Arter & Hadden LLP
725 South Figueroa Street, 34th Floor
Los Angeles, California 90017
Pursuant to Rule 429, this Post-Effective Amendment includes a Combined
Prospectus relating to this Registration Statement and Registration Statement
File No. 333-95451.
Pursuant to Rule 429(b), this Post-Effective Amendment also serves as
Post-Effective Amendment No. 5 to Registration Statement File No. 333-95451.
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.
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Prospectus
22,280,496 Shares
eSAT, INC.
Common Stock
Selling stockholders are offering up to 22,280,496 shares of common
stock. We will not receive any of the proceeds from the sale of this common
stock. We will have been paid for all the shares offered prior to the sale of
the shares under this prospectus.
The selling stockholders may sell these shares from time to time in the
over-the-counter market or otherwise.
Our common stock is traded on the OTC Electronic Bulletin Board under the
symbol "ASAT," and on the Deutsche Borse AG Xetra(TM) (Frankfurt, Germany) under
the symbol "ES8." On May 17, 2001, the last reported bid price of the common
stock on the OTC Electronic Bulletin Board was $0.05 share.
Wentworth, LLC is an underwriter with respect to the shares it is offering
pursuant to this prospectus.
INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE ___.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED ON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
May __, 2001
You may rely only on the information contained in this prospectus. We have
not authorized anyone to provide information different from that contained in
this prospectus. Neither the delivery of this prospectus nor sale of shares
means that information contained in this prospectus is correct after the date of
this prospectus. This prospectus is not an offer to sell or solicitation of an
offer to buy these securities in any circumstances under which the offer or
solicitation is unlawful.
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TABLE OF CONTENTS
Page
----
Prospectus summary......................................................................... 3
Risk factors............................................................................... 6
Forward-looking statements................................................................. 14
Use of proceeds............................................................................ 14
Price range of common stock................................................................ 14
Dividend policy............................................................................ 15
Capitalization............................................................................. 15
Selected consolidated financial data....................................................... 16
Management's discussion and analysis of financial condition and results of operations...... 18
Business................................................................................... 21
Management................................................................................. 30
Certain transactions....................................................................... 36
Principal stockholders..................................................................... 38
Selling stockholders....................................................................... 41
Description of securities.................................................................. 43
Shares eligible for future sale............................................................ 49
Plan of distribution....................................................................... 50
Legal matters.............................................................................. 51
Experts ................................................................................... 51
Additional information..................................................................... 51
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Until _________, 2001 (40 days after the date of this prospectus), all
dealers effecting transactions in the common stock may be required to deliver a
prospectus. This is in addition to the obligations of dealers to deliver a
prospectus when acting as underwriters.
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company, the risks of investing in our common stock,
and our financial statements and notes to those statements appearing elsewhere
in this prospectus.
OUR BUSINESS
We were incorporated in the State of Nevada on June 23, 1995 under the
name U.S. Connect 1995, Inc. On October 8, 1998, we became the surviving
corporation in a merger with Technology Guardian, Inc., a California
corporation. As a part of that merger, we changed our name to Technology
Guardian, Inc. We changed our name to eSAT, Inc. on January 26, 1999. In April
2000, we acquired the businesses of PacificNet Technologies, Inc. and
InterWireless, Inc.
Our principal executive offices are located at 10 Universal City Plaza,
Suite 1130, Universal City, California 91608. Our telephone number is
818-464-2670 and our fax number is 818-464-2799. Our Web site address is
www.esatinc.com. Information accessed on or through our Web site does NOT
constitute a part of this prospectus.
Our principal line of business consists of providing products and services
for Internet service, and Internet management services. Our customers are local,
national and international businesses. Our Internet services and management
services are delivered through our subsidiary, PacificNet. PacificNet provides
software support and managed Internet access to individuals and businesses.
Through this subsidiary, we will focus on using technology to provide
cost-effective, uniform Internet delivery without geographic limitations.
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The Company's management estimates that its current cash, cash equivalents and
cash generated from operations will only be sufficient to meet its
anticipated cash needs through approximately August 15, 2001. Accordingly,
the Company will require either an increase in sales activity, or a
substantial additional cash infusion to continue its operations.
Management is not certain if additional capital will be available.
Management is considering an asset sale or other comparable transaction as
part of a financial restructuring. If the Company is not successful in
completing a strategic transaction, it will be required to cease
operations.
THE OFFERING
Shares offered........................... 22,280,496 shares of common stock
Proceeds to us........................... None. All proceeds will be for the
benefit of selling stockholders who
will have previously paid the
company for common stock or
convertible preferred stock
pursuant to direct sales or upon
exercise of warrants.
Common stock to be outstanding after the
offering................................. 50,690,295 shares
OTC Electronic Bulletin Board symbol..... ASAT
Deutsche Borse AG Xetra(TM) (Frankfurt, ES8
Germany)
In addition to 50,690,295 shares of common stock outstanding after the
offering, we are obligated to issue 10,858,665 shares of common stock on
exercise of other outstanding warrants, and 3,028,738 shares of common stock on
exercise of outstanding options. We do not expect these warrants or options to
be exercised in the near future since, in all cases, the exercise price is
higher than the market price for our common stock.
SUMMARY CONSOLIDATED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------------------------- ---------------------------
2000 1999 1998 2001 2000
------------- ------------ ----------- ------------ ------------
(RESTATED) (UNAUDITED) (UNAUDITED)
NET REVENUE........................... $ 5,663,113 $ 3,676,217 $ 2,474,617 $ 2,211,886 $ 937,387
Gross margin ..................... (445,540) 77,431 (181,473) 72,856 (13,393)
Loss from operations ............. (15,937,268) (8,084,757) (3,123,514) (892,340) (2,667,017)
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Net income (loss) .................. (12,534,492) 73,438,652 (93,675,433) (851,300) (788,712)
EARNINGS PER COMMON SHARE:
Net income (loss)................... $ (0.57) $ 3.50 (4.97) $ (0.03) $ (0.04)
============ =========== =========== =========== ===========
EARNINGS PER COMMON SHARE --
ASSUMING DILUTION
Net income (loss)................... $ (0.57) $ 3.05 $ (4.97) $ (0.03) $ (0.04)
============ =========== =========== =========== ===========
CONSOLIDATED BALANCE SHEET:
DECEMBER 31, MARCH 31,
2000 1999 2001
----------- ----------- -----------
(UNAUDITED)
Cash and cash equivalents... $ 452,144 $ 3,412,205 $ 75,673
Working capital ............ (3,503,540) 1,993,158 (4,243,800)
Total assets ............... 4,447,363 5,980,825 4,498,864
Total stockholders' equity.. (1,215,253) 3,298,674 (2,072,861)
RISK FACTORS
WE WILL CEASE OPERATIONS AT OR AROUND AUGUST 15, 2001 UNLESS WE EXPERIEINCE
INCREASED SALES ACTIVITY, OBTAIN ADDITIONAL CAPITAL OR PURSUE OTHER STRATEGIC
ALTERNATIVES
Our current cash, cash equivalents and cash generated from operations will
only be sufficient to meet our anticipated cash needs to approximately August
15, 2001, although there can be no assurance in this regard. Accordingly, we
will require an increase in sales activity or an additional substantial cash
infusion to continue our operations. We do not believe that additional capital
will be available to us. We are also considering an asset sale or other
comparable transaction as part of a financial restructuring. If we are
unsuccessful in all of these measures, we will be required to cease operations,
and our common stock will have no value. In addition, potential investors in our
securities should consider the risk that, even if we are successful in
completing a strategic transaction, our common stock will nonetheless have
minimal value.
For the three months ended March 31, 2001, we incurred a loss from
operations of $892,340, including all research and development costs. For the
fiscal year ended December 31, 2000, we incurred a loss from operations of
$15,937,268 as compared to a loss from operations of $8,084,757 for the fiscal
year ended December 31, 1999. The losses were primarily due to: (i) employee
compensation, which increased because of additional sales and operations staff
hired in 1998 in anticipation of future growth of our operations; (ii) expenses
related to marketing; and (iii) lack of product sales. In addition, we incurred
significant research and development costs associated with new products. There
can be no assurance that we will be able to generate sufficient revenues to
operate profitably in the future or to pay our debts as they become due. The
company is dependent upon successful completion of future capital infusions to
continue operations.
AS A RESULT OF QUESTIONS CONCERNING OUR STATUS AS A GOING CONCERN, OUR CUSTOMERS
AND VENDORS MAY DECIDE NOT TO DO BUSINESS WITH US
Due to concerns regarding our ability to continue operations, customers
and vendors are likely to decide not to conduct business with us, or may conduct
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business with us on terms that are less favorable than those customarily
extended by them. In that event, our net sales would further decrease, and our
business will suffer significantly.
OUR FINANCIAL STATEMENTS CONTAIN A "GOING CONCERN" QUALIFICATION.
The audit reports accompanying our financial statements for the years
ended December 31, 2000 and 1999 contain a qualification that certain conditions
indicate that we may not be able to continue as a going concern. The financial
statements do not contain any adjustments that might be necessary in such a
case. Note 2 to the financial statements indicates that substantial operating
losses account for this uncertainty. Many investment bankers and investors view
companies with a "going concern" qualification as less desirable for investment.
Accordingly, we will have a more difficult time raising equity capital or
borrowing capital at all on favorable terms. Our suppliers might be less willing
to extend credit. Our potential customers might be less willing to purchase our
products and services if they believe that we will not be viable enough to
provide service, support, back-up, and follow-on products when needed.
Furthermore, we might be disadvantaged in recruiting employees who might be
concerned about the stability of employment with us. Therefore, the "going
concern" qualification can have severe adverse consequences on us.
WE ARE DEFENDANTS IN TWO LAWSUITS WHICH, IF SUCCESSFUL, COULD FORCE US TO SEEK
PROTECTION FROM THE BANKRUPTCY COURT.
In December 2000, Michael C. Palmer, former CEO of the Company and Vantage
Capital, Inc. (controlled by Mr. Palmer), commenced an arbitration proceeding
seeking $325,000 in severance benefits alleged to be part of his contract with
the Company. In January 2001, i-Xposure, Inc. filed a lawsuit against the
Company seeking approximately $351,000 plus interests and costs, allegedly due
under guaranties which were part of a bridge financing arrangement.
Although the Company intends to defend itself, it cannot be certain of a
favorable outcome. Liabilities have been accrued using estimates of the
Company's potential losses.
In January 2001, a claim was asserted against the Company by two
shareholders alleging fraud and material omission of fact as represented by the
current and a former Chief Executive Officer of the Company. The claim alleges
damages of $434,000. The Company believes the claim to be without merit and
intends to vigorously defend itself. No accrual for a potential loss is
reflected in the accompanying financial statements.
In March 2001, Richard Elliot and David Pennells, co-founders and
Presidents of the subsidiaries PacificNet and Interwireless, asserted certain
claims of non-performance against the Company. They have not filed a lawsuit,
nor have they sought any damages, as of yet. Due to uncertainty regarding the
claims, and the fact that nothing has been formally brought against the Company,
no accrual has been made in these financial statements.
WE ARE HIGHLY DEPENDENT ON THE UNINTERRUPTED OPERATION OF THE NETWORK OPERATIONS
CENTER AT OUR UNIVERSAL CITY, CALIFORNIA, SITE.
We currently have all of the equipment used for our PacificNet
subsidiary's network operations located in our Universal City facility. While it
is protected by standard protective devices such as redundant power supplies,
multiple internet connections, fire systems, climate control, and 24 hour
security/access control, we are at risk for catastrophic events that would
require a backup location. Failure of this equipment for any material length of
time would adversely affect our revenue generated from our managed internet
services business which presently accounts for a substantial portion of our
revenue.
WE ARE CURRENTLY DEPENDENT ON A SINGLE CUSTOMER FOR A SIGNIFICANT PORTION OF OUR
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REVENUE.
We provide and manage the actual connection to the Internet to the
subscriber base of a large national telephone dial-up Internet access provider.
Approximately seventy percent of our revenues in the first quarter 2001 were
generated by our service to that company. Loss of that account would have a
material adverse effect on our revenues, which could negatively affect the value
of your investment. Furthermore, we anticipate that revenues derived from this
customer will experience a reduction in the second quarter of 2001 as compared
to the first quarter of 2001.
WE DEPEND ON SATELLITE TRANSMISSION. SATELLITE FAILURE COULD HAVE A SUBSTANTIAL
NEGATIVE EFFECT ON OUR BUSINESS OPERATIONS.
We use a single satellite to provide satellite Internet services. There is
risk associated with this dependence. There are two types of possible failures
to the satellite: a failure of the individual transponder that is used and a
failure of the entire satellite. If there is a failure of a transponder, the
satellite operator is contractually obligated to move us to another transponder.
This would create a minimum interruption to customers, likely less than 24
hours. If the satellite itself completely fails, we will have to move our
services to another satellite. Our transmissions conform to industry standards
so there are several possible alternative satellites. Our current satellite
provider engages in quarterly reviews of available like-satellite space and is
ready to contract for that space if needed. If the entire satellite were to
fail, a one to five day outage of services might occur depending on the
availability of other satellites. Additionally, a repointing of the receiving
dishes on the ground would likely be required. The repointing of the receiving
dishes on the ground would cost us approximately $300 per customer. In the event
of any service disruption due to satellite failure, our customers would be
credited for the dollar value of the amount of time they are without the
satellite Internet service. Such credits would be between to $16.50 per day per
customer and $155.00 per day depending on the level of service subscribed. In
the event of a satellite failure, we could also be subject to loss-of-business
claims, due to the reliance by business customers on the satellite Internet
services we provide. A sustained disruption in satellite service could
materially and negatively impact the value of this portion of our business and
could force us to discontinue operations.
WE ARE CURRENTLY ASSESSING THE DISCONTINUATION OF CERTAIN OF OUR BUSINESS
LINES. THIS WILL RESULT IN OUR BEING A SMALLER COMPANY.
While a reorganization is expected to reduce our operating losses, it will
also reduce the size of our operations and reduce our visibility in the
satellite and/or Internet service provider community. Our reduced size could
result in our being less competitive. It could also reduce the value of your
investment.
WE HAVE A LIMITED OPERATING HISTORY.
We were incorporated in 1995, but did not commence operations until 1997.
Since then, our business has been substantially refocused and is currently
undergoing further assessment. Thus, we have a limited operating history upon
which an evaluation of us can be based. Our prospects are subject to the risks,
expenses and uncertainties frequently encountered by companies in the new and
rapidly evolving markets for Internet products and services. In addition, should
we survive as a going concern in the near term, we will be subject to all of the
risks, uncertainties, expenses, delays, problems and difficulties typically
encountered in the growth of an emerging business and the development and market
acceptance of new products and services. There can be no assurance that
unanticipated expenses, problems or technical difficulties will not occur which
would result in material delays in market acceptance of our products and
services or that our efforts will result in such market acceptance.
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TIMING OF ORDERS FOR AND CONTINUED DEVELOPMENT OF OUR SERVICES AND PRODUCTS WILL
CAUSE OUR QUARTERLY RESULTS TO FLUCTUATE AND CONSEQUENTLY YOU SHOULD NOT RELY ON
THE RESULTS OF ANY PERIOD AS AN INDICATION OF FUTURE PERFORMANCE.
We have experienced material period-to-period fluctuations in revenue and
operating results. We anticipate that these periodic fluctuations in revenue and
operating results will occur in the future. We attribute these fluctuations to a
variety of business conditions that include:
- the volume and timing of orders we receive from quarter to quarter;
- the introduction and acceptance of our new services and products and
product enhancements by us;
- purchasing patterns of our customers and distributors; and
- market acceptance of services and products sold by our distributors.
As a result, we believe that quarterly revenue and operating results are
likely to vary significantly in the future and that quarter-to-quarter
comparisons of our operating results may not be meaningful. You should therefore
not rely on the results of one quarter as an indication of future performance.
OUR INTELLECTUAL PROPERTY MAY BE CHALLENGED.
As is the case with many technology companies, the rapid pace of change in
technology could cause our intellectual property to be challenged. These
challenges could come from stronger companies who believe that the use of our
technology interferes with their use or that they own all of the technology and
related rights. If any of these challenges were successful, our ability to sell
products based on our technology or intellectual property could be severely
impaired.
WE MUST DO BUSINESS IN A DEVELOPING MARKET AND FACE NEW ENTRANTS. FAILURE TO
MEET THE CHALLENGES OF NEW PRODUCTS AND SERVICES AND COMPETITORS WILL REDUCE OUR
MARKET SHARE AND THE VALUE OF YOUR INVESTMENT.
The market for Internet products and computer software is rapidly evolving
and is characterized by an increasing number of market entrants who have
introduced or developed products and services. The diverse segments of the
Internet market may not provide opportunities for more than one dominant
supplier of products and services similar to ours. If a single supplier other
than us dominates one or more market segments, our revenue is likely to decline
and we will become a less valuable company.
BECAUSE WE LACK THE NAME RECOGNITION, CUSTOMER BASE AND RESOURCES OF OTHER
COMPANIES PROVIDING INTERNET ACCESS AND OTHER INTERNET RELATED PRODUCTS AND
SERVICES, WE MAY BE UNABLE TO COMPETE SUCCESSFULLY WHICH WOULD REDUCE OUR
REVENUE AND THE VALUE OF YOUR INVESTMENT.
The markets for our products are intensely competitive and are likely to
become even more competitive. Increased competition could result in:
- pricing pressures, resulting in reduced margins;
- decreased volume, resulting in reduced revenue; or
- the failure of our products and services to achieve or maintain
market acceptance.
Any of these occurrences could have a material adverse effect on our
business, financial condition and operating results. Our products and services
face intense competition from multiple competing vendors. Our principal
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competitors in the Internet management business are IBM Corporation and TRW,
Inc. Our principal competitors in the satellite services business are Loral Inc.
and Hughes Network Systems. Many of our current and potential competitors have:
- longer operating histories,
- greater name recognition,
- access to larger customer bases, or
- substantially greater resources than we have.
As a result, our principal competitors may respond more quickly than we
can to new or changing opportunities and technologies. For all of the reasons
stated above, we may be unable to compete successfully against our current and
future competitors.
WE HAVE NO ASSURANCE OF MARKET ACCEPTANCE OF OUR PRODUCTS AND SERVICES. IF WE
ARE UNABLE TO RAISE MARKET AWARENESS OF OUR PRODUCTS AND SERVICES, WE MAY
EXPERIENCE DECLINING OPERATING RESULTS WHICH WOULD DIMINISH THE VALUE OF YOUR
INVESTMENT.
We are at an early stage of development and our earnings depend primarily
upon market acceptance of our products and services. There can be no assurance
that our development efforts will progress further with respect to any potential
new services or that they will be successfully completed. In addition, there can
be no assurance that our potential new services will achieve customer
acceptance.
There can be no assurance that our services will be successfully marketed.
In addition to our own direct sales force, we use value-added resellers and
distributors to market our satellite products and services. There is no
assurance that any distributor or other reseller will be successful in marketing
our products.
WE MIGHT BECOME SUBJECT TO FURTHER GOVERNMENT REGULATION WHICH COULD HARM OUR
PROSPECTS.
Except for a license from the Federal Communications Commission, we are
not currently subject to direct regulation by any government agency in the
United States, other than regulations applicable to businesses generally. There
are currently few laws or regulations directly applicable to access to or
commerce on the Internet. However, due to the increasing popularity and use of
the Internet, it is possible that laws and regulations may be adopted with
respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. Such laws or regulations
could limit the growth of the Internet, which could in turn decrease the demand
for our proposed products and services or increase our cost of doing business.
Any new legislation or regulation or the application of existing laws and
regulations to the Internet in unexpected ways could have an adverse effect on
our business and prospects.
WE MIGHT FACE LIABILITY FOR INFORMATION OBTAINED OR DISTRIBUTED THROUGH THE
PRODUCTS AND SERVICES WE PROVIDE.
Because materials may be downloaded by the Internet services which we
operate or facilitate and may be subsequently distributed to others, there is a
possibility that claims will be made against us for defamation, negligence,
copyright or trademark infringement, personal injury or other theories based on
the nature and content of such materials. Such claims have sometimes been
successful against Internet service providers. Our general liability insurance
might not cover potential claims of this type or might not be adequate to
indemnify us for all liability that may be imposed. Any imposition of liability
or legal defense expenses that are not covered by insurance or that are in
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excess of insurance coverage could have a material adverse effect on our
business, operating results and financial condition.
LOSS OF KEY MEMBERS OF OUR SENIOR MANAGEMENT COULD ADVERSELY AFFECT OUR BUSINESS
AND PROSPECTS.
Our success will be dependent largely upon the personal efforts of our
acting Chief Executive Officer and Chairman of the Board, Chester L. Noblett,
and David Pennells, Senior Vice President of the company and President of
PacificNet, as well as other senior managers. The loss of their services could
have a material adverse effect on our business and prospects. We have no life
insurance on any of our officers. Mr. Noblett's and Mr. Pennells' services are
governed by contracts. Our success is also dependent upon our ability to hire
and retain additional qualified management, marketing, technical, financial and
other personnel. Competition for qualified personnel is intense and there can be
no assurance that we will be able to hire or retain qualified personnel. Any
inability to attract and retain qualified management and other personnel could
have a material adverse effect on us.
OUR COMMON STOCK IS SUBJECT TO PENNY STOCK RULES. YOU MAY HAVE GREATER
DIFFICULTY SELLING YOUR SHARES.
The Securities Enforcement and Penny Stock Reform Act of 1990 applies to
stock characterized as "penny stocks," and requires additional disclosure
relating to the market for penny stocks in connection with trades in any stock
defined as a penny stock. The Securities and Exchange Commission has adopted
regulations that generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
The exceptions include exchange-listed equity securities and any equity security
issued by an issuer that has
- net tangible assets of at least $2,000,000, if the issuer has been in
continuous operation for at least three years;
- net tangible assets of at least $5,000,000, if the issuer has been in
continuous operation for less than three years; or
- average annual revenue of at least $6,000,000 for the last three years.
Unless an exception is available, the regulations require the delivery,
prior to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the associated risks.
Our financial condition does not meet the above tests. Thus, trading in
the common stock will be covered by Rules 15g-1 through 15g-6 and 15g-9
promulgated under the Securities Exchange Act. Under those rules, broker-dealers
who recommend such securities to persons other than their established customers
and institutional accredited investors must make a special written suitability
determination for the purchaser and must have received the purchaser's written
agreement to a transaction prior to sale. These regulations would likely limit
the ability of broker-dealers to trade in our common stock and thus would make
it more difficult for purchasers of common stock to sell their securities in the
secondary market. The market liquidity for the common stock could be severely
affected.
YOU COULD SUFFER DILUTION OF YOUR INVESTMENT IF SHARES ARE SOLD PURSUANT TO AN
EQUITY CREDIT ARRANGEMENT, CERTAIN WARRANTS ARE EXERCISED, PREFERRED STOCK IS
CONVERTED INTO COMMON STOCK, OR STOCK OPTIONS ARE EXERCISED.
As of May 17, 2001, we have a total of 28,409,799 shares of common stock
outstanding. We have issued warrants to purchase 10,858,665 shares of common
stock at a weighted average price of $4.139 per share, as well as options to
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purchase 3,028,738 shares of common stock at a weighted average price of $3.189
per share. We have issued $5,000,000 of Series C Convertible Preferred Stock
that, based on the current market price per share, can be converted into
approximately 147,000,000 shares of our common stock. We have $6,561,887 of
Series D Convertible Preferred Stock outstanding that, based on the current
market price per share, can be converted into approximately 193,000,000 shares
of our common stock. We have issued $3,000,000 of Series E Convertible Preferred
Stock that, based on the current market price per share, can be converted into
approximately 88,000,000 shares of our common stock. We have entered into a
$7,000,000 private equity credit line agreement, that based on the current
market price per share, if fully drawn down, could be converted into
approximately 206,000,000 shares of our common stock. As of May 17, 2001,
$2,000,000 has been funded under this facility. Issuance of any of these shares
will dilute your interest in our company. Based on the current market price of
our common stock, if all of our outstanding convertible stock, warrants and
options were converted or exercised to acquire common stock, we would not have
enough authorized shares to honor the conversions or exercises.
ISSUANCE OF OUR AUTHORIZED PREFERRED STOCK COULD DISCOURAGE A CHANGE IN CONTROL,
COULD REDUCE THE MARKET PRICE OF OUR COMMON STOCK AND COULD RESULT IN THE
HOLDERS OF PREFERRED STOCK BEING GRANTED VOTING RIGHTS THAT ARE SUPERIOR TO
THOSE OF THE HOLDERS OF COMMON STOCK.
We have issued 155,000 shares of preferred stock. 9,391 of these shares
have been converted into 6,555,291 shares of common stock. All preferred shares
have voting rights on all matters decided by shareholders. The outstanding
preferred shares have the right to cast an aggregate of 1,495,252 votes as of
May 17, 2001, on all matters on which stockholders may vote. We are authorized
to issue an additional 9,845,000 shares of preferred stock without obtaining the
consent or approval of our stockholders. The issuance of preferred stock could
have the effect of delaying, deferring, or preventing a change in control. We
may also grant superior voting rights to the holders of preferred stock. Any
issuance of preferred stock could materially and adversely affect the market
price of the common stock and the voting rights of the holders of common stock.
The issuance of preferred stock may also result in the loss of the voting
control of holders of common stock to the holders of preferred stock.
WE WILL PAY NO DIVIDENDS TO YOU.
We have not paid, and do not expect to pay, any dividends on common stock
in the foreseeable future.
MANY SHARES WILL BECOME ELIGIBLE FOR FUTURE SALE, WHICH MIGHT ADVERSELY AFFECT
THE MARKET PRICE FOR THE SHARES.
As of May 17, 2001, there are 6,063,171 shares of our common stock
outstanding which cannot be sold on the public market. Of these shares,
1,084,684 shares are held by directors, officers, or stockholders who have
beneficial ownership of 10% or more of the outstanding shares, excluding shares
subject to options held by them. 4,978,487 shares are held by other
stockholders. These shares will become eligible for trading at various dates in
2001. In addition, shares of common stock which may be acquired pursuant to
outstanding convertible preferred stock or warrants will be eligible for trading
at various dates after they are acquired. We are unable to predict the effect
that sales of such shares may have on the then prevailing market price of the
common stock. Nonetheless, the possibility exists that the sale of these shares
may have a depressive effect on the price of our common stock.
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FORWARD-LOOKING STATEMENTS
YOU SHOULD NOT RELY ON OUR FORWARD-LOOKING STATEMENTS.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Discussions containing forward-looking statements may be found in
the material set forth under "Prospectus summary," "Management's discussion and
analysis of financial condition and results of operations," and "Business," as
well as within this prospectus generally. In addition, when used in this
prospectus, the words "believes," "intends," "plans," "anticipates," "expects,"
and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are subject to a number of risks and uncertainties.
Actual results could differ materially from those described in the
forward-looking statements as a result of the risk factors set forth and the
information provided in this prospectus generally. We do not intend to update
any forward-looking statements.
USE OF PROCEEDS
All of the shares of common stock offered by this prospectus are being
offered by the selling stockholders. We received or will receive money from the
sale of common stock under a Private Equity Credit Agreement with Wentworth LLC,
described on page 20, as well as the sale of shares of convertible preferred
stock that were converted, or are convertible, into the shares of common stock
offered in this prospectus. We also received, or will receive, money from the
exercise of warrants to purchase common stock which is offered by this
prospectus. This money was, or will be, used for working capital and general
corporate purposes. We will not receive any additional proceeds from the sale of
shares by the selling stockholders. For information about the selling
stockholders, see "Selling stockholders."
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the OTC Electronic Bulletin Board under the
trading symbol "ASAT." The following table sets forth the high and low bid
prices for our common stock since the beginning of the fiscal year 1997. The
quotations reflect inter-dealer prices, with no retail mark-up, mark-down or
commissions, and may not represent actual transactions. The information
presented has been derived from National Quotation Bureau, Inc.
1999 Fiscal year
----------------
First quarter 22.6875 10.50
Second quarter 14.25 7.876
Third quarter 9.3750 4.375
Fourth quarter 6.0625 1.1875
2000 Fiscal year
----------------
First Quarter 7.375 3.0625
Second Quarter 4.3125 1.5625
Third Quarter 2.0312 .5000
Fourth Quarter .6875 .0312
2001 Fiscal year
----------------
First Quarter .2500 .0312
Second Quarter .0700 .0100
14
On May 17, 2001, the last reported trade for our common stock was
$0.05.
As of May 17, 2001, there were 652 holders of record of our common stock.
DIVIDEND POLICY
We plan to retain all of our earnings, if any, to finance the expansion of
our business and for general corporate purposes. We have not declared or paid
any cash dividends on our common stock. We do not anticipate paying cash
dividends in the foreseeable future except possibly on preferred stock. The
terms of our outstanding preferred stock prohibit the payment of dividends on
our common stock unless all dividends accrued on the preferred stock have been
paid.
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2000
and our unaudited capitalization as of March 31, 2001. You should read this
table together with "Management's discussion and analysis of financial condition
and result of operations," consolidated financial statements and notes to
consolidated financial statements appearing elsewhere in this prospectus.
March 31, December 31,
2001 2000
------------ ------------
(UNAUDITED)
Stockholders' equity:
Preferred stock -- Series C -- cumulative, fully
participating convertible, $0.001 par value
Authorized - 50,000 shares Issued and
outstanding -- 50,000 shares (Aggregate
liquidation preference $4,999,500) $ 50 $ 50
Preferred stock - Series D, cumulative, fully
participating, convertible, $0.001 par value
Authorized and issued - 75,000 shares
Outstanding -- 66,166 shares (Aggregate
liquidation preference $6,616,564) 69 66
Preferred stock - Series E, cumulative, fully
participating, convertible, $0.001 par value
Authorized - 30,000 shares, Issued and
outstanding -- 30,000 shares (Aggregate
liquidation preference $2,999,970) 30 30
Common Stock - $0.001 par value Authorized --
100,000,000 shares Issued and outstanding --
25,977,718 shares at March 31, 2001 23,260 25,978
Additional paid-in capital 32,431,556 32,422,533
Retained deficit (33,670,218) (34,521,518)
------------ ------------
Total stockholder's equity $ (1,215,253) $ (2,072,861)
============ ============
The information provided above excludes:
- 10,858,655 shares of common stock issuable upon exercise of
15
warrants,
- 3,028,738 shares of common stock issuable upon exercise of
outstanding options, and
- approximately 634,000,000 shares issuable on conversion of
outstanding preferred stock and shares issuable pursuant to the
PECA.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to and should be read in conjunction with the consolidated financial
statements and notes to consolidated financial statements and the "Management's
discussion and analysis of financial condition and results of operations" and
other financial information included elsewhere in this prospectus. The
consolidated statements of operations data for the years ended December 31,
2000, 1999 and 1998 and the consolidated balance sheet data at December 31, 2000
and 1999 are derived from and qualified by reference to the audited consolidated
financial statements included elsewhere in this prospectus.
The consolidated statements of operations data for the three months ended
March 31, 2001 and the consolidated balance sheet data at March 31, 2001 have
been derived from our unaudited consolidated financial statements but have been
prepared on the same basis as our audited consolidated financial statements
which are included in this prospectus. In our opinion, these unaudited
consolidated financial statements include all adjustments, consisting of
normally recurring adjustments, considered necessary for a fair presentation of
our consolidated financial position and results of operations for that period.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------------------------------- -----------------------------
2000 1999 1998 2001 2000
------------ ----------- ----------- ------------ ------------
(RESTATED) (UNAUDITED) (UNAUDITED)
NET REVENUE $ 5,663,113 $ 3,676,217 $ 2,474,617 $ 2,211,886 $ 937,387
Gross margin (445,540) 77,431 (181,473) 72,856 (13,393)
Loss from operations (15,937,268) (8,084,757) (3,123,514) (892,340) (2,667,017)
Net income (loss) (12,534,492) 73,438,652 (93,675,433) (851,300) (788,712)
EARNINGS PER COMMON SHARE:
Net income (loss) $ (0.57) $ 3.50 $ (4.97) $ (0.03) $ (0.04)
============ ============ ============ ============ ============
EARNINGS PER COMMON SHARE -- ASSUMING
DILUTION
Net income (loss) $ (0.57) $ 3.05 $ (4.97) $ (0.03) $ (0.04)
============ ============ ============ ============ ============
CONSOLIDATED BALANCE SHEET:
DECEMBER 31,
---------------------------
MARCH 31,
2000 1999 2001
----------- ----------- -----------
(UNAUDITED)
Cash and cash equivalents $ 452,144 $ 3,412,205 $ 75,673
Working capital (3,503,540) 1,993,158 (4,234,800)
Total assets 4,447,363 5,980,825 4,498,864
Preferred stock - Series C - cumulative, fully participating 50 50 50
Preferred stock - Series A - cumulative, fully participating -- 10,000 --
16
Preferred stock - Series D - cumulative, fully participating 69 -- 66
Preferred stock - Series E - cumulative, fully participating 30 -- 30
Total stockholders' equity (1,215,253) 3,298,674 (2,072,861)
See note 1(N) of notes to consolidated financial statements for a
discussion regarding the computation and presentation of basic and diluted net
loss per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO
INCLUDED ELSEWHERE IN THIS REPORT, AS WELL AS "RISK FACTORS."
RESULTS OF OPERATIONS
March 31, 2001 as compared to March 31, 2000
Revenues totaled $2,211,886 and $937,387 for the three months ended March
31, 2001 and 2000, respectively. The 2001 revenue reflects an increase in
subscriber based revenues at the Company's managed internet services business
and to a lesser extent, increases in sales of the Company's satellite and
wireless services businesses. Approximately $90,000 of the revenue increase in
2001 is due to the inclusion of the results of the Company's wireless services
business, which was acquired in April, 2000.
For the three months ended March 31, 2001 and 2000, cost of sales totaled
$2,139,030 and $950,780, respectively. The 2001 cost of sales reflects increases
in staffing and operating costs at the Company's wireless and managed internet
services businesses as well as increases in installation and satellite access
fees at the satellite services business.
General and administrative expenses totaled $965,196 for the period ended
March 31, 2001 as compared to $2,653,624 for the prior year period. The decrease
is due to substantial cost reductions undertaken at the Company's corporate
offices, primarily in the area of business development. Cost containment
measures were also undertaken during the 2001 period at the Company's satellite
services business. The prior year balance also includes approximately $540,000
of SFAS 123 expense relating to the issuance of common stock warrants.
Other income for the period ended March 31, 2001 and 2000 totaled $41,040
and $2,058,567, respectively. The 2001 balance includes a gain on the sale of
fixed assets, whereas the prior period balance represents primarily a
compensation adjustment recognized under APB 25.
The loss from operations of discontinued subsidiary of ($180,262) recorded
in the period ended March 31, 2000 represents the Company's interest in the net
loss of its i-xposure subsidiary. The Company sold the majority of its interest
in this subsidiary in October, 2000. The subsidiary is no longer in operation.
2000 AS COMPARED TO 1999
Revenues totaled $5,663,113 and $3,676,217 for the years ended December
31, 2000 and 1999, respectively. The 2000 revenues increased primarily due to an
increase in subscriber levels at PacificNet, and to a lesser extent, the
inclusion of revenues of Interwireless subsequent to its acquisition by the
company in April, 2000.
For the year ended December 31, 2000 and 1999, cost of sales were
$6,108,653 and $3,598,786, respectively. Cost of sales increased in 2000 due
17
primarily to technical staffing increases at the company's network operations
center, increases in related hardware supplies and maintenance, start up cost
incurred in developing the company's fixed wireless network and an increase in
satellite access fees.
General and administrative expenses totaled $10,755,411 for the year ended
December 31, 2000 as compared to $8,162,188 in 1999. The increase in 2000
reflects the cost of business continuity marketing and corporate investor
relations programs, development costs relating to business lines subsequently
abandoned, staffing increases in the areas of technical development and legal
and accounting fees associated with the company becoming a full SEC reporting
company in late 1999.
The impairment loss $4,736,317 in 2000 reflects the write off of remaining
unamortized goodwill relating to the acquisition of Interwireless, as well as
valuation allowances on the fixed assets of Interwireless and the satellite
services businesses.
Other income in 2000 and 1999 reflects primarily a compensation adjustment
recognized under APB 25.
1999 AS COMPARED TO 1998
Revenues totaled $3,676,217 and $2,474,617 for the years ended December
31, 1999 and 1998, respectively. The growth in 1999 revenue reflects increases
in subscriber levels and development of related ancillary revenues at our
PacificNet subsidiary.
For the year ended December 31, 1999 and 1998, cost of sales were
$3,598,786 and $2,656,090, respectively. Cost of sales increased in 1999
primarily due to inventory write offs relating to the company's transition from
a provider of computer network products and services to that of satellite
internet services.
For the year ended December 31, 1999 and 1998, general and administrative
expenses were $8,162,188 and $2,942,041, respectively. The increase in expenses
for fiscal 1999 is due to higher levels of staffing and compensation, increased
marketing expenditures, increased research and development expenditures and
higher levels of professional fees paid to outside accountants and attorneys.
Other income in 1999 and 1998 reflects primarily a compensation adjustment
recognized under APB 25.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have historically been financed from the sale of preferred
and common stock. At March 31, 2001, the Company had cash and cash equivalents
on hand of $75,673 and working capital of ($4,234,800) as compared to cash and
cash equivalents of $452,144 and working capital of ($3,503,540) at December 31,
2000.
18
Net cash used in operating activities of ($610,350) for the three months
ended March 31, 2001 is attributable primarily to the operating loss as adjusted
for depreciation and amortization. Net cash provided by operating activities in
the prior period of ($1,864,108) includes the effect of a compensation expense
recognized under APB 25 and FAS 123.
Net cash used in investing activities of ($84,029) and ($210,653) for the
three months ended March 31, 2001 and 2000, respectively, is attributable to the
purchase and sale of fixed assets.
Net cash provided by financing activities of $317,908 for the three months
ended March 31, 2001 represents primarily the Company's issuance of a note
payable to an investor. Net cash used by financing activities in the prior year
period reflects repayment of debt financing, loans made to a discontinued
subsidiary and distributions to the owners of the managed internet services
business prior to its acquisition by the Company in April, 2000.
In January, 2001 the company received funding of $325,000 through the
issuance of a secured note to Wentworth, LLC. The note bears interest at 8%, was
originally due on April 30, 2001 and is collateralized by all of the assets of
the Company. Concurrent with this funding, the company entered into an agreement
with Wentworth, LLC whereby the $2,000,000 previously advanced under the PECA in
October, 2000 will be converted to a secured note also collateralized by the
assets of the company. The note is expected to be convertible to equity under
provisions substantially identical to those of the PECA.
In May, 2001 the Company issued a note to Wentworth LLC of up to
$1,332,655. This note incorporates the balance and terms of the $325,000 note
issued in January, 2001, and is collateralized by all of the assets of the
Company. The remainder of the May, 2001 note bears interest at prime plus 4%.
The May, 2001 note is due April 30, 2003. A total of $375,000 has been advanced
under this note.
Since November 15, 2000, we have stated that our cash, cash equivalents
and cash that may be generated from operations are not expected to be sufficient
to meet our operating needs. At this time, it appears that our current cash,
cash equivalents and cash generated from operations will only be sufficient to
meet our anticipated cash needs to approximately August 15, 2001, although there
can be no assurance in this regard. In order to continue operations beyond that
date, we would require an increase in sales activity or a substantial cash
infusion. Additional capital may not be available to us.
We are currently assessing strategic alternatives that may include an
asset sale or comparable transaction as part of a financial restructuring.
However, in the event that we are unsuccessful in completing one of these
strategic alternatives, we would be required to cease operations. In that case,
our common stock will have no value. In addition, potential investors in our
securities should consider the risk that, even if we are successful in
completing a strategic transaction as described above, our common stock will
nonetheless have no value.
CHANGE IN ACCOUNTANTS
We dismissed Lichter and Associates as our independent accountant,
effective November 30, 1999. Lichter and Associates' report on the financial
statements for 1998 did not contain an adverse opinion or a disclaimer of
opinion, nor was it qualified or modified, with one exception. The auditor's
report accompanying the financial statements in Amendment No. 1 to Form 10 filed
with the SEC on October 29, 1999 included the following qualification: "As
discussed in Note Q to the financial statements, the company has suffered
recurring losses, a decline in revenue and cash shortages. These issues raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note Q. The financial
statements do not include an adjustment that might result from the outcome of
this uncertainty." The decision to change accountants was approved by the Board
of Directors, including the audit committee. During the period preceding the
dismissal, there were no disagreements with Lichter and Associates on any matter
19
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure.
BUSINESS
OVERVIEW
Historically, we have attempted to position the company as a single source
for long haul, or satellite, last mile, or wireless, broadband delivery and
turnkey Internet products and services including network management. The company
is currently operating with significantly constrained cash resources and is
assessing which, if any, of its business lines will remain as continuing
operations in the near term.
From inception, we have incurred significant losses totaling approximately
$35,000,000 through March 31, 2001. However, to reduce or eliminate those
losses, the company is reviewing all business lines to determine which, if any,
will serve as a viable basis of operations. We have no assurance of obtaining
adequate cash resources to conduct future operations.
OUR PRESENT STRATEGY
In February 2001, we announced our intention to discontinue all of our
unprofitable business lines, which include our Satellite Services and Wireless
Services businesses. Our ability to obtain significant financing to fund these
operations as well as our Managed Internet Services business is limited.
Furthermore, we anticipate that our Managed Internet Services will experience a
reduction in revenues in the second quarter of 2001 as compared to the first
quarter of 2001. Accordingly, our Board of Directors is currently assessing
alternatives to the plan announced in February 2001. We cannot determine with
certainty at this time which of the company's business lines will remain as
continuing operations in the near term.
HISTORICAL SUMMARY OF THE COMPANY
We were incorporated on June 23, 1995, under Nevada laws, as "U.S. Connect
1995, Inc.," for the purposes of marketing and servicing transaction processing
services, prepaid long distance cards, ATM machines and payment systems to
small-to-medium sized merchants. In October 1995, we made a public offering of
our common stock from which we derived gross proceeds of approximately $100,000.
Prior to October 1998, we had not commenced operations and were seeking to
establish a new business. On October 8, 1998, we became the surviving company of
a merger with Technology Guardian, Inc., a California corporation ("TGI"). All
the issued and outstanding shares of TGI were exchanged for shares of our common
stock. In connection with the merger, we changed our name to Technology
Guardian, Inc., and succeeded to the business of TGI, which was providing
computer network installation services and the related sale of personal
computers and telecommunications equipment necessary for the configuration of
local area networks and conducting research and development of satellite-based
services. We changed our name to "eSAT, Inc." on January 26, 1999.
Research and development began in late 1996 for the satellite Internet
access products and services. The development of the satellite Internet products
and services continued during 1997 and into the first quarter of 1998. In the
first quarter of 1998, we terminated our sales of network computer related
products and concentrated entirely on the completion of our satellite Internet
access products and services. In the second quarter of 1998, we started beta
sales and installation of our initial (first generation) satellite Internet
access products. Beta sales involve the sales of products and services which
have been developed in a laboratory setting but have not been tested in actual
use. Beta installation means the first installations in a commercial setting,
often at a discount or at no cost in order for us to obtain additional
information for improving and completing the products and services. Through the
end of 1998, we beta tested our first generation satellite Internet product and
services. Beta testing on the first generation of products was terminated in
20
December 1998, such testing having been completed to our satisfaction.
In the fourth quarter of 1998, we initiated development of a second
generation satellite Internet product and related satellite Internet service.
Development of the second generation of satellite Internet products and services
and beta testing of them was completed to our satisfaction in January 1999. They
were incorporated into our one-way satellite services.
Finally, in the fourth quarter of 1998, we completed installation of our
equipment at a leased network operations center ("NOC") in Raleigh, North
Carolina. The NOC houses our computer equipment and software, functions as a
junction point for all the Internet related data traffic from our customers and
acts as the uplink to the satellites. We contract with third parties for
segments of satellite time that we then resell to our customers.
During the second quarter of 1999, we launched our bi-directional
satellite product.
On April 13, 2000, we acquired all of the outstanding common stock of
PacificNet Technologies, Inc. ("PacificNet"), a provider of software support and
managed Internet access to individuals and businesses, in a merger transaction.
At the same time, we also purchased all of the outstanding common stock of
PacificNet's sister company, InterWireless, Inc. ("InterWireless"), a wireless
Internet service provider that provides broadband wireless Internet access. We
continue to operate the businesses of PacificNet and InterWireless and have
moved our headquarters to their offices in Universal City, California. With the
acquisition of PacificNet and InterWireless, our business focus evolved further
to include ISP management services and last mile wireless Internet content
delivery services.
Due to our need to reduce or eliminate the drain on working capital caused
by our satellite and wireless Internet services business, in December 2000, we
adopted a plan to discontinue the operations of those two business. Since then,
our board of directors has decided to review that plan, and, as of the date
hereof, it is no longer certain which of our businesses might be discontinued or
sold.
PRODUCTS AND SERVICES
Our products and services fall into three general categories: Managed
Internet Services, Satellite Services and Wireless Services. As noted above, we
are in the process of determining which of these business lines will survive as
continuing operations of the company.
MANAGED INTERNET SERVICES. Our PacificNet subsidiary offers a wide range
of services under the product name V-ISP or Virtual Internet Service Provider.
The V-ISP product is geared to companies who currently or wish to offer ISP
services without the burden of investing in and maintaining the "back office"
portion of an ISP business. The VISP product is completely customized to meet
the customers' branding requirements and is operated by PacificNet in its
network operations center. Services include user sign-up, billing,
authentication, email, news, technical support and access to more than 1,100
dial-up locations throughout the world. We are uncertain at this time whether
this business line will remain as a continuing operation of the company or be
sold.
SATELLITE SERVICES. We currently operate a one-way and bi-directional
satellite Internet service which is primarily targeted to rural customers and
the business continuity (disaster recovery) market. The related Internet service
is provided through our Raleigh, North Carolina, network operations center. We
are uncertain at this time whether this business line will remain as a
continuing operation of the company or be sold.
WIRELESS SERVICES. We are able to address the problem of delivering
Internet content from a satellite receiving station to the end-user (the
so-called last mile) using wireless transmission technology. This product
21
offering has met limited success in the marketplace to date, due primarily to
technical equipment issues and limited availability of financial resources. We
are uncertain at this time whether this business line will remain as a
continuing operation of the company or be sold.
MARKETING AND SALES
MANAGED INTERNET SERVICES. We currently sell our Internet management
services to enterprise-size businesses, organizations and affinity groups
interested in outsourcing ISP, network management, co-location and data center
services which want to act independently as an ISP. Currently, we market
primarily through strategic partners and direct sales. We are uncertain at this
time whether this business line will remain as a continuing operation of the
company or be sold.
SATELLITE SERVICES. Our one-way and bi-directional satellite services are
sold directly to small to enterprise-size businesses and through a nationwide
network of value added resellers in a variety of markets including education,
hospitality, government, entertainment and law enforcement. In addition, these
services are marketed in the business continuity market to businesses with
mission-critical applications as a back up to terrestrial infrastructure. We are
uncertain at this time whether this business line will remain as a continuing
operation of the company or be sold.
WIRELESS SERVICES. We market our high-speed fixed wireless offering as an
internet access and data delivery solution to small, medium and enterprise-size
businesses in our service coverage areas. Our initial service launch was
targeted to local businesses in the West Los Angeles region. This product
offering has met limited success in the marketplace to date, due primarily to
technical equipment issues and limited availability of financial resources. We
are uncertain at this time whether this business line will remain as a
continuing operation of the company or be sold.
We employ a staff of three sales people dedicated to our managed internet
services and satellite services businesses. They focus their efforts on
organizing incoming leads, establishing contact with potential customers and the
closure of sales to a wide variety of businesses and consumers.
DIVERSIFICATION OF BUSINESS
Although we are currently assessing whether to sell it, currently, the
majority of our business focus lies in the products and services of our
PacificNet subsidiary. A substantial majority of our consolidated revenue
reported for the first quarter 2001 was derived from providing V-ISP services to
Genuity, Inc.
BACKLOG OF ORDERS
We currently do not have a backlog of orders.
INTELLECTUAL PROPERTY
We believe that our intellectual property is an important factor in
maintaining a competitive position in our business. To protect our proprietary
rights, we rely generally on patent, copyright, trademark and trade secret laws,
as well as confidentiality agreements with our employees, consultants, vendors
and corporate business partners. Despite these protections, a third party could,
without authorization, copy or otherwise obtain and use our products or
technology to develop similar technology. Moreover, our agreements with
employees, consultants and others who participate in product and service
development activities may be breached, we may not have adequate remedies for
any breach, and our trade secrets may become known or independently developed by
22
competitors.
Patents. Regarding our satellite business, we currently have filed two
pending patent applications. Any patent applications may not be granted, future
patents may be challenged, invalidated or circumvented, and the rights granted
under a patent that may be issued may not provide competitive advantages to us.
Many of our current and potential competitors dedicate substantially greater
resources to protection and enforcement of intellectual property rights,
especially patents. If a blocking patent has been issued or is issued in the
future, we would need either to obtain a license from the holder of the patent
or to design around the patent. We may not be able to obtain a required license
on acceptable terms, if at all, or to design around the patent. We are uncertain
at this time whether this business line will remain as a continuing operation of
the company.
Trademarks. We have applied for registration of all of our primary
trademarks in the United States, including "Sibone," "VOS," and "Virtual Onboard
Switching." We cannot be sure that we can prevent all third party use of our
trademarks. We have obtained the Internet domain name "esatinc.com" but we are
aware that an Irish telecommunications company has the same name ("ESAT") and
the Internet domain name "esat.com." We have not been asked to cease using the
name "eSat."
Copyrights. Software has been developed for certain of our business lines
that is protected by copyright law. There is no assurance that the steps we take
will be adequate to protect these rights or that we will be successful in
preventing the illegal duplication, distribution or other use of our software.
Our failure to adequately limit the unauthorized redistribution of our software
could result in litigation, which could harm our business.
The laws of some foreign countries do not protect our proprietary rights
to the same extent as do the laws of the United States, and effective protection
may not be available in these jurisdictions.
We rely on technology and other proprietary matter that we license from
third parties, including software and images that are integrated with internally
developed software and used in our products and services. Third party licenses
may not continue to be available to us on commercially reasonable terms. The
loss of any of these rights could harm our business.
Third parties may assert infringement claims against us. From time to time
we may be subject to claims in the ordinary course of our business, including
claims of alleged infringement of the trademarks, patents and other intellectual
property rights of third parties by us or our users. Any such claims, or any
resultant litigation, should it occur, could subject us to significant liability
for damages and could result in the invalidation of our proprietary rights. In
addition, such litigation could be time consuming and expensive to defend, and,
even if we were to prevail, could result in the diversion of our time and
attention, any of which could materially and adversely affect our result in
limitations on our ability to use such trademarks, patents and other
intellectual property unless we enter into arrangements with the appropriate
third parties, which may be unavailable on commercially reasonable terms.
COMPETITION
We compete in the market for providing Internet access services to the
business, government, education and nonprofit sectors.
We anticipate competition from Internet service providers (ISPs) which
provide satellite downlink data transmission in the commercial/business,
government and education sectors. Our competitors also include the established
ISPs, which offer a variety of connection features and speeds of access. Some
use telephone lines, some use television cable systems, and others offer
satellite focused services. There are numerous providers of these services and
no one provider dominates the market. Many service providers are affiliated with
23
telephone or cable television companies which provide capital resources and
customer marketing opportunities unavailable to us. At this time, we believe no
competitor has a dominant position in the worldwide ISP market segment. We have
not established a competitive position in the market place, since we have only
recently commenced the marketing and sales of our products. As a result,
potential customers may not be able to evaluate other customers' experiences in
using our products. This lack of track record might dissuade some customers from
purchasing our products until there is a greater customer base and a broader
evaluation of the quality and effectiveness of our products and services.
RESEARCH AND DEVELOPMENT
We do not plan to devote further resources to continued research and
development of various Internet related products and services.
EMPLOYEES
We currently have fifty-seven employees. Six employees are located at the
Company's Satellite Services business in Fountain Valley, California, fifty are
located at the headquarters, Managed Internet and Wireless Services facility in
Universal City, California, and one employee is located in Vienna, Austria.
PROPERTIES
We do not own any materially important physical properties. We lease our
headquarters in Universal City California, as well as our other facility in
Fountain Valley, California, pursuant to commercial leases which expire
September 30, 2004, and September 30, 2003, respectively. We could move our
headquarters without any material adverse affect on us. We lease space from
Microspace Corporation in Durham, North Carolina, which houses computer
equipment owned by us in connection with the uplink to the satellite network. We
could replace the Durham NOC without any material adverse effect on us.
LEGAL PROCEEDINGS
On January 24, 2001, i-xposure, Inc. brought an action in the Superior
Court for Orange, California, against the company seeking to enforce certain
guaranties made by the company as a part of a bridge financing transaction for
i-xposure. The complaint seeks to recover approximately $351,000 pursuant to the
guaranties, costs and other relief deemed proper by the court. If the company is
unable to successfully defend this action, it might be forced to seek protection
under the bankruptcy laws.
On December 12, 2000, Michael C. Palmer, the former Chief Executive
Officer of the company, and Vantage Capital, Inc. (controlled by Mr. Palmer),
commenced an arbitration proceeding against the company in Los Angeles,
California, under the rules of the American Arbitration Association, seeking
$325,000 in compensation he alleges is owed to him under his contractual
arrangements with the company. He has received a writ of attachment in the
Superior Court of Los Angeles County, California. If the company is unable to
successfully settle this action, it might be forced to seek protection under the
bankruptcy laws.
In January, 2000, a claim was asserted against the Company by two
shareholders alleging fraud and material omission of fact as represented by a
former Chief Executive Officer of the Company. The claim alleges damages of
$434,000.
In March 2001, Richard Elliot and David Pennells, co-founders and
Presidents of the subsidiaries PacificNet and Interwireless, asserted certain
claims of non-performance against the Company. They have not filed a lawsuit,
nor have they sought any damages, as of yet. Due to uncertainty regarding the
24
claims, and the fact that nothing has been formally brought against the Company,
no accrual has been made in these financial statements.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and positions of our directors
and executive officers:
Officer Name Age Position Since
------------ --- -------- -----
Chester (Chet) L. Noblett, Jr. 55 Chairman of the Board and acting CEO 1997
David Pennells 44 Senior Vice President 2000
Steven A. Tulk 34 Chief Operating Officer, PacificNet Technologies, Inc. 2000
Leon Shpilsky 37 Senior Vice President, Managing Director --
Europe Operations 2000
Mark Basile 39 Chief Financial Officer 2000
Salvator A. Piraino 72 Director 1997
Edward Raymund 71 Director 2000
James E. Fuchs 72 Director 2000
The directors are elected to hold office until the next annual meeting of
stockholders and until their respective successors have been elected and
qualified. Officers are elected annually by the board of directors and hold
office until their successors are elected and qualified.
The following sets forth biographical information concerning our directors
and executive officers for at least the past five years.
CHESTER (CHET) L. NOBLETT, JR. has been Chairman of the Board since April
1999 and a Director since June 1997 and acting CEO since September 2000. He was
Chief Operating Officer from June 1997 until December 1999. He served briefly as
interim Chief Financial Officer in January and February 2000. From 1990 to 1996,
Mr. Noblett was employed as the chief executive officer for Tradom
International, a subsidiary of Asahi Shouian, Inc., an international food
brokerage company. From 1975 to 1990, he was chief executive officer of C.
Noblett & Associates, a food brokerage company. Mr. Noblett is also president
and a director of Cyber Village Network, a computer software company. Mr.
Noblett received a B.S. degree in Business Administration from the University of
Southern California in 1971.
DAVID PENNELLS became Senior Vice President of the company on May 1, 2000.
From 1995 to 1999, he was Vice President and co-founder (along with Mr. Elliot)
of PacificNet, LLC, the predecessor of PacificNet Technologies, Inc. He remains
the Vice President of PacificNet. In 1998, Mr. Pennells co-founded (along with
Mr. Elliot), and became Vice President of, InterWireless, Inc. He remains in
that position.
STEVEN A. TULK was appointed Chief Operating Officer of PacificNet
Technologies, Inc. and InterWireless, Inc. in July 2000. Prior to that he served
as the company's Senior Vice President, Managing Director - Asia Operations from
January 2000 to July 2000. Mr. Tulk served as chief information officer of
Vivendi Water's consumer and commercial division from December 1998 to January
2000. From 1994 to 1998, Mr. Tulk operated Tulk Consulting Inc., a software
development and network engineering consulting firm. From 1992 to 1994 Mr. Tulk
25
was director of management information systems for Pharmacia's ophthalmic
division. Mr. Tulk served as senior technical specialist for the J. Paul Getty
Trust from 1990 to 1992. Mr. Tulk received a B.S. in Business Administration
from the University of California at Riverside in 1990.
LEON SHPILSKY was appointed as the company's Senior Vice President,
Managing Director - Europe Operations in May 2000. From 1987 to May 2000, Mr.
Shpilsky held various positions with the certified public accounting firm of
Parks, Palmer, Turner and Yemenedjian, most recently serving as
principal/director of international practice. From 1984 to 1987, Mr. Shpilsky
was a certified public accountant with KPMG Peat Marwick, LLP, an international
accounting and consulting firm. Mr. Shpilsky received a B.S. in Business
Administration from the University of Southern California in 1984.
MARK BASILE was appointed as the company's Chief Financial Officer in
March 2000 and Secretary in September 2000. From March 1999 to March 2000, Mr.
Basile was chief financial officer of Superior Galleries, Inc., an auction
services firm in Beverly Hills, California. From 1996 through March 1999, Mr.
Basile served as director of management accounting and controller of the Hawaii
division of Young's Market Company. From 1989 to 1996, Mr. Basile was director
of internal audit at K2 Inc., a manufacturer of sporting goods and recreational
products. Prior to that, Mr. Basile was a certified public accountant at Ernst &
Young LLP, an international accounting and consulting firm. Mr. Basile received
a B.S. in Accounting from the University of Florida in 1983.
SALVATOR A. PIRAINO has been a director of the company since December
1997. From September 1992 to the present, Mr. Piraino has operated Management
and Technical Services, a management consultant firm providing management,
engineering and manufacturing expertise to a number of small companies. From
1974 to 1992, Mr. Piraino was employed as a director, program manager, product
line manager and assistant division manager for Hughes Aircraft Company. Mr.
Piraino received a B.E. degree in Engineering from Loyola University in 1950.
EDWARD (ED) RAYMUND has been a director of the company since July 2000.
Mr. Raymund is founder and Chairman Emeritus of Tech Data Corp., a Fortune 500
company which he founded in 1973. Mr. Raymund serves as a director on Tech
Data's Board. He is also chairman of the University of Southern California
Supply Chain Management Board of Directors and is a member of the Advisory
Boards for Mission Hospital Regional Medical Center and the University of
Southern California Business School. In 1997, Mr. Raymund was named in initial
inductee in Computer Reseller New's Industry Hall of Fame. Mr. Raymund holds a
Bachelor's Degree in Business Administrating with an emphasis in Finance from
the University of Southern California.
JAMES E. FUCHS has been a director of the company since July 2000. Mr.
Fuchs is chairman and co-chief executive officer of the Consamer Group, Inc., a
corporation structured to utilize its marketing, sales, finance and consulting
expertise for various ventures. Mr. Fuchs is also chairman and chief executive
officer of Grenfox Group, Inc., a company involved in the development and
production of environmentally friendly inks and related coating products. Prior
to these posts, Mr. Fuchs was chairman and chief executive officer of Integrated
Human Solutions, an international human resources and consulting firm, and held
executive positions with the National Broadcasting Company, Curtis Publishing
Company, the Mutual Broadcasting Systems, Mutual Sports, Inc. and Culligan
Communications, Inc. Mr. Fuchs is a member of the board of directors of Fountain
Pharmaceuticals, Inc. and Alternate Care, Inc. Mr. Fuchs is a graduate of Yale
University.
EXECUTIVE COMPENSATION
26
The following table sets forth information concerning the compensation we
paid to our Chief Executive Officer, each of the four most highly compensated
executive officers that earned more than $100,000 during 2000.
Annual Compensation Long Term Compensation
-------------------------------------------------- ----------------------------------------
Awards
--------------------------
Other Restricted Securities
Name and Annual Stock Underlying All Other
Principal Position Year Salary Bonus Compensation Awards Options Compensation
- -------------------- ---- ---------- ------- ------------ ---------- --------- ------------
Michael C. Palmer(1) 2000 $ 210,833 $
Former President, CEO 1999 455,913 $ 87,500 1,625,000
and Secretary 1998 10,780 100,000
Chester L. Noblett, Jr.(2) 2000 230,042
Chief Executive Officer 1999 178,936 48,750 300,000
1998 114,750 1,095,802
Richard Elliot(3) 2000 127,500 3,482
Senior Vice President 1999 --
and Chief Technology Officer, 1998 --
Interwireless, Inc.
David Pennells(4) 2000 108,250 2,885
Senior Vice President 1999 --
and President, PacificNet 1998 --
Technologies, Inc.
Steven A. Tulk(5) 2000 145,250 50,000 115,007 350,000
Chief Operating Officer, 1999 --
PacificNet Technologies, Inc. 1998 --
Mark Basile(6) 2000 101,250 300,000
Chief Financial Officer 1999 --
1998 --
- ----------
* Please see Certain transactions, below, and Note 8(e) to the Financial
Statements regarding the cancellation of Mr. Coulter's options in March,
1999.
(1) In 1999, Mr. Palmer was an employee of Parks Palmer Business Services, a
subsidiary of Century Business Services. The amount denoted as salary
includes all amounts paid to Parks Palmer Business Services through
October 1999, including payments for services other than those provided by
Mr. Palmer. Effective November 1999, the company paid Vantage Capital,
Inc. ("VCI") $25,000 per month for Mr. Palmer's services pursuant to a
consulting agreement. Mr. Palmer is the sole owner of VCI. In addition,
VCI received warrants to purchase 600,000 shares of common stock as part
of the consulting arrangement. See "Certain transactions" for additional
information. Mr. Palmer ceased being an officer of the company in
September 2000.
(2) Includes back pay of $57,417 earned in 1999 and paid in January 2000.
(3) Mr. Elliot joined us in April 2000, with a base salary of $180,000. Mr.
Elliot left the company in January, 2001.
(4) Mr. Pennells joined us in April 2000, with a base salary of $150,000.
(5) Mr. Tulk joined us in January 2000, with a base salary of $150,000. Other
compensation includes amounts paid to Mr. Tulk for relocation of his home.
(6) Mr. Basile joined us in March 2000, with a base salary of $150,000.
The company has entered into an employment agreement with Mr. Noblett for
a period of five years commencing September 25, 1997. Under the agreement, Mr.
Noblett receives a salary of $225,000 per year plus health insurance
27
benefits of $200 per month. The employment agreement includes a cost-of-living
increase, plus any other increase which may be determined from time to time in
the discretion of our Board of Directors. In addition, Mr. Noblett is provided
with a car on lease terms determined by the company, provided that the monthly
operating costs (including lease payments) to be paid by the company will not
exceed $750.
We have entered into an employment agreement with Mr. Tulk for a period of
five years, commencing January 1, 2000. Under the terms of this agreement, Mr.
Tulk receives a minimum base salary of $150,000 per year, and is eligible to
earn a performance bonus of up to 100% of his base salary. In addition to
receiving a signing bonus of $50,000, Mr. Tulk is also entitled to reimbursement
of his relocation expenses, as well as his business-related expenses, under the
employment agreement. Further, Mr. Tulk received stock options for 350,000
shares of our stock by the terms of his stock option agreement.
The company entered into an employment agreement with Richard Elliot for a
period of three years, commencing May 1, 2000. He resigned as an officer of the
company in January 2001. By the terms of the agreement, Mr. Elliot received a
base salary of $180,000 per year. The employment agreement included company
health insurance coverage and reimbursement of normal business-related expenses.
In addition, Mr. Elliot was entitled to receive paid vacation and sick time, as
well as paid time during which he may attend professional conferences or
seminars. The agreement also provided an automobile allowance of $1400 per month
that includes payment of associated automobile insurance.
The company has entered into an employment agreement with David Pennells
for a period of three years, commencing May 1, 2000. The agreement will
automatically renew for successive one year periods unless either party chooses
not to renew the contract. Mr. Pennells, by the terms of the agreement, receives
a base salary of $180,000 per year, and is eligible to receive performance-based
bonus compensation. Under the agreement, Mr. Pennells' salary will be reviewed
on an annual basis (or more frequently) by our Board of Directors. The
employment agreement includes company health insurance coverage and
reimbursement of normal business-related expenses. In addition, Mr. Pennells is
entitled to receive paid vacation and sick time, as well as paid time during
which he may attend professional conferences or seminars. The agreement also
provides an automobile allowance of $1400 per month that includes payment of
associated automobile insurance. Further, Mr. Pennells' employment agreement
allows him to be eligible to receive an aggregate of 1,000,000 options to
purchase shares of our stock for allocation to a pool of PacificNet and
InterWireless employees. 850,000 of these options have already been allocated to
certain employees of those two subsidiaries.
We have entered into an employment agreement with Leon Shpilsky for a
period of three years, commencing May 8, 2000. The agreement will automatically
renew for successive one year periods, provided neither party chooses not to
renew the contract. Mr. Shpilsky, by the terms of the agreement, receives a base
salary of $125,000 per year, and is eligible to receive performance-based
compensation. Under the agreement, Mr. Shpilsky may also receive a salary
adjustment under certain conditions while he is based in Western Europe. The
employment agreement includes company health insurance coverage and
reimbursement of normal business-related expenses. In addition, Mr. Shpilsky is
entitled to receive paid vacation and sick time, as well as paid time during
which he may attend professional conferences or seminars. The agreement also
provides a monthly automobile expense allowance that includes payment of
automobile insurance and associated expenses. Further, Mr. Shpilsky is entitled
to receive compensation for relocation expenses. The employment agreement also
grants to Mr. Shpilsky 300,000 stock options for shares of our company's common
stock.
OPTION GRANTS IN FISCAL YEAR 2000
28
Percent
of Total
Options
Number of Granted to Exercise
Shares Employees or Base Potential Realizable Value at
Underlying in Fiscal Price Expiration Assumed Annual Rates of Stock
Name Options Year ($/Sh) Date Price Appreciation for Option Term
- ---- ---------- ---------- --------- -------- ----------------------------------
5%($) 10%($)
--------------- ---------------
Michael C. Palmer(1)
Chester L. Noblett(1)
Richard Elliot(1)
David Pennells(1)
Steven A. Tulk 350,000 7.1% $4.00 2/1/04 301,709 649,740
Mark Basile 300,000(2) 6.1% $3.59(2) 3/15/04(2) 258,608 556,920
- ----------
(1) No options were granted to these executive officers in 2000.
(2) Includes 150,000 options exercisable at $4.19 per share expiring 3/15/04
and 150,000 options at $3.00 per share expiring 4/26/04.
No options were exercised by any of the above named persons in 2000.
DIRECTOR COMPENSATION
Each non-employee director receives a payment of $1,000 for each board
meeting attended and an annual option grant to purchase 20,000 shares at market
value. All directors are entitled to reimbursement for expenses of traveling to
and from board meetings, and any other out-of-pocket expenses incurred on behalf
of the company.
Mr. Piraino, who serves as the audit committee chairman, receives a
payment of $500 per month for his services.
Prior to the merger with Technology Guardian, Inc. ("TGI"), Mr. Piraino
was granted 25,000 shares of common stock as compensation for serving on the
board of directors.
CERTAIN TRANSACTIONS
In April 1997, in exchange for the issuance of 849,750 shares of TGI
common stock which were converted into company shares in the merger, TGI entered
into a settlement agreement among TGI, Cyber Village Network, Inc. ("CVN") and
Mr. Noblett in which CVN and Mr. Noblett agreed to release TGI from all
potential claims arising from: (i) an Option Agreement, dated August 6, 1997;
and, (ii) an agreement entered into among TGI, David Coulter, as TGI's then
President, CVN and Mr. Noblett as agent for CVN ("Commission Agreement").
The Option Agreement granted options to CVN to purchase shares equal to
10% of TGI's issued and outstanding shares in exchange for forgiveness of a
$100,000 promissory note held by CVN, as well as the option to purchase shares
equal to 30% of TGI's issued and outstanding shares in exchange for $1,200,000.
Further, the Option Agreement provided that David Coulter, TGI's former
president, had the right to repurchase shares from CVN equal to 15% of TGI's
common stock following the exercise of the option by CVN in exchange for
$1,200,000. Mr. Coulter offset his obligation to pay CVN $1,200,000 by the
$1,200,000 payable to TGI by CVN pursuant to its exercise of options. The
Commission Agreement provided that TGI and Mr. Coulter, TGI's then President,
29
would pay Mr. Noblett, as agent for CVN, an amount equal to 6% of the gross
proceeds received by TGI from any underwriting arranged by Andrew Glashow and
Joe Py, including bridge financing, and subsequently, Mr. Noblett would rebate
one-third of the aforementioned fees to Mr. Coulter. The Option Agreement was
subsequently canceled and the parties released each other from all claims.
Prior to the issuance of the 1,030,000 shares of TGI's stock as a result
of the exercise of the Option Agreement by CVN and the 849,750 shares received
in consideration for the Settlement Agreement, for a total of 1,879,750 Shares,
Mr. Noblett, as agent for CVN, assigned 1,060,000 shares to certain persons as
consideration for loans made to CVN.
In March 1998 TGI completed payment to Mr. Noblett of a fee in the amount
of $100,000 for services provided in assisting TGI with obtaining additional
capital.
In May 1998 Mr. Coulter transferred 379,250 shares of his stock to CVN.
Mr. Coulter then canceled 5,414,172 shares of common stock of TGI in connection
with the pending private placement of shares of TGI. Of the shares canceled, TGI
reissued 125,619 shares to him in August 1998, prior to completion of the merger
with U.S. Connect 1995.
The cancellation of the Option Agreement was part of the overall
consideration given in settling the disputes between Mr. Noblett and Mr.
Coulter. A dispute arose between Messrs. Noblett and Coulter with regard to Mr.
Noblett's right to purchase 30% of the outstanding stock of TGI. Due to what Mr.
Coulter perceived to be the increasing potential of TGI, he did not want TGI to
honor its prior commitment to Mr. Noblett. The transactions had no impact on the
operations of the company. These transactions only resolved disputed issues
between Mr. Noblett and Mr. Coulter. At that point in time, there were fewer
than ten stockholders of the company, all of whom were closely associated with
the company. Accordingly, there were no public stockholders affected in any way
by these transactions.
In connection with the merger with U.S. Connect 1995, we assumed the
obligations of TGI to issue options to purchase 2,000,000 shares of TGI common
stock on a pro rata basis to all TGI stockholders as of August 30, 1998, at an
exercise price of $0.7168 per share, exercisable for five years from date of
grant. In addition, the company assumed the obligations of TGI for options to
purchase 1,910,885 shares of TGI common stock to Mr. Coulter, then-President of
TGI, and 500,000 shares of TGI common stock to Mr. Noblett, the Vice President
and Chief Operating Officer of TGI, at an exercise price of $.7168 per share,
exercisable for five years from date of grant. In October 1998 the Board of
Directors authorized the issuance of additional options to purchase 1,500,000
shares of common stock to Mr. Coulter, and 333,000 shares of common stock to Mr.
Noblett, at an exercise price of $3.00 per share, exercisable for five years
from date of grant subject to the company achieving $30,000,000 in sales in
1999. We did not achieve this level of sales in 1999, and therefore the
additional options issued to Mr. Coulter (1,500,000) and Mr. Noblett (333,000)
lapsed.
On March 22, 1999, Mr. Coulter resigned as a director and officer of the
company. Pursuant to a resignation agreement, Mr. Coulter agreed to cancel
1,767,769 shares of common stock, reducing the number of shares he holds to
3,000,000 shares of common stock. By contract, the 3,000,000 shares retained by
Mr. Coulter are nonvoting. In addition, Mr. Coulter agreed to cancel all options
held by him to purchase 3,410,885 shares of common stock. The canceled options
included options on 1,500,000 shares exercisable at $3.00 per share and options
on 1,910,885 shares at $0.7168 per share. Mr. Coulter agreed to accept in lieu
thereof options to purchase 1,500,000 shares of common stock, with an exercise
price of $3.00 per share, for five years from August 22, 1999. Mr. Coulter also
agreed to the termination of his employment agreement. We agreed to pay Mr.
Coulter a severance payment of $150,000, payable at the rate of $30,000 per
month from the time of resignation, and to pay Mr. Coulter for consulting with
us at the rate of $10,000 per month for a total of 36 months, commencing upon
his resignation. We have entered into a general mutual release of claims with
Mr. Coulter. As a result of an alleged breach of the resignation agreement by
30
Mr. Coulter, we suspended the payment of $10,000 per month to Mr. Coulter. On
February 23, 2000, we entered into a settlement agreement and general release
with Mr. Coulter, pursuant to which Mr. Coulter released all claims for
compensation under the resignation agreement of March 22, 1999, and agreed to
transfer certain domain names to us. In return, we agreed to pay Mr. Coulter
$90,000 and to grant him piggy back registration rights with respect to shares
he acquires in the exercise of his stock options.
CFE and VCI (the "Consultant") worked together as equal joint venture
partners pursuant to an exclusive consulting agreement entered into between the
Consultant and the company, dated September 15, 1999, which was to terminate no
earlier than September 15, 2002. Mr. Palmer, CEO of the company, is also the
owner and President of the Consultant.
Pursuant to the consulting agreement, we agreed to issue 2,500,000 shares
of Series B 12% Convertible Preferred Stock to CFE for $2.00 per share, and
1,000,000 shares of Series A 12% Convertible Preferred Stock to VCI for $2.00
per share.
The consulting agreement and the issued and outstanding Series B Preferred
Stock were canceled by mutual agreement of the parties in March 2000. As part of
the settlement, we agreed with CFE to settle a dispute about the number of
common shares issued to CFE and its clients and the amount we received in
payment for those shares. CFE paid us $558,510 and we entered into a mutual
release with CFE for all claims. In addition, CFE agreed to put the shares of
common stock which CFE would receive upon conversion of its warrants into a
voting trust if requested by NASDAQ in order to facilitate a listing on NASDAQ.
Furthermore, all of the outstanding Series A Preferred Stock were converted into
550,000 shares of common stock in April 2000. The warrants issued to the former
holders of Series A Preferred Stock and Series B Preferred Stock remain
outstanding.
In 2000, the company entered into a consulting agreement with a company
controlled by Salvator A. Piraino, one of our directors. Such company agreed to
provide sales strategy and other business strategy services for a flat fee of
$1,500 per month. The agreement is cancellable by either party at will.
PRINCIPAL STOCKHOLDERS
COMMON STOCK
The following table sets forth, as of May 17, 2001, the ownership of the
company's common stock by
- each director and named executive officer of the company,
- all named executive officers and directors of the company as a group,
and
- all persons known by the company to beneficially own more than 5% of the
company's common stock.
Amount and Percent
Nature of of Total
Beneficial Shares and
Beneficial Owner Ownership(1) Options
- ------------------------------------ ------------ --------------
David B. Coulter(2)
15555 Huntington Village Lane, #239 1,500,000 5.02%
31
Building 9
Huntington Beach, CA 92647
Chester (Chet) L. Noblett Jr.(3) 2,737,097 9.23%
16520 Harbor Boulevard, Bldg. G
Fountain Valley, California 92708
Salvator Piraino(4) 161,103 *
16520 Harbor Boulevard, Bldg. G
Fountain Valley, California 92708
James E. Fuchs 2,500 *
10 Universal City Plaza, Suite 1130
Universal City, California 91608
Michael C. Palmer(5) 950,000 3.26%
10 Universal City Plaza, Suite 1130
Universal City, California 91608
Richard Elliot 2,062,500 7.26%
10 Universal City Plaza, Suite 1130
Universal City, California 91608
Steven A. Tulk(6) 233,333 *
10 Universal City Plaza, Suite 1130
Universal City, California 91608
Ed Raymund -- *
10 Universal City Plaza, Suite 1130
Universal City, California 91608
David Pennells 687,500 2.42%
10 Universal City Plaza, Suite 1130
Universal City, California 91608
Mark Basile (7) 107,000 *
10 Universal City Plaza, Suite 1130
Universal City, California 91608
Directors and Named Executive Officers 8,388,533 26.03%
as a group
- ----------
* Less than one percent.
(1) Unless otherwise stated below, each such person has sole voting and
investment power with respect to all such shares. Under Rule 13d-3(d),
shares not outstanding which are subject to options, warrants, rights or
conversion privileges exercisable within 60 days are deemed outstanding
for the purpose of calculating the number and percentage owned by such
person, but are not deemed outstanding for the purpose of calculating the
percentage owned by each other person listed.
(2) Includes options to purchase 1,500,000 shares of the company's common
stock at $3.00 per share for a period of five years from August 22, 1998.
(3) Includes options to purchase (i) 262,802 shares of the company's common
stock at $0.7168 per share for a period of five years from date of grant
(August 8, 1998); (ii) 333,000 shares of the company's common stock at
$3.00 per share for a period of five years from date of grant (October 7,
1998); (iii) 300,000 shares of the company's common stock at $3.00 per
share for a period of five years from date of grant (September 15, 1998);
and (iv) warrants to purchase 350,000 shares of the company's common stock
at $2.40 per share for a period of five years from date of
32
grant (June 9, 1998).
(4) Includes options to purchase (i) 16,103 shares of the company's common
stock at $0.7168 per share for a period of five years from date of grant
(August 31, 1998); (ii) 20,000 shares of the company's common stock at
$5.50 per share for a period of five years from date of grant (September
30, 1999); and (iii) 25,000 shares of the company's common stock at $4.00
per share for a period of five years from date of grant (February 9,
1999).
(5) Includes options to purchase (i) 100,000 shares of the company's common
stock at $9.25 per share for a period of five years from date of grant
(November 28, 1998); (ii) 25,000 shares of the company's common stock at
$4.00 per share for a period of five years from date of grant (February 9,
1999); and (iii) 100,000 shares of the company's common stock at $6.25 per
share, 150,000 shares at $4.25 per share, 150,000 shares at $5.25 per
share and 200,000 shares at $8.50 per share for a period of five years
from date of grant (November 1, 1999).
(6) Includes vested portion of options to purchase 350,000 shares of the
company's common stock at $4.00 per share for a period of four years from
date of grant (February 1, 2004)
(7) Includes vested portion of options to purchase 150,000 shares of the
company's common stock at $4.19 per share for a period of four years from
date of grant (March 15, 2004) and vested portion of options to purchase
150,000 shares of the company's common stock at $3.00 per share for a
period of four years from date of grant (April 26, 2004)
PREFERRED STOCK
The following table sets forth information regarding the beneficial
ownership of our voting preferred stock as of the date of this prospectus:
Name and Address Number of Shares Percent
Class of Beneficial Owner Beneficially Owned of Class
----- ------------------- ------------------ --------
Series C Wentworth, LLC 50,000 100%
6% Convertible Corporate Center
Preferred Stock(1) West Bay Road
Grand Cayman
Series D Wentworth, LLC 65,619 100%
6% Convertible Preferred Corporate Center
Stock(1) West Bay Road
Grand Cayman
Series E Wentworth, LLC 30,000 100%
6% Convertible Corporate Center
Preferred Stock(1) West Bay Road
Grand Cayman
- ----------
(1) All of the above preferred stock is convertible into common stock
immediately; provided however, that no conversion may occur if, after
conversion, the holder would be deemed beneficial owner of more than 4.99%
of the company's then outstanding common stock. See "Description of
securities" for details on the conversion prices.
33
SELLING STOCKHOLDERS
All of the shares offered by this prospectus have been registered for sale
for the accounts of selling stockholders. The selling stockholders have obtained
or will obtain the common stock offered under this prospectus by purchasing
common stock from us pursuant to the Private Equity Credit Agreement described
in "Management's discussion and analysis of financial condition and results of
operations - Liquidity and capital resources," or converting or exercising
certain of our convertible securities that they now hold or have the right to
acquire. These selling stockholders hold shares of Series C 6% Convertible
Preferred Stock ("Series C Preferred"), Series D 6% Convertible Preferred Stock
("Series D Preferred"), Series E 6% Convertible Preferred Stock ("Series E
Preferred"), warrants to purchase common stock that we issued to holders of the
Series C Preferred, Series D Preferred and Series E Preferred in connection with
the issuance of the Series C Preferred, Series D Preferred, Series E Preferred,
warrants we issued to an investment banker that facilitated our sales of Series
C, D and E Preferred or common stock acquired upon the exercise of those
warrants.
The table below includes, in the total number of shares offered, shares of
common stock that have been issued or are issuable pursuant to the Private
Equity Credit Agreement or upon conversion of shares of Series C Preferred,
Series D Preferred and Series E Preferred.
The table below also includes shares of common stock issuable upon
exercise of warrants issued or issuable (i) to Wentworth, LLC under the Private
Equity Credit Agreement, (ii) to Wentworth, LLC in connection with a secured
loan transaction, (iii) to holders (who are selling stockholders) of Series C
Preferred, Series D Preferred, and Series E Preferred, (iv) to an investment
banker which facilitated the sale of Series C, D and E Preferred and (v) shares
of common stock acquired, or to be acquired, by a selling stockholder pursuant
to exercise of certain warrants.
We will not receive any portion of the proceeds from the sale of shares of
common stock by the selling stockholders. We have previously received
$15,500,000 from the sale of Series C, Series D and Series E Preferred shares,
$1,125,000 pursuant to the secured loan transaction, and may receive up to
$7,000,000 ($2,000,000 of which has already been received)from sale of common
stock under the Private Equity Credit Agreement. In addition, we may receive
additional funds in a currently indeterminable amount if outstanding warrants
are exercised by the selling stockholders.
Based on the information supplied to us by each selling stockholder, the
following table sets forth certain information regarding the approximate number
of shares of common stock which each selling stockholder owns or has the right
to immediately acquire as of the date hereof, and as adjusted to reflect the
sale by the selling stockholders of the shares of common stock offered by this
prospectus. No selling stockholder has held any office or maintained any
material relationship with us, or any of our predecessors or affiliates, over
the past three years.
Common Shares Common Shares
Beneficially Owned Number of Beneficially Owned
Prior to Offering(1) Common After Offering(1)(2)
------------------------- Shares ---------------------
Name and Address Number Percent Offered Number Percent
----------- ---------- --------- ------- ----------
Wentworth, LLC(3)
Corporate Center
West Bay Road
Grand Cayman 115,402,363(4) 81.9%(5) 25,404,986(4) -0- 0%
----------- ------ ---------- -------- --------
34
Grayson & Associates(6)
One Tabor Center
1200 17th Street,
16th Floor
Golden, Colorado 80202 1,226,657 4.6% 1,226,657 -0- 0%
----------- ------ ---------- -------- --------
- ----------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated, each
person possesses sole voting and investment power with respect to all of
the shares of common stock owned by such person, subject to community
property laws where applicable. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options and convertible
securities held by that person that are currently exercisable, or that
become exercisable within 60 days of the date of this prospectus, are
deemed outstanding. Such shares, however, are not deemed outstanding for
the purpose of computing the percentage ownership of any other person. The
information as to each person has been furnished by such person. For
purposes of this table, it is assumed that all shares registered and
offered pursuant to this prospectus have been purchased. All such shares
will be purchased or acquired pursuant to a Private Equity Credit
Agreement, upon conversion of convertible preferred stock or exercise of
warrants prior to being resold pursuant to this prospectus.
(2) Assumes that all shares of common stock offered in this prospectus will be
sold.
42
44
(3) Navigator Management Ltd., the Manager of Wentworth, LLC, has voting and
investment decision authority over this investment.
(4) In accordance with the Private Equity Credit Agreement, the terms of the
Series C, D and E Preferred Stock, and the underlying warrant agreements
with Wentworth, LLC, we are required to register an amount of shares equal
to 200% of the shares issuable with respect to such agreements. The actual
number of shares to be sold will depend on the number of shares acquired
by Wentworth, LLC pursuant to the Private Equity Credit Agreement or upon
conversion of the Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and warrants it holds.
(5) Pursuant to the Private Equity Credit Agreement, Wentworth LLC, without
our shareholders' approval, may not acquire at any one time more than
19.9% of our outstanding common stock. Pursuant to the terms of our Series
C, D and E Preferred Stock, Wentworth LLC may not convert such shares into
our common stock if the conversion would result in its being deemed
beneficial owner of more than 4.99% of our outstanding common stock.
(6) Gerald Grayson, President of Grayson & Associates, is the individual who
has voting and investment decision authority over this investment.
DESCRIPTION OF SECURITIES
The following summary description of our capital stock is not intended to
be complete and is subject to and qualified in its entirety by reference to our
Amended and Restated Articles of Incorporation, copies of which are filed as
exhibits to the registration statement of which this prospectus forms a
35
part.
GENERAL
We have authorized capital stock consisting of 100,000,000 shares of
common stock, $0.001 par value, of which 28,409,799 common shares are issued and
outstanding (exclusive of shares reflected in this prospectus as being held for
sale by selling shareholders), and 10,000,000 shares of preferred stock, $0.001
par value, of which 145,609 shares are issued and outstanding. There are 652
holders of record of our common stock as of the date of this prospectus.
Based on the current market price of our common stock, if all of our
outstanding convertible stock, warrants and options were all converted or
exercised to acquire common stock, we would not have enough authorized shares to
honor the conversions or exercises. The company will monitor the situation and,
if deemed necessary, will propose an amendment to the articles of incorporation
at the next annual meeting to increase the number of authorized shares of common
stock.
As of May 17, 2001, we have reserved 3,028,738 shares of common stock for
issuance pursuant to options, and an aggregate of 10,858,665 shares for issuance
pursuant to outstanding warrants and convertible securities agreements. We do
not expect these warrants or options to be exercised in the near future since,
in all cases, the exercise price is higher than the market price for our common
stock.
COMMON STOCK
The principal terms of our common stock are set forth below:
- number authorized: 100,000,000
- number outstanding: 28,409,799 exclusive of shares reflected in this
prospectus as being held for sale by the selling stockholders
- dividend rate: see "Dividend policy"
- vote per share: one
- no preemptive rights or other rights to subscribe for unissued or
treasury shares or securities convertible into or exercisable or
exchangeable for shares of our common stock
- outstanding shares of common stock are duly authorized and validly
issued, fully paid and nonassessable
PREFERRED STOCK
Our Board of Directors has the authority to issue up to 10,000,000 shares
of preferred stock in one or more series and to fix the powers, designations,
rights, preferences and restrictions thereof, including dividend rights,
conversion rights, voting rights, redemption terms, liquidation preferences and
the number of shares constituting each such series, without any further vote or
action by our stockholders. The issuance of preferred stock in certain
circumstances may delay, deter or prevent a change in control of the company,
may discourage bids for our common stock at a premium over the market price of
the common stock, and may adversely affect the market price of, and the voting
and other rights of the holders of, our common stock. The principal terms of our
preferred stock are set forth below:
Series C 6% Convertible Preferred
36
- number authorized: 50,000 shares
- number outstanding: 50,000 shares
- dividend rate: 6% payable in either cash or common stock
- per share liquidation preference: $100 (aggregate preference of
$5,000,000)
- vote per share: one vote for each share of common stock into which
the preferred stock could be converted as of the record date for the
vote
- right to appoint directors: none
- when convertible: all shares are convertible as of the date of this
prospectus, provided that not more than 20% of the shares may be
converted in any period of five consecutive trading days.
Further, no holder may
convert into common stock if, as a result of such conversion, that
holder would own more than 19.9% of the issued and outstanding
shares of our common stock (we are required to redeem any excess).
In addition, no holder may convert Series C Preferred Stock if,
after such conversion, the holder would be deemed a beneficial owner
of more than 4.99% of the then outstanding shares of common stock of
the company
- conversion price: the lesser of 125% of the closing bid price of the
common stock on December 28, 1999 ($3.4375), or 85% of the five date
average quoted price for the five trading days immediately preceding
the conversion notice date
- contains standard anti-dilution provisions to protect against stock
splits and below market stock issuances
- redemption rights: holders have no redemption rights. We may redeem
at our election for cash at a price equal to the greater of a) an
amount sufficient to yield to holders a 17.5% annualized rate of
return or b) the economic benefit a holder would realize (before
taxes and brokerage commissions) from converting the stock to common
stock and selling it
- registration rights: the common stock into which the Series C
Preferred may be converted is required to be registered with the
Securities and Exchange Commission
Series D 6% Convertible Preferred
- number authorized: 75,000 shares
- number outstanding: 65,619 shares
- dividend rate: 6% payable in either cash or common stock
- per share liquidation preference: $100 (aggregate preference of
$6,561,887)
- vote per share: one vote for each share of common stock into which
the preferred stock could be converted as of the record date for the
vote
- right to appoint directors: none
- when convertible: 25,000 shares are convertible 30 days after the
effective date of this prospectus; 25,000 shares are convertible 60
days after the date of this prospectus; and the balance is
37
convertible 90 days after the date of this prospectus; provided that
not more than 20% of the shares may be converted in any period of
five consecutive trading days. Further, no holder may convert into
common stock if, as a result of such conversion, that holder would
own more than 19.9% of the issued and outstanding shares of our
common stock (we are required to redeem any excess). In addition, no
holder may convert Series D Preferred Stock if, after such
conversion, the holder would be deemed a beneficial owner of more
than 4.99% of the then outstanding shares of common stock of the
company
- conversion price: the lesser of 125% of the closing bid price of the
common stock on April 12, 2000 ($3.1875), or 85% of the average
price for the five trading days prior to the conversion notice date
- contains standard anti-dilution provisions to protect against stock
splits and below market stock issuances
- redemption rights: holders have no redemption rights. We may redeem
at our election for cash at a price equal to the greater of a) an
amount sufficient to yield to holders a 17.5% annualized rate of
return or b) the economic benefit a holder would realize (before
taxes and brokerage commissions) from converting the stock to common
stock and selling it
- registration rights: the common stock into which the Series D
Preferred may be converted is required to be registered with the
Securities and Exchange Commission
Series E 6% Convertible Preferred
- number authorized: 30,000 shares
- number outstanding: 30,000 shares
- dividend rate: 6% payable in either cash or common stock
- per share liquidation preference: $100 (aggregate preference of
$3,000,000)
- vote per share: one vote for each share of common stock into which
the preferred stock could be converted as of the record date for the
vote
- right to appoint directors: none
- when convertible: 10,000 shares are convertible 30 days after
issuance; 10,000 shares are convertible 60 days after issuance; and
the balance is convertible 90 days after issuance; provided that not
more than 20% of the shares may be converted in any period of five
consecutive trading days. Further, no holder may convert into common
stock if, as a result of such conversion, that holder would own more
than 19.9% of the issued and outstanding shares of our common stock
(we are required to redeem any excess). In addition, no holder may
convert Series E Preferred Stock if, after such conversion, that
holder would own more than 19.9% of the issued and outstanding
shares of our common stock (we are required to redeem any excess).
In addition, no holder may convert Series E Preferred Stock if,
after such conversion, the holder would be deemed a beneficial owner
of more than 4.99% of the then outstanding shares of common stock of
the company
- conversion price: the lesser of 125% of the closing bid price of the
common stock on August 9, 2000 ($1.5234), or 85% of the average
price for the five trading days prior to the conversion
38
notice date
- contains standard anti-dilution provisions to protect against stock
splits and below market stock issuances
- redemption rights: holders have no redemption rights. We may redeem
at our election for cash at a price equal to the greater of a) an
amount sufficient to yield to holders a 17.5% annualized rate of
return or b) the economic benefit a holder would realize (before
taxes and brokerage commissions) from converting the stock to common
stock and selling it
- registration rights: the common stock into which the Series E
Preferred may be converted is required to be registered with the
Securities and Exchange Commission
------------
With regard to the issuance of Series C, D and E Preferred Stock, except
in certain circumstances, we have agreed not to sell additional common stock to
a third party until 120 days after the date of this prospectus.
WARRANTS TO WENTWORTH, LLC AND GRAYSON & ASSOCIATES PURSUANT TO SERIES C, SERIES
D AND SERIES E PREFERRED STOCK, THE PRIVATE EQUITY CREDIT AGREEMENT ("PECA"),
THE OCTOBER 2000 MODIFICATION OF THE PECA AND THE SECURED LOAN TRANSACTION OF
MAY 2001
- number of warrants: 4,204,892
- when exercisable: at any time and from time to time; provided,
however, that in no event shall the holder be entitled to exercise
the warrant or shall the company have the obligation to issue shares
upon such exercise of all or any portion of the warrant to the
extent that, after such conversion, the sum of (i) the number of
shares of common stock beneficially owned by the holder and its
affiliates (other than shares of common stock, which may be deemed
beneficially owned through the ownership of the unconverted portion
of the preferred stock or unexercised portion of the warrants), and
(ii) the number of shares of common stock issuable upon the
conversion of the preferred stock or exercise of the warrants with
respect to which the determination of this proviso is being made,
would result in beneficial ownership by the holder and its
affiliates of more than 9.99% of the outstanding shares of common
stock (after taking into account the shares to be issued to the
holder upon such conversion or exercise)
- exercise price: $4.617 for warrants issued with the Series C
Preferred Stock. $3.9844 for warrants issued with the Series D
Preferred Stock; $1.5234 for warrants issued with Series E Preferred
Stock; the pricing for the warrants issued with the PECA will be
based on 125% of the market value of the company's common stock; the
pricing for the warrants issued with the secured loan transaction of
May 2001 is based on 110% of the market value for the company's
stock.
- contains standard anti-dilution provisions to protect against stock
splits and below market stock issuances
- registration rights: the common stock issuable upon exercise of the
Series C, Series D, Series E and PECA related warrants is required
to be registered with the Securities and Exchange Commission
39
ANTI-TAKEOVER LAW
Acquisition of controlling interests. A corporation is subject to Nevada's
control share law if it has more than 200 stockholders, at least 100 of whom are
stockholders of record and residents of Nevada, and it does business in Nevada
or through an affiliated corporation.
The law focuses on the acquisition of a "controlling interest" which means
the ownership of outstanding voting shares sufficient, but for the control share
law, to enable the acquiring person to exercise the following proportions of the
voting power of the corporation in the election of directors: (i) one-fifth or
more but less than one-third, (ii) one-third or more but less than a majority,
or (iii) a majority or more. The ability to exercise such voting power may be
direct or indirect, as well as individual or in association with others.
The effect of the control share law is that the acquiring person, and
those acting in association with it, obtains only such voting rights in the
control shares as are conferred by a resolution of the stockholders of the
corporation, approved at a special or annual meeting of stockholders. The
control share law contemplates that voting rights will be considered only once
by the other stockholders. Thus, there is no authority to strip voting rights
from the control shares of an acquiring person once those rights have been
approved. If the stockholders do not grant voting rights to the control shares
acquired by an acquiring person, those shares do not become permanent non-voting
shares. The acquiring person is free to sell its shares to others. If the buyers
of those shares themselves do not acquire a controlling interest, their shares
do not become governed by the control share law.
If control shares are accorded full voting rights and the acquiring person
has acquired control shares with a majority or more of the voting power, any
stockholder of record, other than an acquiring person, who has not voted in
favor of approval of voting rights is entitled to demand fair value for such
stockholder's shares.
Nevada's control share law may have the effect of discouraging takeovers
of the corporation.
Business combination law. In addition to the above control share law,
Nevada has a business combination law which prohibits certain business
combinations between Nevada corporations and "interested stockholders" for three
years after the "interested stockholder" first becomes an "interested
stockholder" unless the corporation's board of directors approves the
combination in advance. For purposes of Nevada law, an "interested stockholder"
is any person who is (i) the beneficial owner, directly or indirectly, of ten
percent or more of the voting power of the outstanding voting shares of the
corporation, or (ii) an affiliate or associate of the corporation and at any
time within the three previous years was the beneficial owner, directly or
indirectly, of ten percent or more of the voting power of the then outstanding
shares of the corporation. The definition of the term "business combination" is
sufficiently broad to cover virtually any kind of transaction that would allow a
potential acquiror to use the corporation's assets to finance the acquisition or
otherwise to benefit its own interests rather than the interests of the
corporation and its other shareholders.
The effect of Nevada's business combination law is to potentially
discourage parties interested in taking control of the company from doing so if
it cannot obtain the approval of our board of directors.
DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION
Pursuant to the company's articles of incorporation, the personal
liability of a director or officer of the company to the company or a
stockholder for monetary damages for breach of a fiduciary duty is limited to
situations in which a director's or officer's acts or omissions involve
intentional misconduct, fraud or knowing violations of law.
40
The company's articles of incorporation and bylaws provide for the
indemnification of directors and officers of the company to the maximum extent
permitted by law. The bylaws provide generally for indemnification as to all
expenses incurred or imposed upon them as a result of actions, suits or
proceedings if they act in good faith and in a manner they reasonably believe to
be in or not opposed to the best interests of the company. These documents,
among other things, indemnify the company's employees, officers and directors
for certain expenses (including attorneys' fees), judgments, fines and
settlement amounts incurred by such person in any action or proceeding,
including any action by or in the right of the company, on account of services
as any employee, officer or director of the company or as an employee, officer
or director of any affiliate of the company. The company believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers.
Except for the fraud claim discussed in "Business-Legal Proceedings",there
is no pending litigation or proceeding involving a director, officer, employee
or other agent of the company as to which indemnification is being sought, and
the company is not aware of any pending or threatened litigation that may result
in claims for indemnification by any director, officer, employee or other agent.
The company has purchased directors and officers liability insurance to
defend and indemnify directors and officers who are subject to claims made
against them for their actions and omissions as directors and officers of the
company. The insurance policy provides standard directors and officers liability
insurance in the amount of $5,000,000.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers or controlling persons, pursuant
to the foregoing provisions, or otherwise, we have been advised that, in the
opinion of the SEC, such indemnification is against public policy as expressed
in the Securities Act, and is, therefore, unenforceable.
SHARES ELIGIBLE FOR FUTURE SALE
As of the May 17, 2001, assuming sale of $7,000,000 of common stock
pursuant to the Private Equity Credit Agreement at $.034 per share and full
conversion of our Series C, Series D and Series E Preferred Stock at the current
conversion price, and exercise of the related warrants, we will have 666,787,838
shares of common stock outstanding. Of the then outstanding shares of common
stock, 659,501,056 would be freely tradable by persons other than executive
officers, directors and ten percent stockholders of the company as that term is
defined under the Securities Act, without restriction or further registration,
and 7,286,782 would be deemed "restricted securities" within the meaning of, or
otherwise governed by, Rule 144 under the Securities Act. If presently
unexercised warrants (other than related to Series C, D or E Preferred Stock) or
options were exercised to purchase common stock, or presently convertible
preferred stock (other than Series C, Series D and Series E Preferred Stock) was
converted into common stock, we would have an additional 10,858,665 shares of
"restricted securities" outstanding for a total of 677,646,503 shares.
"Restricted securities" may not be sold in the absence of registration unless an
exemption from registration is available, including the exemption contained in
Rule 144. The presently outstanding "restricted securities" will be eligible for
resale under Rule 144.
In general, under Rule 144, a stockholder who has beneficially owned
shares of common stock for at least one year is entitled to sell, within any
three-month period, a number of "restricted" shares that does not exceed the
greater of one percent of the then outstanding shares of common stock or the
average weekly trading volume during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to sale limitations, notice
requirements and the availability of current public information about us. Rule
41
144(k) provides that a stockholder who is not deemed to be an "affiliate" and
who has beneficially owned shares of common stock for at least two years is
entitled to sell those shares at any time under Rule 144(k) without regard to
the limitations described above. In addition to the shares of common stock that
are currently outstanding, a total of 3,028,738 shares of common stock are
reserved for issuance upon exercise of options granted to our directors,
executive officers and employees; 10,858,665 shares are issuable upon exercise
of outstanding warrants, exclusive of shares of common stock underlying warrants
registered in this prospectus; and, at current conversion prices, 638,378,039
shares are issuable upon conversion of Series C, Series D and Series E Preferred
Stock, PECA and related warrants.
We are unable to estimate the number of shares that may be sold in the
future by existing holders of shares of our common stock or holders of options
or warrants or convertible securities that are outstanding or the effect, if
any, that sales of shares of common stock by these persons will have on the
market price of the common stock prevailing from time to time. Sales of
substantial amounts of common stock by these persons could adversely affect the
then prevailing market prices of the common stock and warrants.
PLAN OF DISTRIBUTION
The shares offered by this prospectus may be sold from time to time by
selling stockholders, who consist of the persons named under "Selling
stockholders" above and those persons' pledgees, donees, transferees or other
successors in interest. The selling stockholders may sell the shares on the OTC
Bulletin Board or otherwise, at market prices or at negotiated prices. They may
sell shares by one or a combination of the following:
- a block trade in which a broker or dealer so engaged will attempt to
sell the shares as agent, but may position and resell a portion of the block as
principal to facilitate the transaction;
- purchases by a broker or dealer as principal and resale by the broker or
dealer for its account pursuant to this prospectus;
- ordinary brokerage transactions and transactions in which a broker
solicits purchasers;
- privately negotiated transactions;
- if such a sale qualifies, in accordance with Rule 144 promulgated under
the Securities Act rather than pursuant to this prospectus; and
- any other method permitted pursuant to applicable law.
In making sales, brokers or dealers engaged by the selling stockholders
may arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from selling stockholders in amounts to be
negotiated prior to the sale.
Wentworth, LLC is an underwriter with regard to the shares it is offering
in this prospectus. Any profits on the resale of such shares may be deemed to be
underwriting discounts and commissions.
With regard to the other shares offered hereby, the selling stockholders
and any broker-dealers that participate in the distribution may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act of
1933. Any proceeds or commissions received by them, and any profits on the
resale of shares sold by broker-dealers, may be deemed to be underwriting
discounts and commissions.
If any selling stockholder notifies us that a material arrangement has
been entered into with a broker-dealer for the sale of shares through a block
42
trade, special offering, exchange distribution or secondary distribution or a
purchase by a broker or dealer, we will file a prospectus supplement, if
required pursuant to Rule 424(c) under the Securities Act of 1933, setting
forth:
- the name of each of the participating broker-dealers,
- the number of shares involved,
- the price at which the shares were sold,
- the commissions paid or discounts or concessions allowed to the
broker-dealers, where applicable,
- a statement to the effect that the broker-dealers did not conduct any
investigation to verify the information set out or incorporated by reference in
this prospectus, and
- any other facts material to the transaction.
We are paying the expenses incurred in connection with preparing and
filing this prospectus and the registration statement to which it relates, other
than selling commissions. In addition, in the event the selling stockholders
sell short shares of common stock issuable on conversion of our Series C, D or E
Preferred Stock, this prospectus may be delivered in connection with such short
sales and the shares offered by this prospectus may be used to cover such short
sales. To the extent, if any, that the selling stockholders may be considered
"underwriters" within the meaning of the Securities Act, the sale of the shares
by them shall be covered by this prospectus.
We have advised the selling stockholders that the anti-manipulation rules
under the Securities Exchange Act of 1934 may apply to sales of shares in the
market and to the activities of the selling stockholders and their affiliates.
In addition, we will make copies of this prospectus available to the selling
stockholders and have informed them of the need for delivery of copies of this
prospectus to purchasers at or prior to the time of any sale of the shares
offered hereby.
LEGAL MATTERS
Arter & Hadden LLP, Los Angeles, California, has advised us with respect
to the validity of the shares of common stock offered by this prospectus.
EXPERTS
Sprayberry, Barnes, Marietta & Luttrell (formerly known as Carpenter,
Kuhen & Sprayberry, independent auditors), have audited the consolidated
financial statements of the company for the year ended December 31, 2000 and
1999. Lichter and Associates, independent auditors, audited our consolidated
financial statements for the year ended December 31, 1998. Their reports are
included in this prospectus. Our consolidated financial statements are included
in this prospectus in reliance on their reports, given their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
The company has filed with the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, a registration statement on Form S-1
under the Securities Act with respect to the securities offered. As permitted by
SEC rules, this prospectus does not contain all of the information set forth in
the registration statement and the exhibits and schedules to the registration
statement. For further information concerning the company and the securities
offered, we refer you to the registration statement and the exhibits and
schedules filed as a part
43
of the registration statement.
Statements contained in this prospectus concerning the contents of any
contract or any other document are not necessarily complete. In each instance
where a copy of that contract or document has been filed as an exhibit to the
registration statement, we refer you to the copy of the contract or document
that has been filed. Each statement is qualified in all respects by reference to
that exhibit. The registration statement, including its exhibits and schedules,
may be inspected without charge at the SEC's Public Reference Room, at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and at the SEC's regional
offices at Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511, and 7 World Trade Center, New York, New York
10048. Copies of all or any part of those documents may be obtained from the
SEC's office after payment of the SEC's prescribed fees. You may call the SEC at
1-800-SEC-0330 for further information on the operation of the SEC's public
reference rooms. The SEC maintains a Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding companies that file electronically with the SEC.
We intend to provide our stockholders with annual reports containing
consolidated financial statements audited by an independent public accounting
firm and will make available to stockholders quarterly reports containing
unaudited consolidated financial data for the first three quarters of each year.
We are subject to the information and reporting requirements of the Securities
Exchange Act of 1934, as amended, and file periodic reports, proxy statements
and other information with the SEC.
ESAT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
ESAT, INC. FINANCIAL STATEMENTS
Report of Sprayberry, Barnes, Marietta & Lutrell, Independent Auditors...................... F-2
Report of Lichter and Associates, Independent Auditors...................................... F-3
Consolidated Balance Sheets - December 31, 2000 and 1999 and March 31,2001(Unaudited)....... F-4
Consolidated Statements of Operations for the years ended December 31, 2000,
1999 and 1998 and the three months ended March 31, 2001 and 2000 (Unaudited)............ F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2000,
1999 and 1998 and the three months ended March 31, 2001 and 2000 (Unaudited)............ F-7
Consolidated Statements of Stockholders' Equity for the years ended December
31, 2000 and 1999 and the three months ended March 31, 2001 (Unaudited)................. F-8
Notes to Consolidated Financial Statements for the years ended December 31, 2000,
1999 and 1998 .......................................................................... F-9
Notes to Consolidated Financial Statements (Unaudited) for the three months ended
March 31, 2001 and 2000 ............................................................... F-34
F-1
44
ESAT, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000, 1999, AND 1998
AND MARCH 31, 2001 (UNAUDITED)
TOGETHER WITH INDEPENDENT AUDITOR'S REPORT
[SPRAYBERRY, BARNES, MARIETTA & LUTTRELL LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
eSAT, Inc.
Universal City, California
We have audited the accompanying consolidated balance sheets of eSAT, Inc., and
subsidiaries, as of December 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of eSAT, Inc.
as of December 31, 2000 and 1999 and the results of operations and cash flows
for the years then ended in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern; however, the Company has
experienced losses from operations since inception, except for the reversal in
1999 of employee stock option compensation expense that was recognized in 1998
in accordance with APB 25, and substantial doubt exists as to its continuation
as a going concern. The Company's management estimates that its current cash,
cash equivalents and cash generated from operations will only be sufficient to
meet its anticipated cash needs through approximately May 15, 2001. Accordingly,
the Company will require a substantial additional cash infusion to continue its
operations. Management does not believe that additional capital will be
available. Management's plans in regard to those matters are described in Note
2. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Certain errors in applying APB 25 resulted in an understatement of previously
reported compensation expense for the year ended December 31, 1998. Accordingly,
the 1998 financial statements have been restated and an adjustment has been made
to compensation expense and retained earnings to correct the error.
SPRAYBERRY, BARNES, MARIETTA & LUTTRELL
Bakersfield, California
March 23, 2001
45
[LICHTER AND ASSOCIATES LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
eSat, Inc. (Formerly Technology Guardian, Inc.)
Fountain Valley, California
Members of the Board:
We have audited the accompanying consolidated statement of operations and cash
flows of eSat, Inc. (Formerly Technology Guardian, Inc.) ("the Company") for the
year ended December 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of eSat, Inc.
(Formerly Technology Guardian, Inc.) for the year ended December 31, 1998 in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company has suffered
recurring losses, a decline in revenue and cash shortages. These issues raise
substantial doubt about the ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note Q. The financial
statements do not include any adjustment that might result from the outcome of
this uncertainty.
As discussed in Note 14 to the financial statements, the Company's 1998
Additional Paid in Capital previously reported as $8,614,398 should have been
$8,051,234. This discovery was made subsequent to the issuance of the financial
statements. The financial statements have been restated to reflect this
correction.
Also, certain errors in applying APB 25 resulted in an understatement of
previously reported compensation expense for the year ended December 31, 1998
and was discovered during the current year. Accordingly, the 1998 financial
statements have been restated and an adjustment has been made to compensation
expense and retained earnings to cover the error.
/s/ LICHTER AND ASSOCIATES
----------------------------------------
March 30, 2001, except for Note P, as to which the date is June 14, 1999, Notes
J, K and Q as to which the date is October 22, 1999 and above correction as to
which the date is March 29, 2000
Los Angeles, California
46
eSAT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 2000 and 1999
AND MARCH 31, 2001 (UNAUDITED)
ASSETS
December 31, March 31,
2000 1999 2001
---------- ---------- ----------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 452,144 $3,412,205 $ 75,673
Accounts receivable, net 787,428 471,899 1,211,598
Inventory, net 176,495 135,189 62,274
Other current assets 157,616 17,866 355,343
Deposits 159,850 420,747 --
Note receivable-related party -- 64,553 --
---------- ---------- ----------
Total current assets 1,733,533 4,522,459 1,704,888
---------- ---------- ----------
PROPERTY AND EQUIPMENT, NET 1,358,072 1,051,936 1,377,423
---------- ---------- ----------
OTHER ASSETS:
Notes receivable -- 250,000 --
Deferred charges -- -- 44,855
Deposits 144,958 132,523 160,898
Idle property 1,210,800 -- 1,210,800
Other assets -- 23,907 --
---------- ---------- ----------
Total other assets 1,355,758 406,430 1,416,553
---------- ---------- ----------
$4,447,363 $5,980,825 $4,498,864
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, March 31,
2000 1999 2001
---------- ---------- ----------
(UNAUDITED)
CURRENT LIABILITIES:
Accounts payable-trade $1,654,170 $ 837,065 $2,083,343
Accounts payable-other 1,414,500 -- 1,414,500
Accrued expenses 395,464 199,955 453,982
Unearned revenue 151,883 306,732 151,883
Deferred revenue 316,398 73,646 686,749
Other current liabilities 23,048 -- 22,047
Current portion of
obligations under capital
lease 75,902 76,049 75,118
Contracts payable 13,012 76,973 13,012
Net assets held for disposal -- 284,419 --
Note payable stockholder 34,700 -- 34,700
Accrued loss contingencies 1,157,996 -- 1,004,354
Severance pay payable -- 90,000 --
Commission payable -- 160,000 --
Current portion of long-term
debt -- 250,346 --
Settlement payable -- 83,866 --
Note payable related party -- 90,250 --
---------- ---------- ----------
Total current liabilities 5,237,073 2,529,301 5,939,688
---------- ---------- ----------
LONG-TERM LIABILITIES
Obligations under capital
lease 100,843 130,395 100,843
Long-term debt -- -- 332,655
Deferred revenue 324,700 22,455 198,539
---------- ---------- ----------
Total long-term
liabilities 425,543 152,850 632,037
---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock - Series C,
cumulative, fully participating,
convertible, $0.01 par value
Authorized - 50,000 shares, Issued and
outstanding - 50,000 shares (Aggregate
liquidation preference $4,999,500) 50 50 50
Preferred stock - Series A,
cumulative, fully participating,
convertible, $0.01 par value
Authorized - 2,000,000 shares, Issued
and outstanding - 1,000,000 shares
(Aggregate liquidation preference
$1,990,000) -- 10,000 --
Preferred stock - Series D,
cumulative, fully participating,
convertible, $0.001 par value
Authorized and issued - 75,000 shares,
Outstanding - 69,050 shares (Aggregate
liquidation preference $6,904,931) 69 -- 66
Preferred stock - Series E,
cumulative, fully participating,
convertible, $0.001 par value
Authorized - 30,000 shares Issued and
outstanding - 30,000 Shares (Aggregate
liquidation preference $2,999,970) 30 -- 30
Common stock - $0.001 par value
Authorized - 50,000 shares Issued
and outstanding 23,260,057 shares 23,260 21,095 25,978
Additional paid-in capital 32,431,556 25,762,647 32,422,533
Retained deficit (33,670,218) (20,936,608) (34,521,518)
----------- ---------- ----------
(1,215,253) 4,857,184 (2,072,861)
Less: Subscriptions receivable -- (1,558,510) --
----------- ---------- ----------
Total stockholders' equity (1,215,253) 3,298,674 (2,072,861)
----------- ---------- ----------
$ 4,447,363 $5,980,825 $4,498,864
=========== ========== ==========
47
eSat, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
YEARS ENDED
DECEMBER 31,
----------------------------------------------
RESTATED
2000 1999 1998
------------ ------------ ------------
SALES $ 5,663,113 $ 3,676,217 $ 2,474,617
COST OF SALES 6,108,653 3,598,786 2,656,090
------------ ------------ ------------
Gross margin (445,540) 77,431 (181,473)
------------ ------------ ------------
OPERATING EXPENSES:
General and administrative
expenses 10,755,411 8,162,188 2,942,041
Impairment loss 4,736,317 -- --
------------ ------------ ------------
15,491,728 8,162,188 2,942,041
------------ ------------ ------------
Loss from operations (15,937,268) (8,084,757) (3,123,514)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Compensation adjustment
recognized under APB 25 4,802,916 81,945,112 (90,754,014)
Interest income 39,123 57,170 --
Other income 3,538 165,684 15,000
Interest expense (38,355) (68,192) (27,009)
Gain (loss) on sale of assets 25,000 (122,368) (24,286)
------------ ------------ ------------
4,832,222 81,977,406 (90,790,309)
------------ ------------ ------------
Income (loss) before
income taxes,
discontinued operations
and extraordinary
income (11,105,046) 73,892,649 (93,913,823)
PROVISION FOR INCOME TAXES 4,800 5,400 4,600
------------ ------------ ------------
Income (loss) before
discontinued operations
and extraordinary
income (11,109,846) 73,887,249 (93,918,423)
------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from operations of
discontinued subsidiary
(less applicable taxes
of $-0-) (1,184,404) (448,597) --
Loss on disposal of
discontinued subsidiary
(less applicable taxes
of $-0-) (240,242) -- --
------------ ------------ ------------
(1,424,646) (448,597) --
------------ ------------ ------------
Income (loss) before
extraordinary item (12,534,492) 73,438,652 (93,918,423)
EXTRAORDINARY INCOME, (less
applicable taxes of $-0-) -- -- 242,990
------------ ------------ ------------
Net income (loss) $(12,534,492) $ 73,438,652 $(93,675,433)
============ ============ ============
EARNINGS PER COMMON SHARE:
Income (loss) before
discontinued operations and
extraordinary income $ (0.51) $ 3.53 $ (4.99)
============ ============ ============
Discontinued operations $ (0.07) $ (0.02) $ --
============ ============ ============
Extraordinary income $ -- $ -- $ 0.01
============ ============ ============
Net income (loss) $ (0.57) $ 3.50 $ (4.97)
============ ============ ============
EARNINGS PER COMMON SHARE--
ASSUMING DILUTION:
Income (loss) before
discontinued operations and
extraordinary income $ (0.51) $ 3.07 $ (4.99)
============ ============ ============
Discontinued operations $ (0.07) $ (0.02) $ --
============ ============ ============
Extraordinary income $ -- $ -- $ 0.01
============ ============ ============
Net income (loss) $ (0.57) $ 3.05 $ (4.97)
============ ============ ============
48
THREE MONTHS ENDED
MARCH 31,
---------------------------
2001 2000
----------- -----------
(UNAUDITED) (UNAUDITED)
SALES $ 2,211,886 $ 937,387
COST OF SALES 2,139,030 950,780
----------- -----------
Gross margin 72,856 (13,393)
GENERAL AND ADMINISTRATIVE
EXPENSES 965,196 2,653,624
----------- -----------
Loss from operations (892,340) (2,667,017)
----------- -----------
OTHER INCOME (EXPENSE)
Compensation adjustment recognized
under APB 25 -- 2,060,604
Other income 4,032 18,359
Gain on sale of assets 44,696 --
Interest expense (7,688) (20,396)
----------- -----------
41,040 2,058,567
----------- -----------
Loss before income taxes
and discontinued operations (851,300) (608,450)
PROVISION FOR INCOME TAXES -- --
----------- -----------
Loss before discontinued
operations (851,300) (608,450)
DISCONTINUED OPERATIONS:
Loss from operations of discontinued
subsidiary (less applicable taxes of $-0-) -- (180,262)
----------- -----------
Net loss $ (851,300) $ (788,712)
=========== ===========
EARNINGS PER COMMON SHARE -- BASIC AND DILUTED:
Discontinued operations $ -- $ (0.01)
=========== ===========
Net loss $ (0.03) $ (0.04)
=========== ===========
49
eSAT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1998
AND PERIOD ENDED MARCH 31, 2001 (UNAUDITED)
Preferred Series A Preferred Series C
------------------------- ------------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
Balance, December 31, 1998 -- $ -- -- $ --
Adjustment in connection
with pooling of
interests -- -- -- --
---------- ---------- ---------- ----------
Balance, December 31,
1998, as restated -- -- -- --
Net income -- -- -- --
Compensation adjustment
recognized under APB 25 -- -- -- --
Sale of common stock -- -- -- --
Issuance of common stock
for services -- -- -- --
Sale of preferred stock
series A 1,000,000 10,000 -- --
Sale of preferred stock
series C -- -- 50,000 50
Cancellation of common
stock in settlement -- -- -- --
---------- ---------- ---------- ----------
Balance, December 31, 1999 1,000,000 10,000 50,000 50
Net loss -- -- -- --
Compensation adjustment
recognized under FAS 123 -- -- -- --
Compensation adjustment
recognized under APB 25 -- -- -- --
Issuance of common stock
for services -- -- -- --
Stock accepted for payment
of note -- -- -- --
Sale of preferred stock
series D, net of expenses -- -- -- --
Conversion of series A
preferred stock (1,000,000) (10,000) -- --
Acquisition expenses -- -- -- --
Cashless exercise of common
stock options -- -- -- --
Cashless exercise of common
stock warrants -- -- -- --
Reversal of payable related
to cost of capital -- -- -- --
Payment of preferred stock
dividends -- -- -- --
Member distributions -- -- -- --
Treasury shares -- -- -- --
Payment of subscription -- -- -- --
Capitalized expenses -- -- -- --
Sale of preferred stock
series E, net of expenses -- -- -- --
Conversion of series D
preferred stock -- -- -- --
Proceeds from PECA, net
of expenses -- -- -- --
Elimination of subscription
receivable -- -- -- --
---------- ---------- ---------- ----------
Balance December 31, 2000 -- -- 50,000 50
Net loss -- -- -- --
Conversion of series D
preferred stock -- -- -- --
Capitalized expenses -- -- -- --
---------- ---------- ---------- ----------
Balance March 31, 2001 -- $ -- 50,000 $ 50
========== ========== ========== ==========
The accompanying notes are an integral part of the financial statements.
50
ESAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1998
AND PERIOD ENDED MARCH 31, 2001 (UNAUDITED)
Preferred Series D Preferred Series E
------------------- ------------------
Shares Amount Shares Amount
------- ------- ------- -------
Balance, December 31, 1998 -- $ -- -- $ --
Adjustment in connection
with pooling of
interests -- -- -- --
------- ------- ------- -------
Balance, December 31,
1998, as restated -- -- -- --
Net income -- -- -- --
Compensation adjustment
recognized under APB 25 -- -- -- --
Sale of common stock -- -- -- --
Issuance of common stock
for services -- -- -- --
Sale of preferred stock
series A -- -- -- --
Sale of preferred stock
series C -- -- -- --
Cancellation of common
stock in settlement -- -- -- --
------- ------- ------- -------
Balance, December 31, 1999 -- -- -- --
Net loss -- -- -- --
Compensation adjustment
recognized under FAS 123 -- -- -- --
Compensation adjustment
recognized under APB 25 -- -- -- --
Issuance of common stock
for services -- -- -- --
Stock accepted for payment
of note -- -- -- --
Sale of preferred stock
series D, net of expenses 75,000 75 -- --
Conversion of series A
preferred stock -- -- -- --
Acquisition expenses -- -- -- --
Cashless exercise of common
stock options -- -- -- --
Cashless exercise of common
stock warrants -- -- -- --
Reversal of payable related
to cost of capital -- -- -- --
Payment of preferred stock
dividends -- -- -- --
Member distributions -- -- -- --
Treasury shares -- -- -- --
Payment of subscription -- -- -- --
Capitalized expenses -- -- -- --
Sale of preferred stock
series E, net of expenses -- -- 30,000 30
Conversion of series D
preferred stock (5,950) (6) -- --
Proceeds from PECA, net
of expenses -- -- -- --
Elimination of subscription
receivable -- -- -- --
------- ------- ------- -------
Balance December 31, 2000 69,050 69 30,000 30
Net loss -- -- -- --
Conversion of series D
preferred stock (2,884) (3) -- --
Capitalized expenses -- -- -- --
------- ------- ------- -------
Balance March 31, 2001 66,166 $ 66 30,000 $ 30
======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
51
ESAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1998
AND PERIOD ENDED MARCH 31, 2001 (UNAUDITED)
Common Stock Additional
----------------------------- Paid-In
Shares Amount Capital
------------ ------------ ------------
Balance, December 31, 1998 16,085,936 $ 16,086 $ 96,805,249
Adjustment in connection
with pooling of interests 2,750,000 2,750 (2,750)
------------ ------------ ------------
Balance, December 31, 1998,
as adjusted 18,835,936 18,836 96,802,499
Net income -- -- --
Compensation adjustment
recognized under APB 25 -- -- (81,945,112)
Member distributions -- -- --
Sale of common stock 3,848,577 3,848 3,278,365
Issuance of common stock
for services 178,470 179 1,161,945
Sale of preferred stock
series A -- -- 1,990,000
Sale of preferred stock
series C -- -- 4,474,950
Cancellation of common
stock in settlement (1,767,769) (1,768) --
------------ ------------ ------------
Balance, December 31, 1999 21,095,214 21,095 25,762,647
Net loss -- -- --
Compensation adjustment
recognized under FAS 123 -- -- 919,827
Compensation adjustment
recognized under APB 25 -- -- (4,802,916)
Issuance of common stock
for services 228,888 229 188,349
Stock accepted for payment
of note (24,988) (25) (50,731)
Sale of preferred stock
series D, net of expenses -- -- 6,984,925
Conversion of series A
preferred stock 550,000 550 9,450
Acquisition expenses -- -- (183,277)
Cashless exercise of common
stock options 75,642 76 (76)
Cashless exercise of common
stock warrants 36,509 36 (36)
Reversal of payable related
to cost of capital -- -- 160,000
Payment of preferred stock
dividends -- -- --
Member distributions -- -- --
Treasury shares (106,757) (107) 107
Payment of subscription -- -- --
Capitalized expenses -- -- (235,023)
Sale of preferred stock
series E, net of expenses -- -- 2,759,940
Conversion of series D
preferred stock 1,405,549 1,406 (1,400)
Proceeds from PECA, net
of expenses -- -- 1,819,770
Elimination of subscription
receivable -- -- (900,000)
------------ ------------ ------------
Balance December 31, 2000 23,260,057 $ 23,260 $ 32,431,556
Net loss -- -- --
Conversion of series D
preferred stock 2,717,661 2,718 (2,715)
Capitalized expenses -- -- (6,308)
------------ ------------ ------------
Balance March 31, 2001 25,977,718 $ 25,978 $ 32,422,533
============ ============ ============
The accompanying notes are an integral part of the financial statements.
52
ESAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1998
AND PERIOD ENDED MARCH 31, 2001 (UNAUDITED)
Total
Retained Subscription Stockholders'
Deficit Receivable Equity
------------ ------------ ------------
Balance, December 31, 1998 $(94,098,990) $ -- $ 2,722,345
Adjustment in connection
with pooling of interests (99,352) -- (99,352)
------------ ------------ ------------
Balance, December 31, 1998,
as adjusted (94,198,342) -- 2,622,993
Net income 73,438,652 -- 73,438,652
Compensation adjustment
recognized under APB 25 -- -- (81,945,112)
Member distributions (176,918) -- (176,918)
Sale of common stock -- (558,510) 2,723,703
Issuance of common stock
for services -- -- 1,162,124
Sale of preferred stock
series A -- (1,000,000) 1,000,000
Sale of preferred stock
series C -- -- 4,475,000
Cancellation of common
stock in settlement -- -- (1,768)
------------ ------------ ------------
Balance, December 31, 1999 (20,936,608) (1,558,510) 3,298,674
Net loss (12,534,492) -- (12,534,492)
Compensation adjustment
recognized under FAS 123 -- -- 919,827
Compensation adjustment
recognized under APB 25 -- -- (4,802,916)
Issuance of common stock
for services -- -- 188,578
Stock accepted for payment
of note -- -- (50,756)
Sale of preferred stock
series D, net of expenses -- -- 6,985,000
Conversion of series A
preferred stock -- -- --
Acquisition expenses -- -- (183,277)
Cashless exercise of common
stock options -- -- --
Cashless exercise of common
stock warrants -- -- --
Reversal of payable related
to cost of capital -- -- 160,000
Payment of preferred stock
dividends (86,667) -- (86,667)
Member distributions (112,451) -- (112,451)
Treasury shares -- -- --
Payment of subscription -- 558,510 558,510
Capitalized expenses -- -- (235,023)
Sale of preferred stock
series E, net of expenses -- -- 2,759,970
Conversion of series D
preferred stock -- -- --
Proceeds from PECA, net
of expenses -- -- 1,819,770
Elimination of subscription
receivable -- 1,000,000 100,000
------------ ------------ ------------
Balance December 31, 2000 (33,670,218) -- (1,215,253)
Net loss (851,300) -- (851,300)
Conversion of series D
preferred stock -- -- --
Capitalized expenses -- -- (6,308)
------------ ------------ ------------
Balance March 31, 2001 $(34,521,518) $ -- $ (2,072,861)
============ ============ ============
The accompanying notes are an integral part of the financial statements.
53
eSat Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
AND FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
YEARS ENDED
DECEMBER 31,
----------------------------------------------
RESTATED
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $(12,534,492) $ 73,438,652 $(93,675,433)
Adjustments to reconcile
net loss to net cash used
in operating activities--
Noncash items included in
net income:
Depreciation and
amortization 1,033,584 338,044 154,420
Impairment loss 4,736,318 -- --
Gain (loss) on
disposal of assets (25,000) 122,368 24,286
Loss on worthless stock -- 2,000 --
Compensation - stock
issued for services 188,578 1,162,477 --
Compensation adjustment
recognized under APB 25 (4,802,916) (81,945,112) 90,754,013
Compensation adjustment
recognized under FAS 123 919,827 -- --
Bad debt on notes
receivable 208,994 -- --
Net change in assets and
liabilities of
discontinued operation (284,419) 284,419 --
Net change in operating
assets and liabilities 2,185,725 201,997 66,249
------------ ------------ ------------
Net cash used in
operating activities (8,373,801) (6,395,155) (2,676,465)
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
(Increase) decrease
in amount due from
related party 64,553 (48,414) (18,113)
Increase in amount due
from members -- 2,376 (2,376)
Payments for purchase
of fixed assets (1,688,976) (582,545) (376,312)
Proceeds from sale
of fixed assets -- 70,280 --
Increase in notes receivable -- (235,000) --
Proceeds from the sale of
assets 25,000 -- --
Purchase of Interwireless
including related expenses (4,152,219) -- --
Purchase of stock -- -- (2,000)
------------ ------------ ------------
Net cash used in
investing activities (5,751,642) (793,303) (398,801)
------------ ------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
54
ESAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
AND FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
YEARS ENDED
DECEMBER 31,
----------------------------------------------
RESTATED
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Increase (decrease)in
contracts payable (63,961) 54,263 22,710
Payments of lease obligations (60,873) (33,777) (12,044)
Issuance of long-term debt -- -- 269,049
Payments of long-term debt (250,346) (95,713) --
Member distributions (112,451) (176,918) (78,500)
Payments on notes payable -- (47,283) --
Proceeds from issuance of
preferred stock 9,745,000 5,475,000 --
Proceeds from issuance of
common stock -- 2,721,575 5,673,132
Dividends paid (86,667) -- --
Receipt of subscription
receivable 558,510 -- --
Increase in note payable
stockholder 34,700 -- --
Proceeds from Private
Equity Credit Agreement 1,819,770 -- --
Payments for capitalized
equity-related costs (418,300) -- --
------------ ------------ ------------
Net cash provided by
financing activities 11,165,382 7,897,147 5,874,347
------------ ------------ ------------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS (2,960,061) 708,689 2,799,081
CASH (OVERDRAFT) AND CASH
EQUIVALENTS, BEGINNING 3,412,205 2,703,516 (95,565)
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 452,144 $ 3,412,205 $ 2,703,516
============ ============ ============
THREE MONTHS ENDED
MARCH 31,
---------------------------
2001 2000
----------- -----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (851,300) $ (788,712)
Adjustments to reconcile loss to net cash used
in operating activities -
Noncash items included in net loss:
Depreciation and amortization 109,374 104,161
Gain on sale of assets (44,696) --
Compensation - stock issued for services -- 539,667
Compensation adjustment recognized under APB 25 -- (2,060,604)
Net change in assets & liabilities of
discontinued operation -- 180,301
Bad debt expense 39,318 107,861
Accrued interest 7,655 --
Net change in operating assets and liabilities 129,299 53,218
----------- -----------
Net cash used in operating
activities (610,350) (1,864,108)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of fixed assets (152,029) (209,153)
Proceeds from sale of fixed assets 68,000 --
Increase in notes receivable -- (1,500)
----------- -----------
Net cash used in investing
activities (84,029) (210,653)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase(decrease) in notes payable 325,000 (90,162)
Decrease in capital lease obligations (784) (15,794)
Payments on contracts payable -- (18,915)
Loan to discontinued operation -- (212,429)
Member distributions -- (100,308)
Preferred stock dividend paid -- (11,666)
Payments for capitalized equity-related costs (6,308) --
----------- -----------
Net cash provided by (used in)
financing activities 317,908 (449,274)
----------- -----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (376,471) (2,524,035)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 452,144 3,412,205
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 75,673 $ 888,170
=========== ===========
55
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies of eSAT, Inc., is presented to assist
in understanding the Company's financial statements. These accounting
policies conform to generally accepted accounting principles.
eSAT, Inc. ("the Company"), was originally incorporated under the laws of
the state of California on February 22, 1996 as Technology Guardian, Inc.
On October 8, 1998, the Company merged with U.S. Connect 1995, Inc., and
on January 26, 1999, changed its name to eSAT, Inc.
a) Nature of Operations
The Company provides a wide range of services under the product name
VISP or Virtual Internet Service Provider. The VISP product is
geared to companies who currently or wish to offer ISP services
without the burden of investing in and maintaining a "back office"
portion of an ISP business. The VISP product is completely
customized to meet the customers' branding requirements and is
operated by the Company in its network operations center. Services
include user signup, billing, authentication, email, news, technical
support and access to more than 1,100 dialup locations throughout
the world.
The Company also provides satellite Internet access services and
products to businesses, educational institutions, and government
agencies. The Company's satellite network enables it to provide data
delivery services without geographical constraints.
b) Revenue Recognition
The Company reports on the accrual basis for both financial
statement and income tax purposes. Revenue from product sales is
recognized as products are shipped. Revenue from services is
recognized as the service is provided. Deferred revenue consists of
prepaid Internet and satellite access fees, prepaid VISP contract
services and deferred start up fees. Deferred fee revenue is
amortized using the straight-line method over the estimated life of
the contract. A related liability, deferred revenue is recorded for
the unearned portion of service revenue recognized.
c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
d) Concentration of Credit Risk
The Company maintains its cash balances in various financial
institutions. The balances are insured by the Federal Deposit
Insurance Corporation up to $100,000. At various times throughout
the years ended December 31, 2000 and 1999, the Company has
maintained balances in excess of federally insured limits. The
Company's uninsured balances totaled $279,263 and $3,260,611 at
December 31, 2000 and 1999, respectively.
56
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d) Concentration of Credit Risk (Continued)
The Company purchases satellite transponder time from one supplier.
The Company is currently behind in its payments to this supplier.
The Company had a single customer that accounted for 54 percent and
26 percent of its revenue during the years ended December 31, 2000
and 1999 respectively and 76 percent and 43 percent of net accounts
receivable at December 31, 2000 and 1999 respectively.
Subsequent to December 31, 2000 the Company was informed that its
major customer was discontinuing a product which had provided a
significant source of revenue to the Company. Revenue provided by
this source averaged $266,245 per month during the last quarter of
2000.
e) Principles of Consolidation
The consolidated financial statements include the accounts of eSAT,
Inc., and its wholly owned subsidiaries. Significant inter-company
transactions and amounts have been eliminated in consolidation.
f) Business Combinations
In October 1998, the Company completed a reverse acquisition with
U.S. Connect 1995 Inc. A total of 11,407,507 common shares were
exchanged in a 1:1 ratio. The transaction was a merger of a private
operating company into a non-operating public shell corporation with
nominal assets.
On April 13, 2000 the Company acquired InterWireless, Inc. in a
business combination accounted for as a purchase. The purchase price
of $4,152,219 exceeded the fair value of the net assets by
$4,152,219, which was recorded as goodwill and was to be amortized
using the straight-line method over 7 years. See Note 5 for further
information about the goodwill valuation. The results of operations
of InterWireless, Inc. are included with the results of the Company
beginning April 13, 2000.
On April 13, 2000, the Company acquired PacificNet Technologies,
Inc. in a business combination accounted for as a pooling of
interests. PacificNet Technologies, Inc. became a wholly owned
subsidiary of the Company through the exchange of 2,750,000 shares
of the Company's common stock for all the outstanding stock of
PacificNet Technologies, Inc. The accompanying financial statements
for the years ended December 31, 1999 and 1998 have been restated to
give effect to this combination.
Following is a reconciliation of the amounts of net sales and net
income previously reported with restated amounts:
RESTATED
1999 1998
---------- ----------
Sales:
As previously reported $ 313,640 $ 341,047
Acquired company 3,362,577 2,133,570
---------- ----------
As restated $3,676,217 $2,474,617
========== ==========
57
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
f) Business Combinations (Continued)
Net income (loss):
As previously reported $ 73,199,403 $(93,481,186)
Acquired company 239,249 (194,247)
------------ ------------
As restated $ 73,438,652 $(93,675,433)
============ ============
g) Cash and Cash Equivalents
The Company considers all investment instruments purchased with a
maturity of three months or less to be cash equivalents.
h) Accounts Receivable
The allowance for doubtful accounts is established through a
provision for bad debt charged to expense. Receivables are charged
off against the allowance when management believes that the
collectibility of the account is unlikely. Recoveries of amounts
previously charged off are credited to revenues. At December 31,
2000 and 1999, the allowance for doubtful accounts was $305,450 and
$127,434, respectively.
i) Inventory
Inventory consists of satellite dishes and related equipment and is
stated at the lower of cost or market. Cost is determined using the
weighted average method.
j) Property, Equipment and Depreciation
Property and equipment are initially recorded at cost. During 2000,
fixed assets used in the operations of the Interwireless subsidiary
and fixed assets related to satellite services were deemed to be
impaired and written down to their fair value. Fair value exceeded
their carrying value by $1,006,211. An impairment loss of that
amount (included in operating expenses) has been charged to
operations in 2000. Depreciation of property and equipment is
provided using the straight-line method over the following estimated
useful lives:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -----------
Machinery and equipment 3-5 Years
Office equipment 3 Years
Furniture 5 Years
Leasehold improvements 3 Years
Expenditures for maintenance and repairs are charged to expense as
incurred.
58
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
j) Property, Equipment and Depreciation (Continued)
Property and equipment consist of:
2000 1999
----------- -----------
Machinery and equipment $ 1,634,804 $ 790,065
Office equipment 325,753 267,918
Furniture 73,900 103,269
Leasehold improvements 35,187 35,440
----------- -----------
2,069,644 1,196,692
Less -- Accumulated depreciation (925,833) (376,807)
----------- -----------
1,143,811 819,885
Leased property under capital
lease, net 214,261 232,051
----------- -----------
$ 1,358,072 $ 1,051,936
=========== ===========
k) Research and Development
Research and development costs are charged to operations when
incurred and are included in operating expenses. The amounts charged
to operations for the years ended December 31, 2000 and 1999 were
$199,885 and $500,134 respectively. For the year ended December 31,
1998 there were no expenditures for research and development.
l) Income Taxes
The Company files a consolidated federal income tax return. The
subsidiaries pay to or receive from eSAT, Inc., the parent company,
the amount of federal income taxes they would have paid or received
had the subsidiaries filed separate federal income tax returns.
Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income
taxes. The Company has a deferred tax asset due to net operating
loss carryforwards for income tax purposes and the timing difference
in the recognition of compensation expense for financial statement
purposes. The deferred tax asset is approximately $6.3 million and
$2.8 million at December 31, 2000 and 1999, respectively; however,
due to the ongoing nature of the losses and the potential inability
of the Company to ever realize the benefit, a valuation allowance
has been established for 100% of the deferred tax asset. At December
31, 2000 and 1999, the Company's available federal net operating
loss carry forwards totaled $24.9 million and $12.2 million,
respectively, and California net operating loss carry forwards
totaled $18.6 million and $12.2 million, respectively. The loss
carry forwards will expire at various dates through the year 2021.
59
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
l) Income Taxes (Continued)
Prior to the pooling of interests on April 13, 2000, PacificNet
operated as a limited liability company. It was treated as a
partnership for federal income tax purposes. Consequently, federal
income taxes were not payable by, or provided for the subsidiary.
Members were taxed individually on their shares of the subsidiary's
earnings at the federal and state levels. The subsidiary was subject
to an annual California minimum franchise tax of $800 and the
California Limited Liability Company Fee, which is based on annual
gross sales. The subsidiary's net income or loss was allocated among
the members in accordance with the operating agreement of the
subsidiary. The accompanying financial statements, restated to give
effect to the pooling reflect the fact that had PacificNet been a
subsidiary in prior years, no additional tax would have been
incurred due to the parent company's net operational losses.
m) Stock-Based Compensation
The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of APB 25, Accounting
for Stock Issued to Employees, and complies with the disclosure
provisions of SFAS 123, Accounting for Stock-Based Compensation.
Under APB 25, compensation cost is recognized on fixed plans over
the vesting period based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount
an employee must pay to acquire the stock. For variable plans, APB
25 requires recognition of compensation cost over the vesting period
based on the difference, if any, on the period-end date between the
fair value of the Company's stock and the amount an employee must
pay to acquire the stock. Forfeitures of variable plan options
result in a reversal of previously recognized compensation cost.
Due to the large number of variable plan options granted by the
Company in 1998 and the significant difference between the exercise
price of those options and the fair value of the Company's stock at
December 31, 1998, the Company recognized a substantial amount of
non-cash compensation cost in 1998. Subsequently, a large number of
forfeitures and the re-pricing to market of those options in 1999
caused a considerable reversal of the previously recognized non-cash
compensation cost. The resulting net income for the year ended
December 31, 1999, should not be construed as profitable operations
during that year (See Note 2 for Going Concern disclosure).
n) Net Earnings or Loss Per Share
The following data show the amounts used in computing earnings per
share and the effect on income and the weighted average number of
shares of dilutive potential common stock for the year ended
December 31, 1999:
Income available to common
stockholders before adjustments $ 73,438,652
Adjustments --
------------
Income available to common
stockholders used in basic EPS $ 73,438,652
============
60
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
n) Net Earnings or Loss Per Share (Continued)
Weighted average number of
common shares used in basic EPS 20,956,553
Effect of dilutive securities:
Common stock dividend on
preferred stock Series A (479)
Stock options 1,762,798
Warrants 1,270,949
Convertible preferred
stock Series A 97,691
Convertible preferred
stock Series C 11,022
----------
Weighted average number of
common shares and dilutive
potential common stock used
in dilutive EPS 24,098,534
==========
Basic net loss per share is based on the weighted average number of
common shares outstanding of 21,900,103 and 18,835,936 for 2000 and
1998 respectively. The basic and diluted earnings per share
calculations are the same for 2000 and 1998 because potential
dilutive securities would have had an antidilutive effect for all
periods presented. Securities that were not included in the 2000 and
1998 earnings per share calculation because they were antidilutive
consist of the convertible preferred stock, warrants and stock
options.
o) Advertising
The Company expenses advertising costs as they are incurred.
Advertising expenses for the years ended December 31, 2000, 1999,
and 1998 were $903,952, $479,387 and $175,647 respectively.
(2) GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which
contemplate continuation of the Company as a going concern; however, the
Company has sustained substantial operating losses in recent years. In
view of this matter, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements, and the success of its future operations.
The Company's management estimates that its current cash, cash equivalents
and cash generated from operations will only be sufficient to meet its
anticipated cash needs through approximately May 15, 2001. Accordingly the
Company will require a substantial additional cash infusion to continue
its operations. Management does not believe that additional capital will
be available. Management is considering an asset sale or other comparable
transaction as part of a financial restructuring. If the Company is not
successful in completing a strategic transaction, it will be required to
cease operations.
61
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(3) NOTE RECEIVABLE - EMPLOYEE
Note receivable - employee at December 31, 1999 consisted of a note
receivable from an employee dated June 9, 2000, due in monthly payments of
$1,580, including interest at 6.5%, secured by personal property of the
employee. During the year ended December 31, 2000 the Company accepted
24,988 shares of its own stock in satisfaction of the note.
(4) LEASED PROPERTY UNDER CAPITAL LEASE
The Company leases office equipment under capital leases. The economic
substance of these lease agreements is that the Company is financing the
acquisition of the leased assets through the leases and, accordingly, they
are recorded in the Company's assets and liabilities. The following is an
analysis of the leased property under capital lease:
2000 1999
--------- ---------
Computer equipment $ 291,553 $ 159,579
Office equipment 36,910 137,081
Less accumulated depreciation (114,202) (64,609)
--------- ---------
$ 214,261 $ 232,051
========= =========
Net minimum lease payments $ 234,878 $ 245,949
Less -- amount representing
interest (58,133) (39,505)
--------- ---------
Present value of net minimum
lease payments $ 176,745 $ 206,444
========= =========
The following is a schedule by years of future minimum lease payments
required under the leases:
Years ending December 31, 2001 $ 75,902
2002 46,785
2003 17,044
2004 17,490
2005 19,524
---------
$ 176,745
=========
62
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(5) GOODWILL
Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at the date of acquisition. Amortization
expense charged to operations totaled $444,881 during the year ended
December 31, 2000. In December 2000, fixed assets used in the operations
of Interwireless were deemed to be impaired. See Note 1(j) for details
regarding the write down of such assets to their fair value. In addition,
goodwill with a carrying value of $3,707,338, which arose in connection
with the acquisition of Interwireless, has been written down to zero. The
write-off of goodwill is included in the 2000 income statement as part of
impairment loss.
(6) NOTES PAYABLE STOCKHOLDER
2000 1999
------- ----
Notes payable to stockholders, former
principals of Interwireless, due on
demand, unsecured. $34,700 $ --
======= ====
(7) NOTE PAYABLE - RELATED PARTY
2000 1999
------- ------
Note payable - Vantage Capital, Inc.,
due on demand, with interest at the
applicable Federal rates, unsecured.
Michael Palmer, former CEO of eSAT,
Inc., is the 100% shareholder of
Vantage Capital, Inc. AFR at
December 31, 1999 was 5.59% $ -- $90,250
======= =======
(8) COMMITMENTS AND CONTINGENCIES
a) Non-Cancelable Operating Lease
The Company leases various equipment and office facilities under a
non- cancelable operating leases. The leases have various terms,
ranging from two years to ten years which expire periodically
through 2006.
The following is a schedule by years of future minimum lease
payments required under the leases:
Years ending December 31, 2001 $ 943,757
2002 857,265
2003 616,801
2004 479,916
2005 91,032
-----------
$ 2,988,771
===========
63
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(8) COMMITMENTS AND CONTINGENCIES (Continued)
b) Pending and Threatened Litigation
In December 2000, Michael C. Palmer, former CEO of the Company and
Vantage Capital, Inc. (controlled by Mr. Palmer), commenced an
arbitration proceeding seeking $325,000 in severance benefits
alleged to be part of his contract with the Company. In January
2001, i-Xposure, Inc. filed a lawsuit against the Company seeking
approximately $351,000 plus interests and costs, allegedly due under
guaranties which were part of a bridge financing arrangement.
Although the Company intends to defend itself, it cannot be certain
of a favorable outcome. Liabilities have been accrued using
estimates of the Company's potential losses.
In January 2001, a claim was asserted against the Company by two
shareholders alleging fraud and material omission of fact as
represented by the current and a former Chief Executive Officer of
the Company. The claim alleges damages of $434,000. The Company
believes the claim to be without merit and intends to vigorously
defend itself. No accrual for a potential loss is reflected in the
accompanying financial statements.
In March 2001, Richard Elliot and David Pennells, co-founders and
Presidents of the subsidiaries PacificNet and Interwireless,
asserted certain claims of non-performance against the Company. They
have not filed a lawsuit, nor have they sought any damages, as of
yet. Due to uncertainty regarding the claims, and the fact that
nothing has been formally brought against the Company, no accrual
has been made in these financial statements.
c) Employment Agreements
The Company has entered into agreements with certain of its
officers. The agreements provide for a minimum annual salary and
options to purchase stock of the Company.
d) Purchase Obligations
In order to assure its supply of satellite transmission time when
needed, the Company has entered into Transponder Lease Agreements
with a supplier with available transponder capacity. The agreements
expire at various dates through November, 2002. The Company may
terminate the agreements only if there is a period of interruption
of service greater than 14 days or in the event the satellite the
agreement pertains to is taken out of service. The Company is
required to make minimum annual payments as follows, payable in
monthly installments whether or not it makes use of the time under
the agreements:
Years ending December 31, 2001 $ 753,960
2002 72,000
----------
$ 825,960
==========
The Company is currently behind in these payments. In addition, at
the Company's option, for additional monthly fees, the Company may
upgrade service if additional capacity is needed. The Company is
responsible for the payment of all taxes, duties, user fees, and
privilege or excise taxes pertaining to the use of the suppliers'
equipment. Fees paid under these agreements totaled $889,960,
$601,960 and $37,230 for the years ended December 31, 2000, 1999 and
1998, respectively.
64
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(8) COMMITMENTS AND CONTINGENCIES (Continued)
d) Purchase Obligations (Continued)
In June 2000 the Company entered into an agreement with a supplier
of radio frequency equipment for use in its fixed wireless business
line. The agreement requires the Company to purchase specified
quantities of product through October 2003. The failure of the
Company to meet the stated purchase commitments could result in a
liability to the supplier of approximately $5,000,000. The equipment
has not performed as specified in the agreement in multiple material
aspects. Accordingly, the Company is seeking rescission of the
contract, and has not accrued the liability.
(9) STOCKHOLDERS' EQUITY
a) Common Stock and Warrants
At December 31, 2000, the Company had 100 million shares authorized
and 23,260,057 issued and outstanding. In addition, the Company had
outstanding at December 31, 2000 and 1999, 10,698,665 and 5,039,163
warrants convertible into common shares at various prices ranging
from $0.39 to $14.70, with expiration dates through December, 2004.
A summary of the warrants outstanding at December 31, 2000 is as
follows:
WEIGHTED AVERAGE
EXERCISE REMAINING WEIGHTED AVERAGE
PRICE RANGE NUMBER CONTRACTUAL LIFE EXERCISE PRICE
--------------- ---------- ---------------- ----------------
$0.39 - $1.52 2,484,256 52 months $1.13
$2.40 - $3.31 3,065,110 26 months $2.90
$3.98 - $6.25 3,372,299 49 months $4.62
$8.00 - $8.50 900,000 53 months $8.22
$10.00 - $14.70 877,000 20 months $11.73
A summary of the warrants outstanding at December 31, 1999 is as
follows:
WEIGHTED AVERAGE
EXERCISE REMAINING WEIGHTED AVERAGE
PRICE RANGE NUMBER CONTRACTUAL LIFE EXERCISE PRICE
-------------------- --------- ----------------- ----------------
$0.72 - $1.37 225,000 50 months $0.86
$2.40 - $3.14 3,009,286 49 months $2.94
$4.25 - $6.25 1,038,877 58 months $5.02
$8.50 400,000 58 months $8.50
$14.00 - $14.70 366,000 45 months $14.13
65
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(9) STOCKHOLDERS' EQUITY (Continued)
b) Common Stock Reserved
At December 31, 2000, common stock was reserved for the following
reasons:
Exercise of common stock warrants 10,698,655
Conversion of preferred stock 5,815,014
Exercise of employee stock options 3,343,738
----------
19,857,407
==========
The holders of Preferred Stock series C, D and E can own no more
than 4.99 percent of the outstanding common stock of the Company.
The above reserve for the conversion of preferred shares assumes
that any converted shares will be retained by the Preferred stock
shareholders. Had the Preferred shareholders converted to common
stock at December 31, 2000 and sold it, a total of approximately
86,338,000 shares of common stock would have been required. This
amount combined with the outstanding shares at December 31, 2000
exceeded the common shares authorized.
At December 31, 1999, common stock was reserved for the following
reasons:
Exercise of common stock warrants 5,039,163
Conversion of preferred stock 847,037
Common stock dividends on preferred stock 5,129
Exercise of employee stock options 2,704,873
---------
8,596,202
=========
c) Preferred Stock
Preferred stock consists of the following:
Series A - $.01 par value, 2 million shares authorized, 1 million
shares issued and outstanding, pays dividends quarterly in the form
of common stock at an annual rate of 12 percent, cumulative and
fully participating, convertible to common stock at a rate of one
share of preferred stock for $2 of common stock, rounded to the
nearest whole common share. The Company is required to maintain a
reserve of common stock sufficient to effect conversion. Holders of
Series A Preferred Stock are entitled to one vote per share. In
addition, the Company must obtain the consent of the holders of not
less than 50% of the shares of outstanding Series A preferred stock
on matters involving declaration and payment of dividends on common
stock, sale or issuance of capital stock of the Company or options
to acquire capital stock of the Company other than Series A
Preferred Stock, or changes in the general character of the
Company's business. All outstanding shares of Series A preferred
stock were held by Vantage Capital, Inc., a related party. During
the year ended December 31, 2000, all the outstanding shares of
Series A preferred stock were converted into common shares.
Series C - $.001 par value, 50,000 shares authorized, issued and
outstanding, pays dividends quarterly in the form of cash or common
stock at an annual rate of 6 percent, cumulative and fully
participating, redeemable and convertible to common stock. The
number of common shares to be issued upon conversion is determined
by multiplying the number of preferred shares to be converted by a
fraction. The numerator of the fraction is the purchase price of the
preferred shares. The denominator of the fraction is the conversion
price, calculated as the lesser of 125 percent of the closing bid
price of the common stock on the trading day immediately preceding
the issue date, or 85 percent of the five day average quoted price
for the five trading days immediately preceding the conversion
notice date. At December 31, 2000 dividends in arrears on the Series
C Preferred stock were $212,500 ($4.25 per share).
66
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(9) STOCKHOLDERS' EQUITY (Continued)
c) Preferred Stock (Continued)
Series D - $.001 par value, 75,000 shares authorized, 69,050 shares
issued and outstanding, pays dividends quarterly in the form of cash
or common stock at an annual rate of 6 percent, cumulative and fully
participating, redeemable and convertible to common stock. The
number of common shares to be issued upon conversion is determined
by multiplying the number of preferred shares to be converted by a
fraction. The numerator of the fraction is the purchase price of the
preferred shares. The denominator of the fraction is the conversion
price, calculated as the lesser of 125 percent of the closing bid
price of the common stock on the trading day immediately preceding
the issue date, or 85 percent of the five day average quoted price
for the five trading days immediately preceding the conversion
notice date. Holders of Series D Preferred Stock are entitled to one
vote per share. At December 31, 2000 dividends in arrears on the
Series D Preferred stock were $293,463 ($4.25 per share).
Series E - $.001 par value, 30,000 shares authorized, issued and
outstanding, pays dividends quarterly in the form of cash or common
stock at an annual rate of 6 percent, cumulative and fully
participating, redeemable and convertible to common stock. The
number of common shares to be issued upon conversion is determined
by multiplying the number of preferred shares to be converted by a
fraction. The numerator of the fraction is the purchase price of the
preferred shares. The denominator of the fraction is the conversion
price, calculated as 10,000 shares of Series E preferred Stock
commencing on each of the 30th, 60th and 90th days after the first
issue date, provided that in no event shall any holder of Series E
Preferred stock convert more than 20 percent of such holder's shares
in any period of five consecutive trading days. Holders of Series D
Preferred Stock are entitled to one vote per share. At December 31,
2000 dividends in arrears on the Series E preferred stock were
$70,510 ($2.35 per share).
d) Stock Option Agreements
The Company has granted fixed employee stock-based compensation
options and variable employee stock-based compensation options. The
variable option agreements provide for exercise of options into a
number of shares of common stock, which is dependent on the market
value of the stock at the date of exercise. The fixed and variable
option agreements typically have a maximum term of 5 years and are
typically fully vested at the date of grant.
The fair value of each option granted is estimated on the grant date
using the Black-Scholes Model. The following assumptions were made
in estimating fair value:
FIXED VARIABLE
OPTIONS OPTIONS
------------- --------------
Dividend yield 0.00 % 0.00 %
Risk-free interest rate 6.56 % 6.56 %
Expected life 2.50 years 2.50
years
Expected volatility 64.32 % 64.32 %
67
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(9) STOCKHOLDERS' EQUITY (Continued)
d) Stock Option Agreements (Continued)
Had compensation cost been determined on the basis of fair value
pursuant to FASB Statement No. 123, net income and earnings per
share for the years ended December 31, 2000 and 1999 would have been
reduced as follows:
Year Ended December 31,
-----------------------
2000 1999
------------- --------------
Net income (loss):
As reported $ (12,534,492) $ 73,438,652
============== ==============
Pro forma $ (18,046,333) $ (11,714,410)
============== ==============
Basic earnings per share:
As reported $ (0.58) $ 3.50
============== ==============
Pro forma $ (0.82) $ (0.56)
============== ==============
Diluted earnings per share:
As reported $ (0.58) $ 3.05
============== ==============
Pro forma $ (0.82) $ (0.49)
============== ==============
The following is a schedule of the weighted average exercise price
and weighted average fair value in accordance with SFAS 123 at
December 31, 2000:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE PRICE FAIR VALUE
-------------- ----------
Exercise price:
Exceeds market price $ 3.33 $ 0.00
Equals market price n/a n/a
Less than market price n/a n/a
The following is a schedule of the weighted average exercise price
and weighted average fair value in accordance with SFAS 123 at
December 31, 1999:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE PRICE FAIR VALUE
-------------- ----------
Exercise price:
Exceeds market price $ 10.25 $ 0.60
Equals market price $ 3.26 $ 1.25
Less than market price $ 6.23 $ 1.03
68
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(9) STOCKHOLDERS' EQUITY (Continued)
d) Stock Option Agreements (Continued)
The Company applies APB Opinion 25 in accounting for its fixed and
variable stock compensation plans. Compensation cost charged to
operations in 2000 was $0 and $(4,802,916) for the fixed and
variable plans, respectively. Compensation cost charged to
operations in 1999 was $2,522,340 and $(84,467,452) for the fixed
and variable plans, respectively. Compensation cost charged to
operations in 1998 was $0 and $90,754,014 for the fixed and variable
plans, respectively.
Following is a summary of the status of the variable plan during
1998, 1999 and 2000:
NUMBER OF WEIGHTED AVG.
SHARES EXERCISE PRICE
--------- --------------
Outstanding at
December 31, 1997 -- $ --
Granted 6,752,236 1.98
Exercised -- --
Forfeited -- --
----------
Outstanding at
December 31, 1998 6,752,236 1.98
Granted -- --
Exercised (598,941) 0.95
Forfeited (4,564,422) 1.92
----------
Outstanding at December 31,
1999 1,588,873 2.56
Granted 1,290,000 3.75
Exercised (169,300) 1.39
Forfeited (962,668) 3.78
----------
Outstanding at December 31,
2000 1,746,905 $ 3.22
==========
Options exercisable at
December 31, 1998 6,752,236 $ 1.98
=========
Options exercisable at
December 31, 1999 1,588,873 $ 2.56
==========
Options exercisable at
December 31, 2000 1,382,599 $ 2.71
==========
69
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(9) STOCKHOLDERS' EQUITY (Continued)
d) Stock Option Agreements (Continued)
Following is a summary of the status of the fixed plan during 1999
and 2000:
NUMBER OF WEIGHTED AVG.
SHARES EXERCISE PRICE
--------- --------------
Outstanding at
January 1, 1999 -- $ --
Granted 1,366,000 7.32
Exercised -- --
Forfeited -- --
-----------
Outstanding at
December 31, 1999
Granted 1,366,000 7.32
Exercised 4,386,712 3.68
Forfeited -- --
(4,155,879) 5.04
-----------
Outstanding at
December 31, 2000 1,596,833 $ 3.70
=========
Options exercisable
at December 31, 1999 1,116,000 $ 8.15
=========
Options exercisable
at December 31, 2000 397,902 $ 4.12
=========
Following is a summary of the status of variable options outstanding
at December 31, 1999:
WEIGHTED AVERAGE
EXERCISE REMAINING WEIGHTED AVERAGE
PRICE RANGE NUMBER CONTRACTUAL LIFE EXERCISE PRICE
------------ ------ ---------------- --------------
$0.72 580,873 45 months $0.72
$3.00 908,000 45 months $3.00
$9.25 100,000 48 months $9.25
70
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(9) STOCKHOLDERS' EQUITY (Continued)
d) Stock Option Plan (Continued)
Following is a summary of the status of variable options outstanding
at December 31, 2000:
WEIGHTED AVERAGE
EXERCISE REMAINING WEIGHTED AVERAGE
PRICE RANGE NUMBER CONTRACTUAL LIFE EXERCISE PRICE
------------ --------- ----------------- ----------------
$0.72 288,905 32 months $0.72
$3.00-$4.19 1,458,000 35 months $3.43
Following is a summary of the status of fixed options outstanding at
December 31, 1999:
WEIGHTED AVERAGE
EXERCISE REMAINING WEIGHTED AVERAGE
PRICE RANGE NUMBER CONTRACTUAL LIFE EXERCISE PRICE
------------ ------ ---------------- --------------
$3.00-$3.50 335,000 60 months $3.45
$4.00 460,000 55 months $4.00
$5.50 60,000 58 months $5.50
$10.25 11,000 54 months $10.25
$13.13 500,000 53 months $13.13
Following is a summary of the status of fixed options outstanding at
December 31, 2000:
WEIGHTED AVERAGE
EXERCISE REMAINING WEIGHTED AVERAGE
PRICE RANGE NUMBER CONTRACTUAL LIFE EXERCISE PRICE
------------ ------ ---------------- --------------
$2.50-$3.00 665,000 41 months $2.99
$4.00-$5.69 931,833 42 months $4.21
e) Common Stock Issuance Settlement
During the years ended December 31, 1998 and 1999, Corporate
Financial Enterprises (CFE) was engaged to complete a private
placement of approximately 2 million shares. This private placement
was to yield proceeds of $1.5 million to the Company. A former
officer of the Company authorized the issuance of over 3.3 million
shares under this agreement. The Company received $1.5 million, but
received no consideration for the excess shares issued.
In settlement of the discrepancy, the Company entered into a Stock
Reconciliation Settlement Agreement with CFE effective December 31,
1999. Under the terms of the agreement the Company received $558,310
in cash as settlement for the unpaid stock, net of unpaid fees owed
CFE. The CFE agreement for future fees was canceled. Also, the
Company kept a $1 million deposit made by CFE in anticipation of
purchasing certain preferred shares. CFE waived all rights to
receive any preferred shares. Additionally, approximately 1.8
million shares owned by the former officer were forfeited and
canceled under a resignation agreement.
71
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(9) STOCKHOLDERS' EQUITY (Continued)
f) Private Equity Credit Agreement ("PECA")
During the year ended December 31, 1999, the purchasers of the
Series C Preferred Stock committed to purchase up to $20,000,000 of
common stock at a price equal to 90 percent of the average of the
five lowest closing bid prices for the 10 days prior to each notice
of sale. In August 2000, the Company modified the terms of this
equity line of credit with Wentworth, LLC establishing a $7,000,000
credit limit. In October 2000, the Company received $2,000,000 under
a modification to the PECA. In accordance with the agreement, shares
of the Company's common stock are issuable to Wentworth, LLC upon
receipt of their call notice. A call notice on this financing has
not been received by the Company to date. The PECA also calls for
the issuance of warrant to purchase shares of an amount equal to 25
percent of the shares issued from each put or call notice at a price
of 125 percent of the market price with respect to each funding
under the PECA including the $2,000,000 financing. Management is
uncertain whether Wentworth, LLC will allow the Company to continue
to receive funding under the PECA.
Subsequent to December 31, 2000, the Company received funding from
Wentworth, LLC and concurrently entered into an agreement whereby
the $2,000,000 received in October 2000 will be converted into a
secured note collateralized by all the assets of the Company. This
note is expected to be convertible into equity at the option of the
holder.
(10) DISCONTINUED OPERATIONS
On June 30, 2000 the Company adopted a formal plan to dispose of its
subsidiary i-Xposure, Inc. On October 6, 2000 the Company completed a
transactions whereby the Company disposed of approximately 80 percent of
its interest in i-Xposure. As part of this transaction, the Company
guaranteed certain loans and revenue amounts. However, these amounts are
currently in dispute. See Note 8(b) for additional details.
Net sales and results of operations of i-Xposure through October 6, 2000
were $528,993 and $(1,782,118) respectively. These amounts are not
included in net sales or loss from operations in the accompanying
statements of operations.
(11) RELATED PARTY TRANSACTIONS
On September 17, 1999, the Company entered into a consulting agreement
(the "Agreement") with Vantage Capital, Inc., which is wholly owned by
Michael Palmer, former Chief Executive Officer of eSAT, Inc. The Agreement
stated that the duties of the consultant include: (1) identifying,
analyzing, structuring, negotiating and financing business sales and/or
acquisitions, including without limitation, merger agreements, stock
purchase agreements, and any agreements relating to financing and/or the
placement of debt or equity securities of the Company; (2) assist the
Company in its corporate strategies; and (3) assist the Company in the
implementation of its business plan, in each case as requested by the
Company. The Agreement provided for compensation in the form of a
72
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(11) RELATED PARTY TRANSACTIONS (Continued)
monthly retainer of $5,000 in cash or stock, the issuance of 600,000
warrants exercisable at prices ranging from $4.25 to $8.50, a fee of 10%
of the total aggregate consideration paid for any acquisition or sale by
the Company of any business, corporation, or division, a fee equal to 10%
of any private or public placement of debt or equity securities of the
Company, and a share in any fees or commissions payable by third parties
on any transaction contemplated by the Agreement. In accordance with this
agreement, a $160,000 liability was accrued at December 31, 1999.
During the years ended December 31, 2000 and 1999, the Company paid
approximately $50,000 and $576,000 respectively to Parks, Palmer, Turner
and Yemenidjian, LLP, a public accounting firm in which Michael Palmer,
the Company's former CEO, was previously the managing partner. The
payments were compensation for the services of Michael Palmer and
associates of the firm.
(12) STATEMENTS OF CASH FLOWS
The net changes in operating assets and liabilities shown on the
statements of cash flows consist of the following:
RESTATED
2000 1999 1998
----------- ---------- ---------
(Increase) Decrease:
Accounts receivable, net $ (315,529) $(350,999) $ 201,101
Inventory (41,306) 154,071 (92,820)
Other current assets (139,750) (431,827) 3,539
Other assets 23,907 (92,463) (39,746)
Deposits 248,462 -- --
Increase (Decrease):
Accounts payable 817,107 136,292 8,726
Accrued expenses 195,509 (14,371) 2,289
Unearned revenue (154,849) 189,662 117,070
Other current
liabilities 23,047 587,665 (153,447)
Deferred revenue 544,997 23,967 19,537
Severance payable (90,000) -- --
Settlement payable (83,866) -- --
Accrued loss
contingencies 1,157,996 -- --
----------- ---------- ---------
$2,185,725 $ 201,997 $ 66,249
=========== ========== ==========
Operating activities reflect:
Interest paid $ 38,355 $ 68,192 $ 27,009
========= ========= =========
Income taxes paid $ 8,390 $ 4,600 $ 4,600
========= ========= =========
73
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(12) STATEMENTS OF CASH FLOWS (Continued)
Non-cash investing and financing transactions:
Conversion of Series A
Preferred stock $ (10,000) $ -- $ --
Issuance of common stock 10,000 -- --
----------- ---- -----
$ -- $ -- $ --
=========== ==== =====
Conversion of Series D
Preferred stock $ (1,406) $ -- $ --
Issuance of common stock 1,406 -- --
----------- ---- -----
$ -- $ -- $ --
=========== ==== =====
Cancellation of note
receivable $ 50,756 $ -- $ --
Cancellation of common
stock received in
satisfaction of note (50,756) -- --
---------- ---- -----
$ -- $ -- $ --
=========== ==== =====
Purchase of idle
assets under dispute $(1,414,500) $ -- $ --
Accounts payable-non
trade 1,414,500 -- --
----------- ---- -----
$ -- $ -- $ --
=========== ==== ======
Return of fixed assets
under capital lease $ 49,012 $ -- $ --
Cancellation of capital
lease obligation (49,012) -- --
----------- ---- -----
$ -- $ -- $ --
=========== ==== =====
74
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(12) STATEMENTS OF CASH FLOWS (Continued)
Cancellation of
subscription receivable $ 1,000,000 $ -- $ --
Reduction of Series A
Preferred stock issued (900,000) -- --
Reduction of note
payable (100,000) -- --
------------- ------------ ------------
$ -- $ -- $ --
============= ============ ============
Subscription receivable $ -- $ (558,510) $ --
Issuance of common stock -- 558,510 --
------------- ------------ ------------
$ -- $ -- $ --
============= ============ ============
Subscription receivable $ -- $(2,000,000) $ --
Collection of
subscription receivable -- 1,000,000 --
Issuance of Series A
Preferred stock -- 2,000,000 --
------------- ------------ ------------
Cash received for the
issuance of Series A
Preferred stock $ -- $ 1,000,000 $ --
============= ============ ============
Purchase fixed assets $ (1,769,162) $ (828,795) $ (448,080)
Capital lease obligation 80,186 246,250 71,768
------------- ------------ ------------
Cash paid for fixed
assets $ (1,688,976) $ (582,545) $ (376,312)
============= ============ ============
(13) SUBSEQUENT EVENTS
Subsequent to December 31, 2000, the Company lost a significant source of
revenue. See Note 1d for additional details.
In January 2001, the Company received funding of $325,000 through the
percent, is due on April 20, 2001 and is collateralized by all the assets
of the Company. Concurrent with this funding, the Company entered into an
agreement with Wentworth, LLC whereby the $2,000,000 previously advanced
under the PECA in October 2000 will be converted to a secured note also
collateralized by the assets of the Company. The note is expected to be
convertible to equity under provisions substantially identical to those of
the PECA.
(14) PRIOR PERIOD ADJUSTMENT
The accompanying statement of operations and cash flows for 1998 have been
restated to correct an error in the application of APB 25, Accounting for
Stock Issued to Employees, made in 1998. The effect of the restatement was
to decrease net income for 1998 by $90,754,014 ($4.98 per share), net of
income tax.
75
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(15) EXTRAORDINARY INCOME
During the year ended December 31, 1998, the Company was released from a
liability to a factoring company. In accordance with SFAS 4 the Company
recorded extraordinary income in the amount of $242,990.
The agreement with the factoring organization called for factor to
purchase receivables at a price equal to 80% of the face value of
acceptable accounts from the Company. The Company therefore would
appropriately record the transaction as a sale of receivables with
proceeds of the sale reduced by the fair value of the recourse obligation.
Under the terms of the Agreement, factor earned a fee equal to 14% of the
face amount of the accounts purchased and such fee shall be taken at the
time of collection of an invoice. Factor shall reserve and hold 2.5% of
the face value of purchased accounts for bad debts. Factor shall be
entitled to immediate and full recourse against the Company to demand
payment with respect to a purchase account in the event that the purchase
account is not paid in full within 75 days. During the course of the
relationship with the factor, the Company's largest client filed a Chapter
7 bankruptcy liquidation resulting in more than $100,000 in purchased
accounts going unpaid. In accordance with the terms of the Agreement
factor made demand upon the Company for immediate payment plus accrued
unpaid fees and interest through the date of Company's payment.
The Company was released from its liability to the factoring organization
because during the year 1998 it was unable to make payment under the terms
of the agreement, which had been entered into. Upon breach of the
agreement, the liability was transferred to the individual who had
provided a personal guarantee, Mr. David Coulter. This individual
subsequently settled all outstanding obligations with the factoring
organization through the transfer of 25,000 shares of restricted Rule 144
stock from his name into the name of the factoring organization and the
payment of $89,000 out of his personal account.
(16) SEGMENT REPORTING
During the year ended December 31, 2000, the Company had two reportable
segments: Virtual Internet Service Provider (VISP) and Satellite Services.
The VISP derives its revenue from providing virtual internet service
provider services to external customers. Satellite services provides
satellite Internet access services and products. The accounting policies
applied by each of the segments are the same as those described in the
summary of significant accounting policies. The Company's reportable
segments are strategic business units that offer different products and
services. They are managed separately because each segment requires
different technology and marketing strategies.
76
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(16) SEGMENT REPORTING (Continued)
Satellite All
VISP Services Other Total
------------ ------------ ------------ ------------
Net sales $ 5,105,114 $ 331,654 $ 226,345 $ 5,663,113
Cost of sales (4,243,937) (1,233,157) (631,559) (6,108,653)
General and
administrative expenses (832,774) (9,699,011) (223,626) (10,755,411)
Impairment loss -- (4,375,819) (360,498) (4,736,317)
Interest expense (23,695) (14,645) (15) (38,355)
Compensation adjustment
under APB 25 -- 4,802,916 -- 4,802,916
Loss from discontinued
operations -- -- (1,424,646) (1,424,646)
Net income (loss) 18,754 (10,136,134) (2,417,112) (12,534,492)
Depreciation and
amortization (183,762) (803,721) (46,101) (1,033,584)
Total assets $ 2,038,982 $ 1,009,287 $ 1,399,094 $ 4,447,363
The 1999 segment information as restated to account for the pooling of
interests is as follows:
Satellite All
VISP Services Other Total
------------ ------------ ------------ ------------
Net sales $ 3,362,577 $ 313,640 $ -- $ 3,676,217
Cost of sales (2,371,923) (1,226,863) -- (3,598,786)
General and
administrative expenses (598,112) (7,564,076) -- (8,162,188)
Compensation adjustment
under APB 25 -- 81,945,112 -- 81,945,112
Interest expense (42,462) (25,730) -- (68,192)
Loss on discontinued
operations -- -- (448,597) (448,597)
Net income (loss) 239,249 73,648,000 (448,597) 73,438,652
Depreciation and
amortization (109,385) (228,659) -- (338,044)
Total assets $ 824,356 $ 5,441,418 $ (284,949) $ 5,980,825
The 1998 segment information as restated to account for the pooling of
interests is as follows:
Satellite All
VISP Services Other Total
------------ ------------ ------------ ------------
Net sales $ 2,133,570 $ 341,047 $ -- $ 2,474,617
Cost of sales (1,970,520) (685,570) -- (2,656,090)
General and
administrative expenses (328,573) (2,613,468) -- (2,942,041)
Compensation adjustment
under APB 25 -- (90,754,014) -- (90,754,014)
Interest expense (15,638) (11,371) -- (27,009)
Extraordinary income -- 242,990 -- 242,990
Net income (loss) (194,247) (93,481,186) -- (93,675,433)
Depreciation and
amortization $ (129,761) $ (24,659) $ -- $ (154,420)
(17) INCOME TAXES
The provision for income taxes consists of the following:
2000 1999 1998
------ ------ ------
Current $4,800 $5,400 $4,600
Deferred -- -- --
------ ------ ------
Provision for income taxes $4,800 $5,400 $4,600
====== ====== ======
The components of the Company's net deferred tax assets are as follows:
2000 1999 1998
------------ ------------ ------------
Allowance for doubtful accounts $ 69,000 $ 29,000 $ 10,290
Net operating loss 5,129,000 2,802,000 798,000
Asset impairment 1,066,000 -- --
----------- ----------- -----------
6,264,000 2,831,000 808,290
Valuation reserve (6,264,000) (2,831,000) (808,290)
----------- ----------- -----------
Net deferred tax asset $ -- $ -- $ --
=========== =========== ===========
A reconciliation of the provision for income taxes to the amount computed at the
federal statutory rate is as follows:
2000 1999 1998
------------ ------------ ------------
Federal income tax at statutory rate $ (2,819,181) $ 16,889,648 $(21,545,350)
State minimum tax 4,800 5,400 4,600
Change in valuation reserve 3,433,000 2,022,710 808,290
Permanent differences (613,819) (18,912,358) 20,737,060
------------ ------------ ------------
$ 4,800 $ 5,400 $ 4,600
============ ============ ============
77
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2001 AND 2001 (UNAUDITED)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements of eSat, Inc. (the "Company") include all adjustments
(consisting only of normal recurring adjustments) considered necessary to
present fairly its financial position as of March 31, 2001 and 2000, and
the results of operations, stockholders' equity and cash flows for the
three months ended March 31, 2001 and 2000. The results of operations for
the three months ended March 31, 2001 and 2000, are not necessarily
indicative of the results to be expected for the full year or for any
future period.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant inter-company transactions and
balances have been eliminated in consolidation. The consolidated financial
statements and notes included herein should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Stock-Based Compensation
The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of APB 25, Accounting
for Stock Issued to Employees, and complies with the disclosure
provisions of SFAS 123, Accounting for Stock-Based Compensation.
Under APB 25, compensation cost is recognized on fixed plans over
the vesting period based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount
an employee must pay to acquire the stock. For variable plans, APB
25 requires recognition of compensation cost over the vesting period
based on the difference, if any, on the period-end date between the
fair value of the Company's stock and the amount an employee must
pay to acquire the stock. Forfeitures of variable plan options
result in a reversal of previously recognized compensation cost.
Due to the large number of variable plan options granted by the
Company in 1998 and the significant difference between the exercise
price of those options and the fair value of the Company's stock at
December 31, 1998, the Company recognized a substantial amount of
non-cash compensation cost in 1998. Subsequently, a large number of
forfeitures and the re-pricing to market of those options in 2000
caused a considerable reversal of the previously recognized non-cash
compensation cost.
78
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2001 AND 2000 (UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b) Net Loss Per Share
The following data show the amounts used in computing earnings per
share. Basic and diluted earnings per share are the same because
potentially dilutive securities would have an anti-dilutive effect.
2001 2000
------------ ------------
Income available to common stockholders before
adjustments $ (851,300) $ (788,712)
Adjustments -- (11,666)
------------ ------------
Income available to common stockholders used in
basic EPS $ (851,300) $ (800,378)
============ ============
Weighted average number of common
shares used in basic EPS 25,088,015 21,391,509
The following transactions occurred after March 31, 2001, which, had
they taken place during the first quarter, would have changed the
number of shares used in the computations of earnings per share: (1)
on April 16, 2001, 182 shares of Preferred Series D Stock was
converted into 1,296,302 shares of common stock; (2) common stock
warrants issuable in connection with the funding of loan amounts
under the Company's May 2001 secured note agreement with Wentworth,
LLC.
(c) Revenue Recognition
In accordance with SEC Staff Accounting Bulletin No. 101, the
company recognizes revenues from the sale of satellite access
equipment over the life of the underlying access agreement, not upon
the installation of the equipment. The unrecognized portion of the
sales value of the equipment is recorded as deferred revenue and
amortized using the straight-line method over the life of the
satellite access contract.
79
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2001 AND 2000 (UNAUDITED)
(3) GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which
contemplate continuation of the Company as a going concern; however, the
Company has sustained substantial operating losses in recent years. In
view of this matter, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements, and the success of its future operations.
The Company's management estimates that its current cash, cash equivalents
and cash generated from operations will only be sufficient to meet its
anticipated cash needs through approximately August 15, 2001. Accordingly,
the Company will require either an increase in sales activity, or a
substantial additional cash infusion to continue its operations.
Management is not certain if additional capital will be available.
Management is considering an asset sale or other comparable transaction as
part of a financial restructuring. If the Company is not successful in
completing a strategic transaction, it will be required to cease
operations.
(4) NOTE PAYABLE
Note payable consists of a $325,000 secured note, plus accrued interest to
payable Wentworth, LLC. The note bears interest at 8% and was originally
due April 30, 2001. The note was subsequently refinanced; see Note 5 for
additional detail.
(5) SUBSEQUENT EVENTS
In May 2001, the Company issued a secured note payable to Wentworth, LLC
of up to $1,332,655. $325,000 of the note bears interest at 8% and
represents a refinancing of the previous note due April 30, 2001. Amounts
advanced in excess of $325,000 under the note bear interest at prime plus
4%. The note is due April 30, 2003. Additionally, should the Company
receive funds as a result of the sale of stock or the sale of all or
substantially all of the assets of any of its subsidiaries, it shall,
after paying all reasonable expenses in connection with such sale,
immediately pay the balance thereof in reduction of the amounts
outstanding on the note. A total of $375,000 has been funded to the
Company under this facility.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 15. Recent Sales of Unregistered Securities
On October 6, 2000, the Company received an advance of $2,000,000 from
Wentworth LLC pursuant to a modification of the Private Equity Credit Agreement
("PECA") between the Company and Wentworth LLC, dated August 9, 2000. Pursuant
to such modification, the actual number of shares of common stock to be issued
will be determined in the future. When issued, the shares will be issued to
accredited investors pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
On January 24, 2001, the Company issued a note for $325,000 to Wentworth
LLC, which note was secured by all of the assets of the Company. The note is due
on April 30, 2001. Contemporaneously with the issuance of the note, the Company
agreed with Wentworth LLC to convert the $2,000,000 advance into a convertible
promissory note, also secured by all of the Company's assets. The conversion
features of the note, which has not been prepared as of this filing, will mirror
the conversion features of the PECA. The note was issued to an accredited
investor pursuant to Section 4(2) of the Securities Act of 1934, as amended.
On May 15, 2001, the Company issued a note for up to $1,332,655 to
Wentworth, LLC, which, among other things, refinanced the amount of the January
2001 note. The note is secured by all of the assets of the Company. The note is
due on April 30, 2003. Contemporaneously, the Company issued to Wentworth, LLC,
warrants to purchase 160,000 shares at 110% of market value of the Company's
common stock on the date that funds are advanced under the note. The note and
warrants were issued to an accredited investor pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
Item 16. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.46 Bridge Loan Financing Agreement and Form of Warrant between the Company
and Wentworth, LLC dated May 15, 2001 (13)
10.47 Secured Note and Security Interest Provisions in favor of Wentworth, LLC
issued by the Company, dated May 15, 2001 (13)
(attachments excluded), dated January 24, 2001 (12)
23.6 Consent of Lichter, Weil & Associates (certified public accountants)
23.7 Consent of Sprayberry, Barnes, Marietta & Luttrell (formerly known as
Carpenter, Kuhen & Sprayberry) (independent auditors)
(13) Filed as an Exhibit to the company's Form 10-Q for the period ended
March 31, 2001 and incorporated herein by this reference.
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81
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Universal City, State
of California, on May 21, 2001.
ESAT, INC.
By /s/ Mark S. Basile
-------------------------------------
Mark S. Basile,
Chief Financial Officer
Pursuant to the requirement of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Chester L. Noblett, Jr. Acting Chief Executive Officer, May 21, 2001
- -------------------------------- Chairman of the Board and
Chester L. Noblett, Jr. Assistant Secretary
/s/ Mark S. Basile Chief Financial Officer, May 21, 2001
- -------------------------------- Principal Accounting Officer
Mark S. Basile and Secretary
/s/ Salvator A. Piraino Director May 21, 2001
- --------------------------------
Salvator A. Piraino
/s/ Edward Raymund* Director May 21, 2001
- --------------------------------
Edward Raymund
/s/ James E. Fuchs* Director May 21, 2001
- --------------------------------
James E. Fuchs
* By /s/ Mark S. Basile
-----------------------------------
Mark S. Basile
Attorney-in-Fact
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