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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended December 31, 1997
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________
Commission File Number: 0-21225
U.S. DIGITAL COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 52-2124492
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2 Wisconsin Circle, Suite 700, Chevy Chase, Maryland 20815
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (301) 961-1540
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of October 6, 1998, the aggregate market value of the voting and non-
voting common equity held by non-affiliates of the registrant was approximately
$46,091,672 based on the average of the bid and asked prices. As of October 6,
1998, the number of shares outstanding of the registrant's class of common stock
was 15,526,800.
DOCUMENTS INCORPORATED BY REFERENCE: None
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PART I
ITEM 1. BUSINESS
Unless the context otherwise requires, all references to the "Company"
herein refer to U.S. Digital Communications, Inc. ("U.S. Digital") and its
wholly-owned subsidiary U.S. Digital Satellite, Inc. ("Insat") and Insat's two
wholly-owned subsidiaries, Skysite Communications Corp. ("Skysite") and Project
77 Corp. ("Project 77"). On October 24, 1997, U.S. Digital changed its name
from Viscorp.
BACKGROUND
U.S. Digital Communications, Inc. is a telecommunications industry company
based in Chevy Chase, Maryland. The Company is primarily a global satellite
communications firm that specializes in corporate applications. Specifically,
the Company is a provider of satellite telephone subscriber equipment and
services.
Visual Information Services Corp. was originally incorporated in Illinois
in May 1990, and was founded to develop an electronic device capable of adding
modem, video data and telephone features to an ordinary television receiver over
a telephone line. On November 28, 1995, shareholders of Visual Information
Services Corp. acquired the outstanding shares of Global Telephone and
Communications, Inc., a Nevada corporation ("GTCI"), in exchange for their
shares of Visual Information Services Corp. (the "Transaction"). GTCI was
incorporated in May 1984 to provide consulting services for the public and
private sectors. To the Company's knowledge, GTCI never operated as a consultant
nor carried on any type of business at any time prior to the Transaction. The
Transaction was consummated because the common stock of GTCI traded on the
Nasdaq Bulletin Board, and thus, the Transaction provided the Company an entity
with an existing public presence. Pursuant to the Transaction, each share of
Common Stock of Visual Information Services Corp. was exchanged for four shares
of common stock of GTCI. Following the Transaction, GTCI changed its name to
Viscorp.
Between November 1995 and August 1997, the Company developed two products:
the Universal Internet Television Interface Device ("UITI") and the Electronic
Device ("ED"). UITI is a technology designed to give the home television
viewer access to the Internet, World Wide Web and other on-line services. ED is
a device which, in addition to on-line services, was designed to feature such
capabilities as telephone reception and dial-up, facsimile, pay-per-view options
and electronic mail. The Company has decided not to take any further steps to
develop this technology or to market these products. For the year ended
December 31, 1997, there was no revenue from the sale of these products. The
Company is not aware of any market for this technology, and does not expect to
realize any revenue therefrom. On September 1, 1998, pursuant to a settlement
agreement with Raquel Velasco, the Company granted Ms. Velasco an option to
purchase the ED and UITI technologies, in addition to certain other property,
for a total consideration of $50,000. See "--Legal Proceedings."
In May 1997, U.S. Digital became involved in operating Skysite
Communications Corporation. Skysite was initially created to market a new
satellite-based telecommunications system called Mobilesat, or MSAT (MSAT is a
trademark term used as an abbreviation by the American Mobile Satellite
Corporation in the United States).
On June 20, 1997, the Company entered into an Agreement and Plan of
Reorganization with Intercontinental Technologies Group, Tom D. Soumas, Jr.,
Cochran Ranch Golf and Tennis Resort, Sinai Administrative Trust, Carol
Anderson, Howard Garber, George Straayer (the "Selling Shareholders") and
Skysite. Under the Agreement, the Company was to issue 750,000 shares of its
common stock to the shareholders of Skysite, as well as options to purchase an
additional 500,000 shares of its common stock at an exercise price of $.40 per
share, in exchange for 100% of the outstanding shares of common stock of
Skysite.
The stock of Skysite was transferred to the Company on August 26, 1997.
Subsequent to the acquisition, disputes arose between the Company and the former
President of Skysite, Tom D. Soumas, related to the value of Skysite at the time
of the acquisition. As a result of the dispute, the Company withheld its
shares. On May 28, 1998, the Company entered into an amended agreement with the
Selling Shareholders, except for Tom D. Soumas. Under the terms of the amended
agreement, the other shareholders' shares and options will be placed in an
escrow account. The shareholders will have all rights attributable to these
escrowed shares, however, they have agreed that at such time when they elect to
sell these shares, the first $200,000 of related proceeds will be paid to the
Company, and the remaining shares and options will be released to the other
Shareholders. The 240,000 shares due to Mr. Soumas under the original agreement
remain unissued, and the Company does not intend to issue such shares. No
shares or options for the other Selling Shareholders have been issued or placed
in escrow as of October 6, 1998.
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On October 24, 1997, Viscorp changed its name to U.S. Digital
Communications, Inc. In connection with the acquisition of Skysite, the sellers
of Skysite incurred an obligation to pay a broker's commission of options to
purchase 200,000 shares of U.S. Digital at $0.40 per share to be paid from
the 500,000 options issued to them by the Company. In July 1998, the Company
created Insat to oversee its satellite communications operations and transferred
the common stock of Skysite to Insat and incorporated Project 77 as Insat's
other wholly-owned subsidiary.
GENERAL
In addition to its corporate offices in Chevy Chase, Maryland, the Company
has operations in Burbank, California, and Washington, D.C. The Company,
through Insat, markets satellite and wireless digital communications equipment
and services. Skysite operates as the marketer of satellite telephone products
and services and Project 77 specializes in Iridium satellite personal
communications technology. The Company, through its subsidiaries, works closely
with satellite telephone manufacturers and systems operators to provide
solutions to communications needs of international business travelers and
companies with global, emergency and/or remote operations.
While the Company has developed a revenue stream from satellite telephone
customers over the past two years, it is still in a development stage and has
not been profitable. The satellite telephony industry is still in its infancy
and the eventual profitability of the Company will be dependent on the
acceptance of the new communications technologies it will provide. The Company
is preparing to expand its current product offerings upon the proposed
commercialization of the Iridium global satellite system prior to the end of
1998. See "Risk Factors--Dependence on Certain Suppliers."
Domestically, the Company is exploring opportunities to acquire companies
with existing corporate and customer bases within its niche markets, which
include the media, government, oil exploration, transportation and disaster
recovery. The Company also seeks to increase its global presence through the
acquisition of suitable companies located in other major markets outside of the
United States. On April 8, 1998, the Company entered into a non-binding
memorandum of understanding with Eurotelecom Communications, Inc., a Delaware
corporation, to purchase all of the issued and outstanding shares of Eurotelecom
("Eurotelecom") in exchange for approximately 1.7 million shares of the
Company's common stock. As a part thereof, the Company agreed to provide up to
$1.0 million to Eurotelecom for operating expenditures. Eurotelecom owns 100%
of Eurotelecom Corporation Limited, incorporated in England and Wales, which, in
turn, owns 100% of the stock of Eurotelecom Secure Networks Limited, also
incorporated in England and Wales. The memorandum of understanding also
provided for employment agreements with key employees which were to include
shares of the Company's common stock as part of the compensation terms. A
condition to the closing was the acquisition by Eurotelecom of Optilan (UK)
Limited, Easy-IP Limited and Intelligent Networks, Limited, all incorporated in
England and Wales. It was also the parties' intention that Eurotelecom be
represented on the Company's Board of Directors. In May 1998 and in August
1998, the Company loaned $260,000 and $250,000, respectively, for a total of
$510,000, to Eurotelecom for operating expenses.
On August 4, 1998, the Company terminated the memorandum of understanding
with Eurotelecom due to a change in the proposed structure of the acquisitions.
The Company is negotiating with EuroTelecom Corporation Limited, the wholly-
owned subsidiary of Eurotelecom, to purchase all of the issued and outstanding
shares of Eurotelecom Secure Networks Limited, Optilan Limited, Easy IP Limited
and Intelligent Networks Limited. However, such negotiations have stalled, and
the Company does not know whether the acquisitions will take place. EuroTelecom
Corporation Limited has agreed to repay the outstanding loans in accordance with
their terms. The Company and EuroTelecom Corporation Limited have not entered
into an agreement and there can be no assurance that such acquisition will take
place.
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RISK FACTORS
The Company may from time to time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission (the "Commission"), in press
releases, and in reports to shareholders. The Private Securities Litigation
Reform Act of 1995 contains a safe harbor for forward-looking statements on
which the Company relies in making such disclosures. Forward-looking statements
can be identified by the use of words such as "believes," "anticipates,"
"plans," "expects," "may," "will," "intends," "estimates" and the negatives
thereof and similar expressions. In connection with this "safe harbor," the
Company is hereby identifying important factors that could cause actual results
to differ materially from those contained in any forward-looking statements made
by or on behalf of the Company. Any such statement is qualified by reference to
the following cautionary statements.
DEVELOPMENT STAGE COMPANY; HISTORY OF OPERATING LOSSES; FUTURE CAPITAL NEEDS
The Company is a development stage company. The Company has incurred
significant operating losses in every fiscal period since inception. In August
1997, in connection with the acquisition of Skysite, the Company terminated its
production of the UITI and ED technologies and concentrated its business on the
global satellite communications market. Skysite was incorporated in August 1995
and has only limited operating history. The Company is thus subject to the
risks inherent in the establishment and growth of a new business enterprise.
The likelihood of success of the Company must be considered in light of the
problems, expenses, difficulties and delays frequently encountered in connection
with a new business, including, but not limited to, a continually evolving
industry subject to rapid technological and price changes, acceptance of the
products that Skysite markets and an increasing number of market competitors.
For the year ended December 31, 1997, the Company's operating loss was
$5,144,888. The Company expects to incur substantial quarterly operating losses
through 1998 and possibly longer.
In order to become profitable, the Company must successfully market and
sell its satellite telephone products and services, sell evolving products for
new and existing markets, increase gross margins through higher sales volumes,
expand its distribution capability and manage its operating expenses. There can
be no assurance that the Company will ever achieve those objectives or
profitability. The Company's actual working capital needs depend upon numerous
factors, including the extent and timing of acceptance of the Company's products
in the market, the Company's operating results, the cost of increasing the
Company's sales and marketing activities and the status of competitive products,
none of which can be predicted with certainty. As a result, there can be no
assurance that the Company will not require additional funding. There can be no
assurance that any additional financing will be available to the Company on
acceptable terms, or at all, when required by the Company. The inability to
obtain such financing would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company could be
required to significantly reduce or suspend its operations, seek a merger
partner or sell additional securities on terms that are highly dilutive to
shareholders. The type, timing and terms of financing amounts selected by the
Company will be dependent upon the Company's cash needs, the availability of
other financing sources and the prevailing conditions in the financial markets.
For the year ended December 31, 1997, the Company raised $4,306,944 million in
equity offerings. See "--Significant Dilutive Effects of Shares Eligible for
Future Sale on Market Price of Common Stock," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and Financial Statements.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON PRODUCT DEVELOPMENT
The market for satellite telephone products is characterized by rapidly
changing technology, frequent new product introductions and other changes.
Accordingly, the Company's success will be substantially dependent on a number
of factors, including its ability to identify emerging standards in the
satellite telephone markets, to differentiate the products it sells from those
of its competitors, and to bring those products to market quickly. Given the
emerging nature of the satellite telephone market, there can be no assurance
that the Company's products or technology will not be rendered obsolete by
alternative technologies. Furthermore, short product life cycles expose the
Company's products to the risk of obsolescence and require frequent new product
introductions. The satellite telephone market is extremely competitive and is
characterized by rapidly advancing technology, frequent changes in user
preferences and frequent product introductions. The future success of the
Company will depend in large part on its ability, and that of its product
suppliers, to keep pace with advances in technologies for the satellite
telephone market. There can be no assurance that the Company will be able to
identify, market or support such products successfully or that it will be able
to respond effectively to technological changes or product announcements by
competitors. The Company is unable to predict which of the many possible future
products and services will meet evolving industry standards and consumer
demands. Delays in response by the Company could have a material adverse effect
on the Company's business, financial condition and results of operations.
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COMPETITION
The wireless communications industry is highly competitive and is
characterized by frequent technological innovation. The industry includes major
domestic and international companies, many of which have financial, technical,
marketing, sales, distribution and other resources substantially greater than
those of the Company and which provide, or plan to provide, a wider range of
services. The Company's products and services compete with a number of
communications services, including existing satellite services, terrestrial air-
to-ground services, and terrestrial land-mobile and fixed services, and may
compete with new technologies in the future. In addition, the Federal
Communications Commission ("FCC") has recently allocated large amounts of
additional spectrum for communications uses or potential uses that could compete
with the Company, and additional allocations of spectrum for such uses may occur
in the future. There can be no assurance that the Company will be able to
compete successfully with such companies. See "Business-Competition."
DEPENDENCE ON CERTAIN SUPPLIERS
The Company is supplied satellite services pursuant to an agreement with
American Mobile Satellite Corporation and intends to be supplied satellite
services prior to the end of 1998 pursuant to an agreement with Iridium U.S.,
L.P. ("Iridium"). Currently, the Company is supplied satellite services
primarily by American Mobile Satellite Corporation. The Company is a
nonexclusive dealer for manufacturers of satellite telephones, which include
Westinghouse Electric ("Westinghouse") and Mitsubishi Electronics America, Inc.
("Mitsubishi"). For the year ended December 31, 1997, retail sales by the
Company of Westinghouse products and services accounted for approximately 56% of
the Company's revenues. Since a material amount of the Company's revenues are
derived from selling air time, the unavailability of products would have a
material adverse effect on the Company's business and prospects. The limited
number of manufacturers is a risk of the Company's business. The loss of any
supplier could have a material adverse affect on the Company's business,
financial condition and results of operations. Furthermore, there can be no
assurance that current suppliers will continue to provide products to the
Company at attractive prices, or at all, or that the Company will be able to
obtain such products in the future from these or other providers on the scale
and within the time frames required by the Company. Also, there can be no
assurance that Iridium will begin to supply satellite services to the Company
within the time frame currently projected. Further, there can be no assurance
that any of the Company's suppliers will not enter into exclusive arrangements
with the Company's competitors, or cease selling these components to the Company
at commercially reasonable prices, or at all. Any failure to obtain such
products on a timely basis at an affordable cost, or any significant delays or
interruptions of supply, would have a material adverse effect on the Company's
business, financial condition or results of operations.
DEPENDENCE ON KEY CUSTOMERS
During the year ended December 31, 1997, the Company's net sales to its
five largest customers accounted for approximately 40% of total net sales. For
the year ended December 31, 1997, the Royal Bahamas Police Force represented 22%
of the Company's net sales. Other than the foregoing, no one customer accounted
for 10.0% or more of net sales for the period. In addition, the satellite
telephone market experiences rapidly changing technology and frequent new
product introduction which may result in loss of customers or uncollectiblity of
accounts receivables of any major customer. As of December 31, 1997, HMS Marine
Services represented 11% of trade receivables. Other than the foregoing, no one
customer accounted for 10.0% or more of trade receivables. The loss of or
significant decrease in sales to any one of the Company's major customers or
uncollectability of any accounts receivable of any major customer could have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon its executive officers and certain key
employees, the loss of any one of whom could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company's future success will depend in significant part upon the continued
service of certain key personnel, and the Company's continuing ability to
attract, assimilate and retain highly qualified managerial and sales and
marketing personnel. There can be no assurance that the Company can retain its
existing key managerial or sales and marketing personnel or that it can attract,
assimilate and retain such employees in the future. The loss of key personnel or
the inability to hire, assimilate or retain qualified personnel in the future
could have a material adverse effect upon the Company's business, financial
condition or results of operations. The Company does not have employment
contracts with its officers and key employees. Moreover, the Company does not
have key-man life or disability insurance on any of its officers or key
employees. In the event of their death or disability or in the event they are
otherwise unable to render services to the Company, there can be no assurance
that the Company will be able to recruit and retain replacements. See
"Management--Directors and Executive Officers."
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MANAGEMENT OF GROWTH
Depending on the extent of its future growth, the Company may experience a
significant strain on its management, operational and financial resources. The
Company's ability to manage its growth effectively may require it to continue to
implement and improve its operational and financial systems and may require the
addition of new management personnel. The failure of the Company's management
team to effectively manage growth, should it occur, could have a material
adverse impact on the Company's business, financial condition or results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business--Employees" and "Management."
UNCERTAINTY OF ACQUISITION OPPORTUNITIES
The Company believes that it will achieve significant competitive
advantages by expanding its geographic and products markets through
acquisitions. The availability of suitable companies on economically acceptable
terms is uncertain. The Company's growth could be affected unfavorably if it
cannot implement its acquisition strategy.
VOLATILITY OF STOCK PRICE
There can be no assurance that a public market for the Company's Common
Stock will be sustained. In the absence of such a market, purchasers of the
Common Stock may experience substantial difficulty in selling their securities.
The trading price of the Company's Common Stock may be, and has been, subject to
significant fluctuations in response to variations in quarterly operating
results, announcements of technological innovations by the Company or its
competitors, general conditions in the satellite telephone market and other
factors. In addition, the stock market is subject to price and volume
fluctuations that affect the market prices for companies in general, and small
capitalization companies in particular. See "Market For Registrant's Common
Equity and Related Shareholder Matters."
ILLIQUIDITY OF TRADING MARKET; RISK OF PENNY STOCK STATUS
The Company's Common Stock is traded on the OTC Bulletin Board.
Consequently, the liquidity of the Common Stock has been in the past, and could
be in the future, impaired, not only in the number of shares of Common Stock
which could be bought and sold, but also through delays in the timing of the
transactions, reductions in security analysts' and the news media's coverage of
the Company, and lower prices for the Common Stock than might otherwise be
attained. The Company will be subject to the Commission's "penny stock" rules.
Securities are exempt from this rule if, among other things, the market price is
at least $5.00 per share. Consequently, an investor will find it more difficult
to dispose of, or to obtain accurate quotations as to the price of, the
Company's securities. The "penny stock" rules under the Securities Exchange Act
of 1934, as amended, impose additional sales practice and market-making
requirements on broker-dealers who sell and/or make a market in such securities.
For transactions covered by the penny stock rules, a broker-dealer must make
special suitability determinations for purchasers other than established
customers and must have received the purchasers' written consent to the
transactions prior to sale. In addition, prior to any transaction involving a
penny stock, unless exempted, the rules require delivery of a disclosure
schedule to the Commission relating to the penny stock. Disclosure is also
required to be made about commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in
penny stocks. The rules on penny stocks could affect the ability or willingness
of broker-dealers to sell and/or make a market in the Company's securities and
therefore could severely adversely affect the market liquidity for the Company's
securities. See "Market for Registrant's Common Equity and Related Shareholder
Matters."
INDICTMENT OF PERSONS ASSOCIATED WITH WS MARKETING AND FINANCIAL SERVICES, INC.
In September 1998, the Company became aware that persons associated with WS
Marketing and Financial Services, Inc., the placement agent for the Company's
Series B and Series C Preferred Stock, are currently under Federal indictment
concerning matters unrelated to WS Marketing and Financial Services, Inc.'s
relationship with the Company. The criminal indictment, filed in the United
States District Court, Southern District of Texas, Houston Division, Criminal
No. H-97-262-SS, includes allegations of conspiracy, wire fraud and money
laundering. There can be no assurance that the foregoing indictment will not
affect the Company's liquidity or capital resources. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
SIGNIFICANT DILUTIVE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON MARKET PRICE
OF COMMON STOCK
As of October 6, 1998, there were 735,000 shares of Common Stock issuable
upon the exercise of options under the Company's 1996 Non-Employee Directors'
Stock Option Plan and the
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1998 Stock Option, Deferred Stock and Restricted Stock Plan. In addition, as of
October 6, 1998, there were 1,910,200 shares of Common Stock issuable upon the
exercise of options under the stock option plan adopted by the Company in 1995.
See "Executive Compensation-Stock Option Plans." Finally, as of October 6, 1998,
there were 3,560,400 shares of Common Stock issuable upon the exercise of
options granted outside any of the Company's stock option plans. Of these
options, 2,380,000 options were granted to a placement agent in connection with
the Series A Preferred Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
In addition, the Company has issued 4,338,832 shares of Series A Preferred
Stock, 3,000 shares of Series B Preferred Stock, and 3,000 shares of Series C
Preferred Stock, which are all convertible into shares of Common Stock. Each
share of Series A Preferred Stock is convertible into one share of Common Stock,
whereas each share of Series B and Series C Preferred Stock is convertible into
a number of shares as determined by the Series B and Series C conversion
formula. Holders of Series A Preferred Stock may convert up to 25% of their
shares 90 days following the date the shares were issued, and up to 25% of their
shares at the end of each of the three consecutive 90-day periods thereafter.
Holders of Series A Preferred Stock also possess conversion rights exercisable
upon acquisition of the Company by another entity. Further, the Series A
Preferred Stock is automatically converted into Common Stock upon the
consummation of the Company's sale of its Common Stock in a firm commitment
underwritten public offering, or upon acquisition of the Company, if, in
connection with such acquisition, the holders of Series A Preferred Stock
receive an amount per share greater than $1.50. Holders of Series B Preferred
Stock may convert 50% of their shares into Common Stock on the effective date of
registration of the underlying Common Stock and the remaining 50% 45 days
thereafter. Holders of Series C Preferred Stock have the right to convert 50% of
their shares into Common Stock upon the earlier of the effective date of
registration of the underlying Common Stock, or 120 days after issuance of the
Series C Preferred Stock and the remaining 50% upon the earlier of 45 days
following the effective date of registration of the underlying Common Stock, or
165 days after issuance of the Preferred Stock. In connection with the sale of
the Series A, Series B and Series C Preferred Stock, the Company issued
2,169,416, 500,000 and 495,000 warrants, respectively, convertible into an
aggregate of 3,164,416 shares of Common Stock. Lastly, in connection with each
of the offerings of the Series B and Series C Preferred Stock, the Company
issued 250,000 warrants, for a total of 500,000 warrants, to the placement agent
thereof. The warrants include certain dilution adjustments resulting from the
subsequent issuance of Common Stock or securities converting into Common Stock.
All of the common shares, to the extent that they are eligible or appear to be
eligible for sale in the public market, could have a material adverse effect on
the market price of the Common Stock and therefore make it more difficult for
the Company to sell equity securities or equity-related securities in the future
at a time and price that the Company deems appropriate.
The Series B Preferred Stock subscription agreements contain a "put"
provision for Common Stock which allows the Company to raise an additional
$3,000,000. The provision specifies that 75 days after the effective date of
the registration of additional common shares to be used under this provision,
the Company may sell Common Stock (the "Put Stock") to the Series B subscribers.
The price of the Put Stock is determined by taking the lower of (1) 80 percent
of the lowest closing bid price for the previous 20 trading days prior to
funding or (2) 80 percent of the closing bid price on the day of funding. The
minimum draw is $250,000 and the maximum draw is $750,000. If the price of the
Company's Common Stock for the 20 trading days prior to the funding is less than
$1.25 and the average trading volume is less than $300,000 per day for the
previous 20 trading days, the Series B shareholders have the option not to fund
the requested draw. These minimums increase as the amount of the funds
requested by the Company increase from $250,000 to $750,000.
The Company has issued in the past, and intends to issue in the future,
additional equity securities in order to fund working capital requirements. To
the extent the Company does so, existing shareholders of the Company will
experience substantial dilution, particularly if the terms of such issuance
include discounts to market prices or the issuance of warrants. In addition, to
the extent the Company issues securities at a discount to the then current
market price, the Company will be required to record a stock compensation
expense of such issuances in its financial statements, which will adversely
affect the Company's operating results for the period in which such stock is
issued. For the year ended December 31, 1997, the Company recorded a stock
compensation expense of $1,349,587 in connection with the issuance of Common
Stock and securities convertible into Common Stock.
In addition, the holders of Series B and Series C Convertible Preferred
Stock and related warrants are entitled to registration rights with respect to
the shares of Common Stock underlying their respective securities. Pursuant to
the registration rights agreement between the Company and the holders of Series
B and Series C Preferred Stock, the Company is required to file a registration
statement covering the resale of the shares of the Company's Common Stock,
together with any capital shares issued in replacement of or in exchange for
such Common Shares, issuable or issued upon conversion of the Series B or Series
C Preferred Stock and warrants, pursuant to each offering. The registration
rights agreements also grant holders piggyback and demand registration rights.
To the extent that such holders convert their existing securities into Common
Stock, following the effective date of the Registration Statement related
thereto, such shares will be immediately eligible to be sold in the public
market without restriction under Rule 144 under the Securities Act of 1933, as
amended (the "Act"), which, given the relatively low trading volumes for the
Company's
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Common Stock, would likely have a significant depressant effect of the per share
market price of the Company's Common Stock.
YEAR 2000 COMPLIANCE
The Company is assessing the internal readiness of its computer systems for
handling the year 2000 issue. The Company expects to implement the systems and
programming changes necessary to address year 2000 issues with respect to its
internal systems and does not believe that the costs of such actions will have a
material adverse effect on its business, financial condition and results of
operations. Although the Company is not aware of any material operational
issues or costs associated with preparing its internal systems for the year
2000, there can be no assurance that there will not be a delay in, or increased
costs associated with, the implementation of the necessary systems and changes
to address the year 2000 issues, and the Company's inability to implement such
systems and changes in a timely manner could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company also relies, directly and indirectly, on external systems of
business enterprises such as brokers, sub-servicers, customers, financial
organizations and governmental entities for accurate exchange of data. Even if
the internal systems of the Company are not materially affected by the year 2000
issue, the Company could be affected by disruptions in the operation of the
enterprises with which the Company interacts. Despite the Company's efforts to
address the year 2000 issues' impact on its internal systems and business
operations, there can be no assurance that such impact will not result in a
material disruption of its business or have a material adverse effect on the
Company's business, financial condition or results of operations.
RISKS ASSOCIATED WITH STOCK OPTION GRANTS
The Company has adopted three stock option plans under which it has granted
options to purchase an aggregate of 2,645,200 shares of the Company's Common
Stock. See "Executive Compensation--Stock Option Plans." In addition, the
Company has granted additional options to purchase 3,560,400 shares of Common
Stock outside of any stock option plan. To date, the shares underlying the
stock options have not been registered with the Commission, or under the
securities laws of any applicable state. The Company has granted the foregoing
options and permitted the issuance of 670,000 shares of Common Stock upon the
exercise of certain stock options in reliance on the exemption from registration
found in Section 4(2) of the Act or Rules 505 or 506 promulgated thereunder and
similar state securities exemptions. Section 4(2) of the Act exempts from the
registration requirements of Section 5 of the Act those transactions by an
issuer not involving a public offering. If it is determined at a later date
that the grant of the aforementioned stock options or the issuance of Common
Stock pursuant to the exercise thereof involved a public offering for which the
Company cannot find an exemption, then the Company will have committed a Section
5 violation, or a violation of similar state securities laws, and may be subject
to suit by shareholders pursuant to Section 12 of the Act or such other similar
state securities laws. A successful suit under Sections 5 or 12 of the Act or
their state securities law counterparts could have a material adverse effect on
the Company's business, financial condition or results of operations.
8
<PAGE>
BUSINESS DESCRIPTION
INDUSTRY BACKGROUND
The Company operates in the global personal voice, paging and data
communications industry. Potential customers for the products and services
provided by the industry include international corporations, professionals and
others (i) who travel outside their "home" wireless network's roaming area, (ii)
find it important to be able to make or receive calls, or receive pages, at any
time by means of a single phone or pager, with a single phone or pager number or
(iii) are located where terrestrial landline or wireless services are not
available or do not offer an attractive or convenient option.
Global satellite communications systems are designed to address two broad
trends in the communications market: (i) the worldwide growth in the demand for
portable wireless communications; and (ii) the growing demand for communications
services to and from areas where landline or terrestrial wireless service is not
available or accessible.
TELECOMMUNICATIONS MARKETS
The Company believes that its products and services are applicable to six
distinct market segments:
1. Transportation;
2. Broadcast Media and Motion Picture Industry;
3. Disaster Recovery;
4. Government and Public Safety;
5. Natural Resource Extraction-Petroleum, Mining & Utilities; and
6. Rural, Remote and Mobile Telephony.
The Company currently sells satellite telephone and related products and
services to the markets listed above. Each subgroup has its own applications and
requires different equipment, service and market approach.
PRODUCTS AND SUPPLIERS
The Company is primarily a global satellite communications firm that
specializes in corporate applications. Specifically, the Company is a provider
of satellite telephone subscriber equipment and services, including Low Earth
Orbit and geostationary Digital Satellite Telephone Systems.
Low Earth Orbit and Geostationary Digital Satellite Telephone Systems are
mobile satellite services for voice, fax and data, that span land-mobile, fixed-
site, transportable and maritime applications. Subscribers on the MSAT System
(i.e., mobile satellite) dial direct, through a communications satellite, using
a variety of satellite terminals. These mobile terminals are built by leaders
in wireless electronic communications, which include Westinghouse Wireless
Solutions Company, Mitsubishi Electronics of America, Cal Corporation, KVH
Maritime Products, Kyocera and Motorola. The Company is a distributor for
Westinghouse mobile terminals.
Pursuant to its agreement with AMSC Subsidiary Corporation ("AMSC"), a
wholly-owned subsidiary of American Mobile Satellite Corporation, the Company
purchases and resells mobile satellite service on a private network basis. This
telephone service provides traditional voice, fax and data service through
satellite terminals that are similar to cellular phones. Telephone calls made
through the Skysite Satellite Telephone System on these mobile satellite
terminals initiate contact with the outside world through one L-Band (1.5Ghz)
GM/Hughes communications satellite in geo-synchronous orbit 22,300 miles above
the equator. The satellite is downlinked into the Public Switched Telephone
Network through a Westinghouse-built Communications Ground Segment ("CGS") earth
station located in Reston, Virginia. Within the satellite coverage area, which
encompasses most of North and Central America, Hawaii, the western Atlantic and
eastern Pacific oceans, the entire Caribbean basin and the northern portion of
Columbia and Venezuela, a subscriber can make or receive direct dial calls
generally to or from anywhere in the world. This is a dial-up-on-demand system
that charges the subscriber for the time actually used.
Satellite telephony customers also have the opportunity to subscribe for
advanced services. These offerings include voice mail, conference circuit
services, and disaster recovery telephone testing and audit services. Unlike
cellular, a satellite telephone cannot be monitored. The Company's services
also include full STU 3 encryption, which scrambles voice communication, when
required. With the special security system unique to the MSAT I satellite, the
telephone cannot be "cloned," which is the number one cause of fraud among
cellular roaming customers.
9
<PAGE>
In addition to dial-up telephone service, the Company also offers a half-
duplex, push-to-talk ("PTT") dispatch system that can be set up on a channeled
basis into talk groups organized along hierarchical, geographical or task-
related lines. When in this mode, users activating their talk group channel are
put directly in contact with each other, without interfacing with the Public
Switched Telephone or Data Networks.
As a complement to its other products and services, the Company also offers
pagers through its non-exclusive distribution agreement with CUE paging network,
covering the U.S. and Canada, and the ARDIS two-way wireless data services.
The Company, pursuant to an agreement with PTT Telecom BV (as represented
by Station 12, the satellite division of PTT Telecom BV), dated September 15,
1997, also offers Inmarsat and other satellite services provided by Station 12,
which services are marketed under the brand name of "Altus."
The Company also plans to offer, on a non-exclusive basis, Iridium services
throughout the world, and subscriber units pursuant to its agreement for a term
of three years with Iridium U.S., L.P. Iridium is a network of low-earth orbit
satellites. The launch of commercial service on the Iridium system is expected
before the end of 1998, but there can be no assurance that this goal will be
achieved. See "Risk Factors--Dependence on Certain Suppliers."
The Company has relationships with companies in both the wireless
communications industry and the Company's selected industry market segments as a
non-exclusive distributor of satellite telephone products. Westinghouse Wireless
Solutions is engaged in a strategic supply/marketing partnership with the
Company. The breadth of this relationship includes distribution of the
Westinghouse mobile satellite terminal equipment (SERIES 1000 Satellite
Telephone Systems), joint advertising and marketing that targets dealer and end-
user prospects. See "--Legal Proceedings" for a description of settlement and
payment with Westinghouse.
PRICING
As a distributor, the Company purchases products and services on a bulk
basis based on agreed upon prices with its suppliers and then resells those
products and services to its customers. The Company has a distinct pricing
strategy for each of its major product lines, equipment and telephone services
("airtime"). Retail pricing for satellite terminal equipment is highly
competitive and is characterized by the low gross margins associated with
commodity products. The Company completes aggressively in this arena, in part,
to establish customer relationships that may result in higher margin airtime
sales. The Company's pricing schedule for airtime is primarily determined by
the charges established for satellite system operators' and any intermediary
distributor's bulk airtime with whom it deals.
The Company offers fixed-site, land-mobile, transportable and maritime
telephone equipment ranging in price from approximately $3,000 to $6,000 per
unit. System price varies depending upon durability, power, battery life and
antenna gain.
The Company's Satellite Telephone Services is a dial-up-on-demand system
that only charges the subscriber for the time actually used. For example, if
there is a three-minute call made or received, the subscriber is charged for
only three minutes. Basic subscriber rates begin at $25.00 per month for voice
telephone service. Fax and data service is available for a small premium.
These rates include an assigned, toll-free 888 number for each subscriber Mobile
Terminal.
The Company's STS fixed-site, land-mobile, transportable and maritime
subscribers pay a non-discounted rate of only $1.45 per minute of use.
Industry-specific enhanced service plans provide bulk minutes and full dispatch
channels at a variety of per minute/channel rates. The Company provides special
"bundled" service packages by industry group to meet the unique needs of the
Company's varied subscriber base. When a Mobile Terminal makes or receives a
call to or from anywhere in the continental United States, there is no
additional long-distance charge. International long-distance calling is charged
as air time plus international toll from Reston, Virginia.
The Company's PTT dispatch system is charged out on either a talk group
channel, virtual or dedicated satellite channel basis.
SALES, MARKETING AND DISTRIBUTION
The Company predominately sells its telephone equipment and airtime
services via a direct-sales force and to a lesser extent via authorized agents.
Prior to August 1998, the direct-sales forces operated from the Company's office
in California. Since August 1998, the Company has hired sales representatives
who operate from their homes and are located across the United States. The
Company now has sales representatives in Los Angeles, New York City,
10
<PAGE>
Washington, DC, Providence, Charlotte, Fort Lauderdale, Saint Louis, Cincinnati,
Kansas City, San Diego and Portland, Oregon. Each sales representative sells the
Company's full line of products. Product managers assist the sales team in the
configuration of the various services and equipment supported by the Company to
meet the needs of individual customers.
The Company's marketing program is focused on identifying corporate
prospects in niche markets via direct mail campaigns, attending industry trade
shows and to a limited extent via trade journal advertising. The Company's web
page has been developed to support the sales and marketing effort. The
Company's marketing program is directed at corporate rather than individual
customers. The Company has an in-house art and editorial team that develop the
Company's promotional materials.
The Company's products are warehoused, tested and shipped to customers from
the Company's California office.
CUSTOMERS
The Company's customers are generally corporations with significant sales
or government entities. The Company has very few individual customers. The
Company's largest customer is the Royal Bahamas Police Force who accounted for
22% of sales during 1997. However, the Company believes 1998 sales to this
customer will drop significantly as approximately half of the Company's revenues
for fiscal 1997 from this customer was from the non-recurring sale of equipment.
COMPETITION
The wireless communications industry is highly competitive and is
characterized by frequent technological innovation. The industry includes major
domestic and international companies, many of which have financial, technical,
marketing, sales, distribution and other resources substantially greater than
those of the Company and which provide or plan to provide, a wider range of
services. The Company's satellite products and services compete with a number
of other communications services including cellular telephone and other wireless
data services, including Qualcomm. In addition, there are a number of planned
satellite systems using new technologies expected to be commercially available
in the next few years, including Globalstar. Furthermore, the FCC is
considering applications for satellite systems that currently operate in Canada
to provide commercial service in the United States.
The Company, as non-exclusive service providers for American Mobile
Satellite (AMSC) and Iridium, competes against other service providers of these
products. For the AMSC products and services, the Company's major competitor is
AMSC's direct sales force. The Company believes that the list of Iridium
service providers will include, among others, Allied Signal, Bearcom,
CellularOne Paging, GST Telecom, IWL Communications, Pagenet and Motorola
Cellular.
GOVERNMENT REGULATION
The Company operates as an indirect, unlicensed international
communications carrier in the wireless communications industry and therefore
falls loosely under the regulation of the FCC. The Company is not the satellite
or equipment licensee, and is not required to maintain manufacturing, service or
operational permits to provide product sales or provision of airtime services.
However, the Company is critically dependent on its equipment and airtime
suppliers who are, in turn, heavily regulated. The allocation and use of the
radio frequency spectrum for the provision of communications services are
subject to international and national regulation. The implementation and
operation of all satellite and wireless systems are dependent upon obtaining
licenses and other approvals. The national administration of each country
decides how the radio frequencies that the International Telecommunications
Union has allocated to particular communications services should be allocated
and assigned domestically to specific radio systems. In addition, the provision
of communications services in most countries is subject to regulatory controls
by the national governments of each country.
The Company is confident that its suppliers will continue to obtain the
approvals and licenses they require to operate globally. There is, however, no
guarantee that the Company's operation and profitability will not be subject,
directly or indirectly, to restrictive national policies or international
regulation or that the Company will not be subject to increased taxation by
federal, state or local agencies in the future.
11
<PAGE>
PATENTS AND TRADEMARKS
The Company has five granted patents relating to its ED and UITI
technology. The Company also owns trademarks on ED in the United States and
France, and on UITI and UITI TV in the United States. In August 1998, the
Company, pursuant to a settlement agreement, granted Raquel Velasco an option to
purchase the aforementioned intellectual property for $50,000. See "--Legal
Proceedings." Skysite's products are not branded, as Skysite is primarily a
reseller and service provider.
EMPLOYEES
At October 6, 1998, the Company had approximately 29 employees.
ITEM 2. PROPERTIES
The Company's headquarters are located in Chevy Chase, Maryland and
consist of approximately 1,500 square feet. The annual base rent is
approximately $94,032 and the lease expires December 31, 1998. The Company
also leases space in Washington D.C., consisting of 1,835 square feet. The
annual base rent is approximately $58,300, and the lease expires October 31,
1998. The Company also leases space for Skysite in Burbank, California
consisting of 6,157 square feet. The annual base rent is approximately $66,000
and the lease expires January 31, 1999.
ITEM 3. LEGAL PROCEEDINGS
William H. Buck v. Viscorp & Visual Information Services Corp. On or about
--------------------------------------------------------------
June 2, 1997, the Company filed a complaint against William H. Buck , the
Company's former Chief Executive Officer and Director, in the United States
District Court, Northern District of Illinois, Eastern Division, Case No. 97 C
3390, entitled Viscorp and Visual Information Services Corp. v. William H. Buck,
----------------------------------------------------------------
alleging breach of fiduciary duty, breach of employment agreement, accounting as
to severance agreement and conspiracy to defraud arising out of Mr. Buck's
conduct as Chief Executive Officer of the Company. On June 23 1997, Mr. Buck
filed a complaint against Viscorp, et. al., in the United States District Court,
Northern District of Illinois, Eastern Division, Case No. 97 C 4480. Mr. Buck
sought a declaratory judgment permitting him to sell 220,000 shares of Common
Stock of the Company. On September 19, 1997, Mr. Buck filed a counterclaim
against the Company, alleging partial rescission of his severance agreement,
dated January 8, 1997, breach of severance agreement, rescission of lock-up
agreement, breach of lock-up agreement and tortious interference with economic
advantage. On November 12, 1997, Raquel Velasco filed a complaint against the
Company, in the United States District Court, Northern District of Illinois,
Eastern Division, Case Number 97-C-7897, entitled Raquel Velasco v. Viscorp,
-------------------------
seeking $220,000 in damages and expenses from alleged rescission for breach of
written severance agreement, or in the alternative, breach of severance
agreement. On June 9, 1998, the Company filed a counterclaim against Ms.
Velasco relating to her alleged employment agreement with the Company. The
aforementioned matters were consolidated for purposes of discovery. On August
31, 1998, the Company entered into settlement agreements with Mr. Buck and Ms.
Velasco. Pursuant to the Company's settlement agreement with Mr. Buck, Mr. Buck
is permitted to sell 350,000 shares of the Company's common stock that he
already owns, pursuant to a tradeability schedule. Mr. Buck returned all other
shares to the Company for cancellation. Mr. Buck's stock options have been
canceled. Pursuant to the Company's settlement agreement with Ms. Velasco, Ms.
Velasco received 350,000 shares of the Company's common stock, formerly held by
Mr. Buck, also subject to a tradeability schedule. Ms. Velasco has also been
granted an option to purchase certain property from the Company, including the
ED and UITI technologies, for $50,000. See "Business --Background."
Visual Information Service Corp. v. Interactive Video Publishing, Inc. On
----------------------------------------------------------------------
July 25, 1996, the Company filed a lawsuit in the United States District Court
for the Northern District of California, San Jose Division, case number C 96-
20593 RMW (EAI), against Interactive Video Publishing, Inc., David Serlin, Steve
Owens and Kaori Kuwata ("Defendants") for injunctive relief and damages of
approximately $7 million for misappropriation of trade secrets, conversion and
breach of fiduciary duty. Defendants filed counterclaims for declaratory
relief, intentional interference with economic advantage, breach of contract and
unfair competition claiming damages yet to be determined. On November 20, 1996,
David Serlin and Marvin Lerch filed suit against the Company and its former
officer, Jerome Greenberg, in the United States District Court, Northern
District of California, San Jose Division. The case is captioned
12
<PAGE>
Serlin v. Visual Information Service Corp., case number C 96-21073. David Serlin
- -----------------------------------------
and Marvin Lerch claimed damages in excess of $6.5 million in connection with
the alleged breach of their employment contracts, alleging breach of employment
contracts, breach of the implied covenant of good faith and fair dealing, fraud,
deceit and negligent misrepresentation among several causes of action. On June
25, 1997, a settlement conference was held in Visual Information Service Corp.
--------------------------------
v. Interactive Video Publishing, Inc. and Serlin v. Visual Information Service
- ------------------------------------- ------------------------------------
Corp. and a settlement was reached with all parties in both actions. On
- -----
September 26, 1997, Messrs. Serlin and Lerch entered into a settlement agreement
with the Company whereby the Company agreed to pay Messrs. Serlin and Lerch
$25,000 each, and granted each 400,000 stock options with an exercise price of
$1.50. Viscorp is currently unable to comply with terms of the settlement
agreement because the shares underlying the stock options have not yet been
registered.
Donald Gilbreath v. USDI, Viscorp and Corporate Stock Transfer, Inc. On
--------------------------------------------------------------------
December 19, 1997, Donald Gilbreath, a former director of the Company, filed a
complaint against the Company in the United States District Court, District of
Colorado, Case No. 97-WY-2667-CB, alleging a claim against the Company for
failing to remove restrictive legends on shares owned by Mr. Gilbreath. Mr.
Gilbreath requested that the Court hold that he was the lawful owner of
1,000,000 unrestricted shares of Common Stock of the Company, and 237,800
unrestricted options to acquire common shares. On July 2, 1998, the Company
entered into a settlement agreement with Mr. Gilbreath, whereby 500,000 of Mr.
Gilbreath's shares in the Company will be unrestricted, and Mr. Gilbreath will
retain 75,000 options, which must be exercised by January 1, 1999. Pursuant to
the settlement agreement, the remaining 500,000 shares have been canceled.
Further, Mr. Gilbreath is permitted to sell his shares pursuant to a
tradeability schedule.
Roger and Bonnie Remillard v. U.S. Digital Communications, Inc. f/k/a
---------------------------------------------------------------------
Viscorp and Corporate Stock Transfer, Inc. On or about June 1, 1998, Roger and
- ------------------------------------------
Bonnie Remillard filed a complaint in the United States District Court, District
of Colorado, Case No. 98-WY-1217-CH, alleging that the Company failed to remove
restrictive legends from the Remillards' shares in the Company, in violation of
Nevada Revised Statute 104.8401. Pursuant to a settlement agreement, dated July
2, 1998, the Remillards retained 820,000 shares of the Company's Common Stock.
Further, the Remillards retained 200,000 out of 288,000 stock options, which
must be exercised before January 1, 1999. The Remillards are permitted to sell
their shares pursuant to a tradeability schedule.
James Goodnow v. Viscorp. On February 9, 1998, James Goodnow filed a
------------------------
complaint in the Nevada County Superior Court, State of California, against the
Company, alleging breach of contract, fraud, unfair business practices and money
on open book account, based on the alleged breach of a software consulting
agreement dated July 17, 1997. Mr. Goodnow sought damages in the amount of
$20,219.40. In June, 1998, the Company and Mr. Goodnow entered into a
settlement agreement whereby the Company agreed to pay Mr. Goodnow $16,000,
which was subsequently paid.
Cochran Ranch, ITG and Rubin Kitay v. U.S. Digital Communications Inc. and
--------------------------------------------------------------------------
Larry Siegel. In January 1998, plaintiffs, former shareholders of Skysite,
- ------------
filed a request for mediation and demand for arbitration with the American
Arbitration Association in Los Angeles, California, case number 72 174 00098 98
GS, requesting mediation and arbitration in connection with the Company's
alleged breach of the Agreement and Plan of Reorganization, dated June 20, 1997,
whereby the Company acquired Skysite. Plaintiffs alleged that the Company
failed to issue shares in consideration of the acquisition. On May 28, 1998,
plaintiffs and the Company settled this dispute pursuant to the amendment to
agreement and plan of reorganization. See "Business -- Background" for a more
detailed description of the settlement.
Nolan Bushnell v. Viscorp. On December 13, 1994, Nolan Bushnell filed a
-------------------------
complaint against the Company, in San Mateo Superior Court, case number 390474,
alleging breach of fiduciary duties, breach of contract, wrongful termination
and other causes of action in connection with Mr. Bushnell's employment with
Company. On February 3, 1998, the Company and Nolan and Nancy Bushnell entered
into a settlement, the terms of which, by agreement of the parties thereto, are
confidential. The Company believes that the terms of such settlement agreement
would not have a material adverse effect on the Company.
David Rosen v. U.S. Digital Communications, Inc. On July 27, 1998, David
------------------------------------------------
Rosen, a former employee and consultant of the Company, filed a complaint
against the Company in the California Superior Court, County of San Francisco,
case number 996762, in connection with his alleged employment contract and his
employment termination. Mr. Rosen alleged breach of contract, breach of the
covenant of good faith and fair dealing, violation of California Labor Code
Sections 201, 226 and 227, and conversion. Mr. Rosen seeks severance pay and
other damages in excess of $100,000. Discovery has not yet begun.
CBS (formerly Westinghouse) v. Skysite. On April 1, 1998, CBS filed a
--------------------------------------
complaint, in Los Angeles County Superior Court, case number 188569, alleging
that Skysite breached a distribution agreement with CBS dated December 21, 1996,
and a subsequent settlement agreement between CBS and Skysite, dated March 6,
1997, seeking monies
13
<PAGE>
allegedly owed under the distribution agreement. In June 1998, CBS and the
Company entered into a settlement agreement whereby Skysite agreed to pay CBS
$430,000, which was paid soon thereafter.
Witter Publishing v. Skysite. On February 6, 1997, Witter Publishing filed
----------------------------
a complaint in Los Angeles Municipal Court, case number 97K02741, alleging open
book account and account stated, and seeking money damages. On December 12,
1997, Witter Publishing and Skysite entered a stipulation for entry of judgment
whereby Skysite agreed to pay Witter Publishing $19,037.96 between December 20,
1997 and November 20, 1998.
PR Newswire Association, Inc. v. Skysite. On November 12, 1997, PR
----------------------------------------
Newswire filed a complaint against Skysite in New Jersey Superior Court, Hudson
County, docket number DC - 10873 - 97, alleging a breach of contract and seeking
damages of $6,589.81. In January 1998, Skysite agreed to pay PR Newswire
payments totaling $5,043.95, and the case has been dismissed.
Tom Soumas v. Skysite. On October 6, 1997, Tom Soumas, a former employee
---------------------
of Skysite, filed a complaint with the Labor Commissioner of the State of
California, seeking damages for vacation pay and wellness days he alleges he was
due upon termination, in the amount of $9,300. A hearing on Mr. Soumas' claim
was held on June 2, 1998, pursuant to which the Labor Commissioner issued a
decision in favor or Mr. Soumas in the amount of $2,500.
Penwell Publishing v. Skysite. On March 5, 1997, plaintiff filed a
-----------------------------
complaint in the Tulsa County, Oklahoma District Court, Case Number CJ 9701105,
alleging actions for open account and breach of contract resulting from the
Company's alleged obligation to place certain advertisements in Penwell
Publications. Plaintiff seeks damages of $36,216.75.
Intelligent Data Systems, Inc. On August 4, 1998, counsel for Intelligent
------------------------------
Date Systems, Inc. ("IDS") made a demand on the Company for (i) rescission of a
technology licensing agreement dated January 1, 1995 and (ii) return of
consideration to IDS, in the amount of $968,750. No complaint has been filed.
Tom Soumas. In a letter dated August 31, 1998, counsel for Tom Soumas made
----------
a demand on the Company in connection with the Company's acquisition of Skysite.
No lawsuit has been filed and no damages have been alleged. The Company is
unable to express an opinion as to the outcome of this matter as no lawsuit has
been filed and the Company has made no independent investigation of potential
claims, defense and counterclaims. If a lawsuit is ever filed, it will be
vigorously defended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's shares have been traded on a limited basis on the Nasdaq
Bulletin Board under the symbol USDI since October 29, 1997. Prior to October
29, 1997, and subsequent to December 8, 1995, the Company's shares had been
traded on the Nasdaq Bulletin Board under the symbol VICP. The following table
sets forth the range of high and low bid prices as reported on the Nasdaq
Bulletin Board. These prices reflect inter-dealer prices, without retail mark-
up, mark-down or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
1996
----
First Quarter $ 8.25 $5.25
Second Quarter $11.38 $8.13
Third Quarter $ 9.75 $8.75
Fourth Quarter $ 9.38 $1.25
1997
----
First Quarter $ 2.06 $1.06
Second Quarter $ 1.59 $0.31
Third Quarter $ 2.44 $0.61
Fourth Quarter $ 2.65 $0.67
1998
----
First Quarter $ 1.61 $0.67
Second Quarter $ 5.25 $0.77
Third Quarter $ 7.00 $2.25
Fourth Quarter (through October 19) $ 4.00 $2.31
</TABLE>
There were 109 shareholders of record of the Common Stock as of October 6,
1998. As of October 6, 1998, the closing bid price of the Company's Common
Stock was $3.19 as quoted on the Nasdaq Bulletin Board.
DIVIDENDS
Excluding the dividend described below, the Company has never declared or
paid cash dividends on its Common Stock and does not anticipate paying cash
dividends on its Common Stock in the foreseeable future, but intends to retain
future earnings, if any, for reinvestment in the future operation and expansion
of the Company's business and related development activities. Any future
determination to pay cash dividends on its Common Stock will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements and such other
factors as the Board of Directors deems relevant, as well as the terms of any
financing arrangements.
Pursuant to the terms of the Company's Series A Preferred Stock, the
Company is required to pay dividends at the rate of 8% per annum quarterly, on
March 31, June 30, September 30 and December 31. The Company is not required to
pay any dividends on the Series B or the Series C Preferred Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for, and as of the end of, each of the
years in the five-year period ended December 31, 1997, are derived from the
financial statements of U.S. Digital Communications, Inc. and its subsidiaries.
The years ended December 31, 1994, 1995 and 1996 have been audited by Blackman
Kallick Bartelstein, LLP, whose report included an explanatory paragraph with
respect to the Company's ability to continue as a going concern. The financial
statements as of December 31, 1996 and 1997, and for each of the years in the
three-year period ended December 31, 1997, are included elsewhere in this
filing. The financial statements as of and for the
15
<PAGE>
year ended December 31, 1997, are not reported on by independent accountants.
See "Changes in and Disagreements with Accountants on Accounting and
Disclosure."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Sales of equipment
and services $ 0 $ 0 $ 0 $ 0 $ 486,642
License Income 0 0 629,688 0 0
Gross Profit 0 0 0 0 73,875
Total operating expenses (1,248,360) (1,339,364) (3,222,489) (7,885,929) (5,218,763)
Loss from operations (1,248,360) (1,339,364) (2,592,801) (7,885,929) (5,144,888)
Other income (expense), net (112,246) 3,338 4,748 (170,989) (330,063)
Net loss (1,360,606) (1,336,026) (2,588,053) (8,056,918) (5,474,951)
Dividends on preferred stock 0 0 0 0 (1,629,916)
Net loss per common share (0.19) (0.12) (0.15) (0.37) (0.34)
Weighted average shares of 7,104,092 11,775,976 17,190,915 21,914,630 20,676,196
common stock outstanding
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 0 $ 552,878 $ 739,930 $ 8,654 $ 545,790
Working capital (128,371) 388,875 287,713 (2,936,191) (4,058,089)
Total assets 16,982 664,328 1,258,853 242,302 2,809,451
Notes payable (net 1,494,161 0 0 29,865 17,785
of current portion)
Common stock 800,200 2,566,167 212,080 221,280 222,980
Preferred stock 0 0 0 0 4,105,607
Accumulated deficit (2,405,750) (3,741,776) (6,329,829) (14,386,747) (21,491,614)
Total shareholders' equity (1,605,550) 493,752 706,636 (2,782,886) (2,171,689)
(deficit)
</TABLE>
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company may from time to time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Commission, in press releases, and in reports to shareholders. The
Private Securities Reform Act of 1995 contains a safe harbor for forward-looking
statements on which the Company relies in making such disclosures. Forward-
looking statements can be identified by the use of words such as "believes,"
"anticipates," "plans," "expects," "may," "will," "intends," "estimates" and the
negatives thereof and similar expressions. The Company's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth in "Risk Factors" and
elsewhere in this report.
GENERAL
The Company has incurred net losses in its last three fiscal years.
Moreover, there can be no assurance that the Company or its subsidiaries will
ever generate significant revenues. Further, there is no guarantee that if the
Company ever achieves a level of profitability, that it can be sustained.
Pursuant to the Agreement and Plan of Reorganization, dated June 20, 1997,
and the amendment thereto, dated May 28, 1998, U.S. Digital Communications,
Inc., acquired Skysite Communications Corporation. See "Business--Background."
During 1997, the Company sold 2,882,282 shares of 8% Cumulative Convertible
Preferred Stock, pursuant to Regulation S promulgated by the United States
Securities and Exchange Commission.
RESULTS OF OPERATIONS
1997 Compared to 1996
The Company had $486,642 in revenue from sales of satellite equipment and
services in fiscal 1997 compared to no such revenue in fiscal 1996. This
increase resulted entirely from the Company's acquisition of Skysite.
Costs of goods sold was $412,767 in fiscal 1997 compared to no cost of
goods sold in fiscal 1996. These costs were associated with the sales generated
by Skysite.
Sales and marketing expense for fiscal 1997 was $286,258 compared to no
such expense in fiscal 1996. These costs were due to the Company's acquisition
of Skysite.
The Company had no research and development expenses for fiscal 1997, as
compared to $955,570 for fiscal 1996. This decrease was due to the Company's
decision to terminate the development of the ED device and related products.
General and administrative expenses, including travel and entertainment
expenses, legal fees and consulting fees, as well as certain other expenses,
increased to $3,582,918 for fiscal 1997, compared to $2,985,039 for fiscal 1996.
This increase of $597,879 was due to the Company's assumption of Skysite's
general and administrative expenses pursuant to the Company's acquisition of
Skysite.
The Company granted stock options to various employees and other
individuals during fiscal 1997. In connection with the granting of these
options, the Company recorded a stock option compensation expense in the amount
of $1,349,587. The amount recorded represents the difference between the
exercise price and the fair market value of the Company's Common Stock, as
determined by reference to the publicly traded value of the stock, as of the
date the options were granted.
1996 Compared to 1995.
The Company had no license income in fiscal 1996 compared to $629,688 in
fiscal 1995. The $629,688 represented the value of the 250,000 shares of
Digital Sciences, Inc. ("Digital") stock received by the Company as an initial
license fee pursuant to an agreement entered into, in 1995, by and between
Digital and the Company, by which the Company licensed its ED technology to
Digital.
Research and development expenses decreased to $955,570 for fiscal 1996
from $1,010,884 for fiscal 1995, a decrease of $55,314. This decrease was due
to the decreased activity relating to the production of a prototype of the ED.
17
<PAGE>
General and administrative expenses increased to $2,985,039 for fiscal 1996
from $2,211,605 for fiscal 1995, an increase of $773,434. This increase was due
to the relocation of the Company into larger office facilities, hiring of
additional employees, increased accounting fees and fees for directors and
officer's insurance, and increased depreciation on the Company's assets. An
amount of $300,000 was set aside for reimbursement of expenses pursuant to a
severance agreement which includes the Company's former president and a
consultant. The severance agreement provides that the Company shall reimburse
these individuals for reasonable expenses associated with the Company's business
incurred by them up to an amount equal to approximately $300,000 upon submission
to the Company of valid documentation. The amount of expenses currently claimed
is $255,350. The Company has recorded a liability of $300,000. This liability
has been reduced by $96,478, which represents amounts loaned to the former
president by the Company.
An amount of $118,237 has been charged to Operating Expenses for fiscal
1996 in connection with failed efforts to raise additional capital in 1996.
An amount of $900,000 has been charged to Operating Expenses for fiscal
1996 in connection with the Company's December, 1995 licensing agreement with a
technology company. In January, 1996, the Company paid an initial royalty
deposit of $450,000. Pursuant to the licensing agreement, the Company may be
obligated to pay an additional royalty fee of $450,000 in December, 1998.
The Company granted stock options to various employees and consultants
during fiscal 1996. In connection with the granting of these options, the
Company recorded compensation and consulting expense, and a related increase to
additional paid-in-capital, in the amount of $2,927,083 during 1996. The amount
recorded represents the difference between the exercise price and the fair
market value of the Company's Common Stock, as determined by reference to the
publicly traded value of the stock, as of the date the options were granted.
LIQUIDITY AND CAPITAL RESOURCES
Pursuant to an agreement with a placement agent, Wincap, Ltd. ("Wincap"),
the Company effected two private offerings of 8% Cumulative Convertible Series A
Preferred Stock. Pursuant to the first offering, the Company sold approximately
2,031,832 shares of Series A Preferred Stock and 1,015,916 warrants to purchase
shares of Common Stock, for a consideration of approximately $3,047,748.
Pursuant to the second offering, the Company sold approximately 2,307,000 shares
of Series A Preferred Stock and 1,153,500 warrants to purchase shares of Common
Stock, for a consideration of approximately $3,460,500, for a total
consideration from both offerings of approximately $6,508,248. Of this amount,
the Company received approximately $5,749,728, which it intends to use for
working capital. In addition, Wincap received the right to acquire 2,380,000
shares of the Company's Common Stock, issuable upon registration.
Pursuant to an agreement with a placement agent, WS Marketing and Financial
Services, Inc., for a private offering of 3,000 shares of Series B Preferred
Stock, as of July 23, 1998 (the date of closing), the Company sold all 3,000
shares for a total consideration of approximately $3,000,000. Of this amount,
the Company received approximately $2,670,000, which it intends to use for
working capital. In addition, WS Marketing and Financial Services, Inc.
received 250,000 warrants to purchase Common Stock as part of its placement fee.
Pursuant to an agreement with a placement agent, WS Marketing and Financial
Services, Inc., for a private offering of 4,000 shares of Series C Preferred
Stock, as of October 6, 1998, the Company sold 3,000 shares for a total
consideration of approximately $3,000,000. Of this amount, the Company received
approximately $2,670,000, which it intends to use for working capital. In
addition, WS Marketing and Financial Services, Inc. received 250,000 warrants to
purchase Common Stock as part of its placement fee.
The Company has generated losses since its inception in May 1990 and cannot
currently generate sufficient revenues and cash flow from operations to meet its
business obligations.
The Company anticipates it will not need to incur material capital
expenditures in the future. In prior years, the Company was able to fund its
operations through the issuance of its Common and Preferred Stock in
transactions exempt under the Securities Act of 1933, and through shareholder
loans. The Company cannot currently generate sufficient revenues and cash flow
from operations to meet its business obligations. Therefore, future operations
are predicated on raising additional capital in debt or equity markets.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
[INSERT FINANCIAL STATEMENTS]
18
<PAGE>
U.S. DIGITAL COMMUNICATIONS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(Not reported upon
by Public
Accountants)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,654 $ 545,790
Trade accounts receivable, net of allowance for uncollectible accounts of $19,000 - 209,073
Other receivables 20,000 -
Inventory - 107,967
Note receivable - 25,000
Prepaid expenses 30,478 17,436
------------ ------------
Total current assets 59,132 905,266
------------ ------------
Investments (Note 3) - 9,750
Property and equipment, net 90,789 122,500
Intangible assets, net 86,628 1,758,903
Other noncurrent assets 5,753 13,032
------------ ------------
Total assets $ 242,302 $ 2,809,451
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 1,572,011 $ 1,770,208
Deferred revenue - 107,267
Dividends payable - 135,931
Stockholder loans (Note 5) 624,386 962,385
Accrued interest on stockholder loans 34,649 144,252
Notes payable (Note 5) 110,755 313,290
Minimum royalty obligation (Note 12) 450,000 450,000
Due to former officers and shareholders (Note 9) 203,522 1,080,022
------------ ------------
Total current liabilities 2,995,323 4,963,355
------------ ------------
Notes payable (net of current portion) (Note 5) 29,865 17,785
------------ ------------
Total liabilities 3,025,188 4,981,140
------------ ------------
Commitments and contingencies (Note 9)
Stockholders' (deficit) (Note 6):
Preferred stock -- $.01 par, 10,000,000 shares authorized; 2,882,232 - 4,105,607
outstanding at December 31, 1997; liquidation preference of $4,459,279
Common stock -- $0.01 par, 50,000,000 shares authorized; 22,128,000 and 221,280 222,980
22,980,000 outstanding at December 31, 1996 and 1997, respectively
Additional paid-in capital 15,096,123 12,422,255
Common stock warrants - 1,581,337
Accumulated unrealized losses on investments - (31,200)
Treasury stock (5,902,200 shares of common stock in 1997, at cost) - (10)
Deferred compensation (Note 10) (3,713,542) (3,744)
Shares to be issued (including additional paid in capital) (Note 1) - 1,222,700
Shareholders' receivable (Note 1) - (200,000)
Accumulated deficit (14,386,747) (21,491,614)
------------ ------------
Total stockholders' (deficit) (2,782,886) (2,171,689)
------------ ------------
Total liabilities and stockholders' (deficit) $ 242,302 $ 2,809,451
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-1
<PAGE>
U.S. DIGITAL COMMUNICATIONS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
- --------------------------------------------------------------------------------------------------------------
(Not reported upon by Public Accountants)
<S> <C> <C> <C>
Sales:
Equipment $ - $ - $ 285,047
Services - - 201,595
License fees (Note 11) 629,688 - -
----------- ----------- -----------
Total sales 629,688 - 486,642
Cost of goods sold - - 412,767
----------- ----------- -----------
Gross margin - - 73,875
----------- ----------- -----------
Operating expenses:
Sales and marketing - - 286,258
Research and development 1,010,884 955,570 -
Minimum royalty expense - 900,000 -
Fund-raising fees for failed offering - 118,237 -
General and administrative 2,211,605 2,985,039 3,582,918
Stock option compensation - 2,927,083 1,349,587
----------- ----------- -----------
Total operating expenses 3,222,489 7,885,929 5,218,763
----------- ----------- -----------
Loss from operations (2,592,801) (7,885,929) (5,144,888)
----------- ----------- -----------
Other income (expense):
Interest expense (4,013) (47,618) (183,593)
Interest and other income 8,761 7,385 23,280
Loss on repayment of debt (Note 5) - - (85,700)
Loss on investments - (130,756) (84,050)
----------- ----------- -----------
Total other income (expense), net 4,748 (170,989) (330,063)
----------- ----------- -----------
Net loss (2,588,053) (8,056,918) (5,474,951)
Dividends on preferred stock - - (1,629,916)
----------- ----------- -----------
Net loss available to common stockholders $(2,588,053) $(8,056,918) $(7,104,867)
----------- ----------- -----------
Net loss per common share:
Basic $ (0.15) $ (0.37) $ (0.34)
=========== =========== ===========
Diluted $ (0.15) $ (0.37) $ (0.34)
=========== =========== ===========
Weighted average shares of common stock outstanding 17,190,915 21,914,630 20,676,196
=========== =========== ===========
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
U.S. Digital Communications, Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997 (NOT REPORTED UPON BY
PUBLIC ACCOUNTANTS)
<TABLE>
<CAPTION>
Common Stock Common Stock
Preferred Stock Par Value No Par Value
------------------------ ---------------------- ------------------------
Shares Amount Shares Amount Shares Amount
--------- ---------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 - $ - - $ 3,722,000 $ 2,566,167
Sale of stock for cash - - - - 1,161,000 3,035,000
Stock issued as compensation - - - - 150,000 375,000
Stock issued for consulting services - - - - 26,500 66,250
Stock issuance costs - - - - - (330,000)
Effect of merger - - 21,208,000 212,080 (5,059,500) (5,712,417)
Change in unrealized loss on investments - - - - - -
Net loss - - - - - -
--------- ---------- ---------- -------- ---------- -----------
BALANCE, DECEMBER 31, 1995 - - 21,208,000 212,080 - -
Sale of stock for cash - - 920,000 9,200 - -
Change in unrealized loss on investments - - - - - -
Stock issuance costs (Note 6) - - - - - -
Options issued to Placement Agent - - - - - -
Deferred compensation related to grant of stock
options (Note 10) - - - - - -
Amortization of deferred compensation - - - - - -
Net loss - - - - - -
--------- ---------- ---------- -------- ---------- -----------
BALANCE, DECEMBER 31, 1996 - - 22,128,000 221,280 - -
Sale of stock and warrants for cash 2,882,232 2,725,607 - - - -
Issuance of stock for noncash transactions
(Notes 5) - - 170,000 1,700 - -
Stock issuance costs (Note 6) - - - - - -
Options issued to Placement Agent - - - - - -
Deferred compensation related to grant of stock
options (Notes 6 and 10) - - - - - -
Cancellation of options - - - - - -
Amortization of deferred compensation (Note 10) - - - - - -
Preferred dividends and beneficial conversion
feature - 1,380,000 - - - -
Change in unrealized loss on investment - - - - - -
Repurchase of common stock - - - - - -
Shareholders' receivable - - - - - -
Shares to be issued (including additional
paid-in capital) - - - - - -
Net loss - - - - - -
--------- ---------- ---------- -------- ---------- -----------
BALANCE, DECEMBER 31, 1997 2,882,232 $4,105,607 22,980,000 $222,980 - $ -
========= ========== ========== ======== ========== ===========
<CAPTION>
Accumulated
Additional Common Unrealized Treasury Stock
Paid-In Stock Loss on ----------------------
Capital Warrants Investment Shares Cost
----------- ----------- ------------- ---------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ 1,669,361 $ - $ - - -
Sale of stock for cash - - - - -
Stock issued as compensation - - - - -
Stock issued for consulting services - - - - -
Stock issuance costs - - - - -
Effect of merger 5,500,337 - - - -
Change in unrealized loss on investments - - (345,313) - -
Net loss - - - - -
----------- ---------- ------------ ---------- ----
BALANCE, DECEMBER 31, 1995 7,169,698 - (345,313) - -
Sale of stock for cash 1,290,800 - - - -
Change in unrealized loss on investments - - 345,313 - -
Stock issuance costs (Note 6) (2,805,000) - - - -
Options issued to Placement Agent 2,800,000 - - - -
Deferred compensation related to grant of stock
options (Note 10) 6,640,625 - - - -
Amortization of deferred compensation - - - - -
Net loss - - - - -
----------- ---------- ------------ ---------- ----
BALANCE, DECEMBER 31, 1996 15,096,123 - - - -
Sale of stock and warrants for cash - 1,581,337 - - -
Issuance of stock for noncash transactions
(Notes 5) 193,600 - - - -
Stock issuance costs (Note 6) (5,410,057) - - - -
Options issued to Placement Agent 4,902,800 - - - -
Deferred compensation related to grant of stock
options (Notes 6 and 10) 960,622 - - - -
Cancellation of options (3,320,833) - - - -
Amortization of deferred compensation (Note 10) - - - - -
Preferred dividends and beneficial conversion
feature - - - - -
Change in unrealized loss on investment - - (31,200) - -
Repurchase of common stock - - - (5,902,200) (10)
Shareholders' receivable - - - - -
Shares to be issued (including additional
paid-in capital) - - - - -
Net loss - - - - -
----------- ---------- ------------ ---------- ----
BALANCE, DECEMBER 31, 1997 $12,422,255 $1,581,337 $ (31,200) (5,902,200) $(10)
=========== ========== ============ ========== ====
<CAPTION>
Shares Total
Deferred to be Stockholders' Accumulated Stockholders'
Compensation Issued Receivable Deficit Equity
-------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ - $ - $ - $ (3,741,776) $ 493,752
Sale of stock for cash - - - - 3,035,000
Stock issued as compensation - - - - 375,000
Stock issued for consulting services - - - - 66,250
Stock issuance costs - - - - (330,000)
Effect of merger - - - - -
Change in unrealized loss on investments - - - - (345,313)
Net loss - - - (2,588,053) (2,588,053)
----------- ---------- --------- ------------ -----------
BALANCE, DECEMBER 31, 1995 - - - (6,329,829) 706,636
Sale of stock for cash - - - - 1,300,000
Change in unrealized loss on investments - - - - 345,313
Stock issuance costs (Note 6) - - - - (2,805,000)
Options issued to Placement Agent - - - - 2,800,000
Deferred compensation related to grant of stock
options (Note 10) (6,640,625) - - - -
Amortization of deferred compensation 2,927,083 - - - 2,927,083
Net loss - - - (8,056,918) (8,056,918)
----------- ---------- --------- ------------ -----------
BALANCE, DECEMBER 31, 1996 (3,713,542) - - (14,386,747) (2,782,886)
Sale of stock and warrants for cash - - - - 4,306,944
Issuance of stock for noncash transactions
(Notes 5) - - - - 195,300
Stock issuance costs (Note 6) - - - - (5,410,057)
Options issued to Placement Agent - - - - 4,902,800
Deferred compensation related to grant of stock
options (Notes 6 and 10) (960,622) - - - -
Cancellation of options 3,320,833 - - - -
Amortization of deferred compensation (Note 10) 1,349,587 - - - 1,349,587
Preferred dividends and beneficial conversion
feature - - - (1,629,916) (249,916)
Change in unrealized loss on investment - - - - (31,200)
Repurchase of common stock - - - - (10)
Shareholders' receivable - - (200,000) - (200,000)
Shares to be issued (including additional
paid-in capital) - 1,222,700 - - 1,222,700
Net loss - - - (5,474,951) (5,474,951)
----------- ---------- --------- ------------ -----------
BALANCE, DECEMBER 31, 1997 $ (3,744) $1,222,700 $(200,000) $(21,491,614) $(2,171,689)
=========== ========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
U.S. DIGITAL COMMUNICATIONS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
(Not reported upon by Public Accountants)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,588,053) $(8,056,918) $(5,474,951)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization 13,136 41,256 250,606
License income received in stock (629,688) - -
Stock option compensation - 2,927,083 1,349,587
Loss on investments - 129,688 84,050
Loss on repayment of debt - - 85,700
Services paid in stock 416,250 - -
Provision for losses on advances 25,000 - -
Loss on disposal of equipment - 1,068 -
Changes in assets and liabilities:
Increase in trade accounts receivable - - (96,380)
Decrease in other receivables - - 20,000
Decrease in inventory - - 43,349
Increase in note receivable - - (25,000)
Decrease (increase) in prepaid expenses (93,247) 69,522 13,042
Increase in other noncurrent assets - - (3,079)
(Decrease) increase in accounts payable and accrued 197,274 1,260,270 (520,463)
expenses
Decrease in deferred revenue - - (70,400)
Increase in accrued interest on stockholder loans 2,910 25,659 109,603
Increase in minimum royalty obligation - 450,000 -
Increase in due to former officers and shareholders - 300,000 876,500
----------- ----------- -----------
Total adjustments (68,572) 5,204,546 2,117,115
----------- ----------- -----------
Net cash used in operating activities (2,656,625) (2,852,372) (3,357,836)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of investments - - (125,000)
Capital expenditures (14,784) (30,518) (62,444)
Advances to Skysite prior to acquisition - - (231,039)
Advances to related company (25,000) - -
Patents and other expenditures (28,023) (13,838) -
Advances to stockholders - (116,478) -
----------- ----------- -----------
Net cash used in investing activities (67,807) (160,834) (418,483)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
U.S. DIGITAL COMMUNICATIONS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(CONTINUED)
<TABLE>
<CAPTION>
1995 1996 1997
- -------------------------------------------------------------------------------------------------------------------------
(Not reported upon by Public Accountants)
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings from nonstockholders $ - $ 100,000 $ 300,000
Borrowings from stockholders 231,484 992,900 388,000
Principal payments under notes payable - (5,970) (10,237)
Proceeds from issuance of common stock 3,035,000 1,300,000 -
Proceeds from issuance of preferred stock and warrants - - 4,306,944
Purchase of treasury stock - - (10)
Payment of dividends on preferred stock - - (113,985)
Payment of stock issuance costs (355,000) (5,000) (507,257)
Repayment of stockholder borrowings - (100,000) (50,000)
---------- ---------- ----------
Net cash provided by financing activities 2,911,484 2,281,930 4,313,455
---------- ---------- ----------
Net change in cash and cash equivalents 187,052 (731,276) 537,136
Cash and cash equivalents, beginning of year 552,878 739,930 8,654
---------- ---------- ----------
Cash and cash equivalents, end of year $ 739,930 $ 8,654 $ 545,790
========== ========== ==========
Supplemental disclosures of cash transactions:
Cash paid for interest $ - $ 7,772 $ 7,639
========== ========== ==========
Supplemental disclosures of non-cash transactions:
Beneficial conversion feature on preferred stock $ - $ - $1,380,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
U.S. DIGITAL COMMUNICATIONS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995, 1996, AND 1997
1. OPERATIONS:
U.S. Digital Communications, Inc. ("the Company", a Nevada corporation), is a
provider of satellite and wireless digital communications equipment and services
to corporate and other consumers. The Company, through a wholly owned
subsidiary, markets satellite telephone products and services to provide
solutions to communications needs of companies with global operations or remote
installations. Prior to its acquisition of this subsidiary, the Company was a
development stage enterprise founded to develop various internet, modem, video
data and telephone products and devices. In 1997, the Company discontinued
development of these products.
On November 28, 1995, Global Telephone and Communications, Inc. ("GTCI," a
Nevada corporation), and Visual Information Service Corporation ("Viscorp," an
Illinois corporation) entered into an agreement and plan of reorganization under
which every share of Viscorp stock was exchanged for four shares of GTCI stock.
This resulted in the stockholders of Viscorp obtaining voting control over GTCI.
In conjunction with the transaction, GTCI was renamed Viscorp. On October 24,
1997, Viscorp was renamed U.S. Digital Communications, Inc.
ACQUISITION OF SKYSITE
On June 20, 1997, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with Skysite Communications Corporation
("Skysite"). Under the Agreement, the Company was to issue 750,000 shares of
its common stock to the shareholders of Skysite, as well as options to purchase
an additional 500,000 shares of its common stock at an exercise price of $.40
per share.
The stock of Skysite was transferred to the Company on August 26, 1997.
Subsequent to the acquisition, disputes arose between the Company and the former
President of Skysite related to the value of Skysite at the time of the
acquisition. As a result of this dispute, the Company withheld its shares. The
Company has entered into an amended agreement with the shareholders of Skysite,
except for the former President (who was allocated 240,000 shares). Under the
terms of this amended agreement, the other shareholders' shares and options will
be placed in an escrow account. The shareholders will have all rights
attributable to these escrowed shares, however, they have agreed that at such
time when they elect to sell these shares, the first $200,000 of related
proceeds will be paid to the Company, and the remaining shares and options will
be released to the shareholders. The 240,000 shares due to the former President
remain unissued, and the Company does not intend to issue such
F-6
<PAGE>
shares. No shares or options for the other shareholders have been issued or
placed in escrow as of September 1, 1998.
At the time of the acquisition, the Company also entered into an agreement with
the former President of Skysite to issue options to purchase 146,961 shares of
the Company's stock at an exercise price of $.40 per share, over the following
36 months in amounts to be determined by the Company. The number of options
granted to the former President of Skysite would be adjusted for any material
breach of the Agreement. In addition, the options to be granted were also based
upon employment services which were to be provided. No options have been
granted to the former President since the Company believes the former President
did breach the Agreement, and no services were performed.
The Company has recognized the Skysite acquisition as a purchase for accounting
purposes. The Company has valued the consideration to be given to the
shareholders of Skysite using the 510,000 shares to be placed in escrow and the
related options, less the $200,000 to be received from escrow when these shares
are sold. This $200,000 has been recognized by the Company as a reduction of
stockholders' equity. Since the Company does not intend to issue the 240,000
shares to Skysite's former President, the value for these shares ($304,000) has
not been included in the consideration to be given. If the Company is required
to distribute such shares in the future, the equity and related goodwill
accounts will be increased. The following is the valuation at August 26, 1997,
the closing date of the acquisition, of consideration to be given for Skysite.
<TABLE>
<S> <C>
510,000 shares of Company common stock $ 647,700
500,000 options to purchase Company common
stock 575,000
Due from Skysite shareholders (200,000)
Advances made from the Company to Skysite
prior to acquisition 231,039
----------
$1,253,739
==========
</TABLE>
Since the Company has not issued the shares or options due to the other
shareholders, the Company has recorded the value of the consideration to be
given as shares to be issued in stockholders' equity. At such time when these
shares and options are placed in the escrow account, the Company will recognize
an increase to its common stock and additional paid in capital accounts. The
purchase price is $1,884,539 in excess of the fair value of the net tangible
assets acquired. The Company has recognized this as intangible assets.
In accordance with APB Opinion No. 16, the Company allocated the purchase price
based on the fair value of assets acquired and liabilities
F-7
<PAGE>
assumed. The aggregate purchase price of $1,253,739, was allocated as follows:
<TABLE>
<S> <C>
Current assets $ 289,440
Property and equipment 11,474
Other assets 4,200
Intangible assets 1,884,539
Liabilities assumed (935,914)
----------
$1,253,739
==========
</TABLE>
F-8
<PAGE>
The following unaudited pro forma financial information presents the
consolidated results of operations of the Company and Skysite as if the
acquisition had occurred as of January 1, 1996. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had the Company and Skysite constituted a single entity during
such periods.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1996 1997
---- ----
Unaudited
<S> <C> <C>
Pro forma revenues $ 704,179 $ 1,243,961
Pro forma net loss available to common
shareholders (8,898,614) (7,494,961)
Pro forma net income (loss) per share (0.41) (0.36)
</TABLE>
RISKS AND OTHER IMPORTANT FACTORS
For the three years ended December 31, 1997, the Company has experienced
significant losses due to its previous development activities and the acquired
Skysite operations. The success of the Company is dependent on its ability to
generate adequate cash for operations and capital needs. Its ability to
generate adequate cash for such needs is in part dependent on its success in
increasing sales of Skysite's products and services. The Company has developed
a plan to increase revenues through sales of products and services, however, due
to market conditions and other factors beyond its control, there can be no
assurance the Company will be able to adequately increase product sales.
Therefore, the Company may have to generate additional cash through the sale of
debt or equity securities. Although the Company believes it has the ability to
generate additional cash through such sales, such sales may be dilutive and
there can be no assurances that adequate funds will be available or available on
terms that are reasonable or acceptable to the Company. If the Company is
unable to generate adequate cash there could be a material and adverse effect on
the business and financial condition of the Company. Therefore, the Company has
developed a plan to implement certain cost control measures to mitigate its
liquidity risk, and is aggressively seeking other companies to acquire that will
increase cash flow and reduce the risk of reliance on Skysite's products and
services.
Future operating results may be affected by a number of other factors including
the timing of new products in the market place, competitive pricing pressures
and economic conditions. As the market for the Company's product is
characterized by rapidly changing technology, the development and introduction
of competitive products may require a significant investment of financial
resources.
F-9
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
Skysite, after eliminating intercompany balances and transactions. The amounts
included for Skysite represent all activity from August 26, 1997, the date of
acquisition, to December 31, 1997.
MANAGEMENT'S 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.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. As of December 31,
1997, substantially all funds are held at one financial institution. The
Company does not believe it is exposed to any significant credit risk on cash
equivalents.
INVENTORIES
Inventories, which consist primarily of finished goods, are stated at the lower
of cost or market. Cost is determined using the weighted average cost method.
During 1997, the Company's inventory and receivables were pledged as collateral
to a supplier for past due amounts. The inventory and receivable balance on the
date of the agreement was $433,206. The supplier subsequently released their
security interest in 1998 (see Note 9).
PROPERTY AND EQUIPMENT
Property and equipment are recorded at historical cost and are being depreciated
over the estimated useful lives of the assets ranging from 3 to 7 years, using
accelerated methods. For property and equipment under capital lease, the assets
are depreciated over the shorter of the remaining life of the lease or the
useful life of the asset.
INTANGIBLE ASSETS
Intangible assets includes the excess purchase price over net assets received
resulting from the August 26, 1997, acquisition of Skysite. As of December 31,
1997, the unamortized balance was $1,758,903 (net of
F-10
<PAGE>
accumulated amortization of $125,636). The amortization period being used is
five years.
Prior to the Company's acquisition of Skysite, the Company incurred certain
expenses for patents and trademarks related to the development of various
internet, modem, video data, and telephone products. Since the Company has
discontinued development of these devices, the Company has written-off the
unamortized balance related to these items as of December 31, 1997.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company complies with the Statement of Financial Accounting Standard
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. To determine
recoverability of its long-lived assets, the Company evaluates the probability
that future undiscounted net cash flows will be less than the carrying amounts
of net assets. Impairment is measured at fair value.
EARNINGS (LOSS) PER COMMON SHARE
Effective January 1, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share" which requires dual
presentation of basic and diluted earnings per share on the face of the income
statement for all periods presented. Basic earnings per common share are
computed by dividing net loss available to common stockholders by the weighted-
average number of common shares outstanding. Diluted earnings per common share
are computed by dividing net income by the weighted-average number of shares of
common stock outstanding plus other dilutive securities.
Since the Company had net losses from operations, no potential common shares to
be issued are included in the computation of the diluted per share amount as
they would be anti-dilutive. Accordingly, the following common stock
equivalents are not included in the weighted-average shares of common stock
outstanding.
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Common shares to be granted
under option arrangements,
less shares assumed
purchased at average market
price 1,054,786 2,312,122 1,580,562
</TABLE>
F-11
<PAGE>
<TABLE>
<S> <C> <C> <C>
Convertible preferred
securities and related
warrants - - 935,800
--------- --------- ---------
1,054,786 2,312,122 2,516,362
========= ========= =========
</TABLE>
FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, receivables, and stockholder
loans are a reasonable estimate of their fair value given their short-term
nature. Investment securities are carried at their fair value.
STOCK-BASED COMPENSATION
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). The Company has adopted the disclosure-only
provisions of SFAS No. 123. Accordingly, when the Company grants stock options
with an exercise price equal to the fair market value of the shares on the date
of grant, no compensation expense is recorded.
RESEARCH AND DEVELOPMENT EXPENSE
The Company expenses research and development costs as they are incurred.
ADVERTISING COSTS
In accordance with the AICPA's Statement of Position 93-7, "Reporting on
Advertising Costs," costs for advertising are expensed as incurred within the
fiscal year. Such costs are included in sales and marketing expenses in the
accompanying statements of operations.
REVENUE RECOGNITION
The Company recognizes equipment sales revenue upon shipment. Airtime services
are recognized in the period in which communications services are rendered.
Deferred revenue consists of customer payments received in advance of services
provided under contractual arrangements.
CONCENTRATIONS OF RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of accounts receivable. Risk
with respect to accounts receivable is generally diversified among a number of
entities comprising the Company's customer base. The Company performs ongoing
credit evaluations of its customers' financial condition and maintains
allowances for potential credit losses. Actual losses and allowances have been
within management's expectations.
F-12
<PAGE>
DEFERRED COMPENSATION
The Company records deferred compensation as the difference between the exercise
price of options granted and the fair value of the Company's common stock on the
date of grant. The amount of deferred compensation recognized in 1996 and 1997
was $6,640,625 and $960,622, respectively. Deferred compensation is amortized
to expense during the vesting period of the related options.
INCOME TAXES
Deferred income taxes are recognized based on the estimated future tax effects
of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amount used for income tax purposes.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. Income tax expense represents
the current tax provision for the period and the change during the period in
deferred tax asset and liabilities.
RECLASSIFICATIONS
Certain balances from 1995 and 1996 have been reclassified to conform to current
year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company will adopt SFAS No. 130, "Reporting
Comprehensive Income," and SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." Those statements will require the Company
to change the format of its consolidated financial statements presentation and
disclose certain information related to the different segments of its business.
3. INVESTMENTS:
In 1997, the Company loaned $50,000 to EDNET, an unrelated company. Under the
terms of a loan agreement, if EDNET did not repay the loan by June 15, 1997, the
Company would, and did, receive 65,000 shares of EDNET, which were restricted
through June 15, 1998. The value of these shares on June 15, 1997, was $40,950.
Due to the transaction, the Company has recognized a loss of $9,050, which is
included in loss on investments in the accompanying financial statements. As of
December 31, 1997, the fair value of these shares was approximately $0.15 per
share. The Company has classified these shares as available for sale. The
Company has reflected the reduction in the value of this investment by recording
a $31,200 unrealized loss in stockholders' equity in the accompanying
consolidated balance sheet.
4. PROPERTY AND EQUIPMENT:
F-13
<PAGE>
As of December 31, 1996 and 1997, property and equipment consists of the
following:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Office furniture and equipment $109,482 $176,623
Computer and video equipment 18,040 18,040
Less - Accumulated depreciation (36,733) (72,163)
-------- --------
Property and equipment, net $ 90,789 $122,500
======== ========
</TABLE>
Depreciation expense for 1995, 1996, and 1997, amounted to $10,432, $19,534,
and $35,430, respectively.
5. NOTES PAYABLE:
As of December 31, 1996 and 1997, notes payable consist of the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Note payable to stockholder, interest rate 8%,
payable on demand (Note 6) $ 519,386 $ 857,385
Note payable to stockholder, interest rate 8%,
payable on demand (Note 15) 105,000 105,000
Note payable, interest rate 12%, payable
June 30, 1997 100,000 -
Note payable, interest rate of 10%, payable
March 31, 1998 - 300,000
Capital lease obligation, payable in monthly
installments of $846 through February 6,
1999, including interest at an annual
rate of 36.7% 15,403 9,521
Capital lease obligation, payable in monthly
installments of $211 through May 1, 2001,
including interest at an annual rate of
14.5% 8,143 6,817
Capital lease obligation, payable in monthly
installments of $431 through February 13,
2001, including interest at an annual
rate of 12.3% 17,074 14,737
--------- -----------
Total debt 765,006 1,293,460
Less - Current maturities (735,141) (1,275,675)
--------- -----------
$ 29,865 $ 17,785
========= ===========
</TABLE>
F-14
<PAGE>
On April 15, 1997, the Company issued 160,000 shares of common stock in full
satisfaction of the $100,000 note payable. On this date, the outstanding
balance on this note, including accrued interest was $109,500 and the value of
the shares issued was $195,200. The company recognized a loss on this
transaction of $85,700 which is reflected in loss of repayment of debt within
the accompanying financial statements.
The Company has not made payment on the $300,000 note, which was due March 31,
1998. Under the terms of the agreement, the lender is entitled to collect a
late payment premium of five percent of any past due amount, which will be
accrued for by the Company in 1998.
On August 24, 1998, the Company entered into a settlement related to an amount
owed to a shareholder of the Company. The balance owed to the shareholder,
including interest and unreimbursed expenses totaled $1,033,951 as of December
31, 1997. Under the agreement, the Company will make $250,000 payments on the
following dates: September 1, 1998, January 5, 1999, and February 28, 1999.
Additionally, the Company will issue 200,000 shares of its restricted common
stock to the shareholder. The value of the consideration given in exchange for
the extinguishment of this liability is $1,537,500. This transaction results in
an extraordinary loss of $503,549 in 1998.
Future minimum payments of debt, excluding those amounts payable on demand, are
as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
<S> <C>
1998 $314,493
1999 7,741
2000 6,969
2001 1,872
--------
Total $331,075
========
</TABLE>
6. STOCKHOLDERS' EQUITY:
COMMON STOCK
In November 1994, the Company entered into an agreement with a placement agent
for a private offering. This private offering resulted in the sale of 2,000,000
units at a purchase price of $0.625 per unit for a total consideration of
$1,250,000. Each unit consisted of one share of common stock, one Class A
warrant and one Class B warrant (no Class A or Class B warrants were exercised
prior to their expiration date). The placement agent received 200,000 shares of
common stock and 48,000 expense units valued at $155,000 as compensation for its
services and costs. Each
F-15
<PAGE>
expense unit was composed of one share of common stock, one Class A warrant and
one Class B warrant (no Class A or Class B warrants were exercised prior to
their expiration date). In addition, attorney and finder's fees totaling
$83,833, paid or to be paid in cash, were incurred and are included as stock
issuance costs. Of the $83,833, $50,000 was payable at December 31, 1994, to
one consultant. In addition, the consultant was granted an option, exercisable
until March 8,1998, for the purchase of 80,000 shares of common stock at the
exercise price of $0.625 per share.
During 1995, the Company and the consultant revised the fee structure noted in
the previous paragraph. In exchange for the cancellation of the $50,000
obligation and the option to purchase 80,000 shares, the consultant received
$25,000 in cash, 40,000 shares of common stock with a deemed value of $25,000
and 120,000 options. The additional compensation was recorded as general and
administrative expense by the Company.
During 1995, the Company entered into an agreement with an investment advisor to
raise equity financing solely from offshore purchasers and purchasers who may be
deemed "accredited investors" as those terms are generally defined under
Regulation S and Regulation D, respectively, promulgated by the U.S. Securities
and Exchange Commission. A total of 4,400,000 shares of the Company's stock
were issued at a purchase price of $0.625 per share for a total of $2,750,000.
The placement agent received a finder's fee totaling $330,000 which is included
as stock issuance costs and charged against additional paid-in capital.
Prior to signing the agreement with the investment advisor, the Company had
independently raised $285,000 through the issuance of 212,000 shares at a
purchase price of $1.25 per share and $20,000 through the issuance of 32,000
shares at a purchase price of $0.625 per share in separate transactions.
In addition, an officer of the Company and outside consultants received 600,000
and 66,000 shares, respectively, during 1995 as payment for services rendered,
valued at the price of $0.625 per share. The value of the shares issued,
$375,000 and $41,250, were charged to research and development, and general and
administrative, respectively.
In February 1996, the Company raised $50,000 through the issuance of 20,000
shares of common stock. In addition, from March 1 through April 11, 1996, the
Company raised $1,000,000 through the issuance of 500,000 shares of common stock
and $250,000 through the exercise of 400,000 options at a price of $0.625 per
share which were convertible into 400,000 shares. The options were issued to a
placement agent for raising the $1,000,000 noted in the previous sentence, and
were valued at $2,800,000. This amount is included as stock issuance costs and
charged to additional paid-in capital in the statement of stockholders' equity.
F-16
<PAGE>
In 1997, the Company issued 160,000 common shares to a third party for full
settlement of a note payable (see Note 5). In addition, the Company reacquired
5,902,200 common shares from a former director for total consideration of $10.
PREFERRED STOCK
SERIES A
In December 1996 and again in August 1997, the Company entered into an agreement
with a placement agent to raise equity financing solely from non-U.S. persons as
defined in Regulation S promulgated by the U.S. Securities and Exchange
Commission through private offerings of the Company's 8 percent cumulative
convertible preferred stock ("Series A"), $0.01 par value per share. The Series
A preferred stock is nonvoting. For each two shares of Series A Preferred Stock,
an investor also received a warrant to purchase the company's Common Stock.
The 1st offering period, according to the December 1996 offering memorandum, was
to expire on June 30, 1997. However, the Company closed that offering in
February of 1997 after selling 2,031,832 shares of Series A Preferred Stock with
1,015,916 warrants for a total consideration of $3,047,748. In August of 1997,
the Company again offered its Series A Preferred Stock and warrants with the
offering period to expire March 31, 1998. The August 1997 memorandum was
subsequently amended and the offering period was extended to July 31, 1998. The
Company raised $3,460,500 through the issuance of 2,307,000 additional shares of
Series A preferred stock and 1,153,500 warrants. The Company raised $4,306,944
in 1997 from the sale of Series A Preferred Stock. The Company raised a total of
$6,508,248 through the issuance of 4,338,832 total shares of Series A preferred
stock in the two offering.
For every two Series A preferred shares purchased, the stockholder received one
warrant (which shall expire three years after the date of execution of the
subscription agreement) to purchase one share of common stock at an exercise
price of $3.00 per share (the "Preferred Stock Warrants"). The Preferred Stock
Warrants shall become exercisable in the same increments and on the same dates
that the conversion rights with respect to the shares to which they are attached
become vested, as described below. As of December 31, 1997, a total of 1,441,116
warrants had been issued. No warrants were exercised in 1997.
The Company has allocated the equity raised between the preferred stock and the
warrants. Based on the valuation of each on the date of issuance, the Company
has allocated approximately $2,868,000 to the preferred stock and $3,640,000 to
the warrants for the entire proceeds received under Series A through closing at
July 31, 1998. As of December 31, 1997, the allocation amounted to $2,725,607
and $1,581,337 for the preferred stock and warrants, respectively.
F-17
<PAGE>
Series A preferred stockholders have the right to convert each share into one
share of common stock as follows: a) 25 percent of the shares 90 days following
the date the shares were issued (the initial conversion date) and b) 25 percent
of the shares at the end of each of the three consecutive 90-day periods
following the initial conversion date. No conversion of Series A preferred
stock to common stock was made in 1997.
Six months after the date of issuance of the Series A preferred shares, the
Company shall have the option to require the preferred stockholder to convert
each of such shares into one share of common stock. Upon such conversion, all
of the Preferred Stock Warrants attached to such shares shall become fully
exercisable.
Each Series A preferred stockholder is entitled to receive quarterly dividends
on the last day of March, June, September and December in an amount equal to 8
percent per annum of the stated value of the Preferred stock. Dividends
totaling $113,985 were paid in 1997. Additionally, the Company has recognized
dividends payable totaling $135,931.
On the date of issuance of some of the Series A preferred stock, the purchase
price of the shares was less than the quoted market price of the Company's
common stock. Accordingly, the intrinsic value of this beneficial conversion
feature (approximately $1,529,000) is being accreted to preferred stock over the
conversion rights period. Accretion of the beneficial conversion feature as of
December 31, 1997, totaled $1,380,000 and is reflected as an increase in the
carrying value of the preferred stock and a dividend charge against retained
earnings. Subsequent to year-end, additional shares of Series A preferred stock
were issued. The intrinsic value of the beneficial conversion feature for those
shares was approximately $6,100,000.
Upon any voluntary or involuntary liquidation, dissolution or winding up of the
Company, the holders of the Series A preferred stock will be entitled to be
paid, before any distribution or payment is made in respect of any Common Stock
as to distribution on liquidation, dissolution or winding up, an amount in cash
equal to the aggregate Stated Value ($1.50 per share) of all shares outstanding
plus all accrued but unpaid dividends.
Under the terms of the Placement Agent Agreement related to Series A, the
Placement Agent is entitled to (1) a Placement Fee based on a percentage of
capital raised, (2) options to purchase common stock of the Company and (3) five
percent of the proceeds related to exercise of warrants issued with the Series A
preferred shares. The total fees earned and the value of the options granted
through the closing at July 31, 1998, amounted to $5,661,320. In accordance
with the Placement Agent Agreement, on March 6, 1997, the placement agent was
granted 2,800,000 options to purchase common stock of the Company at $.3125 per
share. On December 12, 1997, these options were canceled and the Company
granted the placement agent 2,800,000 new options, for which the placement agent
could exchange each option for .85 share of the
F-18
<PAGE>
Company's stock upon registration. The Company calculated the fair value of the
options granted on March 6, 1997, to be $4,256,000. On December 12, 1997, the
Company valued the new options to be $4,902,800. The Company has recognized the
value of the new options and the percentage fee earned by the placement agent
and recorded this amount, which totaled $5,410,057 for the year ended December
31, 1997, as stock issuance cost, which is reflected as a reduction of
additional paid-in capital. In addition, if all warrants issued in the Series A
offering are exercised, the placement agent's 5 percent fee would increase by
approximately $325,000.
SERIES B
In April 1998, the Company created a Series B issue of Preferred Stock, which it
offered in a Regulation D Private Placement. The Company offered 3,000 shares
of the 10,000,000 authorized shares of Preferred Stock at a purchase price of
$1,000 per share. Each share had a stated value of $1,000 and no par value.
Series B closed on May 28, 1998. The Company issued all 3,000 shares for
$3,000,000, resulting in $2,670,000 net cash proceeds to the Company. (See Note
9 related to the placement agent fee.) The Series B Preferred Stock will not
pay dividends and is nonvoting stock.
Each share of Series B Preferred Stock shall be convertible into shares of the
Company's common stock based upon a Conversion Formula, as defined in the
Offering agreement.
In conjunction with the offering, 500,000 warrants were issued to the Series B
shareholders proportionate to each investor's number of shares purchased to the
total shares offered. Each warrant entitles the holder to purchase shares of
the Company's common stock at a price 110 percent of the closing bid price as of
the closing of the Series B offering. The exercise price is $4.34. The
exercise price and number of shares to be purchased may be adjusted from time to
time based on computations included in the warrant agreement. Such warrants are
exercisable for three years after closing of the Series B offering.
The Company has allocated the equity raised between the preferred stock and the
warrants. Based on the valuation of each on the date of issuance, the Company
will allocate approximately $955,000 to the preferred stock and $2,045,000 to
the warrants.
Each holder of Series B Preferred Stock will have the right to convert their
shares as follows: a) 50 percent of the shares on the effective date of
registration ("Conversion Date") at the Conversion Price (lesser of (i) 25
percent off the five-day average Closing Bid Price for the Company's common
stock immediately before conversion or (ii) 100 percent of Closing Bid Price for
the Company's common stock on the date of closing, but not less than $.50 per
share of the Company's common stock) and b) 50 percent of the shares on the
45/th/ day after the effective date of registration at the
F-19
<PAGE>
Conversion Price. The holder shall be entitled to an additional discount
privilege equal to one percent (1%) per month, or fraction of a month, from the
time of closing until the Conversion Date for any conversion thirty (30) days
after the Conversion Date and one-half percent (.5%) per month or fraction of a
month for any conversions thereafter ("Additional Discount"). All shares
outstanding on May 1, 2001, will be automatically converted into common stock in
accordance with the Conversion Formula, at the Conversion Price.
The Company will have the right, in its sole discretion, to redeem in whole or
in part any shares of Series B Preferred Stock submitted for conversion. The
redemption price per share of common stock after conversion of the Series B
Preferred Stock shall be calculated as 133 percent of the face value plus any
accrued Additional Discount.
On the date of issuance of the Series B preferred stock, the conversion price of
certain of the Series B preferred stock was less than the quoted market price of
the Company's common stock. Accordingly, had the shares been converted as of
the issuance date, the intrinsic value of this beneficial conversion feature
would have been approximately $1,288,000. The eventual accretion of the
intrinsic value of the beneficial conversion feature will be recorded as an
increase in the carrying value of the preferred stock and a dividend charge to
retained earnings over the conversion rights period.
In the event of any liquidation, dissolution or winding-up of the Company,
either voluntary or involuntary (a "Liquidation"), the holders of shares of the
Series B Preferred Stock then issued and outstanding shall be entitled to be
paid out of the assets of the Company available for distribution to its
shareholders, whether from capital, surplus or earnings, before any payment
shall be made to the holders of shares of the Common Stock or upon any other
series of Preferred Stock of the Company with a liquidation preference
subordinate to the liquidation preference of the Series A Preferred Stock. The
amount of the pay-out will be an amount per share equal to the Stated Value.
The Series B preferred stock subscription agreements contain a "put" provision
for common stock which allows the Company to raise an additional $3,000,000.
The provision specifies that 75 days after the effective date of the
registration of additional common shares to be used under this provision, the
Company may sell common stock (the "Put Stock") to the Series B subscribers.
The price of the Put Stock is determined by taking the lower of (1) 80 percent
of the lowest closing bid price for the previous 20 trading days prior to
funding or (2) 80 percent of the closing bid price on the day of funding. The
minimum draw is $250,000 and the maximum draw is $750,000. If the price of the
Company's common stock for the 20 trading days prior to the funding is less than
$1.25 and the average trading volume is less than $300,000 per day for the
previous 20 trading days, the Series B shareholders have the option not to fund
the
F-20
<PAGE>
requested draw. These minimums increase as the amount of the funds requested by
the Company increase from $250,000 to $750,000.
On the date of issuance of the Series B Preferred Stock with the put provision,
the conversion price under the put provision was less than the quoted market
price of the Company's common stock. Accordingly, had the put provision been
exercised at the date of issuance of the Series B Preferred Stock, the intrinsic
value of the beneficial conversion feature would have been approximately
$483,000. The put provision will be recorded as an offsetting charge to
shareholders' equity. The stock put rights will be amortized over the period of
the put provision with an offsetting charge to retained earnings. The accretion
of the intrinsic value of the beneficial conversion feature will be recorded
ratably over the term of the put contract (two years from execution of the
subscription agreement) based on the earliest dates the Company may put its
shares.
SERIES C
In August 1998, the Company created a Series C issue of Preferred Stock. The
Company offered 4,000 shares of the 10,000,000 authorized shares of Preferred
Stock at a purchase price of $1,000 and no par value. As of September 1, 1998,
the Company had issued 3,000 out of the 4,000 shares for $3,000,000, resulting
in $2,670,000 net cash proceeds to the Company (see Note 9 for discussion of
placement agent fee). The Company expects to place the remaining 1,000 shares
in the near term. The Series C preferred stock will not pay dividends and is
nonvoting stock.
In conjunction with the offering, 660,000 warrants will be issued to the Series
C shareholders proportionate to each investor's number of shares purchased to
the total shares offered. Each warrant entitles the holder to purchase shares
of the Company's common stock at a price of $4.34. The exercise price and
number of shares to be purchased may be adjusted from time to time based on
computations included in the warrant agreement. Such warrants are exercisable
for three years after closing of the Series C offering.
The Company has allocated the equity raised between the preferred stock and the
related warrants. Based on the valuation of each on the date of issuance, the
Company will allocate $1,802,000 to the preferred stock and $1,198,000 to the
warrants.
Fifty percent of each share of Series C Preferred Stock shall be convertible on
the earlier of the effective date of registration of the Company's common stock
("Conversion Date") or one-hundred and twenty (120) days from the closing of the
Series C Preferred Stock, the remaining fifty percent shall be convertible on
the earlier of the forty-fifth day after the effective date of registration or
one-hundred and sixty-five (165) from the closing of the Series C Preferred
Stock. The Conversion Price will be either the discounted price (twenty-five
percent off of the five-day closing bid price) or $3.94, whichever is less.
However, in no event shall the
F-21
<PAGE>
conversion price be less than $1.875 per share. In the event the stock is
trading below $1.875, the floor price will be adjusted to the lowest closing bid
price for the Company's common stock during such five-day period from which the
holder shall be entitled to an additional discount. The holder shall be
entitled to an additional discount privilege equal to one percent (1%) per
month, or fraction of a month, from the time of closing until the Conversion
Date for any conversion thirty (30) days after the Conversion Date and one-half
percent (.5%) per month or fraction of a month for any conversions thereafter
("Additional Discount"). All shares outstanding on June 1, 2001, will be
automatically converted into Common Stock on such date in accordance with the
Conversion Formula and the Conversion Price then in effect.
The Company shall have the right in its sole discretion, to redeem, prior to
receipt of the Notice of Conversion, in whole or in part any shares of Series C
Preferred Stock. The redemption price per share of common stock after
conversion of the Series C Preferred Stock shall be calculated as 133 percent of
the face value plus any unpaid penalty should the Company not effect the date of
registration 150 days from Closing. The Company shall not have a redemption
privilege if the common stock is trading above $3.50 per share unless the Holder
agrees in writing to allow the Company to redeem such shares.
On the date of issuance of the Series C preferred stock, the conversion price of
certain of the Series C preferred stock was less than the quoted market price of
the Company's common stock. Accordingly, had the shares been converted as of
the issuance date, the intrinsic value of this beneficial conversion feature
would have been approximately $263,000. The eventual accretion of the intrinsic
value of the beneficial conversion feature will be measured at the date of
conversion and will be recorded as an increase in the carrying value of the
preferred stock and a dividend charge to retained earnings over the conversion
rights period.
In the event of any liquidation, dissolution or winding-up of the Company,
either voluntary or involuntary (a "Liquidation"), the holders of shares of the
Series C Preferred Stock then issued and outstanding shall be entitled to be
paid out of the assets of the Company available for distribution to its
shareholders, whether from capital, surplus or earnings, before any payment
shall be made to the holders of shares of the Common Stock or upon any other
series of Preferred Stock of the Company with a liquidation preference
subordinate to the liquidation preferences of the Series A and B Preferred
Stock. The amount of the pay-out will be an amount per share equal to the
Stated Value.
7. INCOME TAXES:
The components of the provision for income taxes for the years ended December
31, 1995, 1996, and 1997, are as follows:
F-22
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
CURRENT TAXES:
Federal $ (818,086) $(1,739,575) $(1,355,932)
State (144,368) (306,984) (233,658)
----------- ----------- -----------
(962,454) (2,406,559) (1,589,590)
----------- ----------- -----------
Deferred taxes:
Federal (61,852) (993,316) (458,860)
State (10,915) (175,625) (79,118)
----------- ----------- -----------
(72,767) (1,168,941) (537,978)
----------- ----------- -----------
Income tax benefit (1,035,221) (3,215,500) (2,127,568)
Increase in valuation
allowance 1,035,221 3,215,500 2,127,568
----------- ----------- -----------
Income tax provision $ - $ - $ -
=========== =========== ===========
</TABLE>
Components of the Company's deferred tax assets as of December 31, 1996 and
1997, are as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 3,374,800 $ 4,964,390
Compensation related to granting of
stock options 1,170,800 1,708,778
----------- -----------
Total deferred tax assets 4,545,600 6,673,168
Valuation allowance (4,545,600) (6,673,168)
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
</TABLE>
Because of the uncertainty associated with future realization of the deferred
tax assets, the deferred tax asset has been offset in total by a valuation
allowance.
F-23
<PAGE>
The Company has net operating loss ("NOL") carryforwards for federal tax return
purposes that may be offset against future taxable income. If not used, the
carryforwards will expire as follows. The use of the NOLs is subject to
statutory and regulatory limitations regarding changes in ownership.
<TABLE>
<CAPTION>
OPERATING
LOSSES
-----------
<S> <C>
2009 $ 1,076,200
2010 2,249,000
2011 5,111,700
2012 3,988,032
-----------
$12,424,932
===========
</TABLE>
Reconciliation of the statutory federal rate to the effective rates were as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
U.S. federal statutory income tax rate 34.00% 34.00% 34.00%
State income taxes, net of federal tax benefit 4.71 4.71 2.38
Amortization of intangibles assets - - 2.48
Valuation allowance (38.71) (38.71) (38.86)
------ ------ ------
-% -% -%
====== ====== ======
</TABLE>
8. LEASES:
The Company has entered into several operating leases for office space and
equipment that are to expire at certain times through 2002. Additionally, the
Company has certain capital lease obligations for office equipment. As of
December 31, 1997, the Company had the following minimum lease payments:
<TABLE>
<CAPTION>
YEAR
ENDING
DECEMBER 31
- -----------
<S> <C>
1998 $152,003
1999 15,997
2000 15,225
2001 7,718
2002 5,846
--------
Total Minimum Lease Payments $196,789
========
</TABLE>
Included in the above are lease payments being made by the Company on behalf of
the former lessee. Management is in the process of assuming the lease. Total
rent expense was $8,400, $47,672, and $62,844 for the years ended December 31,
F-24
<PAGE>
1995, 1996, and 1997, respectively. The amount of related party rent expense
was $8,400, $11,400, and $0 for the years ended December 31, 1995, 1996, and
1997, respectively.
9. COMMITMENTS AND CONTINGENCIES:
EMPLOYMENT AGREEMENTS
Through December 31, 1995, the Company had entered into separate employment
agreements with four of its officers. The agreements for the four officers were
to expire November 11, 1997, and automatically renew for an additional one-year
period unless the Company or the employees notified the other party not less
than 120 days prior to the expiration of the agreement of the Company's or the
employees' intent to let the agreement expire. One of the officers resigned on
January 8, 1997, but the remaining terms and conditions of his employment
agreement remained in full force as they related to his continuing obligations
(i.e., noncompete agreement) to the Company. The agreements for two of the
officers were terminated by the Board of Directors effective March 15, 1997.
During 1996, the Company entered into separate employment agreements with three
of its officers and one employee. All agreements expire in 1998 and do not
automatically renew. The agreements for two of the officers were terminated
August 6, 1996, and January 27, 1997, respectively.
All of the above agreements included the granting of stock options to purchase
common stock. (See Note 10.)
PLACEMENT AGENT FEE
SERIES B
Under the terms of the Placement Agent Agreement related to the issuance of
Series B Preferred Stock (Note 6), the Placement Agent was paid fees equal to 11
percent of the funded amount of $3 million or $330,000 for the placement of the
3,000 shares of Series B Preferred Stock, 50,000 shares of common stock of the
Company, valued at approximately $200,000 as of the closing date, for
establishing the Put Equity Line of Credit and warrants to purchase 250,000
shares of common stock at a price and under the conditions of the Series B
Preferred Stock investors' warrants, valued at approximately $815,000 as of the
closing date. In addition, as the Company, at its sole discretion, utilizes the
Put Equity Line of Credit, the Placement Agent will receive a fee of 8 percent
of the cash actually invested at each funding. If the entire Line of Credit is
used, the Placement Agent would earn an additional $240,000.
SERIES C
Under the terms of the Placement Agent Agreement related to the issuance of
Series C Preferred Stock (Note 6), the Placement Agent was paid fees equal to 11
percent of the funded amount of $3 million or $330,000 for the placement of
F-25
<PAGE>
the 3,000 shares of Series C Preferred Stock, and warrants to purchase 250,000
shares of common stock at a price and under the conditions of the Series C
Preferred Stock investors' warrants, valued at approximately $690,000 as of
September 1, 1998, (Series C has not closed).
LITIGATION
In December 1994, a former officer and director filed suit against the Company,
claiming damages for breach of fiduciary duty, breach of oral agreement,
interference with contractual relations, conspiracy, restitution, and fraud. On
April 4, 1995, the Company had filed a counterclaim against the plaintiff for
fraud, breach of fiduciary duty, declaratory relief, recession, intentional and
negligent interference with prospective advantage and money loaned. On December
17, 1996, the Court entered summary judgment against the plaintiff on all claims
against the Company. On February 5, 1997, all claims were dismissed and final
judgment was entered. On February 11, 1997, the plaintiff filed a notice of
appeal. On February 3, 1998, the Company and the plaintiff agreed to a
settlement in which plaintiff would receive a certain number of the Company's
common shares. The Company has recognized a liability of $178,500, as of
December 31, 1997, related to the settlement. The liability is included in due
to former officers and shareholders on the accompanying balance sheet.
The Company filed a lawsuit against three individuals formerly associated with
the Company for misappropriation of trade secrets, conversion and breach of
fiduciary duty. The defendants filed counterclaims against the Company alleging
intentional interference with economic advantage, intentional interference with
contractual relations and unfair competition arising out of the same set of
occurrences. On July 26, 1996, the Company filed a motion for a preliminary
injunction. On December 4, 1996, the District Court granted the Company's
motion and issued a preliminary injunction against the defendants. The
injunction was conditioned upon the Company's posting a bond in the amount of $1
million. The Company did not post the bond and the injunction was dissolved.
Prior to December 31, 1997, the case was settled in conjunction with another
related case. See the following paragraph for a discussion of the settlement.
On December 20, 1996, a lawsuit was filed against the Company by one of the
individuals discussed above and another individual formerly associated with the
Company. The complaint alleges multiple claims including breach of contract,
fraud, negligent misrepresentation, breach of fiduciary duty, wrongful
termination and conversion, all arising out of the plaintiffs' employment with
the Company. On March 25, 1997, the Company filed a counterclaim for
misappropriation of trade secrets, conversion, and breach of fiduciary duty. On
June 25, 1997, the Company and the plaintiffs agreed to a settlement in which
the Company would pay cash and provide options to purchase shares of registered
Company common stock. Currently, the Company is unable to comply with the
requirement because the Company does not have a registration statement on file
with the SEC. The court has requested continual updates regarding the Company's
efforts to comply. The Company has recognized a liability of $698,000 related
to the settlement of this case. The liability is included in due to former
officers and shareholders in the accompanying balance sheet.
F-26
<PAGE>
In June 1996, a former Director and Officer filed a Complaint against the
Company, in which he requested the Court to declare that he could sell 220,000
shares of the Company's common stock standing in his name. The Company also
filed a complaint against the former officer and director in which it asserted
claims for breach of fiduciary duty, breach of a certain Employment Agreement,
accounting as to a certain Severance Agreement, declaratory relief, fraud, and
conspiracy to defraud. In the declaratory relief claim, the Company alleged
that former Director and Officer is required, pursuant to a certain Reverse
Stock Split Agreement, to return all of his issued and outstanding shares of the
Company so that new certificates equal to one-half the shares presently standing
in his name can be issued to him, the remaining shares to be retained by the
Company. In September 1997, the former Director and Officer filed a
counterclaim against the Company asserting claims for partial recission of the
Severance Agreement, breach of the Severance Agreement, recission of a certain
Lock-Up Agreement, or in the alternative, breach of the Lock-Up Agreement, and
tortuous interference with economic advantage. An unfavorable outcome against
the Company would not require the former officer and director to return his
shares under the Reverse Stock Split Agreement. Additionally, the Company would
be required to pay a maximum of $300,000 under the Severance Agreement among the
former officer and director, and an individual claiming existence of an
employment and/or consulting arrangement. Currently, the Company has accrued
$203,522 related to this matter as due to former officer on the accompanying
balance sheet.
In November 1997, the individual claiming the existence of an employment and/or
consulting agreement filed a complaint against the Company claiming recission
for breach of a Severance Agreement, or in the alternative, breach of Severance
Agreement. The settlement of this case would fall within the Severance
settlement in the above case.
On September 1, 1998, a settlement agreement for all outstanding claims and
obligations was reached between the Company and the former officer/director and
the individual claiming existence of an employment and/or consulting agreement.
Under the terms of the settlement agreement, 350,000 shares of the Company's
common stock, previously transferred by the former officer/director to the
individual claiming existence of an employment and/or consulting agreement can
remain with the individual. The former officer/director will then return his
remaining shares of the Company's common stock, which will be approximately
1,400,000 shares (after the aforementioned transfer), and the Company will
reissue him 350,000 shares of its common stock. The settlement also provides
that the individual claiming existence of an employment and/or consulting
agreement has the option to purchase the Company's former ED and UITI
technologies for $50,000.
On June 28, 1998, the Company and CBS Corporation agreed to a settlement for
amounts past due, owed to CBS by Skysite. Under the settlement, the Company was
required to pay CBS $430,000. The Company has made payment and CBS has released
all of its prior claims and security interests against the Company. The Company
has fully recognized this settlement in accounts payable and accrued liabilities
in the accompanying consolidated balance sheet.
F-27
<PAGE>
On July 27, 1998, a former employee and consultant of the Company filed a
complaint against the Company for breach of an employment contract related to
his employment termination. The plaintiff has requested unpaid wages and
severance totaling $100,000, the value of 100,000 stock options, which the
former employee believes he is entitled, punitive damages (to be proven at the
time of trial), and related interest. Management believes that the plaintiff
was terminated for just cause and fully compensated under his employment
agreement. Given the early stage of the case, it is not possible to determine
the likelihood of an unfavorable outcome on this matter. Therefore, the Company
has not included an accrual for any possible loss in the accompanying financial
statements.
On August 14, 1998, the Company received correspondence from the legal counsel
of Intelligent Decision Systems, Inc. (see Note 12), alleging breach of certain
terms of a Technology Licensing Agreement, between Intelligent Decisions Systems
and the Company. Intelligent Decision Systems is requesting return of the
consideration previously paid as the initial license fee, amounting to $968,750,
plus interest from February 1995. Management intends to vigorously defend the
case. Due to the recent delivery of the notice, the likelihood of an
unfavorable outcome cannot be determined at this time; therefore no accrual has
been included in the accompanying financial statements.
SUPPLIER AGREEMENT
Skysite is subject to a "take-or-pay" provision pursuant to an agreement with a
supplier of private network satellite products and services. Under this
agreement, Skysite has made payments totaling $418,593. Effective January 1,
1998, the Company executed a new agreement with the Company requiring it to make
future minimum purchases from the supplier as follows (assuming no cancellation
of the agreement under termination provisions described below).
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
- ------------ ----------
<S> <C>
1998 $ 252,000
1999 572,000
2000 892,000
2001 1,212,000
2002 1,532,000
2003 1,852,000
2004 2,172,000
2005 1,206,000
----------
Total $9,690,000
==========
</TABLE>
F-28
<PAGE>
Satisfaction of annual commitments are evaluated quarterly, beginning with a
minimum commitment of $33,000 in the first quarter of 1998 plus increases in
subsequent quarterly commitments of $20,000 each. Notwithstanding the above
provision, the Company may terminate its agreement with the supplier upon 90
days written notice, in which case the Company is required to pay a termination
fee equal to 30 percent of the remaining unpaid balance as of the date of
cancellation.
F-29
<PAGE>
10. STOCK OPTIONS:
The following table summarizes stock option activity under the Company's various
stock option arrangements.
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
OPTIONS PRICE PER AVERAGE
OUTSTANDING SHARE EXERCISE PRICE
----------- -------------- --------------
<S> <C> <C> <C>
Balance, December 31, 1994 1,002,400 $ 0.625 $ 0.625
Granted 1,165,200 0.625 0.625
Exercised - - -
Cancelled/Expired - - -
----------- -------------- ----------
Balance, December 31, 1995 2,167,600 0.625 0.625
Granted 1,145,000 0.625 0.625
Granted (immediately exercisable) 75,000 10.5625-11 10.71
Exercised (400,000) 0.625 0.625
Cancelled/Expired - - -
----------- -------------- ----------
Balance, December 31, 1996 2,987,600 0.625-11 0.878
Granted 2,860,000 0-0.88 0.15
Granted (immediately exercisable) 568,000 0.3125-2.6250 0.9146
Exercised - - -
Cancelled/Expired (400,000) - 0.625
----------- -------------- ----------
Balance, December 31, 1997 6,015,600 $ 0-11 $ 0.51
=========== ============== ==========
</TABLE>
F-30
<PAGE>
The following table summarizes the status of options outstanding as of December
31, 1997.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL NUMBER
EXERCISE PRICE NUMBER LIFE EXERCISABLE
--------------- --------- ----------- -----------
<S> <C> <C> <C>
$0.00 2,380,000 2.2 -
0.3125 264,000 4.1 264,000
0.500 120,000 4.3 120,000
0.625 2,562,600 4.4 2,562,600
0.8733 - 0.9688 240,000 4.6 120,000
01.000 - 2.625 374,000 3.3 374,000
10.563 - 11.0 75,000 3.3 75,000
--------------- --------- --- ---------
$0 - 11.0 6,015,600 3.4 3,515,600
=============== ========= === =========
</TABLE>
F-31
<PAGE>
In September 1995, the Company adopted a stock option plan that reserved a total
of 2,400,000 shares of authorized, but unissued shares of common stock (the
"1995 Plan"). Options under the 1995 Plan may be granted to employees and/or
parties who render services to the Company. The final date on which options
could be granted was September 30, 1996. All options will expire on June 30,
2001 if not previously exercised. During 1995, 725,200 options were granted to
employees and officers under the 1995 Plan at an exercise price of $0.625 per
share. No options under the 1995 Plan have been exercised.
In addition, during September 1995, 440,000 stock options were granted to
parties under various settlement agreements at an exercise price of $0.625 per
share. These options expire in September 2000. No options have been exercised.
In January 1996, the Company granted options to purchase 170,000 shares of
common stock to various individuals at an exercise price of $0.625 per share
under the 1995 Plan. All options expire October 1, 2000. No options have been
exercised.
In March 1996, the Company granted 400,000 options for services rendered in
connection with fund raising activities to an investment advisor. These options
were exercised in 1996.
In May 1996 and September 1996, the Company, pursuant to employment agreements,
granted options to purchase 575,000 shares of common stock at an exercise price
of $0.625 per share. These options were issued to three officers and an
employee of the Company. Options to purchase 100,000 shares of the common stock
were immediately vested with the balance of the options vesting over a two-year
period. These options expire at various dates through September 2001. At the
May 1997 Board meeting, the Company elected to cancel 350,000 of these options
that had not vested as of December 31, 1996. These employees were incorporated
into the new employee stock option plan effective January 1, 1997.
Effective May 6, 1996, the Company established a nonemployee directors' stock
option plan (the "Director Plan") whereby each person who is elected as a
director and constitutes an eligible participant shall be granted an option to
purchase 25,000 shares of common stock on the effective date of his/her becoming
an eligible participant. Each person who is subsequently re-elected to a second
and third term will be granted an option to purchase an additional 25,000 and
50,000 shares, respectively. The exercise price per share for all options
granted under the Director Plan will be equal to the market price of the common
stock as of the date of grant. The term of each option is for a period of five
years from the date of grant. During 1996, three directors were elected with
each receiving 25,000 options. Effective March 15, 1997, the Board of Directors
amended the plan, entitling each outside director to receive 40,000 options
quarterly which will vest on the following dates: March 15, 1997; June 15,
1997; September 15, 1997; December 15, 1997; and March 15, 1998. The exercise
price of each option will be the average bid price for the 90 days immediately
preceding the vesting. The difference between the exercise price and the fair
value of the stock as of the date of issuance represents deferred compensation
which the Company will
F-32
<PAGE>
recognize on the date the options vest. If a director should resign, options
will be awarded according to the above schedule through the closing date of the
quarter in which he/she submits the resignation. The Company reserved 300,000
shares of authorized, but unissued shares of common stock for this plan.
Effective March 14, 1997, the Board of Directors asked that the two employees of
the Company vacate their Employee Agreements and continue to work for the
Company under the new Employee Stock Option Plan. Under the new plan, any and
all employees' in previous agreements will have their options pro-rated through
December 31, 1996. All full-time employees of record on January 1, 1997, will
be covered by the new Employee Stock Option Plan. Every full-time employee on
record will be granted 25,000 options on the first trading day of each calendar
quarter. Each option is vested as it is granted and the exercise price of each
option will be $.3125. As a result of implementation of the new plan and the
change in the options to be given, the Company has canceled the unvested options
by reducing deferred compensation and additional paid-in capital, and valued the
new options based upon the current exercise price and market value.
During 1997, the Company granted 1,045,000 options to employees and nonemployee
directors. These options were issued under various arrangements with different
terms for the exercise price and vesting periods. No options have been
exercised.
On February 21, 1998, the Board adopted the 1998 stock option plan which went
into effect on January 1, 1998. The number of shares increased to 6,000,000.
Officers, other key employees, directors, and advisors of the Company who
contribute to the growth of the Company shall be eligible for the Plan. Both
the option term and price are to be determined at the date of grant.
The Company has elected to follow Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for its employee stock options. Under APB Opinion No. 25, because
the exercise price of the Company's employee stock options is generally equal to
the fair value of the underlying stock at the date of grant, no compensation
expense is recognized. In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," which established an alternative
method of expense recognition for stock-based compensation awards to employees
based on fair values. The Company elected not to adopt SFAS No. 123 for expense
recognition purposes.
Pro forma information regarding net income is required by SFAS No. 123 and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that statement. The weighted-average fair value
of options granted during the years ended December 31, 1995, 1996, and 1997, was
$0.63, $10.14, and $1.26, respectively. The fair value for options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
F-33
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Expected life (in years) 3 3 3
Risk-free interest rate 6.5% 6.5% 6.1%
Volatility factor 20.0% 20.0% 150%
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price characteristics, which
are significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
Had compensation cost for these plans been determined consistent with SFAS No.
123, the Company's net loss and loss per share would have been increased to the
following pro forma amounts:
<TABLE>
<CAPTION>
DECEMBER 31,
- -----------------------------------------------------------------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net loss available to common stockholders:
As reported $(2,588,053) $(8,056,918) $(7,104,867)
Pro forma (2,758,053) (8,236,918) (7,493,351)
Net loss per common share:
As reported $ (0.15) $ (0.37) $ (0.34)
Pro forma (0.16) (0.38) (0.36)
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
11. LICENSE FEE INCOME:
In January 1995, the Company entered into a license agreement with Digital
Sciences, Inc. to license its "ED" technology and services, and received an
initial license fee paid in the form of 250,000 shares of Digital Sciences, Inc.
common stock with a fair value of $629,688. The Company recognized this stock
receipt as income during 1995 as management believed that all of the
requirements of the Company under the agreement were completed during the year.
In addition, Digital Sciences, Inc. will pay a license fee based on a percentage
of gross revenue derived from the use of the ED technology and services. The
Company did not receive any such license fees in 1996 and 1997.
F-34
<PAGE>
As a result of various mergers and acquisitions, the Company's shares in Digital
Science, Inc. were converted to shares in Intelligent Decision Systems, Inc.
("IDSI"). In November 1996, the Company agreed to transfer all of its shares of
IDSI stock to a stockholder in exchange for the cancellation of a loan of
$500,000 made by such stockholder to the Company in October 1996. The Company
recognized a loss of $129,688 on this transfer.
12. LICENSE FEE EXPENSE:
In 1994, as part of an agreement with NTN Communications, Inc. (NTN), the
Company incurred and expensed a license fee of $250,000. Of this fee, $200,000
was paid in 1994. The remaining $50,000 has not been paid and is included in
accounts payable and accrued expenses in the accompanying consolidated balance
sheet. The initial term of the agreement expires December 13, 2001. Unless
terminated, the agreement will be extended for a period of seven years. The
Company has a nonexclusive worldwide license to promote, market and develop an
online computer service, which was to be provided by NTN, for use with the
Company's now abandoned product. The technology of the computer service
provides two-way interactive computerized games that are broadcast to multiple
locations, can be played by multiple participants at each location and allow the
retrieval and processing of data entered by the participants. The Company is
required to pay usage royalties as defined in the agreement. The Company has
not used the NTN online computer service and has not paid any royalties to NTN.
The Company has abandoned this product and does not intend to use the NTN
service in the future.
In January 1996, the Company finalized an agreement with a technology company,
for a nonexclusive, nontransferable license to its computer operating system
technology. The initial term of the agreement expires December 26, 1998.
Unless terminated, in accordance with the terms of the agreement, the agreement
is to be renewable for subsequent three-year periods at the licensee's option.
The Company is required to pay usage royalties as defined in the agreement. To
date no usage royalties have been paid by the Company. Under the terms of the
agreement, the Company is required to pay a minimum royalty of $900,000 to the
licensor or its successors. In January 1996, the Company paid an initial
royalty deposit of $450,000 to the licensor, and recognized this payment as
research and development expense. The Company also recorded an additional
liability in the amount of $450,000 for the unpaid portion of the minimum
royalty.
13. SIGNIFICANT CUSTOMERS/SUPPLIERS:
A significant portion of the Company's net revenues is derived from a limited
number of customers. From August 26, 1997, to December 31, 1997, approximately
11 percent of this Company's total net revenue was derived from the Royal
Bahamas Police Force.
In addition, the Company purchases its supplies from three suppliers --
Westinghouse Electric, AMSC, and Mitsubishi Electronics America.
F-35
<PAGE>
14. RELATED-PARTY TRANSACTIONS:
During 1995 and 1996, the Company made advances to stockholders of $57,908 and
$116,478, respectively. The 1995 amount, which was originally intended to be
recovered, was forgiven during the year in which it was advanced and accounted
for as compensation expense in 1995.
15. SUBSEQUENT EVENTS:
In April and August 1998, the Company made loans totaling $510,000 to a target
company in a potential acquisition. On May 6, 1998, the Company signed a letter
of intent to acquire the target company and certain other companies.
Subsequently, the Company and the target companies mutually rescinded their
letter of intent, and have agreed to renegotiate and restructure the proposed
acquisition.
On July 2, 1998, the Company settled two outstanding cases with two former
officers and directors. Under the terms of the settlement, the plaintiffs would
return to the Company outstanding common shares totaling 872,000 and the Company
will cancel 450,800 of options previously issued to the plaintiffs. The Company
would then release the restrictions associated with the remaining shares held by
the two parties. However, the two parties have agreed to specific terms (i.e.
timing) under which the shares can be sold and the options exercised.
Additionally, one of the plaintiffs has released the Company from any further
payments related to a note payable of $105,000 and accrued interest of $12,701
owed by the Company to the plaintiff as of December 31, 1997 (see Note 5).
F-36
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
DECLINATION/RESIGNATION OF BLACKMAN KALLICK BARTELSTEIN, LLP.
The Company's former independent public accountants, Blackman Kallick
Bartelstein, LLP ("BKB"), declined to stand for re-election as the Company's
auditors for the fiscal year ended December 31, 1997.
The declination/resignation of BKB was effected by letter dated September
24, 1997.
BKB's Report to the Company for the fiscal year ended December 31, 1996 was
qualified with respect to the Company's ability to continue as a going concern.
BKB's report stated that the Company's financial statements had been prepared
assuming that it would continue as a going concern; that the Company continues
to be a development stage enterprise and to date has not generated any revenues
from product sales or positive cash flows from operations; that the ultimate
success of the Company is dependent upon its ability to complete the development
of its products and technology and to successfully introduce its products to the
consumer marketplace; and that the Company must also be able to raise
significant additional capital in debt or equity markets for both the
introduction and development of products and also to sustain the day-to-day
operations of the company. BKB concluded that these factors raised substantial
doubt about the Company's ability to continue as a going concern.
The decision to change accountants was not recommended or approved by the
Company's Board of Directors or Audit Committee, although the Board understood
that since the Company had moved its operations to California, it was not
feasible to continue to have its books audited by a small, Chicago, Illinois
based accounting firm and therefore understood that BKB would probably
voluntarily resign or decline to stand for re-election as the Company's
auditors.
During the two most recent fiscal years, namely the fiscal years ended
December 31, 1996, and December 31, 1997, and the subsequent interim periods
preceding the decision of BKB to decline to stand for re-election as the
Company's auditors, there were no disagreements with BKB on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure.
ENGAGEMENT/RESIGNATION OF ARTHUR ANDERSEN
On April 1, 1998, the Company engaged Arthur Andersen LLP as the Company's
principal accountants to audit the Company's and its subsidiaries financial
statements for the fiscal year ended December 31, 1997. On September 30, 1998,
the Company's auditors, Arthur Andersen LLP, resigned as the Company's
independent accountants. The change in accountant is a result of Arthur Andersen
LLP's resignation and was not recommended or approved by the Company's Board of
Directors, nor was such approval required in order to give effect to the
resignation.
Arthur Andersen LLP was engaged to perform an audit of the Company's and
its subsidiary's 1997 consolidated financial statements and had issued an
unqualified report, dated September 1, 1998, on the consolidated financial
statements of the Company and its subsidiary as of and for the year ended
December 31, 1997. That report, however, was not released by the Company, and on
September 30, 1998, Arthur Andersen LLP withdrew the report. Arthur Andersen
LLP's resignation and withdrawal were not related to the financial statements.
Further, there were no disagreements between the Company and Arthur Andersen LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure or reportable events during such
periods or through the interim period ended September 30, 1998 (date of
resignation).
Arthur Andersen LLP has advised the Company that at the time of its
resignation, it was preparing to issue a management letter with comments and
suggestions for consideration related to the Company's internal controls. This
letter was to contain a reference to material weaknesses in the Company's
internal controls over financial reporting for the year ended December 31, 1997.
However, Arthur Andersen LLP had expanded the scope of its audit to take account
of the weaknesses in internal control so as to be able to issue an unqualified
report and its resignation and withdrawal of the report were unrelated to the
Company's financial reporting for the year ended December 31, 1997. Management
of the Company believes that it has begun to address the issues during 1998 with
the employment of qualified personnel in financial reporting positions.
On September 17, 1998, the Company became aware that persons affiliated
with WS Marketing and Financial Services, Inc., the placement agent used by the
Company during its Series B and C stock offerings in 1998, are currently under
Federal indictment concerning matters unrelated to the Placement Agent's
relationship with the Company. See "Risk Factors--Indictment of WS Marketing
and Financial Services, Inc."
ENGAGEMENT OF REZNICK FEDDER & SILVERMAN
The Company on October 15, 1998 engaged Reznick Fedder & Silverman P.C. to
perform an audit of its financial statements for the fiscal year ended December
31, 1997. Prior to October 15, 1998, the Company had not consulted Reznick
Fedder & Silverman P.C. regarding the application of accounting principles to a
specified transaction where a written report or oral advice was provided to the
Company that it considered an important factor in reaching a decision as to any
accounting auditing or financial reporting issue.
19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each of
the directors and executive officers of the Company as of October 6, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
----- --- --------
<S> <C> <C>
Robert Wussler .............. 61 Chairman of the Board, President and Chief
Executive Officer of the Company and Director of
Skysite
Edward Kopf ................. 51 Executive Vice President, Secretary and Treasurer
of the Company and Secretary of Skysite, Project
77 and Insat
Charles Maynard ............. 54 Chief Executive Officer of Skysite, Project 77
and Insat
Philip Kernan ............... 48 President and Chief Financial Officer of Skysite,
Project 77 and Insat
Lawrence Siegel ............. 49 Director of the Company and Skysite
Thomas Glenndahl ............ 51 Director of the Company and Skysite
Henrikas Iouchkiavitchious .. 63 Director of the Company and Skysite
A. Frans Heideman ........... 56 Director of the Company and Skysite
</TABLE>
ROBERT WUSSLER. Mr. Wussler has been Chairman of the Board since March
1997, a Director of the Company since May 1996 and President and Chief Executive
Officer of the Company since July 1998. Mr. Wussler has been a Director of
Skysite since August 1997. From June 1995 to May 1998, Mr. Wussler was the
President and Chief Executive Officer of Affiliate Enterprises, Inc., a
television syndication company. Since February 1992, Mr. Wussler has been the
President and Chief Executive Officer of the Wussler Group, a media consulting
group. From 1989 to 1992, he was the President and Chief Executive Officer of
COMSAT Video Enterprises, which was in the business of satellite delivery of
entertainment to the U.S. lodging industry. Mr. Wussler is the former President
of CBS Television, CBS Sports and the former Senior Executive Vice President of
Turner Broadcasting System, Inc. Mr. Wussler is a member of the Board of
Directors of the following public companies: EDnet, INC. (OTC - DNET);
Nostalgia Network, Inc. (OTC - NNET); The Translation Group, Ltd. (OTC - THEO);
and Beachport Entertainment Corporation (OTC -BPRT).
EDWARD KOPF. Mr. Kopf has been the Executive Vice President, Secretary and
Treasurer of the Company since July 1998. Prior to that, from January 1997 to
May 1998, Mr. Kopf was an independent consultant and from July 1991 to August
1996, he was the President and Chief Operating Officer of American Political
Network, an information company located in Alexandria, Virginia. Mr. Kopf was
Vice President of Circuit Cities Stores, Inc. from 1982 to 1990.
CHARLES MAYNARD. Mr. Maynard has been the Chief Executive Officer of
Skysite since July 1997. Prior to joining Skysite, Mr. Maynard was the
President and Chief Executive Officer of Cybernetics Services, Inc., a public
media and satellite network company engaged in the creation and delivery of
specialized programs and advertising to various markets. From 1995 to 1997, Mr.
Maynard was the President and Chief Executive Officer of Progressive World
Messaging, a company engaged in the marketing and delivery of wireless data text
messaging, voice messaging, extended cordless telephone service and interactive
video services. From 1992 to 1995, Mr. Maynard served on the Board of Directors
of Source Media Inc. and from 1992 to 1994, he was the managing director of
TeleDiffusion de France.
PHILIP KERNAN. Mr. Kernan has been the President and Chief Financial
Officer of Skysite since July 1997. Prior to joining Skysite, Mr. Kernan worked
as a management consultant at Cybernetic Services, Inc. From May 1993 to
January 1997, Mr. Kernan was a Vice President of David Werner International.
20
<PAGE>
LAWRENCE SIEGEL. Mr. Siegel has been a Director of the Company since
March 1997. Mr. Siegel has been a director of Skysite since August 1997. From
March 1997 to July 1998, Mr. Siegel was the President and Chief Executive
Officer of the Company, and had performed such duties since January 1997 upon
the resignation of William Buck. From January 1996 until January 1997, Mr.
Siegel was an independent consultant. From November 1994 until December 1995,
Mr. Siegel was the President of Yellow Pearl, Inc., a software company founded
by him in 1994. From 1992 to 1994, Mr. Siegel was the President of T-HQ, Inc., a
software company. From 1989 to 1992, he was the President of the Entertainment
Division of Atari Corporation.
THOMAS GLENNDAHL. Mr. Glenndahl was elected to the Board of Directors in
August 1996 and has been a director of Skysite since August 1997. He is the
founder and, since 1982, has been the Chief Executive Officer of the Aspect
Group, an international education group.
HENRIKAS IOUCHKIAVITCHIOUS. Mr. Iouchkiavitchious has been a Director of
the Company since February 1998. Since September 1990, Mr. Iouchkiavitchious has
been an assistant director-general of UNESCO, a division of the United Nations.
A. FRANS HEIDEMAN. Mr. Heideman has been a Director of the Company since
February 1998. Since 1993, Mr. Heideman has been the President of New Dominion
Capital Group, an investment banking firm. Mr. Heideman is a director of
Pyrocap International Corporation (OTC - PYOC), a manufacturer of specialty
products related to fire suppression and odor control and a director of Orion
Technologies, Inc., a Calgary-based Company that provides professional internet
services to businesses.
The Bylaws of the Company require that the Board of Directors be comprised
of not less than three nor more than nine members. There are currently five
members of the Board of Directors and one vacancy. The Company did not hold an
annual meeting of shareholders in 1997. The Company intends to hold its next
annual meeting of shareholders in late 1998 or early 1999.
As of March 1997, each non-employee Director received an option to purchase
up to 40,000 shares of Common Stock, every quarter, with the options vesting on
the 15th day of the month preceding the following quarter. The Company
discontinued the grant of such quarterly options following those grants made in
April 1998. The Company has granted 300,000 options pursuant to the terms of
the 1996 Non-Employee Directors' Stock Option Plan, as amended (the "1996 Stock
Option Plan") and 435,000 options pursuant to the terms of the 1998 Stock
Option, Deferred Stock and Restricted Stock Plan (the "1998 Stock Option
Plan"). None of the shares underlying any of the Company's stock option plans
have been registered with the Securities and Exchange Commission. Furthermore,
many of the option grants were not granted pursuant to a written plan. For the
potential consequences of such option grants, see "Risk Factors--Risks
Associated With Stock Option Grants." Non-employee members of the Board of
Directors are entitled to a retainer fee of $6,000 per year, payable monthly,
and $1,000 per meeting attended, as well as reasonable expenses incurred in
attending such meetings. No family relationships exist between any of the
Directors or executive officers of the Company or Skysite.
SECTION 16(A) COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers, directors and greater than ten
percent shareholders of a registered class of the Company's equity securities to
file reports of beneficial ownership and changes of beneficial ownership with
the Securities and Exchange Commission.
Based solely upon a review of Forms 3, 4 and 5 delivered to the Company by
its officers, directors and greater than 10% shareholders, it appears that the
following reports were not timely filed: Mr. Glenndahl (Form 3); Donald
Gilbreath (Form 3); Roger Remillard (Form 3); William Buck (Form 3); Hugh Jencks
(Form 3); Jerome Greenberg (Form 3); Mitchell Melamed (Form 3); Robert Reid
(Form 3); Mr. Wussler (Form 3); and Mr. Siegel (Form 3).
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to
compensation for fiscal years ended December 31, 1995, 1996 and 1997 paid to the
Company's Chief Executive Officers (the "Named Executive Officers"). No other
executive officers of the Company received compensation in excess of $100,000
during 1997.
21
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- --------------------
SECURITIES
OTHER ANNUAL UNDERLYING LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION OPTIONS/SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($) ($)
- -------------------------- ------- ------- ----- ------------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lawrence Siegel........... 1997(1) 250,288 ---- ----- ----- ----- -----
President and Chief
Executive Officer
William Buck.............. 1997(2) ----- ---- ----- ----- ----- -----
President and Chief
Executive Officer
1996 60,000 ---- ----- ----- ----- -----
1995 60,000 ---- ----- 384,000 ----- -----
</TABLE>
________________
(1) Upon the resignation of Mr. Buck, Mr. Siegel replaced him as interim
President and Chief Executive Officer of the Company in January 1997, and
in March 1997, Mr. Siegel was appointed to such positions until May 1998,
when Mr. Wussler succeeded him.
(2) Mr. Buck resigned from his positions as Chief Executive Officer and
President of the Company on January 8, 1997.
THE STOCK OPTION PLANS
The Company has adopted three stock option plans, two of which, the 1996
Stock Option Plan and the 1998 Stock Option Plan, were adopted to provide a
means of performance-based compensation in an effort to attract and retain
qualified personnel. The Company can grant no further options pursuant to the
terms of its third stock option plan.
1996 Stock Option Plan
Effective May 1996, the Board of Directors adopted the 1996 Stock Option
Plan. The 1996 Stock Option Plan provides for the grant of stock options to the
non-employee Directors of the Company. The terms of the 1996 Stock Option Plan
provide that the exercise price of any options granted shall be no less than the
fair market value of the Common Stock at the time of grant. The exercise period
for any options granted under the 1996 Stock Option Plan is five years.
The 1996 Stock Option Plan authorizes the grant of options to purchase
300,000 shares of Common Stock and as of October 6, 1998, 300,000 shares
underlying the options were available for issue upon the exercise of such
options. Subject to anti-dilution provisions for a stock split, stock dividend,
combination or exchange of shares, recapitalization or other change in the
capital structure of the Company, corporate separation or division of the
Company, sale by the Company of all or a substantial portion of its assets,
reorganization, rights offering, a partial or complete liquidation, or any other
similar corporate transaction, the Board of Directors may adjust the number of
shares available for grant under the 1996 Stock Option Plan, the number of
shares underlying outstanding options, the exercise price of outstanding options
and any other characteristics the Board of Directors deems necessary or
appropriate. In the event of a change in control, as defined in the 1996 Stock
Option Plan, any options not currently exercisable will become exercisable
immediately upon the occurrence of an event constituting a change in control.
Unless previously terminated by the Board of Directors, no options may be
granted under the 1996 Stock Option Plan after December 31, 2000.
22
<PAGE>
The exercise price of any option granted under the 1996 Stock Option Plan
is payable in full (i) in cash, (ii) by surrender of shares of the Company's
Common Stock already owned by the option holder having a market value equal to
the aggregate exercise price of all shares to be purchased, (iii) by the
delivery of cash or the extension of credit by a broker-dealer, (iv) by the
delivery of a note executed by the optionholder, (v) by requesting that the
Company withhold whole shares of Common Stock then issuable upon exercise of any
option, (vi) by certifying ownership of shares to the Board of Directors for
later delivery, or (vii) by any combination of the foregoing.
The Board of Directors may from time to time revise or amend the 1996 Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding Award without such participant's consent.
The Company has granted options to purchase 300,000 shares of Common Stock
at a per share exercise price ranging from approximately $0.50 to $10.87 per
share, vesting within three months from the date of grant under the 1996 Stock
Option Plan.
1998 Stock Option Plan
Effective January 1998, the Board of Directors adopted the 1998 Stock
Option, Deferred Stock and Restricted Stock Plan (the "1998 Stock Option Plan"),
which provides for the grant of qualified incentive stock options ("ISOs") that
meet the requirements of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), stock options not so qualified ("NQSOs"), deferred stock,
restricted stock, stock appreciation rights and limited stock appreciation
rights awards ("Awards"). The 1998 Stock Option Plan may be administered by a
committee of directors appointed by the Board of Directors or by the Board (the
"Administrator"). Subject to shareholder approval of the 1998 Stock Option
Plan, ISOs may be granted to the officers and key employees of the Company, any
of its subsidiaries or parent corporation. The exercise price for any option
granted under the 1998 Stock Option Plan may not be less than 100% (or 110% in
the case of ISOs granted to an employee who is deemed to own in excess of 10% of
the outstanding Common Stock) of the fair market value of the shares of Common
Stock at the time the option is granted.
The 1998 Stock Option Plan authorizes the grant of options to purchase, and
Awards of 6,000,000 shares of the Company's Common Stock, and as of October 6,
1998, 6,000,000 shares underlying the options were available for issue upon the
exercise of such options. The number of shares reserved for issuance under the
1998 Stock Option Plan is subject to anti-dilution provisions for stock splits,
stock dividends and similar events. If an option granted under the 1998 Stock
Option Plan expires or terminates, or an Award is forfeited, the shares subject
to any unexercised portion of such option or Award will again become available
for the issuance of further options or awards under the 1998 Stock Option Plan.
Under the 1998 Stock Option Plan, the Company may make loans available to
stock option plan holders, subject to the Administrator's approval, in
connection with the exercise of stock options granted under the 1998 Stock
Option Plan. If shares of Common Stock are pledged as collateral for such
indebtedness, such shares may be returned to the Company in satisfaction of such
indebtedness. If so returned, such shares shall again be available for issuance
in connection with future stock options and Awards under the 1998 Stock Option
Plan.
Unless the 1998 Stock Option Plan is previously terminated by the Board of
Directors, no options or Awards may be granted under the Stock Option Plan ten
years after the effective date of the 1998 Stock Option Plan.
Options granted under the 1998 Stock Option Plan will become exercisable
according to the terms of the grant made by the Administrator. Awards will be
subject to the terms and restrictions of the award made by the Administrator.
The Administrator has discretionary authority to select participants from among
eligible persons and to determine at the time an option or Award is granted and
in the case of options, whether it is intended to be an ISO or a NQSO, and when
and in what increments shares covered by the option may be purchased.
Under current law, ISOs may not be granted to any individual who is not
also an officer or employee of the Company, any subsidiary or parent
corporation.
The exercise price of any option granted under the 1998 Stock Option Plan
is payable in full (i) in cash, (ii) by surrender of shares of the Company's
Common Stock already owned by the option holder having a market value equal to
the aggregate exercise price of all shares to be purchased including, in the
case of the exercise of NQSOs, restricted stock subject to an Award under the
1998 Stock Option Plan, (iii) by cancellation of indebtedness owed by the
Company to the optionholder, (iv) by a full recourse promissory note executed by
the optionholder, (v) by requesting that the Company withhold whole shares of
Common Stock then issuable upon exercise of any option,
23
<PAGE>
(vi) by arrangement with a broker which is acceptable to the Administrator, or
(vii) by any combination of the foregoing. The terms of any promissory note may
be changed from time to time by the Board of Directors to comply with applicable
Internal Revenue Service or Commission regulations or other relevant
pronouncements.
The Board of Directors may from time to time revise or amend the 1998 Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding Award without such participant's consent or may, without shareholder
approval, increase the number of shares subject to the 1998 Stock Option Plan,
materially modify the class of participants eligible to receive options or
Awards under the 1998 Stock Option Plan, or extend the maximum option term under
the 1998 Stock Option Plan.
The Company has granted options to purchase 435,000 shares of Common Stock
at a per share exercise price ranging from $0.81 to $4.88, vesting from time to
time from the date of grant under the 1998 Stock Option Plan.
In 1995, the Company adopted a stock option plan which permitted the grant
of options to purchase up to 2,400,000 shares of the Company's common stock
pursuant to Rule 701 of the Securities Act (the "1995 Stock Option Plan"). Rule
701 exempts the sale of securities pursuant to the exercise of stock options for
those companies that are not required to make reports pursuant to Section 13 or
15(d) of the Exchange Act, if certain other conditions and restrictions are
satisfied. Because the Company is required to file reports pursuant to Section
13 of the Exchange Act, the Company can no longer grant options pursuant to this
Plan. The Company has granted options to purchase 1,910,200 shares pursuant to
the 1995 Stock Option Plan, of which, 520,000 shares have been issued and
1,390,200 are available for issue upon the exercise of such options. All grants
made pursuant to the 1995 Stock Option Plan were made at a per share exercise
price of approximately $0.63.
The following tables set forth option grants and exercises for the named
executive officers for the year ended December 31, 1997.
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1997
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES EXERCISE OR TERM
OPTIONS IN FISCAL BASE PRICE EXPIRATION ------------------------------
NAME GRANTED (#) YEAR ($/SH) DATE 5% ($) 10% ($)
---- ----------- -------- ---------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
William Buck ......... ---- ---- ---- ---- ---- ----
Lawrence Siegel(1) ... 40,000 5.52 1.1875 1/02/02 5,000 7,500
40,000 5.52 0.5000 4/1/02 43,000 46,000
40,000 5.52 0.8733 7/1/02 ----- -----
40,000 5.52 0.9688 10/1/02 3,248 5,248
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR ENDING OPTION VALUES
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT FISCAL THE-MONEY OPTIONS AT
YEAR-END (#) FISCAL YEAR-END ($)(1)
---------------------- -------------------------
SHARE ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
---- -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
William Buck(2) .... ----- ----- ----- -----
----------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Lawrence Siegel ... ----- ----- 160,000/0 257,600/0
</TABLE>
___________________
(1) The value of "in the money" options represents the difference between the
exercise price of such option and the $1.61 closing price of the Company's
Common Stock as quoted on the Nasdaq Bulletin Board on December 31, 1997.
(2) Pursuant to a settlement agreement with the Company, all outstanding
options granted to Mr. Buck were canceled on September 1, 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a Compensation Committee of the Board of
Directors. Decisions regarding the compensation of the Company's executive
officers are made by the Board. The only current or former officers or
employees of the Company that participated in decisions regarding the
compensation of the executive officers of the Company during the year ended
December 31, 1997 were Mr. Wussler, Mr. Siegel, Hugh Jencks, the Company's
former Secretary, Vice President and Chief Operating Officer and Jerome
Greenberg, the Company's former Chairman of the Board, Vice President and
Treasurer.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of October 6, 1998, except as set
forth in footnote 1 below, by (a) each director and the Named Executive Officers
of the Company, (b) each person known by the Company to beneficially own more
than five percent of the Common Stock and (c) all current executive officers and
directors as a group.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY PERCENT OF SHARES
NAME OF BENEFICIAL OWNER OWNED BENEFICIALLY OWNED (4)
------------------------ ------------ ----------------------
<S> <C> <C>
William Buck(1)........................... 350,000 2.3
Robert Wussler(2)(3)...................... 265,000 1.7
Thomas Glenndahl(2)(3).................... 265,000 1.7
Lawrence Siegel(2)(3)..................... 240,000 1.5
A. Frans Heideman(2)(3)................... 40,000 *
Henrikas Iouchkiavitchious(2)(3).......... 40,000 *
All directors and executive officers
as a group (8 persons)................. 1,078,000 6.5
</TABLE>
________________
* LESS THAN ONE PERCENT.
(1) To the best of the Company's knowledge, Mr. Buck can be reached at 11 Bis
du Dopropol, 75017 Paris, France. The 350,000 shares Mr. Buck is believed
to beneficially own is based upon a settlement agreement with the Company
dated September 1, 1998. Any subsequent acquisitions or dispositions by Mr.
Buck of the Company's Common Stock are unknown. Mr. Buck is no longer
affiliated with the Company.
(2) To the Company's knowledge, except as set forth in the footnotes to this
table and subject to applicable community property laws, each person named
in the table has or will have sole voting and investment power with respect
to the shares of Common Stock set forth opposite such person's name. Each
of such persons may be reached through the Company at 2 Wisconsin Circle,
Chevy Chase, Maryland 20815.
(3) For each of such persons, represents currently vested but unexercised
options to purchase Common Stock.
(4) The percentage of beneficial ownership is calculated using 15,526,800
shares of Common Stock which were outstanding on October 6, 1998.
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 the securities. In computing the number
of shares beneficially owned by a person and the percentage of ownership of
that person, shares of Common Stock subject to options held by that person
that are currently exercisable within 60 days of October 6, 1998 are deemed
outstanding. Such shares, however, are not deemed outstanding for purposes
of computing percentage ownership of any other person.
25
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
William Buck, the Company's former President and Chief Executive
Officer and Director resigned on January 8, 1997. The resignation related to
his position as an officer and Director of the Company and any of the Company's
wholly-owned subsidiaries. The Board of Directors approved a severance
agreement which included the former President and an individual claiming to have
incurred expenses on behalf of the Company as a consultant. The severance
agreement provided that the Company would reimburse the former President and the
alleged consultant for reasonable expenses associated with the Company's
business incurred by them up to an amount approximately equal to $300,000 upon
submission to the Company of valid documentation approved by the Company.
In June 1997, the Company filed a complaint against Mr. Buck in the
United States District Court for the Northern District of Illinois, Eastern
Division asserting claims for breach of fiduciary duty, breach of employment
agreement, accounting as to his severance agreement, fraud and conspiracy to
defraud. The Company is also requesting declaratory relief seeking the return
of Mr. Buck's certificates for the Company's Common Stock so that new
certificates equal to one-half of those surrendered would be reissued to Mr.
Buck in accordance with the terms of a reverse stock split agreement. In
September 1997, Mr. Buck filed a counterclaim against the Company alleging
breach of the severance agreement, breach of a lock-up agreement and tortious
interference with economic advantage. See "Business--Legal Proceedings" for a
more detailed description of the lawsuit.
On June 23, 1997, Mr. Buck filed a lawsuit in the United States
District Court for the Northern District of Illinois Eastern Division against
the Company praying for a declaratory judgment that certain shares of the
Company's Common Stock beneficially owned by Mr. Buck could be sold pursuant to
Rule 144 of the Securities Act. See "Business--Legal Proceedings" for a more
detailed description of the lawsuit.
On September 1, 1998, the Company entered into a Settlement Agreement
and Release with Mr. Buck resolving all disputes, claims and differences between
the parties. The Settlement Agreement and Release provided that Mr. Buck would
be entitled to retain 350,000 shares of the Company's Common Stock, which shares
could be sold by him in accordance with a tradeability schedule limiting the
number of shares that could be sold by him during any month for a period of two
years.
On June 20, 1997, Jerome Greenberg agreed to contribute to the
Company's treasury 5,902,200 shares of Common Stock that he beneficially owned
in exchange for $10 and an agreement by the Company to use 6% of the funds
raised from the sale of its Series A Preferred Stock to repay outstanding notes
payable owed to Mr. Greenberg. As a result of this contribution, Mr. Greenberg
retained 655,800 shares (plus options to purchase an aggregate of 100,000 shares
of Common Stock). The Company entered into a settlement agreement with Mr.
Greenberg on August 24, 1998 whereby the Company agreed to grant 200,000 shares
of Common Stock to Mr. Greenberg and to pay him an aggregate of $750,000 in
three equal installments on September 1, 1998 and January 5 and February 28,
1999 as payment in full for the Company's outstanding obligation.
In December 1997, Donald Gilbreath, a former Vice President of the
Company, filed a complaint in the United States District Court for the District
of Colorado alleging that the Company wrongfully interfered with the sale of
certain shares of the Company's Common Stock owned by Mr. Gilbreath and refused
to permit Mr. Gilbreath to exercise certain vested options to purchase the
Company's Common Stock. In July 1998, Mr. Gilbreath entered into a settlement
agreement which permitted him to keep one-half of his shares of the Company's
Common Stock with all restrictive legends removed. Mr. Gilbreath is subject to
a restrictive tradeability schedule as to the disposition of said shares. See
"Business--Legal Proceedings" for a more detailed description of the lawsuit.
In June 1997, Roger Remillard, a former Director of the Company, and
his wife filed a complaint in the United States District Court for the District
of Colorado alleging that the Company wrongfully refused to remove legends from
certain of the Remillards' shares of the Company's Common Stock, that the
Company refused to permit the Remillards to exercise certain vested stock
options, that the Company wrongfully interfered with a private contract of Mr.
Remillard with a third party and that the Company failed to pay certain sums to
Mr. Remillard under a demand promissory note. In July 1998, the Company and the
Remillards entered into a settlement agreement in which the Remillards were
allowed to retain a majority of their 1,192,000 shares of the Company's Common
Stock with all restrictive legends removed. The Remillards are subject to a
restrictive tradeability schedule as to the disposition of said shares.
Pursuant to the settlement agreement, the Remillards were permitted to retain
200,000 stock options, which must be exercised before January 1, 1999. See
"Business--Legal Proceedings" for a more detailed description of the lawsuit.
26
<PAGE>
In March 1997, the Board of Directors agreed to pay Robert Wussler a
consulting fee of $8,000 per month. This consulting fee arrangement was
discontinued when Mr. Wussler was appointed President and Chief Executive
Officer of the Company in July 1998.
27
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following financial statements are filed as part of this Form 10-K:
The following unaudited consolidated financial statements of the
Company and its subsidiaries:
. Unaudited Consolidated Balance Sheets at December 31, 1996 and
1997.
. Unaudited Consolidated Statements of Operations for the years
ended December 31, 1995, 1996 and 1997.
. Unaudited Consolidated Statements of Changes in Stockholders'
Equity (Deficit) for the years ended December 31, 1995, 1996 and
1997.
. Unaudited Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1996 and 1997.
. Notes to Unaudited consolidated Financial Statements.
All schedules have been omitted because they are either not
applicable, not required or the information required has been disclosed in
the financial statements and related notes or otherwise in the Form 10-K.
(b) Reports on Form 8-K
A Current Report on Form 8-K, dated October 13, 1997, was filed
reporting on Item 4, relating to a change in the Company's certifying
accountant.
A Current Report on Form 8-K/A, dated November 10, 1997, was filed
reporting on Item 4, relating to a change in the Company's certifying
accountant.
A Current Report on Form 8-K/A, dated December 3, 1997, was filed
reporting on Items 4 and 7, relating to a change in the Company's
certifying accountant and letter from certifying accountant.
A Current Report on Form 8-K/A, dated December 15, 1997, was filed
reporting on Items 4 and 7, relating to a change in the Company's
certifying accountants and letter from certifying accountant.
A Current Report on Form 8-K, dated October 7, 1998, was filed
reporting on Items 4 and 7, relating to a change in the Company's
certifying accountant.
(c) Exhibits
Exhibit No. Description
- -------------- -----------
2.1 Agreement and Plan of Reorganization, dated as of June 20,
1997, by and among the Registrant, Skysite and the shareholders
of Skysite, as amended *
3.1 Articles of Incorporation of the Company, as amended *
3.2 Bylaws of the Company(1)
4.1 Specimen Common Stock Certificate(1)
4.2 Specimen Series A Preferred Stock Certificate *
4.3 Specimen Series B Preferred Stock Certificate *
4.4 Specimen Series C Preferred Stock Certificate *
4.5 Certificate of Designations, Preferences and Privileges of
the Series A Preferred Stock of the Company(2)
28
<PAGE>
4.6 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional, and Other Special Rights and
the Qualifications, Limitations, Restrictions, and Other
Distinguishing Characteristics of Series B Preferred Stock of
the Company *
4.7 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional, and Other Special Rights and
the Qualifications, Limitations, Restrictions, and Other
Distinguishing Characteristics of Series C Preferred Stock of
the Company *
10.1 1996 Non-Employee Directors' Stock Option Plan *
10.2 1998 Stock Option, Deferred Stock and Restricted Stock Plan *
10.3 Lease, dated November 14, 1997 between the Company and Alliance
Business Centers, regarding 2 Wisconsin Avenue, Suite 700,
Chevy Chase, Maryland 20815 *
10.4 Lease, dated July 22, 1998, between Skysite and Soundstorm,
regarding 727 South Main Street, Burbank, California 91510 *
10.5 Placement Agent Agreement between the Company and Wincap, Ltd.,
dated December 6, 1996(1)
10.6 Supply Agreement between Skysite and American Mobile Satellite
Corporation, dated February 25, 1998 *
10.7 Distributor Agreement between Skysite and Westinghouse
Electronic Corporation, dated February 21, 1996 *
10.8 Agreement between Skysite and Mitsubishi Electronics America,
Inc., dated November 7, 1997 *
10.9 Service Provider Agreement between Skysite and Iridium North
America, dated December 1, 1997, as amended *
10.10 Agreement between Skysite and PTT Telecom BV,
dated September 15, 1997 *
10.11 Distribution Agreement between Skysite and CUE Paging
Corporation, dated January 26, 1998 *
10.12 Bulk Seller Agreement between Skysite and ARDIS Company, dated
February 23, 1998 *
21 Subsidiaries *
24 Power of attorney (included on signature page) *
27 Financial Data Schedule *
99.1 United States of America v. Alan Brady Bingham, et. al.,
Criminal No. H-97-262-SS, United States District Court,
Southern District of Texas, Houston Division. *
________________
(1) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Registration Statement on Form 10, as amended, File No. 0-
21225 and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Current Report on Form 8-K dated August 20, 1998 and
incorporated herein by reference.
* Previously filed with Form 10-K filed with the Securities and Exchange
Commission on October 7, 1998.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 20th day of
October, 1998.
U.S. DIGITAL COMMUNICATIONS, INC.
By: /s/ ROBERT WUSSLER
-----------------------------------------
Robert Wussler, Chairman, President and
Chief Executive Officer
Secretary and Treasurer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ------ -----
<S> <C> <C>
/s/ ROBERT WUSSLER Chairman of the Board and Directors, October 20, 1998
- ----------------------------------- President and Chief Executive Officer
Robert Wussler
* Executive Vice President, Secretary October 20, 1998
- ----------------------------------- and Treasurer; ( Principal Accounting
Edward Kopf and Financial Officer)
* Director October 20, 1998
- -----------------------------------
Lawrence Siegel
* Director October 20, 1998
- -----------------------------------
Thomas Glenndahl
* Director October 20, 1998
- -----------------------------------
A. Frans Heideman
* Director October 20, 1998
- -----------------------------------
Henrikas Iouchkiavitchious
*By: /s/ ROBERT WUSSLER
-------------------------------
Robert Wussler
Attorney-in-Fact
</TABLE>
30
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- -------------- -----------
2.1 Agreement and Plan of Reorganization, dated as of June 20,
1997, by and among the Registrant, Skysite and the shareholders
of Skysite, as amended *
3.1 Articles of Incorporation of the Company, as amended *
3.2 Bylaws of the Company(1)
4.1 Specimen Common Stock Certificate(1)
4.2 Specimen Series A Preferred Stock Certificate *
4.3 Specimen Series B Preferred Stock Certificate *
4.4 Specimen Series C Preferred Stock Certificate *
4.5 Certificate of Designations, Preferences and Privileges of
the Series A Preferred Stock of the Company(2)
4.6 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional, and Other Special Rights and
the Qualifications, Limitations, Restrictions, and Other
Distinguishing Characteristics of Series B Preferred Stock of
the Company *
4.7 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional, and Other Special Rights and
the Qualifications, Limitations, Restrictions, and Other
Distinguishing Characteristics of Series C Preferred Stock of
the Company *
10.1 1996 Non-Employee Directors' Stock Option Plan *
10.2 1998 Stock Option, Deferred Stock and Restricted Stock Plan *
10.3 Lease, dated November 14, 1997 between the Company and Alliance
Business Centers, regarding 2 Wisconsin Avenue, Suite 700,
Chevy Chase, Maryland 20815 *
10.4 Lease, dated July 22, 1998, between Skysite and Soundstorm,
regarding 727 South Main Street, Burbank, California 91510 *
10.5 Placement Agent Agreement between the Company and Wincap, Ltd.,
dated December 6, 1996(1)
10.6 Supply Agreement between Skysite and American Mobile Satellite
Corporation, dated February 25, 1998 *
10.7 Distributor Agreement between Skysite and Westinghouse
Electronic Corporation, dated February 21, 1996 *
10.8 Agreement between Skysite and Mitsubishi Electronics America,
Inc., dated November 7, 1997 *
10.9 Service Provider Agreement between Skysite and Iridium North
America, dated December 1, 1997, as amended *
10.10 Agreement between Skysite and PTT Telecom BV, dated September
15, 1997 *
10.11 Distribution Agreement between Skysite and CUE Paging
Corporation, dated January 26, 1998 *
10.12 Bulk Seller Agreement between Skysite and ARDIS
Company, dated February 23, 1998 *
31
<PAGE>
21 Subsidiaries *
24 Power of attorney (included on signature page) *
27 Financial Data Schedule *
99.1 United States of America v. Alan Brady Bingham, et. al.,
Criminal No. H-97-262-SS, United States District Court,
Southern District of Texas, Houston Division. *
________________
(1) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Registration Statement on Form 10, as amended, File No. 0-
21225 and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Current Report on Form 8-K dated August 20, 1998 and
incorporated herein by reference.
* Previously filed with Form 10-K filed with the Securities and Exchange
Commission on October 7, 1998.
32
