<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- -------------------------------------------------------------------------------
FORM 10--Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
COMMISSION FILE NUMBER 0-21225
U.S. DIGITAL COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 52-2124492
(STATE OF INCORPORATION) (I.R.S. EMPLOYER ID NO.)
2 Wisconsin Circle, Suite 700, Chevy Chase, Maryland 20815
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(301) 961-1540
(REGISTRANT'S PHONE NUMBER, INCLUDING AREA CODE)
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
REQUIRED 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
--------
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUERS CLASSES OF COMMON STOCK
WAS 15,589,800 SHARES OF COMMON STOCK, PAR VALUE $0.01, OUTSTANDING AS OF
SEPTEMBER 30, 1998
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
U.S. DIGITAL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,616,139 $ 545,790
Trade accounts receivable, net 115,746 209,073
Inventory 38,424 107,967
Note receivable 683,917 25,000
Prepaid expenses 105,880 17,436
---------------- -----------------
Total current assets 5,560,106 905,266
Investments 9,100 9,750
Property and equipment, net 139,561 122,500
Intangible assets, net 1,476,222 1,758,903
Other noncurrent assets 45,046 13,032
---------------- -----------------
Total assets $ 7,230,035 $ 2,809,451
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses 1,629,231 1,770,208
Deferred revenue 32,689 107,267
Dividends payable 453,006 135,931
Stockholder loans 1,010,150 962,385
Accrued interest on stockholder loans 5,001 144,252
Notes payable 913,443 313,290
Minimum royalty obligation 450,000 450,000
Due to former officers and stockholders 698,000 1,080,022
---------------- -----------------
Total current liabilities 5,191,520 4,963,355
Notes payable (net of current portion) 14,835 17,785
---------------- -----------------
Total liabilities 5,206,355 4,981,140
---------------- -----------------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock -- $0.01 par, 10,000,000 shares authorized; 3,889,832 and
2,882,232 issued and outstanding at September 30, 1998 and December 31, 1997 11,717,583 4,105,607
Common stock - $0.01 par, 50,000,000 shares authorized; 21,492,000 and
22,298,000 outstanding at September 30, 1998 and December 31, 1997 214,920 222,980
Additional paid-in capital 10,596,755 12,422,255
Common stock warrants 8,087,837 1,581,337
Accumulated other comprehensive loss (31,850) (31,200)
Treasury stock (5,902,200 shares of common stock, at cost) (10) (10)
Deferred compensation - (3,744)
Shares to be issued (including additional paid in capital) 1,222,700 1,222,700
Stockholders' receivable (200,000) (200,000)
Accumulated deficit (29,584,255) (21,491,614)
---------------- -----------------
Total stockholders' equity (deficit) 2,023,680 (2,171,689)
---------------- -----------------
Total liabilities and stockholders' equity (deficit) $ 7,230,035 $ 2,809,451
================ =================
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE>
U.S. DIGITAL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------- --------------------------------------
1998 1997 1998 1997
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Sales:
Equipment $ 107,326 95,702 $ 301,682 95,702
Services 160,226 46,983 492,027 46,983
----------------- ------------------ ----------------- -----------------
Total sales 267,552 142,685 793,709 142,685
Cost of goods sold 205,451 127,102 579,737 127,102
----------------- ------------------ ----------------- -----------------
Gross margin 62,101 15,583 213,972 15,583
----------------- ------------------ ----------------- -----------------
Operating expenses:
Sales and marketing 423,986 39,414 813,410 39,414
General and administrative 2,338,202 586,326 4,047,936 2,291,888
Stock option compensation - 426,462 353,575 1,134,022
----------------- ------------------ ----------------- -----------------
Total operating expenses 2,762,188 1,052,202 5,214,921 3,465,324
----------------- ------------------ ----------------- -----------------
Loss from operations (2,700,087) (1,036,619) (5,000,949) (3,449,741)
----------------- ------------------ ----------------- -----------------
Other income (expense):
Interest expense (30,927) (39,897) (128,905) (107,822)
Interest and other income 46,388 5,339 63,982 21,413
Income (loss) on repayment of debt - - 167,881 (85,700)
Loss on investments - - - (9,050)
----------------- ------------------ ----------------- -----------------
Total other income (expense), net 15,461 (34,558) 102,958 (181,159)
----------------- ------------------ ----------------- -----------------
Net loss (2,684,626) (1,071,177) (4,897,991) (3,630,900)
Dividends on preferred stock (1,688,535) (420,369) (3,194,650) (1,239,162)
----------------- ------------------ ----------------- -----------------
Net loss available to common stockholders $ (4,373,161) $ (1,491,546) $ (8,092,641) $ (4,870,062)
================= ================== ================= =================
Net loss per common share:
Basic $ (0.27) $ (0.07) $ (0.50) $ (0.22)
Diluted $ (0.27) $ (0.07) $ (0.50) $ (0.22)
Weighted average shares of common stock
outstanding 15,914,637 21,904,079 16,311,875 22,097,082
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE>
U.S. DIGITAL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock Preferred Stock
Series A Series B Series C
--------------------------- --------------------------- --------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 2,882,232 $ 4,105,607 - $ - - $ -
Issuance of stock in legal settlement - - - - - -
Cancelation of stock in legal settlement - - - - - -
Sale of stock for cash in option exercise - - - - - -
Conversion of Preferred Shares (455,000) (682,500) - - - -
Common stock warrants exercised - - - - - -
Sale of Series A Preferred Shares and
Warrants for cash 1,456,600 142,800 - - - -
Sale of Series B Preferred Shares
and Warrants for cash - - 3,000 955,000 - -
Sale of Series C Preferred Shares
and Warrants for cash - - - - 3,000 1,802,100
Put option related to Sale of Series B
Preferred Stock - - - 2,517,000 - -
Preferred dividends and beneficial
conversion feature - 2,877,577 - - - -
Deferred compensation related to grant
of stock options - - - - - -
Amortization of deferred compensation
Other comprehensive income - - - - - -
Stock issuance cost - - - - - -
Net Loss - - - - - -
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1998 3,883,832 $ 6,443,484 3,000 $ 3,472,000 3,000 1,802,100
============ ============ ============ ============ ============ ============
<CAPTION>
Common Stock
Par Value Additional
-----------------------------
Paid-In
Shares Amount Capital
------------- ------------- ----------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 22,298,000 $ 222,980 $ 12,422,255
Issuance of stock in legal settlement 350,000 3,500 962,500
Cancelation of stock in legal settlement (2,124,000) (21,240) 347,363
Sale of stock for cash in option exercise 270,000 2,700 119,175
Conversion of Preferred Shares 455,000 4,550 677,950
Common stock warrants exercised 193,000 1,930 860,570
Sale of Series A Preferred Shares and
Warrants for cash - - -
Sale of Series B Preferred Shares
and Warrants for cash - - -
Sale of Series C Preferred Shares
and Warrants for cash - - -
Put option related to Sale of Series B
Preferred Stock - - (2,517,000)
Preferred dividends and beneficial
conversion feature - - -
Deferred compensation related to grant
of stock options - - 349,831
Amortization of deferred compensation
Other comprehensive income - - -
Stock issuance cost 50,000 500 (2,625,889)
Net Loss - - -
------------- ------------- ----------------
BALANCE, SEPTEMBER 30, 1998 21,492,000 $ 214,920 $ 10,596,756
============= ============= ================
</TABLE>
<TABLE>
<CAPTION>
Acumulated
Common Other Shares
Stock Comprehensive Treasury Stock Deferred to be
--------------------------
Warrants Income (Less) Shares Cost Compensation Issued
--------- ------------- ----------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $ 1,581,337 $ (31,200) (5,902,200) $ (10) (3,744) 1,222,700
Issuance of stock in legal settlement - - - - - -
Cancelation of stock in legal settlement - - -
Sale of stock for cash in option exercise - - - - - -
Conversion of Preferred Shares - - -
Common stock warrants exercised (283,800) - - - - -
Sale of Series A Preferred Shares and
Warrants for cash 2,042,000 - - - - -
Sale of Series B Preferred Shares
and Warrants for cash 2,045,000 - - - - -
Sale of Series C Preferred Shares
and Warrants for cash 1,197,000 - - - - -
Put option related to Sale of Series B
Preferred Stock - - - - - -
Preferred dividends and beneficial
conversion feature - - - - - -
Deferred compensation related to grant
of stock options - - - - (349,831) -
Amortization of deferred compensation - - 353,575
Other comprehensive income - (650) - - - -
Stock issuance cost 1,504,999 - - - - -
Net Loss - - - - -
---------- ----------- ----------- --------- ---------- -----------
BALANCE, SEPTEMBER 30, 1998 $ 8,087,836 (31,850) (5,902,200) $ (10) $ - 1,222,700
========== =========== =========== ========= ========== ===========
<CAPTION>
Total
Stockholders' Accumulated Stockholders'
Receivable Deficit Deficit
------------- ----------- -------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $ (200,000) $ (21,491,614) $ (2,171,689)
Issuance of stock in legal settlement - - 966,000
Cancelation of stock in legal settlement - - 326,123
Sale of stock for cash in option exercise - - 121,875
Conversion of Preferred Shares - - -
Common stock warrants exercised - - 579,000
Sale of Series A Preferred Shares and
Warrants for cash - - 2,184,900
Sale of Series B Preferred Shares
and Warrants for cash - - 3,000,000
Sale of Series C Preferred Shares
and Warrants for cash - - 3,000,000
Put option related to Sale of Series B
Preferred Stock - - -
Preferred dividends and beneficial
conversion feature - (3,194,650) (317,073)
Deferred compensation related to grant
of stock options - - -
Amortization of deferred compensation - - 353,575
Other comprehensive income - - (650)
Stock issuance cost - - (1,120,390)
Net Loss - (4,897,991) (4,897,991)
----------- ------------ ------------
BALANCE, SEPTEMBER 30, 1998 $ (200,000) $ (29,584,255) $ 2,023,681
=========== ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE>
U.S. DIGITAL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,897,991) $ (3,630,900)
------------------ ------------------
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization 310,911 137,290
Stock option compensation 353,575 1,134,022
Loss on investment - 9,050
Loss on repayment of debt - 85,700
Loss on settlement of litigation/claims 509,043 -
Changes in assets and liabilities:
Decrease in trade accounts receivable, net 60,308 (30,175)
Decrease in other receivables 20,102 8,729
Decrease in inventory 69,543 (76,526)
Decrease (increase) in prepaid expenses (88,444) (25,435)
(Increase) Decrease in other noncurrent assets (32,014) (27,052)
(Decrease) increase in accounts payable and accrued expenses (140,977) (572,118)
Decrease in deferred revenue (74,578) (20,338)
Increase in accrued interest on stockholder loans 49,422 29,523
Increase in due to former officers and stockholder - 698,000
------------------ ------------------
Total adjustments 1,036,891 1,350,670
------------------ ------------------
Net cash used in operating activities (3,861,100) (2,280,230)
------------------ ------------------
Cash flows from investing activities:
Advances to non-affiliates (646,000) -
Purchase of investments - (125,000)
Advances to Skysite prior to acquisition - (198,481)
Capital expenditures (45,290) (63,396)
------------------ ------------------
Net cash used in investing activities (691,290) (386,877)
------------------ ------------------
Cash flows from financing activities:
Borrowings from stockholders 1,110,150 170,000
Principal payments under notes payable (2,797) (7,425)
Proceeds from issuance of preferred stock and warrants 8,184,901 3,047,749
Proceeds from issuance of common stock 700,875 6,250
Purchase of treasury stock - (10)
Payment of dividends on preferred stock - (113,985)
Payment of stock issuance costs (1,120,390) (346,503)
Repayment of stockholder borrowings (250,000) (50,000)
------------------ ------------------
Net cash provided by financing activities 8,622,739 2,706,076
------------------ ------------------
Net change in cash and cash equivalents 4,070,349 38,969
Cash and cash equivalents, beginning of period 545,790 8,654
------------------ ------------------
Cash and cash equivalents, end of period $ 4,616,139 $ 47,623
================== ==================
Supplemental disclosures of cash transactions:
Cash paid for interest $ 36,148 $ 27,641
================== ==================
Supplemental disclosures of non-cash transactions:
Common stock issues in satisfication of stockholder loan $ 966,000 $ -
================== ==================
Cancelation of stock and shareholder's loans and withdrawal $ 347,363 $ -
================== ==================
Common stock and warrants issued as consideration for placement fees $ 1,505,499 $ -
================== ==================
Unrealized income on investment $ 650 $ -
================== ==================
Beneficial conversion feature on preferred stock $ 2,877,576 $ 1,057,212
================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE>
US DIGITAL COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The condensed consolidated balance sheets of U.S. Digital Communications, Inc.
(the "Company") as of September 30, 1998 and December 31, 1997, and the related
condensed consolidated statements of operations for the three and nine month
periods ended September 30, 1998 and 1997, condensed consolidated statement of
cash flows for the nine month periods ended September 30, 1998 and 1997 and
condensed consolidated statement of changes in stockholders' equity (deficit)
for the nine month periods ended September 30, 1998 and 1997 presented in this
Form 10-Q are unaudited. In the opinion of management, all adjustments necessary
for a fair presentation of such financial statements have been included. Such
adjustments consist only of normal recurring items. Interim results are not
necessarily indicative of results for a full year. Certain amounts have been
reclassified to conform to the current year presentation.
Certain notes and other information have been condensed or omitted from these
interim financial statements.
(2) ACQUISITION
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 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 shares. The
shares and options for the other shareholders were placed in escrow by the
Company during October 1998.
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.
Since the Company had not issued the shares or options due to the other
shareholders as of September 30, 1998, the Company has recorded the value of the
consideration to be given as shares to be issued in stockholders' equity. As
these shares and options have now been placed in the escrow account, the Company
will recognize an increase to its common stock and additional paid in capital
accounts in its financial statements for the year ending December 31, 1998. 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 which is
being amortized straight-line over a period of five years.
<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, 1997 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>
Nine months Ended
September 30, 1997
------------------
<S> <C>
Proforma sales $ 886,204
Proforma net loss available to common stockholders $ (5,671,092)
Proforma net loss per share $ (0.20)
</TABLE>
(3) RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Standards No. 130, "Reporting Comprehensive Income." This Statement requires
that all items recognized under accounting standards as components of
comprehensive income (loss) be reported in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income (loss) as defined includes all changes in equity (net assets) during a
period from non-owner sources. For the nine months ended September 30, 1998 ,
comprehensive income consisted of unrealized losses on available for sale
securities totaling $650.
Effective January 1, 1998, the Company adopted Statement of Financial
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information." This Statement establishes standards for reporting financial
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
reports issued to shareholders. Disclosure in interim financial reports in the
initial year of adoption is not required. The Statement also establishes
standards for related disclosures about products and services, geographic areas
and major customers. Operating segments are defined as components of an
enterprise about which separate financial information is available and evaluated
regularly by chief operating decision makers in deciding how to allocate
resources and in assessing performance. Management is in the process of
evaluating the segment disclosures for purposes of reporting under this
Statement. The adoption of this Statement will have no impact on the results of
operations or financial condition.
<PAGE>
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 has identified in this report and in its report filed October 20, 1998
on Form 10-K/A for the fiscal year ending December 31, 1997 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 these cautionary factors.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
This report on Form 10-Q for the third quarter of fiscal year 1998 ("September
10-Q"), due on November 15, 1998, is being filed on or about December 7, 1998.
The Company filed a report on Form 10-K for the fiscal year ending December 31,
1997 ("1997 10-K"), due on March 30, 1998, on October 7, 1998 and subsequently
filed a report on Form 10-K/A for the fiscal year ending December 31, 1997
("1997 10-K/A") on October 20, 1998. Both the 1997 10-K and 1997 10-K/A
contained financial statements and accompanying notes that had not been audited
by an independent accountant. The Company filed a report on Form 10-Q for the
first quarter of fiscal year 1998 ("March 10-Q"), due May 15, 1998, on or about
November 19, 1998. The Company filed a report due on Form 10-Q for the second
quarter of fiscal year 1998 ("June 10-Q"), due on August 14, 1998, on or about
November 20, 1998. This filing should be read in conjunction with the more
extensive information provided in the Company's 10-K/A for fiscal year 1997
concerning that year and subsequent events in fiscal year 1998.
The delays and, in the case of the 1997 10-K and 1997 10-K/A, absence of the
required audit have been associated with substantial changes in the Company's
management and operations. In the Summer of 1997, the Company discontinued its
principal business activity - the development of the Universal Internet
Television Interface and Electronic Device technologies - and acquired Skysite
Communications Corporation, Inc. The Company filed a report on Form 10-K for
the year ended December 31, 1996 on May 15, 1997 that describes the discontinued
development program. The Company filed a report on Form 8-K on July 2, 1997
that reported these changes in its operations. In July 1998, the Company
created U.S Digital Satellite, Inc. ("Insat") to oversee its satellite
communications operations and transferred the common stock of Skysite to Insat
and incorporated Project 77 Corp. ("Project 77") as Insat's other wholly-owned
subsidiary. As a result, the Company's business presently consists primarily of
the operations of its wholly owned subsidiary that is engaged in the satellite
based telecommunications business. During the Spring of 1998, the Company
relocated its headquarters from Burbank, California to Chevy Chase, Maryland and
replaced its two principal officers in order to more effectively pursue its new
opportunities. Management believes that it is addressing the effect of these
changes on financial and other operations and intends to achieve compliance with
filing requirements under the Securities Exchange Act of 1934 (the "Exchange
Act") as soon as practically possible. However as of the date of this report,
the Company is not in compliance with the filing requirements of the Exchange
Act as discussed in the paragraph above.
The Company's independent accountant in fiscal year 1996, Blackman, Kallick
Bartelstein, LLP, declined to stand for reelection as the Company's auditors,
effecting its decision through a letter dated September 24, 1997. The Company
filed a report on Form 8-K on December 3, 1997 that discloses the declination.
Arthur Andersen LLP was engaged on June 1, 1998 to perform an audit of the
Company's consolidated balance sheet and related financial statements for the
fiscal year ended December 31, 1997. On September 30, 1998, Arthur Andersen LLP
resigned as the Company's auditors. The Company filed reports on Form 8-K on
June 5, 1998 and October 7, 1998 that announced these events. On October 15,
<PAGE>
1998, the Company engaged Reznick Fedder and Silverman P.C. to perform an audit
of the Company's consolidated balance sheet and related financial statements for
the fiscal year ended December 31, 1997 that is now in progress. The Company
filed a report on Form 8-K on October 20, 1998 that disclosed the engagement.
In August 1998, the Company and a shareholder agreed to a restructuring of the
Company's debt of approximately $1,028,457 to the shareholder. The parties
agreed that the Company would pay $750,000 in cash per a payment schedule and
issue 200,000 shares of the Company's common stock. An initial payment of
$250,000 was made in September 1998.
Also in August of 1998, the Company entered into a take or pay minute of use
commitment for three million minutes with Iridium North America ("INA"). The
minutes must be taken or paid within the fifteen months following the commercial
launch of the Iridium system.
Risk Factors
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. The
Company has discussed risk factors in its report filed on Form 10-K/A for fiscal
year 1997 on October 20, 1998.
Results Of Operations
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997.
The Company had $267,552 in revenue from sales of satellite equipment and
services in the third quarter of fiscal 1998 compared to $142,685 in revenue in
the third quarter of fiscal 1997. This increase of approximately $124,867 or
87.5% resulted largely from increased marketing efforts and expenditures and
greater availability of goods for Skysite Communications Corporation, Inc. in
the 1998 period. The Company's ability to maintain sales volume at current
levels or to increase them is dependent on the uninterrupted supply from its
major vendors of goods and services for resale. This supply could be adversely
affected by trade accounts payable of approximately $1.629 million at the end of
the third quarter of fiscal 1998.
Costs of goods sold was $205,451, 76.8% of total sales, in the third quarter
of fiscal 1998 compared to $127,102, 89.1% of total sales, in the third quarter
of fiscal 1997. The increase of approximately $78,349 was attributable to the
increase in sales. However this increase was moderated by improved gross
margins resulting from an increased proportion of sales derived from higher
margin sales of services.
Sales and marketing expense in the third quarter of fiscal 1998 was $423,986
compared to $39,414 in the third quarter of fiscal 1997. The costs in the
current year period reflect normal sales and marketing expenses incurred by
Skysite. Such expenditures were constrained in the 1997 period by a lack of
liquidity.
General and administrative expenses, including travel and entertainment
expenses, legal fees and consulting fees, as well as certain other expenses,
increased to $2,338,202 in the third quarter of fiscal
<PAGE>
1998, compared to $586,326 in the third quarter of fiscal 1997. This increase of
$1,751,876 was substantially due to increased legal and accounting fees largely
related to the resolution of several long standing matters and to the general
and administrative expenses associated with operating Skysite with a generally
higher level of activity than in the prior year period.
The Company did not grant any stock options during the third quarter of fiscal
1998.
Net loss for the third quarter of fiscal 1998 was $2,684,626 as compared to
$1,071,177 in the third quarter of fiscal 1997. Significant factors
contributing to the increase in the net loss by $1,613,449 were increases in
selling, marketing, and general and administrative expenses offset by a
reduction in stock option compensation.
Nine months Ended September 30, 1998 Compared to Nine months Ended September 30,
1997.
The Company had $793,709 in revenue from sales of satellite equipment and
services in the nine months ended September 30, 1998 compared to $142,685 in the
nine months ended September 30, 1997. The increase of $651,024 primarily
reflects the fact that the results include nine months of sales and expenses for
Skysite in 1998 and approximately one month for 1997. Skysite was not acquired
by the Company until August 24, 1997. The Company's ability to maintain sales
volume at current levels or to increase them is dependent on the uninterrupted
supply from its major vendors of goods and services for resale. This supply
could be adversely affected by trade accounts payable of approximately $1.629
million at the end of the September 30, 1998.
Costs of goods sold was $579,737 in the nine months ended September 30, 1998
compared to $127,102 in the nine months ended September 30, 1997. These costs
were associated with the sales generated by Skysite. The increase of $452,635
was primarily related to the greater period of operation for Skysite included in
the 1998 period. It also reflects an improved sales mix in 1998 weighted toward
higher gross margin service sales.
Sales and marketing expense in the nine months ended September 30, 1998 was
$813,410 compared to $39,414 in the nine months ended September 30, 1997. The
increase of $773,996 was primarily related to the greater period of operation
for Skysite included in the 1998 period versus the prior year period. It also
reflects intensfied marketing efforts due to increased resources in the 1998
period versus the prior year period.
General and administrative expenses, including travel and entertainment
expenses, legal fees and consulting fees, as well as certain other expenses,
increased to $4,047,936 in the nine months ended September 30, 1998, compared to
$2,291,888 in the nine months ended September 30, 1997. This increase of
$1,756,048 was primarily related to the greater period of operation for Skysite
included in the 1998 period versus the prior year period.
The Company granted stock options to various employees and other individuals
during the nine months ended September 30, 1998. In connection with the
granting of these options, the Company recorded a stock option compensation
expense in the amount of $353,575. 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.
Net loss for the nine months ended September 30, 1998 was $4,897,991 as
compared to $3,630,900 in the nine months ended September 30, 1997. Significant
factors contributing to the increase in the net loss by $1,267,091 were an
increase in general and administrative expense offset by a reduction in stock
compensation expense and the greater period of operation for Skysite included in
the 1998 period versus the prior year period.
Liquidity and Capital Resources
<PAGE>
During the the nine months ended September 30, 1998, cash and short-term
investments increased by approximately $4,070,349. The Company used
approximately $3,861,100 of cash in operations during the period ended September
30, 1998. This use of cash were more than offset by the sale of Series A
preferred stock for $2,184,900, Series B preferred stock for $3,000,000 and
Series C preferred stock for $3,000,000 during the nine months ended September
30, 1998. Cash stock issuance costs during the year were approximately
$1,120,390.
The Company's operations continue to use cash in excess of the amounts they
produce and are expected to do so at least for the remainder of this fiscal
year. Additional cash has been required from non-operating sources to support
operational requirements as well as any other cash required, such as for
possible acquisitions. The Company has sold additional preferred shares to meet
operational cash requirements and the proceeds of such sales have been
sufficient to allow it to meet its current liquidity requirements. The Company
expects to make additional offers of stock to support future operations and
acquisitions but there can be no assurance such offerings will be consummated or
that the proceeds thereof will be adequate to meet the Company's requirement.
Series A Preferred Stock: 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 Preferred
Stock"), $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 one share of the Company's Common Stock.
The first 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 a total of
$6,508,248 through the issuance of 4,338,832 total shares of Series A Preferred
Stock in the two offerings. Of this, $2,184,900 was raised through the issuance
of 1,456,600 shares during the first nine months of fiscal year 1998.
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 "Series A Preferred Stock Warrants"). The Series A
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 September 30, 1998, a
total of 2,169,416 Series A Preferred Stock Warrants had been issued.
Shareholders exercised 193,000 warrants through September 30, 1998. The Company
received aproximately $579,000 from these exercises less the related placement
fees of approximately $28,950.
The Company has allocated the equity raised in the Series A Preferred Stock
Offer 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.
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 "Series A Initial Conversion Date") and b)
25 percent of the shares at the end of each of the three consecutive 90-day
periods following the Series A Initial Conversion Date. The Company converted
455,000 shares of Series A Preferred Stock to an equal number of shares of
common stock through September 30, 1998 with all of the conversions occurring
in the third quarter of fiscal 1998.
<PAGE>
Six months after the date of issuance of the Series A preferred shares, the
Company has 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
Series A 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 Series A Preferred stock.
Dividends totaling $113,985 were paid in 1997. Additionally, the Company has
recognized dividends payable totaling $453,006 as of September 30, 1998.
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 $7,650,000) is being accreted to preferred stock over the
conversion rights period. Accretion of the beneficial conversion feature as of
September 30, 1998, totaled $4,257,577and is reflected as an increase in the
carrying value of the preferred stock and a dividend charge against retained
earnings.
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 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 Preferred Stock: 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 Preferred Stock"). The offer of Series B
Preferred Stock closed on May 28, 1998. The Company accepted subscriptions for
all 3,000 shares for $3,000,000, resulting in $2,670,000 net cash proceeds to
the Company. As of September 30, 1998, the Company had received payment of
$3,000,000 for 3,000 shares. 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
<PAGE>
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 in the offerring of the Series B
Preferred Stock 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 ("Series B Conversion Date") at the Series B 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 45th day after the effective date of registration at the
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 Series B Conversion Date for any conversion thirty
(30) days after the Series B Conversion Date and one-half percent (.5%) per
month or fraction of a month for any conversions thereafter ("Series B
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 Series B 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 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 valued the Series B Preferred Stock
Put provision at $2,517,000 which was recorded in full by September 30, 1998.
The value has been recorded as an increase in the carrying value of Preferred
stock and an off-setting charge to additional paid in capital.
<PAGE>
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.
Under the terms of the Placement Agent Agreement related to the issuance of
Series B Preferred Stock, 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. As of September 30, 1998, the Placement Agent had earned
$220,000 as well as common stock valued at approximately $133,333 and warrants
valued at approximately $543,333. 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 Preferred Stock: 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 ("Series C Preferred Stock"). When the offering ended on September 1,
1998, the Company had issued 3,000 shares for $3,000,000, resulting in
$2,670,000 net cash proceeds to the Company. 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 in the offer of the Series C
Preferred Stock between the preferred stock and the related warrants. Based on
the valuation of each on the date of issuance, the Company has as of September
30, 1998 fully 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 ("Series C Conversion Date") or one-hundred and twenty (120) days from the
closing of the Series C Preferred Stock Offering, 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 Offering. The Series C 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 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 Series C Conversion Date for any conversion
thirty (30) days after the Series C Conversion Date and one-half percent (.5%)
per month or fraction of a month for any conversions thereafter ("Series C
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 Series C Conversion Price then in effect.
<PAGE>
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
Series C 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.
Impact of the Year 2000 Issue
The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. Management is in the
process of identifying all significant applications that will require
modification and/or conversion to a new computer system to ensure Year 2000
Compliance. In addition, Management is in the process of evaluating new computer
systems. Maintenance or modification costs will be expensed as incurred. While
the costs associated with new computer systems will be capitalized and amortized
over the systems useful lives. Management is not currently aware of any costs
associated with required modifications and/or conversions to become Year 2000
compliant that will materially effect the Company's financial position or
results of operations in any given year.
Recent Accounting Pronouncements not yet Adopted
In April 1998, the AICPA issued Statement of Position No. 98-5, "Reporting on
the Costs of Start-up Activities" (SOP 98-5). SOP 98-5 must be adopted no later
than January 1, 1999, and requires that costs of start-up activities including
pre-operating, pre-opening and other organizational costs be expensed as
incurred. In addition, at the time of adoption the unamortized balance of any
previously deferred start-up costs must be expensed. Management does not expect
the adoption of SOP 98-5 to have a material effect on results of operations or
financial condition.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
William H. Buck v. Viscorp & Visual Information Services Corp. On or about
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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.
<PAGE>
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 and gave a release of a claim he
had against the Company in the amount of $203,522, which amount has been
credited to additional paid-in capital. Both transactions are reflected in the
financial statements in this report. 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.
Visual Information Service Corp. v. Interactive Video Publishing, Inc. On
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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 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. The Company 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
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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 which
has been reflected in the financial statements in this report. 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.
As a result of this settlement 372,000 shares of the Company's common stock have
been cancelled and $122,601 in loans to the Company have been forgiven and
credited to additional paid-in capital. Both transactions are reflected in the
financial statements in this report. 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. Mr. Remillard is a former director of the Company.
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
<PAGE>
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 "Notes to Condensed Consolidated
Financial Statements (Unaudited) - (2) Acquisition."
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 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 $19,038 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 $6,590. In January 1998, Skysite agreed to pay PR Newswire payments totaling
$5,044, 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
<PAGE>
contract resulting from the Company's alleged obligation to place certain
advertisements in Penwell Publications. Plaintiff seeks damages of $36,217.
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 6 - EXHIBITS AND REPORTS ON FORM 8-K
The Company filed Form 8-K on February 19, 1998 to announce that the Company
had decided in fiscal year 1997 to discontinue the development of the Universal
Internet Television Interface and Electronic Device technologies described under
the section entitled "Business" in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996. As a result, the Registrant's business
presently consists solely of the operation of its wholly owned subsidiary
Skysite Communications Corporation. The filing also reported that the Company
had not yet replaced its prior auditor.
The Company filed Form 8-K on June 5, 1998 to announce that it had engaged
Arthur Andersen LLP to perform an audit of its consolidated balance sheet for
the fiscal year ended December 31, 1997.
The Company filed Form 8-K on July 8, 1998 to announce that Jerome Greenberg
resigned from his position as a director of the Company.
The Company filed Form 8-K on August 20, 1998 to report developments in its
negotiations with EuroTelecomm Communications, Inc. on its possible acquisition
of that company, to disclose sales of Series A Preferred Stock, to disassociate
itself from unauthorized projections of its earnings and to make further
disclosure of its engagement of Arthur Andersen LLP to perform an audit of its
consolidated balance sheet for the fiscal year ended December 31, 1997.
The Company filed Form 8-K on October 7, 1998 to announce that Arthur Andersen
LLP had resigned as its auditor.
The Company filed a Form 8-K on October 20, 1998 to announce that it had
engaged Reznick Fedder and Silverman P.C. to perform an audit of the its
financial statements for the fiscal year ended December 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. Digital Communications, Inc.
Date: December 7, 1998 /s/ ROBERT J. WUSSLER
---------------- ---------------------
Robert J. Wussler
(President, Chief Executive Officer
and Director (Principal Executive
Officer))
Date: December 7, 1998 /s/ EDWARD J. KOPF
---------------- ------------------
Edward J. Kopf
(Executive Vice President and Chief
Operating Officer (Principal Financial and
Accounting Officer))
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.13 Service Provider Agreement Exhibit E: Additional terms and
conditions; Addendum Two Minutes Commitment Plan Addendum; and
Amendment to Addendum Two Satellite Minutes Commitment Plan
Addendum between Skysite/Project 77 and Iridium North America,
dated August 10, 1998.
<PAGE>
Exhibit 10.13
IRIDIUM SERVICE PROVIDER AGREEMENT
EXHIBIT E:
ADDITIONAL TERMS AND CONDITIONS
<PAGE>
Exhibit E
Additional Terms and Conditions
The following terms and conditions are made part of the Iridium Service
Provider Agreement between INA and SkySite Communications Corporation to which
----------------------------------
it is appended. When this Exhibit is signed by both parties, the terms hereof
shall supersede and control over any provisions of the Iridium Service Provider
Agreement that are inconsistent herewith.
A. Ethical Responsibilities of the Parties: INA and SkySite shall each
refrain from doing anything that would tend to discredit, dishonor,
reflect adversely upon, or in any manner injure the reputation of
the other or adversely affect the other, except that a party's
enforcement of its rights and performance of its duties and
obligation contained in this Agreement shall not be deemed a
violation of the provisions of this paragraph. Each party shall be
governed in all its dealings under this Agreement by the highest
standards of honesty, integrity and fair dealing. Each party shall
comply with all applicable federal, state and local laws ordinances
and regulations in performing its duties and obligations contained
in this Agreement.
B. Notwithstanding the provisions of Section 7, the initial term hereof
will continue for a period of three (3) years after execution of
this Agreement.
C. This Agreement may be cancelled by SkySite Communications
Corporation, without further obligation except for those obligations
which are outlined in Article 16.B1, either (a) without cause, by
providing written notice to INA, on or before February 1, 1998; or
(b) if the Commencement Date does not occur before November 23,
1998.
IRIDIUM U.S., L.P. SERVICE PROVIDER
Keith W. Bubb Philip A. Kernan, Jr.
- ------------------------------------- -------------------------
By: By:
/s/ Keith W. Bubb /s/ Philip A. Kernan, Jr.
- ------------------------------------- -------------------------
Signature: Signature:
Director, Gateway Business Operations President and CFO
- ------------------------------------- -------------------------
Title: Title:
<PAGE>
ADDENDUM TWO
SATELLITE MINUTES COMMITMENT PLAN ADDENDUM
This Satellite Minutes Commitment Plan (the "Plan") is dated as of
10 August, 1998 and is by and between Iridium U.S., L.P., d/b/a Iridium North
America ("INA") and Project 77, Inc. ("Service Provider").
RECITALS
Whereas INA and Service Provider have entered into a service provider
agreement, dated November, 1997 (the "Service Provider Agreement") to provide
Iridium satellite services and the parties now desire to modify the pricing
structure set forth therein;
Whereas, Service Provider desires to obtain favorable pricing rates
based upon outbound minutes of domestic and international Iridium homed
satellite use purchased and paid for by Service Provider ("Satellite Minutes")
specifically excluding any promotional or other free minutes of use and INA
desires to obtain a firm commitment from Service Provider for its Satellite
Outbound Minutes over a fifteenth month period; and
Whereas, INA and Service Provider desire to enter in to its Plan upon
the terms and conditions set forth herein.
AGREEMENT
Not, therefore, in consideration of the mutual agreements and
understandings herein contained, the parties hereto agree as follows:
1. COMMITMENT PLAN. INA is offering a volume pricing plan based upon
---------------
Service Provider's level of commitment. The purpose of this Plan is to
grant favorable pricing to Service Provider for cultivating additional
Satellite Minutes through increased sales and Iridium subscribers. In
addition, this Plan is designed to hold Service Provider accountable to
its commitment and discouraging Service Provider from making unrealistic
or impractical commitments, thereby gaining a market pricing advantage
relative to other service providers.
2. COMMITMENT. During the term of this Plan, Service Provider hereby agrees
----------
to commit to the (Initial One of the following):
_____ Entry Level Program and a minimum gross revenue of $500,000.00.
_____ Second Level Program and a minimum of 1,000,000 Satellite Minutes.
_PAK_ Third Level Program and a minimum of 3,000,000 Satellite Minutes.
Service Provider shall be entitled to the pricing and rebate structure and
obligated to the assessment set forth below associated with the program selected
above.
<PAGE>
Entry Level Program.
- -------------------
Pricing. Service Provider shall be charged the standard rates for
Satellite Minutes (the "Standard Rate") which are contained in Exhibit B to the
---------
Service Provider Agreement.
Commitment. Service Provider shall guaranty INA minimum gross revenue
from Satellite Minutes equal to $500,000.00 during the term of this Plan.
Assessment. If Service Provider fails to purchase at least $500,000.00
of Satellite Minutes, Service Provider shall pay to INA the difference between
the gross revenue received from Service Provider for Satellite Minutes and
$500,000.00 thirty days after the end of the term of this Plan.
Termination. If Service Provider fails to purchase at least
$500,000.00 of Satellite Minutes, INA shall have the option of terminating the
Service Provider Agreement, in its sole and absolute discretion.
Secondary Level Program.
- -----------------------
Pricing. Service Provider shall be charged the Standard Rate for
Satellite Minutes less a five percent (5%) discount. Once Service Provider
reaches the first place breakpoint by purchasing 2,000,000 Satellite Minutes
during the term of this Plan, INA shall increase the applicable discount off of
the Standard Rate to seven percent (7%) for Satellite Minutes purchased
thereafter. Once Service Provider reaches the second price breakpoint by
purchasing 3,000,000 Satellite Minutes during the term of this Plan, INA shall
increase the applicable discount off of the Standard Rate to ten percent (10%)
for Satellite Minutes purchased thereafter.
Commitment. Service Provider agrees to purchase a minimum of 1,000,000
Satellite Minutes during the term of this Plan.
Rebates. If Service Provider reaches the first price breakpoint by
purchasing 2,000,000 Satellite Minutes during the term of this Plan, INA shall
credit Service Provider with a rebate. The rebate shall be calculated by taking
two percent (2%) of Service Provider's Blended Rate (defined below) and
multiplying the product thereof by one million (1,000,000). If Service Provider
purchases 3,000,000 Satellite Minutes during the term of this Plan, INA shall
credit Service Provider with a second rebate. The second rebate shall be
calculated by taking three percent (3%) of Service Provider's Blended Rate and
multiplying the product thereof by one million (1,000,000).
Assessment. If Service Provider's Satellite Minutes are less than
1,000,000 at the end of term of this Plan, Service Provider shall pay INA an
assessment for each unused Satellite Minute within thirty days from the end of
this Plan. The assessment shall be equal to the difference between 1,000,000 and
Service Provider's Satellite Minutes multiplied by $1.00. For example, assume
a Service Provider's Satellite Minutes are 800,000 at the end of this Plan. In
this case the difference between the Service Provider's Satellite Minutes and
its commitment to is 200,000. Therefore, the Service Provider's assessment will
be equal to $200,000.00 ([1,000,000 - 800,000] * $1.00).
<PAGE>
Third Level Program
- -------------------
Pricing. Service Provider shall be charged the Standard Rates for
Satellite Minutes less a ten percent (10%) discount. Once Service Provider
reaches the first price breakpoint by purchasing 4,000,000 Satellite Minutes
during the term of this Plan, INA shall increase the applicable discount off of
the Standard Rate to twelve percent (12%) for Satellite Minutes purchased
thereafter. Once Service Provider reaches the second price breakpoint by
purchasing 5,000,000 Satellite Minutes during the term of this Plan, INA shall
increase the applicable discount off of the Standard Rate to fifteen (15%) for
Satellite Minutes purchased thereafter.
Commitment. Service Provider agrees to purchase a minimum of 3,000,000
Satellite Minutes during the term of this Plan.
Rebate. If Service Provider reaches the first price breakpoint by
purchasing 4,000,000 Satellite Minutes during the term of this Plan, INA shall
credit to Service Provider a rebate. The rebate shall be calculated by taking
two percent (2%) of Service Provider's Blended Rate (defined below) and
multiplying the product thereof by one million (1,000,000). If Service Provider
reaches the second price breakpoint by purchasing 5,000,000 Satellite Minutes
during the term of this Plan, INA shall credit to Service Provider a second
rebate. The second rebate shall be calculated by taking three percent (3%) of
Service Provider's Blended Rate and multiplying the product thereof by one
million (1,000,000).
Assessment. If Service Provider's Satellite Minutes are less than
3,000,000 at the end of the term of this Plan, Service Provider shall pay INA an
assessment for each unused Satellite Minute thirty days from the end of this
Plan. The assessment shall be equal to the difference between 3,000,000 and
Service Provider's Satellite Minutes multiplied by $1.00.
3. EVALUATION. INA shall evaluate Service Provider's performance six
----------
months from the Commencement Date and thereafter on a quarterly basis.
If, in INA's sole and absolute discretion, INA determines that Service
Provider will not be able to meet its commitment obligations contained
herein, INA reserves the right to reduce or eliminate the pricing
discount granted to Service Provider to recover the assessment described
above. INA's decision not to modify the discount applied shall not
effect Service Provider's commitment or the assessment due for failure
to meet its commitment.
4. REBATE CALCULATION. Service Provider's Blended Rate shall be equal to
------------------
the weighted average of the Standard Rate for Satellite Minutes during
the applicable period. The "applicable period" shall mean the period
between the billing cycle immediately following Service Provider's
Satellite Minutes exceeding the prior price breakpoint and the billing
cycle immediately following Service Provider's Satellite Minutes
exceeding the current price breakpoint. Service Provider shall, within
thirty (30) days of a written request therefor, reimburse INA for full
amount of any rebate credited hereunder which should not have been
credited to Service Provider as the result of any re-calculation, for
any reason, of the total amount of Service Provider's Satellite Minutes:
INA shall apply a rebate or reimbursement of a rebate to Service
Provider's invoice for the billing cycle following of the close of the
billing cycle in which the commitment is exceeded or the recalculation
is made.
5. TERM. This Plan shall be effective for fifteen (15) months from the
----
Commencement Date or December 31, 1999 whichever is later. If the
Service Provider Agreement is
<PAGE>
terminated prior to such date, this Plan shall terminate and Service
Provider shall pay to INA the assessment calculated above using Service
Provider's actual performance through the billing cycle
immediately following the termination date and a minimum forecast
analysis prepared by INA, in its sole and absolute discretion, for such
time period. The assessment shall be paid thirty (30) days after the end
of the billing cycle following the termination date.
6. REVISIONS. Upon thirty days written notice to Service Provider, INA
---------
reserves the right to revise the terms of this Plan in its sole and
absolute discretion depending on market conditions during the term of
this Plan. If there is a cumulative pricing increase of five percent
(5%) or more during any six month period, Service Provider shall have
the option to revise its commitment election; provided, however, Service
Provider shall not be entitled to revise its election if it could not
reasonably expect to meet its commitment had the pricing increase not
occurred.
7. AMENDMENT. Unless otherwise modified herein, the terms and conditions
---------
set forth in the Service Provider Agreement shall remain in full force
and effect. All capitalized terms not defined herein shall have the
meaning assigned in the Service Provider Agreement.
Dated effective as of the date first written above.
Iridium U.S., L.P. Project 77, Inc.
By: /s/ Jim Walz By: /s/ Philip A. Kernan, Jr.
---------------------- --------------------------
Jim Walz Philip A. Kernan, Jr.
Title: President Title: President
<PAGE>
AMENDMENT TO ADDENDUM TWO
SATELLITE MINUTES COMMITMENT PLAN ADDENDUM
The following terms and conditions are made a part of Addendum Two to
the Iridium Service Provider Agreement between INA and Service Provider, to
which is appended. When this Amendment is signed by both parties, the terms
hereof shall supersede and control over any provisions of Addendum Two that are
inconsistent herewith.
A. Section 3, EVALUATION, Section 3 is deleted in its entirety and replaced
----------
with the following:
"3. EVALUATION. INA shall evaluate Service Provider's performance six months
-------------
from the Commencement Date and thereafter on a quarterly basis. The initial six
month's performance review will be undertaken for all service providers as a
group, and if a substantial majority of service providers have been unable to
meet their program commitment levels, INA, at its sole and absolute discretion,
may make reasonable and non-discriminatory adjustments to the rates and
commitment levels applicable to service providers, including Service Provider. A
decision by INA not to modify the Program Level applied shall leave in effect
Service Provider's commitment and the assessment due to failure to meet its
commitment.
If during the initial six month's performance review, in INA's sole and absolute
discretion INA determines that a general adjustment of rates and commitment
levels is unnecessary but that Service Provider has not reached 300,000
Satellite Minutes, INA shall adjust Service Provider's commitment to a lower
level Program hereunder. INA shall have sole and absolute discretion as to which
lower level Program hereunder Service Provider's commitment will be adjusted. In
the case of such Program adjustment, Service Provider shall reimburse, as set
forth in Section 4 below, INA five percent (5%) of all Service Provider's actual
charges incurred under this Agreement as of the date of such Program adjustment
("Recapture of Discount")."
B. Section 4, REBATE CALCULATION. Section 4 is amended to add the following:
------------------
"The process provided herein shall apply to Rental Service Provider's payment of
the Recapture of Discount calculated pursuant to section 3."
<PAGE>
Unless otherwise modified herein, all other terms and conditions contained in
Addendum Two to the Iridium Service Provider Agreement shall have full force
and effect.
Dated August 18, 1998
---------------
Iridium U.S., L.P. Project 77, Inc.
By: /s/ Jim Walz By: /s/ Philip A. Kernan, Jr.
---------------------- --------------------------
Jim Walz Philip A. Kernan, Jr.
Title: President Title: President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AS OF SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO [COPY
TO COME]
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,616,139
<SECURITIES> 9,100
<RECEIVABLES> 119,346
<ALLOWANCES> 3,600
<INVENTORY> 38,424
<CURRENT-ASSETS> 5,560,106
<PP&E> 139,561
<DEPRECIATION> 310,911
<TOTAL-ASSETS> 7,230,035
<CURRENT-LIABILITIES> 5,191,520
<BONDS> 0
0
11,717,583
<COMMON> 214,920
<OTHER-SE> (9,908,823)
<TOTAL-LIABILITY-AND-EQUITY> 7,230,035
<SALES> 793,709
<TOTAL-REVENUES> 793,709
<CGS> 579,737
<TOTAL-COSTS> 5,214,921
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128,905
<INCOME-PRETAX> (4,897,991)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,897,991)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,897,991)
<EPS-PRIMARY> (0.50)
<EPS-DILUTED> (0.50)
</TABLE>
