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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-K
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, 1998
[_] 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 X No
------------------- -------------------
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 March 1, 1999 the aggregate market value of the voting and non-
voting common equity held by non-affiliates of the registrant was approximately
$35,389,340 based on the average of the bid and asked prices. As of March 1,
1999, the number of shares outstanding of the registrant's class of common stock
was 18,265,466.
DOCUMENTS INCORPORATED BY REFERENCE: None
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PART I
ITEM 1. BUSINESS
Unless the context otherwise requires, all references to the "Company" or
"we" herein refer to U.S. Digital Communications, Inc. ("U.S. Digital") and its
wholly-owned subsidiary, International Satellite Group, 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. During January 1999, Insat changed its name from U.S.
Digital Satellite, Inc.
BACKGROUND
U.S. Digital Communications, Inc. is a telecommunications company based in
Chevy Chase, Maryland. The Company is primarily a global satellite
communications firm that specializes in corporate applications. Specifically, we
are a provider of satellite telephone subscriber equipment and services.
Visual Information Services Corp., a predecessor to the Company, 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 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 our 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 us
with 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, we developed two products: the
Universal Internet Television Interface Device ("UITI") and the Electronic
Device ("ED")(together, the "Initial Products"). 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. We decided in 1997 not to
take any further steps to develop this technology or to market these products,
based on our determination that the market for these technologies would be
inadequate.
In May 1997, we 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). In June 1997, we entered into an Agreement and Plan of
Reorganization providing for the acquisition of 100% of the outstanding shares
of common stock of Skysite in exchange for securities and warrants of the
Company. The stock of Skysite was transferred to the Company on August 26,
1997. Subsequent to the acquisition, disputes arose relating to the sale. See
"Legal Proceedings."
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On October 24, 1997, the Company changed its name from Viscorp to U.S.
Digital Communications, Inc. In July 1998, we created Insat to oversee our
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 our corporate offices in Chevy Chase, Maryland, we have
operations in Burbank, California, and Washington, D.C. Through Insat, we market
satellite and wireless digital communications equipment and services. Skysite
operates as a marketer of satellite telephone products and services and Project
77 specializes in Iridium satellite personal communications technology. Through
our subsidiaries, we work 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 the early stages of
development 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. See "Risk Factors-- Dependence on Key Telephone Suppliers."
Domestically, we are exploring opportunities to acquire companies with
existing corporate and customer bases within our niche markets, which include
the media, government, oil exploration, transportation and disaster recovery.
We also seek to increase our global presence through the acquisition of suitable
companies located in other major markets outside of the United States. On April
8, 1998, we entered into a non-binding memorandum of understanding with
Eurotelecom Communications, Inc., a Delaware corporation ("Eurotelecom"), to
purchase all of the issued and outstanding shares of Eurotelecom in exchange
for approximately 1.7 million shares of the Company's common stock. As a part
of that agreement, we agreed to provide up to $1.0 million to Eurotelecom for
operating expenditures. Eurotelecom owns 100% of Eurotelecom Corporation
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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 our Board of Directors.
In May 1998 and in August 1998, we loaned $260,000 and $250,000, respectively,
for a total of $510,000, to Eurotelecom for operating expenses.
On August 4, 1998, we terminated the memorandum of understanding with
Eurotelecom due to a change in the proposed structure of the acquisitions. We
continued 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 stalled. In December
1998, we resumed discussions regarding an acquisition transaction with
Eurotelecom. We agreed to extend the term of our outstanding loans to
Eurotelecom during the negotiations. The negotiations are not now active and
Eurotelecom repaid $100,000 of its outstanding debt to the Company during
February 1999.
p. 4
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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," we are
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. You should carefully consider the risk
factors set forth below, as well as other information appearing in this or
other filings we make with the Commission, before purchasing any of our
securities.
Early Stages of Development
We are in the early stages of development. We have had only a limited operating
history and have sold only a limited quantity of our products to date. The
likelihood of our success 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 we
market and an increasing number of market competitors.
Since our entry into the satellite-based telecommunication industry in May
1997, we have been engaged primarily in:
raising funds; working with satellite telephone manufacturers on product
development;
working with satellite system providers on service and product development;
recruiting management and technical personnel; and
marketing and sales activities related to our products and services.
The establishment of a new business in the evolving satellite-based
telecommunications industry is very risky. It is likely that further risks will
be encountered as the industry shifts from the development to the
commercialization of new products and services based on innovative technology.
There can be no assurance that we will be able to generate revenues or achieve
profitable operations given these factors.
During parts of 1997 and 1998, the Company did not file certain periodic
reports as required by the rules and regulations promulgated by the Commission
and did not reply to comments from the Commission's staff regarding the filings
that it did make. Beginning with 1998, the Company commenced an effort to
become compliant with the Commission's periodic reporting and accounting
requirements. The Company believes that it is now in compliance with the
Commission's periodic reporting requirements.
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History of Operating Losses; Future Capital Needs
The Company is in the early stages of development and has incurred
significant operating losses in every fiscal period since inception. In August
1997, in connection with the acquisition of Skysite, we terminated our prior
production and development of our Initial Products and concentrated our efforts
on the development of a new business in the global satellite communications
market. Thus, we are subject to the risks inherent in the establishment and
growth of a new business enterprise. For the years ended December 31, 1998, and
December 31, 1997, the Company's net losses were $7,265,156 and $4,685,185,
respectively. The Company does not believe comparison with periods prior to 1997
is meaningful. The Company has incurred substantial quarterly operating losses
for the full fiscal year of 1998 and expects losses for at least the first two
quarters of 1999 and possibly longer.
In order to become profitable, the Company must successfully market and
sell satellite telephone products and services at volumes substantially above
current levels, sell evolving products for new and existing markets, increase
gross margins through higher sales volumes, expand its distribution capability
and manage its operating expenses. The Company has not yet achieved these
objectives to any significant degree. There can be no assurance that the
Company will ever achieve those objectives or profitability. At present, the
Company is dependent on external financing to fund its operations. The
Company's actual working capital needs will 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, the status of competitive products, the
availability of financing sources and the prevailing conditions in the financial
markets, none of which can be predicted with certainty. As a result, there is
no assurance that the Company will be able to obtain adequate financing. 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. For the years ended December 31, 1998, and December 31, 1997,
the Company raised $8,184,900 and $4,306,944 in proceeds (prior to stock
issuance costs)of preferred convertible 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.
Competition
The wireless communications industry is highly competitive and is
characterized by frequent technological innovation. The principle bases of
competition within the industry are price, products and services. The industry
includes major domestic and international companies, many of which have
financial, technical, marketing, sales, distribution and other resources
substantially greater than ours and which provide, or plan to provide, a wider
range of services. In response to competitive pressure from these and other
future competitors, we may have to lower our selling prices or alter our
services, which could have a material adverse effect on the financial position
of the Company. The Company's products and services compete with a number of
other communications services, including:
existing satellite services;
terrestrial air-to-ground services;
p. 6
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terrestrial land-mobile and fixed services, and
any new communications services developed in the future utilizing new
technologies.
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."
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, our success will be substantially dependent on a number of factors,
including our ability to identify emerging standards in the satellite telephone
markets, to differentiate the products we sell from those of our 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 products we sell
or technology and services we provide will not be rendered obsolete by
alternative technologies. Furthermore, short product life cycles expose our
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 Company is largely
dependent on products and satellite airtime provided by third parties. Our
future success will depend in large part on our ability, and the ability of our
product suppliers, to keep pace with advances in technologies for the satellite
telephone market. In order to compete we, in conjunction with our vendors, must
have the ability to, among other things:
complete development and introduce to the marketplace in a timely and cost-
competitive manner new products and technology;
continually enhance and improve our current products, services and
technology; and
successfully develop and market new products, services and technology.
There can be no assurance that we or our vendors will be able to identify,
market or support such products successfully or that we will be able to respond
effectively to technological changes or product announcements by competitors.
The Company is unable to predict with certainty which of the many possible
future products and services will meet evolving industry standards and consumer
demands. Delays in response by the Company or its vendors could have a material
adverse effect on our business, financial condition and results of operations.
Our products are subject to all of the risks inherent in the development of
new technology and products including the following risks:
unanticipated delays;
expenses;
technical problems or difficulties; and
possible insufficiency of funding to complete development.
p. 7
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There is no assurance as to when, or whether, we or our vendors can
successfully complete or implement such developments. Further, there is no
assurance that we or our vendors can develop products in commercially salable
form within projected development or implementation schedules. There is no
assurance that we or our vendors will be able to complete such development or
implementation in a timely manner, or at all.
Enforceability of Patents and Similar Rights; Possible Issuance of Patents to
Competitors; Trade Secrets
We believe that the products we market and sell do not infringe the patents
or other proprietary rights of third parties. Further, we are not aware of any
patents held by our competitors that will prevent, limit or otherwise interfere
with our ability to make and sell our products. However, it is possible that
competitors may have applied for, or may in the future apply for and obtain,
patents which have an adverse impact on our ability to make and sell our
products. In addition, because we are a relatively new company in the early
stages of development, claims that our products infringe on the proprietary
rights of others are more likely to be asserted after commencement of commercial
sales of our products. Defense and prosecution of patent suits, even if
successful, are both costly and time consuming. An adverse outcome in the
defense of a patent suit could subject us to significant liabilities to third
parties, require disputed rights to be licensed from third parties or require us
to cease selling our products.
We also rely on unpatented proprietary technology. There is no assurance
that others may not independently develop the same or similar technology or
otherwise obtain access to our unpatented technology.
Dependence of Key Satellite Airtime Providers
We are dependent on third-party providers for the satellite airtime we
resell to our customers. We are supplied satellite services, on a non-exclusive
basis, primarily pursuant to agreements with American Mobile Satellite
Corporation ("American Mobile") and Iridium North American, L.P. ("Iridium").
During 1998, American Mobile provided substantially all of the airtime that we
resold to our customers. Our plans for continuance and expansion of our business
during 1999 assume that American Mobile airtime will continue to be sold in
growing quantities and, particularly, that sales of Iridium airtime will rapidly
grow and substantially exceed those of American Mobile airtime. Because Iridium
began commercial service only in November, 1998 and its telephone satellite
system has experienced some technical problems in its early operations, our
reliance on that supplier exposes us to heightened risks related to new and
complex products and services. The loss of either provider or significant
shortcomings in the performance of its service would have a material adverse
affect on the Company. Iridium L.L.C. recently disclosed it had received a
60 day waiver of financial covenants from certain lenders and will request
modifications in those covenants. Because Iridium plays a central role in the
Company's sales strategies for 1999, the failure of Iridium's systems to
perform adequately or their unavailability for other reasons could have an
immediate and severe affect on the Company's performance and liquidity.
Dependence on Key Telephone Suppliers
We are a nonexclusive dealer for manufacturers of satellite telephones,
which include Westinghouse Electric Corporation ("Westinghouse"), Mitsubishi
Electronics America, Inc. ("Mitsubishi"), Kyocera Corporation ("Kyocera")and
(through Iridium) Motorola, Inc. ("Motorola"). For the year ended December 31,
1998, retail sales by the Company of Westinghouse products accounted for
approximately 23% of the Company's revenues and sales of Motorola products
accounted for approximately 12% of the Company's revenue. Since a material
amount of the Company's revenues are derived from selling air time, the use of
which requires products from these suppliers, the unavailability of these
products would have a material adverse effect on the Company's business and
prospects. The loss of any supplier could have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
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there can be no assurance that current suppliers or other providers will
continue to provide products to the Company at attractive prices, or at all, or
on the scale and within the time frames required by the Company. Further, there
can be no assurance that any of the Company's suppliers will not enter into
exclusive arrangements or arrangements on more favorable terms with the
Company's competitors (some of whom may transact substantially higher volumes of
business with such suppliers) 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.
Financial Commitments Under the Terms of Supplier Agreements.
The Company's subsidiary, Skysite, is subject to a "take-or-pay" provision
pursuant to an agreement with a supplier of private network satellite products
and services. The agreement requires Skysite to take (purchase and resell) or
pay (even when its payment exceeds the value of time resold) amounts totaling
approximately $9.4 million dollars during the period from 1999 to 2005.
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. Nothwithstanding these
commitments, Skysite may terminate its agreement with the supplier upon 90 days
written notice, in which case Skysite is required to pay a termination fee equal
to 30% of the remaining unpaid balance as of the date of cancellation.
In August 1998, the Company's subsidiary, Project 77, entered into a take
or pay minute of use commitment for three million minutes with Iridium North
America. The minutes must be taken or paid within fifteen months following the
commercial launch of the Iridium System. The impact on the consolidated
financial statements cannot be determined due to potential fluctuations in
future rates.
The failure of Skysite and Project 77 to resell sufficient time to meet
their commitments would require them to make potentially material payments to
the suppliers with no revenue stream to offset those payments. This could have a
significant adverse effect on the financial performance and condition of these
subsidiaries and of the Company.
Dependence on Key Customers
During the year ended December 31, 1998, the Company's net sales to its
three largest customers accounted for approximately 33% of total net sales. For
the year ended December 31, 1998, the Royal Bahamas Police Force represented
approximately 17% of the Company's net sales. Other than the foregoing, no one
customer accounted for 10% or more of net sales for the period. In addition,
the satellite telephone market experiences rapidly changing technology and
frequent new product introductions which may result in loss of customers or
uncollectibility of accounts receivables of any major customer.
In addition, as of December 31, 1998, Wolf Coach accounted for
approximately 11% of trade receivables outstanding. Other than the foregoing, no
one customer accounted for 10% or more of trade receivables at any time in 1998.
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
We are dependent upon our 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. Our 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, technical and sales and marketing personnel.
There can be no assurance that the Company can retain its existing key
managerial, technical 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. With the exception of its Chief Executive
Officer, 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 "--Directors and Executive Officers."
No Dividends
We have not paid any cash dividends on our Common Stock to date. Payment
of dividends on our Common Stock is within the discretion of the Board of
Directors and will depend upon our earnings, our capital requirements and
financial condition, and other relevant factors. We do not intend to declare
any dividends on our Common Stock in the foreseeable future. Instead, we plan
to retain any earnings we receive for development of our business operations.
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Limitation on Liability of Directors and Officers
Our Certificate of Incorporation provides that:
we will indemnify any of our directors, officers, employees or agents
against actions, suits or proceedings relating to our company; and
subject to certain limitations, a director shall not be personally liable
for monetary damages for breach of his fiduciary duty.
In addition, we have entered into an indemnification agreement with each of
our directors. Such indemnification agreement provides that a director is
entitled to indemnification to the fullest extent permitted by law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing and the provisions of Sections 78.502(1)and 78.502(2)
of the General Corporation Law of the State of Nevada, or otherwise, the Company
has been advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted against the Company by
such director, officer or controlling person, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
Management of Growth
We must grow significantly in order to achieve profitability. Such growth
may result in a significant strain on management, operational and financial
resources. Our ability to manage the Company's growth effectively may require
us 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" and "Business--Employees."
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."
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Illiquidity of Trading Market; Risk of Penny Stock Status
Our 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. We are 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, we 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 December 31, 1998, there were 1,077,000 shares of Common Stock
issuable upon the exercise of options under the Company's 1996 Non-Employee
Directors' Stock Option Plan and the 1998 Stock Option, Deferred Stock and
Restricted Stock Plan. In addition, as of December 31, 1998, there were 685,200
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 December 31, 1998, there were 4,187,000 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."
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In addition, as of December 31, 1998, the Company has issued and
outstanding 3,701,332 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 an additional 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, as of December 31, 1998, 2,169,416, and
500,000 and 495,000 warrants, respectively, convertible into an aggregate of
3,164,216 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 stock, 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 in certain circumstances. 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
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expense or other charge for such issuances in its financial statements, which
may adversely affect the Company's operating results for the period in which
such stock is issued.
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 Common Stock, would likely have a significant depressant effect of the
per share market price of the Company's Common Stock. As of December 31, 1998,
over 120 days had passed since the closing of the Series C Preferred Stock
offering and the Company had not filed a registration statement with the
Securities and Exchange Commission as provided for in the Series C Registration
Agreement. As a result the holders of its Series C Preferred Stock were entitled
to certain adjustments that will increase the number of common shares to which
they are entitled upon conversion of their preferred shares - 50% of which were
eligible for conversion as of the end of December 1998.
Impact of the Year 2000 Issue
The Year 2000 issue results from a programming convention in which computer
programs use two digits rather than four to define the applicable year.
Software, hardware or firmware may recognize a date using "00" as the year 1900,
rather than the year 2000. Such an inability of computer programs to recognize a
year that begins with "20" could result in system failures, miscalculations or
errors causing disruptions of operations or other business problems, including,
among others, a temporary inability to process transactions, send invoices or
engage in similar normal business activities. We have established a Year 2000
Program (the "Y2K Program") to address the Year 2000 issue with respect to the
following:
our information technology and operating systems;
our non-information technology systems (such as buildings, plant, equipment
and other infrastructure systems that may contain embedded microcontroller
technology);
certain systems of our major vendors and material service providers
(insofar as they relate to the Company's business activities with such
parties); and
our material clients (insofar as the Year 2000 issue relates to the
Company's ability to provide services to such clients).
The Y2K Program is divided into five major phases: Awareness; Inventory and
Risk Assessment; Repair and Renovation; Verification and Validation; and
Implementation and Monitoring.
The Awareness Phase is intended to ensure the establishment of the program
and the awareness of potential risks and Year 2000 issues. This phase, which
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involves communicating the status and progress of the program within the Company
and to third parties, is an on-going activity and will continue as we proceed
through the other phases.
The Inventory and Risk Assessment Phase involves the performance of an
initial inventory of all hardware, software and infrastructure, as well as
material vendors, to identify potential Year 2000 issues and to determine the
action required, if any, to mitigate the risk to the Company. We are in the
process of contacting its third party service providers to determine the Year
2000 status of their systems, as well as their plans to bring them into
compliance. Material items are those believed by us to have a significant impact
on the business from a customer service, financial or legal perspective. Our
internal Y2K team is performing this phase. We anticipate that this phase will
be substantially complete by the end of the second quarter in 1999.
The Repair, Replacement and Renovation Phase is intended to ensure that the
appropriate items as identified in the final inventory and risk assessment are
upgraded to meet Year 2000 compliance criteria. This may include software
updates, hardware upgrades, development of new processes, new business
practices, training programs, etc. While completion of the various elements of
this phase is tied to corresponding elements within the assessment phase, we
anticipate that material repairs, replacements and renovations will be
substantially complete by mid-1999 for systems under the direct control of the
Company. No current assessment of the completion dates for material repairs,
replacements and renovations not under our direct control, and for which third
parties such as service providers are responsible, will be available until
completion of that portion of the Inventory and Risk Assessment phase.
The Verification and Validation Phase ensures that critical business
processes, systems and infrastructure are verified and tested to ensure Year
2000 issues will not cause major disruption in the ongoing operation of our
business. Verification and testing of those systems under our direct control
will be performed by our internal Y2K team with the support of its technicians
and certain of the principal suppliers of those systems. This phase is ongoing,
but we expect all testing of those systems under our direct control to be
substantially complete in the third quarter of 1999.
Finally, during the Implementation and Monitoring Phase, the Year 2000
upgrades will be installed into our operating systems, as necessary. In
addition, the monitoring activity will be employed in an effort to ensure that
unforeseen Year 2000 critical items are appropriately prioritized for
correction. While the implementation component of this phase is scheduled to be
complete by the end of the third quarter in 1999, our monitoring activities will
be on going.
State of Readiness
Our progress towards completing risk assessment within the Company is on
schedule to be completed in the first quarter 1999, however there is general
uncertainty involved in the attempt to evaluate the Year 2000 problem because of
the uncertainty of the readiness of third party suppliers and vendors. Although
the remediation, testing and implementation phases have not yet commenced, we
anticipate that these phases will proceed along the schedule as contemplated by
its Y2K Program.
Costs
We will utilize both internal and external resources to reprogram, or
replace, and test software for Year 2000 modifications. Total cost associated
with required modifications to become Year 2000 compliant is not expected to be
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material to our consolidated results of operations and financial position in any
given year.
Risks
In a reasonably likely worst case scenario, the failure to correct a
material Year 2000 problem could result in an interruption in, or a failure of,
certain normal business activities or operations, including operations that are
essential to the provision of our services. Such failures could materially and
adversely affect our results of operations, liquidity and financial condition.
Due to the general uncertainty inherent in the Year 2000 problem, resulting in
major part from the present state of our knowledge concerning the Year 2000
readiness of third-parties such as our service providers, we are unable to
determine at this time whether the consequences of Year 2000 failures will have
a material impact on our results of operations, liquidity or financial
condition. The Y2K Program is expected to significantly reduce our level of
uncertainty about the Year 2000 problem and, in particular, about the Year 2000
compliance and readiness of our material partners. We believe that, with the
completion of the Y2K Program as scheduled, the potential of significant
interruptions of normal operations should be reduced.
Contingency Plans
After reviewing information gathered in the Inventory and Risk Assessment
Phase, and to prepare for the possibility that certain information systems or
third party partners and vendors will not be Year 2000 compliant, we intend to
develop contingency plans, as appropriate. These plans may include the
establishment of teams to monitor and correct disruptions, utilization of back-
up processes including data back up and storage, and the development of manual
"work-around" solutions.
Risks Associated With Stock Option Grants
We have adopted three stock option plans under which options were granted
to employees to purchase an aggregate of 1,972,000 shares of the Company's
Common Stock. See "Executive Compensation--Stock Option Plans." In addition, we
granted additional options to purchase 4,728,400 shares of Common Stock outside
of any stock option plan (exclusive of the options issued to the Series A
Preferred Stock Placement Agent). 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 1,904,000 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.
Possible Health Risks
Recently, lawsuits have been filed alleging a link between the non-thermal
electromagnetic field emitted by cellular telephones and two-way radios and the
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<PAGE>
development of cancer. To date, there have been relatively few medical studies
relating to the effects of non-thermal electromagnetic fields on health, and
there are not any widely accepted theories regarding how exposure to a non-
thermal electromagnetic field could threaten health. Future medical studies may
produce findings that could have a material adverse effect upon the wireless
communications industry and the Company.
Government Regulation
From time to time, the FCC amends its regulations governing the licensing
or sale of the communication equipment distributed by the Company, the
frequencies that such equipment uses, and the requirements for operating such
equipment. The FCC has from time to time submitted proposals relating to
licensing, use and regulation of frequency bands that could affect operation on
certain of the frequency bands where equipment marketed by the Company operates.
It is uncertain what impact, if any, these or future proposals may have on the
Company's operations.
General
You should not consider past financial performance as an indicator of
future performance. You should not use historical trends to anticipate future
results. You should be aware that the trading price of our Common Stock may be
subject to wide fluctuations in response to quarter-to-quarter variations in
operating results, general conditions in the telecommunications industries,
changes in earnings estimates, recommendations by analysts and other events.
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<PAGE>
BUSINESS DESCRIPTION
Industry Background
The Company operates in the global personal voice, paging and data satellite
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. We also develop integrated communication
solutions for customers within the target market segments that utilize
proprietary technologies as well as those provided by our suppliers. Each market
group 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 and Motorola and Kyocera satellite telephones.
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)
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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.
The Company also offers, on a non-exclusive basis, Iridium services
throughout the world pursuant to its agreement for a term of three years with
Iridium North America, L.P. The Iridium system is a satellite-based, digital
communications system that is designed to provide subscribers with worldwide
voice, paging, data and fax capability using a hand-held telephone and pager
linked to a constellation of low-earth orbiting satellites. With 66 satellites
forming a cross-linked grid above the Earth, the Iridium system is the first
low-Earth-orbiting system for wireless telephone service. At 780 km (485 miles)
high, these satellites work differently from those at a much higher orbit
(36,000 km) in two major ways. First, they are close enough to receive the
signals of a handheld device; and second, they act like cellular towers in the
sky - where wireless signals can move overhead instead of through ground-based
calls.
The Iridium phone is the primary means by which callers communicate
directly through the Iridium network. Its multi-mode capability allows the
telephone to work as a typical cellular telephone (in areas where compatible
cellular service exists) and as a satellite telephone. For Iridium subscribers,
this means one handheld phone providing both cellular and satellite access.
Iridium now offers, or plans to offer the following services:
Iridium World Satellite Service provides a direct satellite link for both
incoming and outgoing communications in remote areas, poorly covered
regions, and locations outside terrestrial networks.
Iridium World Roaming Service allows roaming across multiple wireless
protocols, allowing one telephone number to receive and one telephone bill
to charge for calls made anywhere on earth.
The Iridium World Page Service will provide global alphanumeric messaging.
Commercial service on the Iridium system was initiated in the fourth
quarter of 1998.
When the Company began selling and shipping Iridium services and equipment
in December 1998, there were initial technical issues that dampened demand for
these products. It is our belief that these issues have been substantially
addressed by Iridium but are still not completely resolved. Unless or until they
are fully resolved, they could continue to depress demand. See "Risk Factors--
Dependence on Key Telephone Suppliers."
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 leading cause of fraud among cellular
roaming customers.
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
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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) also offers Inmarsat
and other satellite services provided by Station 12, which services are marketed
under the brand name of "Altus."
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.
A key element of the Company's marketing strategy is to add to the value of
the products and services it sells by integrating them into business solutions
that utilize our own proprietary technology. The Company acquired technologies
in December 1998 from Global Positioning Technologies, Inc ("GPT") and hired
its principal to continue developing those technologies. GPT's technologies
involve advanced uses of the Global Positioning System in conjunction with
satellite telephones and transmission of real-time single-frame video using
Iridium and similar telephones. The Company has also developed a "front-end"
for satellite and other telephone systems that manages a user's phone call,
voice mail and facsimile needs. These technologies are both nearing readiness
for full scale marketing.
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 competes 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 geostationary satellite-based Satellite Telephone Services
("STS") 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
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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.
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.
Iridium airtime varies in cost depending on the origin and destination of
the call, ranging from approximately $2.00/minute within North America and
$10.00/minute for calls between South America and Asia.
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 locations across the United States. The Company now has sales
representatives in Los Angeles, New York City, 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 has
developed a web site 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 develops many of 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. During
1998, the Company's largest customer was the Royal Bahamas Police Force who
accounted for approximately 17% of sales.
Competition
The wireless communications industry is highly competitive and is
characterized by frequent technological innovation. The principal bases of
competition within the industry are price, products and services. The industry
includes major domestic and international companies, many of which have
financial, technical, marketing, sales, distribution and other resources
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substantially greater than ours and which provide or plan to provide, a wider
range of services. In response competitive pressure from these and other future
competitors, we may have to lower our selling prices or alter our services,
which could have a material adverse effect on the financial position of the
Company. The Company's satellite products and services compete with a number of
other communications services including cellular telephone and other wireless
data services. 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. There can be no assurance that the Company will
be able enter into agreements to market these and other emerging products or, if
it cannot, to compete successfully with those companies that do. Such
competition could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company, as a non-exclusive
service provider for 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 and Stratos Global Corporation. The list
of Iridium service providers includes, 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 indirectly 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.
Patents And Trademarks
The Company filed a patent application on March 4, 1999 for a method and
system for transmitting global position data over a telephone communication
network. This technology, in addition to other uses, enhances satellite
telephone services by enabling emergency location services in conjunction with
"911" calls.
The Company held five 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 which Ms. Velasco exercised in
November 1998. See "--Legal Proceedings." Insat's products are not branded, as
Insat is primarily a reseller and service provider.
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Management Information Systems
The Company believes that the capacity of its existing data processing and
management information systems is sufficient to allow the Company to expand its
business without significant additional capital expenditures. In addition, the
Company has conducted a review of its systems to identify those systems that
could be affected by the Year 2000 problem and modifications to the Company's
systems have been made. See "--Risk Factors: Impact of Year 2000 Issue."
Employees
The Company currently has approximately 59 full-time employees and,
depending on its level of business activity, expects to hire additional
employees in the next 12 months, as needed, to support marketing and sales,
manufacturing and research and development.
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
$98,736 and the lease expires December 31, 1999. The Company also leases space
in Washington D.C., consisting of 2,650 square feet. The annual base rent is
approximately $59,172, and the lease expires June 14, 2000. 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 July 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 retained 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
p. 22
<PAGE>
granted an option to purchase certain property from the Company, including the
ED and UITI technologies, for $50,000 which she exercised in November 1998.
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 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 was unable to comply with the requirement because the Company
did not and does not have a registration statement on file with the SEC. On
February 3, 1999, a new settlement agreement was reached. Under the terms of the
new Settlement Agreement and Release, which supercedes the June 25, 1997
agreement, the U.S. District Court will order the Company to issue to each of
the individuals 245,000 shares of unrestricted stock. These shares will be
subject to a tradibility schedule set forth in the new Settlement Agreement and
Release. The Company has recorded a liability of $266,000 as of December 31,
1998, related to the original settlement.
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 are unrestricted, and Mr. Gilbreath retained
75,000 options, which must be and were in their entirety 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
p. 23
<PAGE>
must be exercised before January 1, 1999. As of December 31, 1998, 150,000 of
those options have been exercised. The remaining 50,000 were the subject of a
dispute and may be exercisable in the future. 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. Under the Agreement, we
were to issue 750,000 shares of our common stock to the shareholders of Skysite,
as well as options to purchase an additional 500,000 shares of our common stock
at an exercise price of $0.40 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 us and the former shareholders of Skysite, including former shareholder
and President of Skysite, Tom D. Soumas, related to the value of Skysite at the
time of the acquisition and representations made to the Company as to the
business and liabilities of Skysite. As a result of the dispute, the Company
withheld its shares. On May 28, 1998, we entered into an amended agreement with
the former shareholders, except for Mr. Soumas to settle this matter. Under the
terms of the amended agreement, the other shareholders' shares and options were
placed in an escrow account in October 1998. 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. 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 our common at $0.40 per
share to be paid from the 500,000 options issued to them by the Company. See
"Legal Proceedings--Tom Soumas."
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 $19,037.96 between December 20,
1997 and November 20, 1998.
p. 24
<PAGE>
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.
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. On or about January 19, 1999, Tom Soumas, a former employee
----------
of Skysite, filed a complaint against the Company alleging multiple claims,
including breach of contract, breach of fair dealing, fraud, negligent
misrepresentation, specific performance, conversion and trespass. On or about
February 16, 1999, Mr. Soumas filed an Amended Complaint in the above-referenced
matter containing the same claims as those in the original Complaint. The claims
arise out of the August 26, 1997 acquisition by the Company of all of the stock
of Skysite, pursuant to the terms of an Agreement and Plan of Reorganization
dated June 20, 1997. Due to disputes between the Company and Mr. Soumas, the
240,000 shares due to Mr. Soumas under the original agreement remain unissued,
and we do not intend to issue such shares. See "Legal Proceedings--Cochran
Ranch."
The Company alleged that numerous misrepresentations were made in the
Agreement. These defenses will be raised as a setoff to the former President's
claim for stock and any damages related thereto. Given the early stages 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.
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 1998.
p. 25
<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 $11.25 $8.75
Fourth Quarter $ 9.31 $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 $ 5.44 $2.31
</TABLE>
There were 117 shareholders of record of the Common Stock as of December
31, 1998. As of December 31, 1998, the closing bid price of the Company's Common
Stock was $3.94 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.
p. 26
<PAGE>
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, 1998, 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, 1997 and 1998, and for each of the years in the
three-year period ended December 31, 1998, are included elsewhere in this
filing. The consolidated financial statements as of and for the years ended
December 31, 1997 and December 31, 1998, have been audited by Reznick Fedder &
Silverman PC. See "Changes in and Disagreements with Accountants on Accounting
and Disclosure."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Sales of equipment
and services $ 0 $ 0 $ 0 $ 486,642 $ 1,179,922
License Income 0 629,688 0 0 0
Gross Profit 0 629,688 0 73,875 225,557
Total operating expenses (1,339,364) (3,222,489) (7,885,929) (4,514,697) (7,671,638)
Loss from operations (1,339,364) (2,592,801) (7,885,929) (4,440,822) (7,446,081)
Other income (expense), net 3,338 4,748 (170,989) (244,363) 180,925
Net loss (1,336,026) (2,588,053) (8,056,918) (4,685,185) (7,265,156)
Dividends on preferred stock 0 0 0 (1,629,916) (4,106,164)
Net loss per common share (0.12) (0.15) (0.37) (0.31) (0.69)
Weighted average shares of
common stock outstanding 11,775,976 17,190,915 21,914,630 20,676,196 16,567,594
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 552,878 $ 739,930 $ 8,654 $ 545,790 $ 1,395,480
Working capital 388,875 287,713 (2,936,191) (3,522,622) (1,125,874)
Total assets 664,328 1,258,853 242,302 2,031,875 3,856,817
Notes payable (net
of current portion) 0 0 29,865 1,671 600,000
Common stock 2,566,167 212,080 221,280 222,980 227,325
Preferred stock 0 0 0 28,822 37,073
Accumulated deficit (3,741,776) (6,329,829) (14,386,747) (20,701,848) (32,073,150)
Total shareholders' equity
(deficit) 493,752 706,636 (2,782,886) (2,397,670) (550,925)
</TABLE>
p. 27
<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.
The following discussion should be read in conjunction with the financial
statements and related notes, and the other financial information, included
elsewhere in this report.
General
The Company has had recurring net losses including its last three fiscal
years. There can be no assurance that the Company or its subsidiaries will ever
generate significant revenues. There is no guarantee that if the Company ever
achieves a level of profitability, that it can be sustained.
The Company's primary activities were in transition between 1996 and 1998.
The Company had continued pursuing the development of its Initial Products
during 1996. But in 1997, the Company concluded that these Initial Products
would not produce adequate revenues or profits if brought to market. A new
interim President was hired and specifically charged with developing a business
plan that would utilize the Company's assets more effectively than would
continuing with its original strategy. The Company refocused its business plan
on reselling satellite telephone products and services and acquired Skysite as a
first step in this direction. Our efforts in 1997 were largely devoted to
completing that acquisition, installing new management for Skysite and seeking
the capital that was required to fund the growth of Skysite. 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."
The Company determined that it required a new, permanent top management
team and a new headquarters location in order to develop its satellite telephone
business properly. In the Spring of 1998, a new CEO was hired and corporate
headquarters were relocated from Southern California to the Washington, D.C.
area. In late 1997 and early 1998, the Company entered into or revised
agreements with American Mobile Satellite Corporation and Iridium North America
that would enable us to improve the breadth and value of our product lines. The
Company considered Iridium, in particular, a significant opportunity in light of
novel and desirable features of its proposed telephone service. However due to
difficulties in acquiring adequate capital, the Company was unable to invest in
marketing and other activities at Skysite at the desired level until the third
quarter of 1998. The resulting inability to produce significant new revenues
contributed to continued losses.
When the availability of funds permitted in the summer of 1998, the Company
began to develop the marketing and service capabilities that would allow it to
exploit our opportunities. The required funds were obtained in part in the
second half of 1997 and the first half of 1998 through the sale of Series A
p. 28
<PAGE>
8% Cumulative Convertible Preferred Stock, pursuant to Regulation S promulgated
by the United States Securities and Exchange Commission. The net cash proceeds
to the Company were $5,749,728. The Company also successfully placed two
additional series of preferred stock between April and September of 1998 (Series
B and C) pursuant to Regulation D promulgated by the United States Securities
and Exchange Commission. Net cash proceeds of these offering were $5,340,000.
Our operating activities in 1998 focused primarily on preparation for the
scheduled initiation of commercial service by Iridium in September, 1998.
Iridium's service launch was delayed and complicated by technical problems. As a
result, the Company continued to bear the expense of its enhanced marketing and
service organizations while receiving minimal revenue from sale of the Iridium
products through the end of 1998.
The Company also devoted substantial financial and human resources in 1998
to legal and accounting issues. During the transition period from its original
business to the satellite telephone business, a number of legal disputes emerged
with former officers of the Company and others. The Company also fell behind
during 1997 and early 1998 in its required filings with the Securities and
Exchange Commission and in its timely production of financial reports.
Substantial accounting and legal fees were incurred in resolving legal disputes
and curing deficiencies in accounting and reporting.
Results of Operations
Fiscal 1998 Compared to Fiscal 1997
The Company had $1,179,922 in revenue from sales of satellite equipment and
services in the 1998 compared to $486,642 in 1997. The increase of $693,280
primarily reflects the fact that the results include nine months of sales and
expenses for Skysite in 1998 and approximately four months for 1997. Skysite
was not acquired by the Company until August 26, 1997. Sales on a pro forma
basis (including Skysite's activity prior to the acquisition) for the first
three quarters of 1998 versus the same period in 1997 declined by approximately
5%. This reflected, in part, a substantial decline in equipment sales that was
fully attributable to a reduction in sales to a single key customer. However
equipment sales to other customers and airtime sales increased - almost
offsetting the decline in equipment sales.
Costs of goods sold was $954,365 in 1998 compared to $412,767 in 1997.
These costs were associated with the sales generated by Skysite. The increase
of $541,598 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 airtime sales. The gross margin in 1998 was
18.9% as opposed to 15.2% in 1997
Sales and marketing expense in 1998 was $1,499,802 compared to $286,258 in
1997. The expense was 127% of revenues in 1998 compared to 59% in 1997. The
increase of $1,213,544 primarily reflects intensified efforts in preparation for
the marketing of Iridium products during the second half of 1998. Since staff
additions and other expenditures did not, and were not expected to, produce
revenue prior to the commercial launch of Iridium, the ratio of sales and
marketing expense to revenues was, as expected, well above normal levels in
1998. But the delay in that launch and the subsequent technical problems
depressed sales and caused the expense ratio to exceed the high level
anticipated. The increase in expense is also related to the greater period of
operation for Skysite included in the 1998 period versus the prior year period.
Research and development expense was $397,869 in 1998 as compared to no
expense in 1997. This expense in 1998 reflected the Company's efforts to develop
products and services that are complementary to its satellite telephone business
in ways that benefit customers in the Company's targeted markets. In 1997, the
Company had not yet implemented this effort.
General and administrative expenses, including travel and entertainment
expenses, legal fees and consulting fees, as well as certain other expenses,
increased to $5,245,277 in 1998, compared to $2,975,782 in 1997. This increase
of $2,269,495 was primarily related to the greater period of operation for
p. 29
<PAGE>
Skysite included in 1998 versus the prior year and to an increase in the legal
and accounting fees incurred in 1998 versus the prior year. These professional
fees are attributable to the Company's one-time need to resolve legal and
accounting issues that had emerged during management transitions in 1997.
The Company granted stock options to various employees and other
individuals during 1998. In connection with the granting of these options, the
Company recorded a stock option compensation expense in the amount of $528,690.
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 1998 was $7,265,156 as compared to $4,685,185 in 1997.
Significant factors contributing to the increase in the net loss by $2,579,971
were increased sales and marketing and general and administrative expense as
described above. These expenses were offset to some degree by a reduction in
stock compensation expense.
Fiscal 1997 Compared to Fiscal 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. There were
no revenues produced prior to the acquisition of Skysite. The revenue in 1997
was derived entirely from the newly acquired operations of Skysite in the
second half of the year.
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 associated with the operations of
Skysite during the second half of the year.
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,
were $2,975,782 for fiscal 1997, compared to $2,985,039 for fiscal 1996. This
slight decrease of $9,257 reflected a reduction in general corporate overhead
offset by 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 $1,252,657. The amount recorded represents the difference between the
exercise price and the fair market value of the Company's Common Stock, as of
the date the options were granted.
Liquidity and Capital Resources
The Company has been dependent on a series of equity fundings to provide
the resources it has required to conduct its business. It has never produced a
positive cash flow from operations. When it abandoned its Initial Products, it
did not have sufficient cash on-hand or readily available to finance its
expenses during a repositioning and start-up of a new business. Its entry into
the satellite telephone business has been made possible by the issuance of three
series of convertible preferred stock during 1997 and 1998.
p. 30
<PAGE>
Pursuant to an agreement with a placement agent, Wincap, Ltd. ("Wincap"),
the Company effected from December of 1997 to July of 1998 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 has used 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 and 500,000 accompanying warrants for a total consideration of
approximately $3,000,000. Of this amount, the Company received approximately
$2,670,000, which it has used 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 December 31, 1998, the Company sold 3,000 shares and 495,000
warrants for a total consideration of approximately $3,000,000. Of this amount,
the Company received approximately $2,670,000, which it has used 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 capital raised in these offerings were sufficient to fund activities
through 1998. The Company will require additional capital to carry out its plan
of operations for 1999 and beyond. These funds will be needed to offset
anticipated operating losses until its satellite telephone business grows to a
break-even point and to provide working capital for inventories and accounts
receivable. Additional funds may be desirable to enable the Company to take
advantage of desirable acquisition opportunities. Funds currently available for
these purposes are unlikely to suffice beyond the first or second quarter of
1999. The Company currently anticipates a need for at least $15 million during
1999 and may seek significantly more. In the event that additional capital is
not raised, the Company would not be able to carry on its business at all or
would have to implement cost-cutting measures that would seriously disrupt its
business plan. The Company is actively engaged in seeking funds to meet its
anticipated needs in 1999. Among other things, it is exploring cash infusions in
the form of bridge loans, private placements or public offerings of equity
securities and working capital loans secured by inventory or accounts
receivable, alone or in combination. The need for working capital may be
compounded if major suppliers are unwilling to offer the Company conventional
terms for payment. At present, the Company has not established such terms with
Iridium. The Company's history of losses, its current cash position and its lack
of extensive credit history may increase the difficulty of obtaining favorable
terms. There can be no assurance that any of these will be successful.
The cost and conditions under which funds will be available, if available
in any form, may be affected adversely by several considerations. The Company's
cash needs will, in part, be determined by the availability and serviceability
of Iridum's and other vendors' equipment and airtime. Potential sources of funds
are aware that Iridium has experienced some delays in deploying its commercial
service and that any future delays may be beyond the Company's control. This
uncertainty raises the possibility that additional, unanticipated
p. 31
<PAGE>
fundings may be required and may dilute the present investors' or lenders'
interests to a degree not foreseen.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
(NOT APPLICABLE)
p. 32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
U.S. Digital Communications, Inc.
We have audited the accompanying consolidated balance sheets of U.S.
Digital Communications, Inc. and Subsidiary as of December 31, 1997 and 1998,
and the related consolidated statements of operations and comprehensive loss,
changes in stockholders' equity (deficit) and cash flows for the yearS then
ended. The consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. The financial statements
of U.S. Digital Communications, Inc. for the year ended December 31, 1996 were
audited by other auditors whose report, dated April 4, 1997, expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of U.S. Digital
Communications, Inc. and Subsidiary as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
A to the consolidated financial statements, the Company has suffered recurring
losses from operations and its total liabilities exceed its total assets. This
raises substantial doubt about the Company's ability to continue as a going
concern. Management's plan in regard to these matters are also described in Note
A. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ REZNICK FEDDER & SILVERMAN
Bethesda, Maryland
March 1, 1999
p. 33
<PAGE>
U. S. Digital Communications, Inc.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
<TABLE>
<CAPTION>
ASSETS
1997 1998
----------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 545,790 $ 1,395,480
Trade accounts receivable, net of allowance for
uncollectible accounts of $19,000 and $13,330 209,073 187,223
Inventory 107,967 795,117
Notes receivable 25,000 100,000
Prepaid expenses 17,436 204,048
Total current assets 905,266 2,681,868
INVESTMENTS 9,750 20,312
PROPERTY AND EQUIPMENT, NET 122,500 237,883
INTANGIBLE ASSETS, NET 981,327 771,039
OTHER NONCURRENT ASSETS 13,032 145,715
----------- -----------
Total assets $ 2,031,875 $ 3,856,817
=========== ===========
</TABLE>
(continued)
-34-
<PAGE>
U. S. Digital Communications, Inc.
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, 1997 and 1998
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable, current portion $ 329,458 $ 314,835
Accounts payable and accrued expenses 1,766,838 1,368,408
Deferred revenue 107,267 12,615
Dividends payable 135,931 584,077
Stockholder loans, current portion 962,385 500,000
Accrued interest on stockholder loans 147,623 66,707
Minimum royalty obligation 450,000 450,000
Due to former officers and shareholders 528,426 511,100
----------- -----------
Total current liabilities 4,427,928 3,807,742
NOTES PAYABLE AND STOCKHOLDERS LOANS, net of
current portion 1,617 600,000
------------ -----------
Total liabilities 4,429,545 4,407,742
------------ -----------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock - $.01 par, 10,000,000 shares authorized;
2,882,232 and 3,707,332 issued and outstanding at December
31, 1997 and 1998; liquidation preference of $6,147,261 28,822 37,073
Common stock - $.01 par, 50,000,000 shares authorized;
22,298,000 issued and 16,395,800 outstanding at
December 31, 1997; 22,732,500 issued and 16,830,000
outstanding at December 31, 1998 222,980 227,325
Additional paid-in capital 16,332,314 24,579,138
Common stock warrants 1,581,337 6,899,337
Accumulated other comprehensive income (loss) (31,200) (20,638)
Treasury stock (5,902,200 shares of common stock at
cost) (10) (10)
Deferred compensation (19,648) -
Shares to be issued (including additional paid-in capital) 389,583 -
Shareholders' receivable (200,000) (200,000)
Accumulated deficit (20,701,848) (32,073,150)
------------ -----------
Total stockholders' equity (deficit) (2,397,670) (550,925)
------------ -----------
Total liabilities and stockholders' equity (deficit) $ 2,031,875 $ 3,856,817
============ ===========
</TABLE>
See notes to consolidated financial statements
-35-
<PAGE>
U. S. Digital Communications, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Sales
Equipment $ - $ 285,047 $ 566,494
Airtime services - 201,595 613,428
------------------ ------------------ ------------------
Total sales - 486,642 1,179,922
Cost of goods sold 412,767 954,365
------------------ ------------------ ------------------
Gross profit - 73,875 225,557
------------------ ------------------ ------------------
Operating expenses
Sales and marketing - 286,258 1,499,802
Research and development 955,570 - 397,869
Minimum royalty expense 900,000 - -
Fund-raising fees for failed offering 118,237 - -
General and administrative 2,985,039 2,975,782 5,245,277
Stock option compensation 2,927,083 1,252,657 528,690
------------------ ------------------ ------------------
Total operating expenses 7,885,929 4,514,697 7,671,638
------------------ ------------------ ------------------
Loss from operations (7,885,929) (4,440,822) (7,446,081)
------------------ ------------------ ------------------
Other income (expense)
Interest expense (47,618) (183,593) (148,905)
Interest and other income 7,385 23,280 339,460
Loss on investments and disposal of equipment (130,756) (84,050) (9,630)
------------------ ------------------ ------------------
Total other income (expense), net (170,989) (244,363) 180,925
------------------ ------------------ ------------------
Net loss (8,056,918) (4,685,185) (7,265,156)
Dividends and beneficial conversion feature on
preferred stock - (1,629,916) (4,106,164)
------------------ ------------------ ------------------
Net loss available to common shareholders (8,056,918) (6,315,101) (11,371,320)
Other comprehensive income (loss) 345,313 (31,200) 10,562
------------------ ------------------ ------------------
Comprehensive loss available to common
stockholders $ (7,711,605) $ (6,346,301) $ (11,360,758)
================== ================== ==================
Net loss per common share
Basic $ (0.37) $ (0.31) $ (0.69)
================== ================== ==================
Diluted $ (0.37) $ (0.31) $ (0.69)
================== ================== ==================
Weighted average shares of common
stock outstanding 21,914,630 20,676,196 16,567,594
================== ================== ==================
</TABLE>
See notes to consolidated financial statements
-36-
<PAGE>
U.S . Digital Communications, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common stock
Preferred stock par value
---------------------- ---------------------- Additional paid
Shares Amount Shares Amount -in capital
---------- ------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 - $ - 21,208,000 $212,080 $ 7,169,698
Net loss
Unrealized gain on securities
Sale of stock for cash - - 920,000 9,200 1,290,800
Stock issuance costs - - - - (2,805,000)
Options issued to placement agent - - - - 2,800,000
Deferred compensation related to
grant of stock options - - - - 6,640,625
Amortization of deferred compensation - - - - -
---------- ------- ---------- -------- -----------
Balance, December 31, 1996 - - 22,128,000 221,280 15,096,123
Net loss
Unrealized loss on securities
Sale of stock and warrants for cash 2,882,232 28,822 - - 2,696,785
Issuance of stock for noncash transactions - - 170,000 1,700 107,900
Stock issuance costs - - - - (1,785,888)
Options issued to Placement Agent - - - - 1,278,631
Deferred compensation related to
grant of stock options - - - - 879,596
Cancellation of options - - - - (3,320,833)
Amortization of deferred compensation - - - - -
Preferred dividends and beneficial
conversion feature - - - - 1,380,000
Repurchase of common stock - - - - -
Shareholders' receivable - - - - -
Shares to be issued (including
additional paid-in capital) - - - - -
---------- ------- ---------- -------- -----------
Balance, December 31, 1997 2,882,232 28,822 22,298,000 222,980 16,332,314
Net loss
Unrealized gain on securities
Sale of stock and warrants for cash 1,462,600 14,626 - - 2,885,274
Issuance of stock for noncash transactions - - 350,000 3,500 842,773
Stock issuance costs - - 50,000 500 (1,451,709)
Exercise of stock options - - 505,000 5,050 263,700
Exercise of warrants - - 286,000 2,860 1,319,140
Cancellation of stock in connection with
legal settlements - - (1,904,000) (19,040) 345,163
Conversion of preferred stock to common
stock (637,500) (6,375) 637,500 6,375 -
Amortization of deferred compensation - - - - -
Preferred dividends and beneficial
conversion feature - - - - 3,658,000
Common stock transferred to escrow - - 510,000 5,100 384,483
---------- ------- ---------- -------- -----------
Balance, December 31, 1998 3,707,332 $37,073 22,732,500 $227,325 $24,579,138
========== ======= ========== ======== ===========
</TABLE>
(continued)
See notes to consolidated financial statements
-37-
<PAGE>
U.S. Digital Communications, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIT) - CONTINUED
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Common stock Treasury stock Deferred Shares to be
-------------------------------
warrants Shares Cost Compensation issued
---------------- ------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ - - $ - $ - $ -
Net loss
Unrealized gain on securities
Sale of stock for cash - - - - -
Stock issuance costs - - - - -
Options issued to placement agent - - - - -
Deferred compensation related to
grant of stock options - - - (6,640,625) -
Amortization of deferred compensation - - - 2,927,083 -
--------------- ----------- ----------- -------------- -----------
Balance, December 31, 1996 - - - (3,713,542) -
Net loss
Unrealized loss on securities
Sale of stock and warrants for cash 1,581,337 - - - -
Issuance of stock for noncash transactions - - - - -
Stock issuance costs - - - - -
Options issued to Placement Agent - - - - -
Deferred compensation related to
grant of stock options - - - (879,596) -
Cancellation of options - - - 3,320,833 -
Amortization of deferred compensation - - - 1,252,657 -
Preferred dividends and beneficial
conversion feature - - - - -
Repurchase of common stock - (5,902,200) (10) - -
Shareholders' receivable - - - - -
Shares to be issued (including
additional paid-in capital) - - - - 389,583
--------------- ----------- ----------- -------------- -----------
Balance, December 31, 1997 1,581,337 (5,902,200) (10) (19,648) 389,583
Net loss
Unrealized gain on securities
Sale of stock and warrants for cash 5,285,000 - - - -
Issuance of stock for noncash transactions - - - - -
Stock issuance costs 497,000 - - - -
Exercise of stock options - - - - -
Exercise of warrants (464,000) - - - -
Cancellation of stock in connection with
legal settlements - - - - -
Conversion of preferred stock to common
stock - - - - -
Amortization of deferred compensation - - - 19,648 -
Preferred dividends and beneficial
conversion feature - - - - -
Common stock transferred to escrow - - - - (389,583)
--------------- ----------- ----------- -------------- -----------
Balance, December 31, 1998 $ 6,899,337 (5,902,200) $ (10) $ - $ -
=============== =========== =========== ============== ===========
</TABLE>
(continued)
See notes to consolidated financial statements
-38-
<PAGE>
U.S. Digital Communications, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIT) - CONTINUED
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Accumulated
other com- Total
Stockholders' prehensive Accumulated stockholders'
receivable income (loss) deficit equity
---------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ - $ (345,313) $ (6,329,829) $ 706,636
Net loss - (8,056,918) (8,056,918)
Unrealized gain on securities 345,313 - 345,313
Sale of stock for cash - - - 1,300,000
Stock issuance costs - - - (2,805,000)
Options issued to placement agent - - - 2,800,000
Deferred compensation related to
grant of stock options - - - -
Amortization of deferred compensation - - - 2,927,083
---------------- --------------- ------------- ----------------
Balance, December 31, 1996 - - (14,386,747) (2,782,886)
Net loss - (4,685,185) (4,685,185)
Unrealized loss on securities (31,200) - (31,200)
Sale of stock and warrants for cash - - - 4,306,944
Issuance of stock for noncash transactions - - - 109,600
Stock issuance costs - - - (1,785,888)
Options issued to Placement Agent - - - 1,278,631
Deferred compensation related to
grant of stock options - - - -
Cancellation of options - - - -
Amortization of deferred compensation - - - 1,252,657
Preferred dividends and beneficial
conversion feature - - (1,629,916) (249,916)
Repurchase of common stock - - - (10)
Shareholders' receivable (200,000) - - (200,000)
Shares to be issued (including
additional paid-in capital) - - - 389,583
---------------- --------------- ------------- ----------------
Balance, December 31, 1997 (200,000) (31,200) (20,701,848) (2,397,670)
Net loss - - (7,265,156) (7,265,156)
Unrealized gain on securities 10,562 - 10,562
Sale of stock and warrants for cash - - - 8,184,900
Issuance of stock for noncash transactions - - - 846,273
Stock issuance costs - - - (954,209)
Exercise of stock options - - - 268,750
Exercise of warrants - - - 858,000
Cancellation of stock in connection with
legal settlements - - - 326,123
Conversion of preferred stock to common
stock - - - -
Amortization of deferred compensation - - - 19,648
Preferred dividends and beneficial
conversion feature - - (4,106,146) (448,146)
Common stock transferred to escrow - - - -
---------------- --------------- ------------- ----------------
Balance, December 31, 1998 $ (200,000) $ (20,638) $ (32,073,150) $ (550,925)
================ =============== ============- ================
</TABLE>
(continued)
See notes to consolidated financial statements
-39-
<PAGE>
U.S. Digital Communications, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (8,056,918) $ (4,685,185) $ (7,265,156)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 41,256 195,065 254,814
Stock option compensation 2,927,083 1,252,657 528,690
Loss on investments and disposal of equipment 130,756 84,050 9,630
Reserve for advances to target companies - - 615,536
Changes in assets and liabilities
Decrease (increase) in trade accounts
receivable - (96,380) 21,850
Decrease in other receivables - 20,000 -
(Increase) decrease in inventory - 43,349 (687,150)
Decrease (increase) in prepaid expenses 69,522 13,042 (186,612)
Increase in other noncurrent assets - (3,079) (132,683)
(Decrease) increase in accounts payable
and accrued expenses 1,260,270 (520,463) (404,060)
Decrease in deferred revenue - (70,400) (94,652)
Increase in accrued interest on
stockholder loans 25,659 109,603 113,257
Increase in minimum royalty obligation 450,000 - -
Increase in due to former officers and
shareholders 300,000 324,905 -
---------------- ---------------- ----------------
Net cash used in operating activities (2,852,372) (3,332,836) (7,226,536)
---------------- ---------------- ----------------
Cash flows from investing activities
Purchase of investments - (125,000) -
Capital expenditures (30,518) (62,444) (169,539)
Advances to Skysite prior to acquisition - (231,039) -
Patents and other expenditures (13,838) - -
Advances to stockholders (116,478) - -
Advances to target companies - (25,000) (690,536)
---------------- ---------------- ----------------
Net cash used in investing activities (160,834) (443,483) (860,075)
---------------- ---------------- ----------------
</TABLE>
(continued)
-40-
<PAGE>
U.S. Digital Communications, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from financing activities
Borrowings from nonstockholders $ 100,000 $ 300,000 $ 600,000
Borrowings from stockholders 992,900 388,000 -
Repayment of stockholder borrowings (100,000) (50,000) (250,000)
Principal payments under notes payable (5,970) (10,237) (16,240)
Proceeds to exercise future common
stock warrants - - 245,100
Proceeds from issuance of common
stock 1,300,000 - -
Proceeds from issuance of preferred
stock and warrants - 4,306,944 8,184,900
Purchase of treasury stock - (10) -
Payment of dividends on preferred stock - (113,985) -
Payment of stock issuance costs, net (5,000) (507,257) (954,209)
Proceeds from exercise of common
stock options - - 268,750
Proceeds from exercise of common
stock warrants - - 858,000
-------------- ---------------- ----------------
Net cash provided by financing activities 2,281,930 4,313,455 8,936,301
-------------- ---------------- ----------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (731,276) 537,136 849,690
Cash and cash equivalents, beginning 739,930 8,654 545,790
---------------- ---------------- --------------
Cash and cash equivalents, end $ 8,654 $ 545,790 $ 1,395,480
================ ================ ==============
</TABLE>
(continued)
-41-
<PAGE>
U.S. Digital Communications, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Supplemental disclosures of cash transactions
Cash paid for interest $ 7,772 $ 70,619 $ 35,648
================= ================= =================
Supplemental disclosures of noncash transactions
Beneficial conversion feature on preferred stock $ - $ 1,380,000 $ 3,658,000
================= ================= =================
Acquisition of Skysite Communications Corporation
Fair value of assets acquired $ - $ 420,622 $ -
Liabilities assumed - 935,914 -
----------------- ----------------- -----------------
Satisfaction of note payable and accrued interest
with issuance of common stock $ - $ 109,500 $ 663,484
================= ================= =================
Satisfaction of amounts due to former officers
with issuance of common stock $ - $ - $ 474,811
================= ================= =================
Satisfaction of accrued interest on amounts due to
former officers with issuance of common stock $ - $ - $ 193,674
================= ================= =================
Common stock issued and transferred to escrow $ - $ - $ 389,583
================= ================= =================
Unpaid accrued dividends payable on preferred stock $ - $ 135,931 $ 448,146
================= ================= =================
</TABLE>
See notes to consolidated financial statements
-42-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE A - ORGANIZATION
Formation
---------
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. To the Company's knowledge, GTCI did not conduct any business prior
to the reorganization. The reorganization was consummated because the stock of
GTCI traded on the NASDAQ Bulletin Board and, therefore, provided the Company
with a public presence. In conjunction with the transaction, GTCI changed its
name to Viscorp. On October 24, 1997, Viscorp changed its name to U.S. Digital
Communications, Inc.
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 for the 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.
Acquisition of Skysite
----------------------
On June 20, 1997, the Company entered into an agreement and plan of
reorganization (the "Agreement") with Skysite. Under the Agreement, the
Company was to issue 750,000 shares of common stock to the shareholders of
Skysite, as well as options to purchase an additional 500,000 shares of
restricted common stock at an exercise price of $.40 per share.
-43-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE A - OPERATIONS (Continued)
Acquisition of Skysite (Continued)
----------------------
The stock of Skysite was transferred to the Company on August 26, 1997.
Subsequent to the acquisition, a dispute 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 the issuance of
its shares. During 1998, the Company entered into an amended agreement with
the shareholders of Skysite, except for the former President (who was
originally allocated 240,000 shares). Under the terms of this amended
agreement, the other shareholders' shares and options were placed in an escrow
account in October 1998. The shareholders have all rights attributable to the
escrowed stock, however, they have agreed that at such time when they elect to
sell these shares, the first $200,000 of proceeds will be placed in escrow and
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.
On or about January 19, 1999, the former President filed a complaint against
the Company alleging multiple claims, including breach of contract, breach of
fair dealing, fraud, negligent misrepresentation, specific performance,
conversion and trespass. On or about February 16, 1999, the former President
filed an Amended Complaint in the above-referenced matter containing the same
claims as those in the original Complaint. The claims arise out of the August
26, 1997 acquisition by the Company of all of the stock of Skysite, pursuant
to the terms of the Agreement.
The Company alleged that numerous misrepresentations were made in the
Agreement. These defenses will be raised as a setoff to the former President's
claim for stock and any damages related thereto. Given the early stages 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.
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 common 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.
-44-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE A - OPERATIONS (Continued)
Acquisition of Skysite (Continued)
----------------------
The Company recognized the Skysite acquisition as a purchase for accounting
purposes. The Company valued the acquisition at the fair value of the
consideration given plus the liabilities assumed. The consideration given
included the 510,000 shares and 500,000 options placed in escrow, less the
$200,000 to be received from escrow when these shares are sold. This $200,000
receivable has been recognized by the Company as a reduction of stockholders'
equity. The shares and options have been recorded at management's estimate of
fair value which reflects a discount due to the restricted nature of the
shares. The following is the valuation at August 26, 1997, the closing date of
the acquisition, of consideration given:
<TABLE>
<S> <C>
510,000 shares of Company common stock $ 214,583
500,000 options to purchase Company common stock 175,000
Due from Skysite shareholders (200,000)
Advances made from the Company to Skysite prior to acquisition 231,039
-----------
420,622
Liabilities assumed 935,914
-----------
Total purchase price $ 1,356,536
===========
</TABLE>
The Company allocated the purchase price based on the fair value of the assets
acquired as follows:
<TABLE>
<S> <C>
Current assets $ 289,440
Property and equipment 11,474
Other assets 4,200
Goodwill 1,051,422
------------
$ 1,356,536
============
</TABLE>
-45-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE A - OPERATIONS (Continued)
Acquisition of Skysite (Continued)
----------------------
The following unaudited proforma financial information presents the
consolidated results of operations of the Company and Skysite as if the
acquisition had occurred on January 1, 1996. The proforma 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>
Year ended
December 31,
------------------------
1996 1997
-------- ----------
(Unaudited)
<S> <C> <C>
Proforma revenue $ 704,179 $ 1,243,961
Proforma net loss available to
common shareholders (8,898,614) (6,810,549)
Proforma net loss per share (0.41) (0.33)
</TABLE>
Reorganization
--------------
In July 1998, the Company formed a new wholly-owned subsidiary, International
Satellite Group, Inc. ("Insat"), to oversee its satellite communication
operations, and transferred the common stock of Skysite Communications
Corporation ("Skysite") to Insat. Additionally, Insat formed Project 77 Corp.
("Project 77") in 1998 as its other wholly-owned subsidiary primarily to
market Iridium satellite telephone equipment and services.
Realization of Assets
---------------------
For the three years ended December 31, 1998, the Company has experienced
significant losses due to its previous technology development activities and
the losses from Skysite's 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 from Insat's products and services and the sale of
new products and services. The Company has developed strategies to increase
the 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 capital through the issuance of debt or equity
securities. Although the Company believes it has the ability to raise
additional capital, such an issuance may be dilutive to existing shareholders
and there can be no assurance that adequate funds will be available, if at
all, on terms that are reasonable or acceptable to the Company.
-46-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE A - OPERATIONS (Continued)
Realization of Assets (Continued)
---------------------
Therefore, the Company has developed a plan to implement certain cost control
measures to mitigate its liquidity risk, and is seeking new products and
services that will increase cash flow and reduce the reliance on Insat's
products and services. If the Company is unable to generate adequate cash,
there could be a material adverse effect on the business and financial
condition of the Company.
Future operating results may be affected by a number of factors including the
timing of new product introductions in the market place, competitive pricing
pressures, and economic conditions. Because the market for the Company's
products is characterized by rapidly changing technology, the development and
introduction of competitive products may pose a threat to the Company's
business.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
---------------------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Insat, after eliminating intercompany balances
and transactions. The amounts included for Skysite for the year ended
December 31, 1997 represent all activity from August 26, 1997, the date of
acquisition, to December 31, 1997.
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 the disclosure
of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Management has estimated the fair value of its unregistered restricted stock
and options given as consideration for the acquisition of Skysite,
compensation to placement agents, satisfaction of debts and other obligations
and compensation to nonemployee directors. Management's estimate of fair value
included marketability discounts that were estimated based on arm's length
transactions consummated with equity securities (e.g., settlement of debt and
stock sales). In addition, management has made estimates in connection with
the valuation allowance on the deferred income taxes, valuation allowance on
notes receivable and the evaluation of potential impairment of goodwill.
-47-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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,
1998, substantially all funds are held at one financial institution and
balances exceed the federally insured limits. The Company does not believe it
is exposed to any significant credit risk on cash equivalents.
Inventory
---------
Inventory, which consists primarily of finished goods, is stated at the lower
of cost or market on a first-in, first-out basis. Cost is determined using
the weighted average cost method.
Property and Equipment
----------------------
Property and equipment are recorded at cost and are being depreciated over the
estimated useful lives of the assets ranging from three to seven 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 include the excess of purchase price over net assets
received resulting from the acquisition of Skysite, which is being amortized
over five years. As of December 31, 1997 and 1998, the unamortized balance
was $981,327 and $771,039, respectively (net of accumulated amortization of
$70,096 and $280,383, respectively).
Impairment of Long-Lived Assets
-------------------------------
The Company complies with Statement of Financial Accounting Standards ("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, if any, is measured at fair value.
-48-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Common Share
--------------------------------
Basic earnings (loss) per common share are computed by dividing net loss
available to common stockholders by the weighted-average number of common
shares outstanding. Diluted earnings (loss) per common share are computed by
dividing net loss 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>
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Common shares to be granted under
option arrangements, less shares
assumed purchased at average
market price 2,312,122 1,580,562 340,888
Convertible preferred securities and
related warrants - 935,800 4,428,498
--------------- --------------- ---------------
2,312,122 2,516,362 4,769,386
=============== =============== ===============
</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. Investments in equity securities are carried at their fair value.
-49-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
------------------------
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company has adopted the
disclosure-only provisions of SFAS No. 123 for employee stock options.
Accordingly, when the Company grants employee stock options with an exercise
price equal to the NASDAQ bulletin board price ("quoted price") of the shares
on the date of grant, no compensation expense is recorded. If employee stock
options are granted at an exercise price less than the quoted price,
compensation expense is recorded to the extent of the intrinsic value.
Transactions with nonemployees in which consideration is received for the
issuance of equity instruments are accounted for based on the fair value of
the consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable.
Research and Development Expense
--------------------------------
The Company expenses research and development costs as they are incurred.
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.
Concentration of Credit 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.
-50-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deferred Compensation
---------------------
The Company records stock option 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 over the vesting period. Deferred compensation
represents the unvested portion. The amount of deferred compensation recorded
in 1996, 1997 and 1998 was $6,640,625, $879,596 and $-0-, respectively.
Deferred compensation is amortized to expense during the vesting period of the
related options.
Comprehensive Income
--------------------
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display
of comprehensive income (net income (loss) plus all other changes in net
assets from nonowner sources) and its components in the financial statements.
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 1996 and 1997 have been reclassified to conform to the
current year presentation.
Segment Information
-------------------
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major customers.
The Company is in one business segment, satellite communications, and follows
the requirements of SFAS No. 131.
-51-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE C - 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, 1998, the fair value of these shares was
approximately $0.31 per share. The Company has reflected the reduction in the
fair value of this investment by recording a $20,638 unrealized loss in
stockholders' equity in the accompanying consolidated balance sheet.
NOTE D - PROPERTY AND EQUIPMENT
As of December 31, 1997 and 1998, property and equipment consists of the
following:
<TABLE>
<CAPTION>
1997 1998
---------------- --------------
<S> <C> <C>
Office furniture and equipment $ 176,623 $ 256,875
Computer and video equipment 18,040 67,069
Less accumulated depreciation (72,163) (86,061)
---------------- --------------
$ 122,500 $ 237,883
================ ==============
</TABLE>
Depreciation expense for 1996, 1997 and 1998 amounted to $19,534, $35,430 and
$54,156, respectively.
-52-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE E - NOTES PAYABLE AND STOCKHOLDER LOANS
As of December 31, 1997 and 1998, notes payable and stockholder loans consist
of the following:
<TABLE>
<CAPTION>
1997 1998
----------------- ----------------
<S> <C> <C>
Note payable to stockholder, interest rate 8%,
payable January 5, 1999 and February 28, 1999 $ 857,385 $ 500,000
Note payable to stockholder, interest rate 8%,
payable on demand 105,000 -
Note payable, interest rate 10%, payable April 2, 2000 - 100,000
Notes payable, interest rate 10%, payable from
September 12, 1999 through May 5, 2000 300,000 800,000
Capital lease obligation, payable in monthly
installments of $846 through February 6, 1999,
including interest at an annual rate of 36.7% 9,521 8,521
Capital lease obligation, payable in monthly
installments of $211 through May 1, 2001,
including interest at an annual rate of 14.5% 6,817 6,314
Capital lease obligation, payable in monthly
installments of $431 through February 13, 2001,
including interest at an annual rate of 12.3% 14,737 -
----------------- -----------------
Total debt 1,293,460 1,414,835
Less current maturities 1,291,843 814,835
----------------- ------------------
$ 1,617 $ 600,000
================= ==================
</TABLE>
On April 15, 1997, the Company issued 160,000 shares of common stock in full
satisfaction of a $100,000 note payable June 30, 1997. On this date, the
outstanding balance on this note, including accrued interest was $109,500. No
gain or loss was recognized by the Company in the settlement of the liability.
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 issued 200,000 shares of its
restricted common stock and made a $250,000 payment to the shareholder on
September 1, 1998. Pursuant to the settlement, the Company was required to
make two payments of $250,000 each on January 5, 1999 and February 28, 1999.
The Company did not make these payments. No gain or loss was recognized by the
Company in the settlement of the liability.
-53-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE E - NOTES PAYABLE AND STOCKHOLDER LOANS (Continued)
Future minimum payments of debt are as follows:
Year ended December 31,
------------------------
1999 $ 814,835
2000 600,000
------------
$ 1,414,835
============
NOTE F - 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 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 common 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.
-54-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE F - STOCKHOLDERS' EQUITY (Continued)
Common Stock (Continued)
------------
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.
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.
In 1997, the Company issued 160,000 common shares to a third-party for full
settlement of a note payable (see note E) and 10,000 shares to a former
consultant. In addition, the Company reacquired 5,902,200 common shares from a
former director for total consideration of $10.
During 1998, the Company issued and cancelled 350,000 and 1,904,000 common
shares, respectively, to former directors for full settlement of amounts owed.
In addition, during 1998, the Company issued 505,000 common shares in exchange
for options exercised, 286,000 common shares in exchange for 464,000 common
stock warrants exercised, converted 637,500 Series A preferred shares for
637,500 common shares (see note F) and issued 50,000 common shares in
connection with sale of 3,000 Series B preferred shares (see note I).
-55-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE F - STOCKHOLDERS' EQUITY (Continued)
Preferred Stock
---------------
Series A
--------
In December 1996 and 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 a private offering of the Company's 8% cumulative
convertible preferred stock ("Series A"), $0.01 par value per share. The
Company offered a minimum of 2,000,000 and a maximum of 6,666,667 shares of
the 8% preferred stock for consideration of between $3,000,000 and
$10,000,000. The Series A preferred stock is nonvoting.
The first offering period was to expire on June 30, 1997; however, the Company
closed that offering in February 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 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 1,153,300
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 amount, $2,184,900 was raised through the issuance of 1,456,600 shares
during 1998.
For every two Series A preferred shares purchased, the stockholder received
one warrant (which expires 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, 1998, a total
of 2,169,416 warrants had been issued and 286,000 warrants were exercised.
The Company allocated the equity raised between the preferred stock and the
warrants. Based on the valuation of each on the date of issuance, the Company
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, 1998, the allocation, net of preferred
shares converted and warrants exercised, amounted to approximately $2,450,000
and $3,200,000 for the preferred stock and warrants, respectively.
-56-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE F - STOCKHOLDERS' EQUITY (Continued)
Preferred Stock (Continued)
---------------
Series A (Continued)
--------
Series A preferred stockholders have the right to convert each share into one
share of common stock as follows: a) 25% of the shares 90 days following the
date the shares were issued (the initial conversion date) and b) 25% 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. In 1998, the Company converted 637,500 shares
of Series A preferred stock to an equal number of shares of common stock.
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% per annum of the stated value of the preferred stock. Dividends totaling
$113,985 were paid in 1997. No dividends were paid in 1998. Additionally,
the Company has recorded dividends payable totaling $584,077 at December 31,
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 is being accreted to preferred stock over the conversion rights
period. Accretion of the beneficial conversion feature as of December 31, 1998
and 1997 totaled $3,658,000 and $1,380,000, respectively, and is reflected as
an increase in the carrying value of the preferred stock and a dividend charge
against accumulated deficit.
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.
-57-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE F - STOCKHOLDERS' EQUITY (Continued)
Preferred Stock (Continued)
---------------
Series A (Continued)
--------
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) 5%
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 $2,037,151. 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 $0.3125
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. On December 12, 1997, the Company valued the new options to be
$1,278,631. 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 $1,785,888 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% fee would increase by approximately $325,000. For the
year ended December 31, 1998, the placement agent earned and was paid $251,264
and $42,900 for capital raised and warrants exercised, respectively.
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 a par
value of $0.01 per share. The Series B offer 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 I related to the placement agent
fee.) The Series B preferred stock does 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.
-58-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE F - STOCKHOLDERS' EQUITY (Continued)
Preferred Stock (Continued)
---------------
Series B (Continued)
--------
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% 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 allocated 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% of the shares on the effective date of registration
("conversion date") at the conversion price (lesser of (i) 25% off the five-
day average closing bid price for the Company's common stock immediately
before conversion or (ii) 100% 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% 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 1% per month, or
fraction of a month, from the time of closing until the conversion date for
any conversion 30 days after the conversion date and 1/2% 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% of the face value plus any accrued
additional discount.
-59-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE F - STOCKHOLDERS' EQUITY (Continued)
Preferred Stock (Continued)
---------------
Series B (Continued)
--------
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 accumulated deficit 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% of the
lowest closing bid price for the previous 20 trading days prior to funding or
(2) 80% 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.
-60-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE F - STOCKHOLDERS' EQUITY (Continued)
Preferred Stock (Continued)
---------------
Series B (Continued)
--------
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 was 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 accumulated
deficit. 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. When the offering ended
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 (see note I for
discussion of placement agent fee). The Series C preferred stock does not pay
dividends and is nonvoting stock.
In conjunction with the offering, 495,000 warrants were 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
numbers 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 allocated $1,802,000 to the preferred stock and $1,198,000 to the
warrants.
-61-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE F - STOCKHOLDERS' EQUITY (Continued)
Preferred Stock (Continued)
---------------
Series C (Continued)
--------
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
("conversion date") or 120 days from the closing of the Series C preferred
stock, the remaining 50% shall be convertible on the earlier of the 45th day
after the effective date of registration or 165 days from the closing of the
Series C preferred stock. The conversion price will be either the discounted
price (25% off of the five-day average closing bid price immediately before
the conversion date) 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
trades below $1.875 for five consecutive days prior to the conversion date,
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 1% per month, or fraction of a month,
from the time of closing until the conversion date for any conversion 30 days
after the conversion date and 1/2% 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% 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.
-62-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE F - STOCKHOLDERS' EQUITY (Continued)
Preferred Stock (Continued)
---------------
Series C (Continued)
--------
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.
NOTE G - INCOME TAXES
The components of the provision for income taxes for the years ended December
31, 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------------- ----------------- -----------------
<S> <C> <C> <C>
Deferred taxes (benefit)
Federal $ (2,732,891) $ (1,588,986) $ (2,258,112)
State (482,609) (246,430) (422,802)
--------------- ----------------- -----------------
Income tax benefit (3,215,500) (1,835,416) (2,680,914)
Increase in valuation allowance 3,215,500 1,835,416 2,680,914
--------------- ----------------- -----------------
Income tax provision $ - $ - $ -
=============== ================= =================
</TABLE>
-63-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE G - INCOME TAXES (Continued)
Components of the Company's deferred tax assets as of December 31, 1997 and
1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
----------------- -----------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 5,057,005 $ 7,495,943
Compensation related to stock options 1,670,109 1,857,509
Amortization of goodwill 18,627 73,203
----------------- -----------------
Total deferred tax assets 6,745,741 9,426,655
Valuation allowance (6,745,741) (9,426,655)
----------------- -----------------
$ - $ -
================= =================
</TABLE>
Because of the uncertainty associated with future realization of the deferred
tax assets, the deferred tax assets have been offset in total by a valuation
allowance.
The Company has net operating loss ("NOL") carryforwards for federal tax
return purposes that may be offset against future taxable income. Prior to
1998, the Company did not file a consolidated federal income tax return and,
accordingly, net operating losses prior to 1998 of $11,811,000 may be limited
in future years. The use of the NOLs is subject to statutory and regulatory
limitations regarding changes in ownership. The August 26, 1997 Skysite
acquisition resulted in a greater that 50% change in ownership for Federal
income tax purposes. Accordingly, the net operating loss carryforward of
Skysite at August 27, 1997 of approximately $337,000 will be limited in future
years. If not used, the carryforwards will expire as follows.
<TABLE>
<CAPTION>
Operating losses
---------------------
<S> <C>
2009 $ 1,076,200
2010 2,249,000
2011 5,111,700
2012 3,374,100
2013 6,020,000
---------------------
$ 17,831,000
=====================
</TABLE>
-64-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE G - INCOME TAXES (Continued)
Reconciliation of the statutory federal rate to the effective rates were as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------------- --------------- --------------
<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 5.38 5.57
Amortization of intangibles assets - 0.48 0.94
Valuation allowance (38.71) (39.86) (40.51)
---------------- --------------- --------------
- % - % - %
================ =============== ==============
</TABLE>
NOTE H - LEASES
The Company has entered into several operating leases for office space and
equipment that are to expire at certain times through 2001. Additionally, the
Company has certain capital lease obligations for office equipment. As of
December 31, 1998, the Company had the following minimum lease payments:
<TABLE>
<CAPTION>
Year ending December 31,
----------------------------
<S> <C>
1999 $ 172,538
2000 47,458
2001 16,459
----------------
Total minimum lease payments $ 236,455
================
</TABLE>
Total rent expense was $47,672, $62,844 and $134,958 for the years ended
December 31, 1996, 1997 and 1998, respectively. The amount of related party
rent expense was $11,400, $-0- and $-0- for the years ended December 31, 1996,
1997 and 1998, respectively. Included in the above are lease payments that
were made by the Company on behalf of the former lessee in 1998. During 1998,
Management completed the process of assuming this lease.
-65-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE I - COMMITMENTS AND CONTINGENCIES
Employment Agreement
--------------------
In December 1998, the Company entered into an employment agreement with the
President and Chief Executive Officer of the Company. The agreement expires
in June 2003. In addition to an annual salary and bonus, the agreement
provides for the granting of 200,000 options annually at a price of $2.00 per
share and additional options upon the achievement of certain performance
measures. Pursuant to the agreement, the Company will advance $150,000 to the
President and Chief Executive Officer to be used to exercise options to
purchase common stock held by the President and Chief Executive Officer at
December 31, 1998.
Placement Agent Fee
-------------------
Series B
--------
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% of
the funded amount of $3,000,000 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 $66,000 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 $269,000 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% 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, the placement agent was paid fees equal to 11% of
the funded amount of $3,000,000 or $330,000 for the placement of 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 $228,000 as of September 1,
1998, the closing date.
-66-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE I - COMMITMENTS AND CONTINGENCIES (Continued)
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 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 2, 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 recognized a liability of
$58,905 as of December 31, 1997, related to the settlement. During 1998, the
Company issued 150,000 common shares to the former officer and director in
full settlement of the liability. No gain or loss was recognized by the
Company in the settlement of the liability.
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 $1,000,000. 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 alleged 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. The Company was unable to comply
with the requirement because the Company does not have a registration
statement on file with the SEC. On February 3, 1999, a new settlement
agreement was reached.
-67-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE I - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
----------
Under the terms of the new Settlement Agreement and Release, which supercedes
the June 25, 1997 agreement, the U.S. District Court will order the Company to
issue to each of the individuals 245,000 shares of unrestricted stock. These
shares will be subject to a tradability schedule set forth in the new
Settlement Agreement and Release, which has not yet been approved by the
Court. The Company has recorded a liability of $266,000 as of December 31,
1998, related to the original settlement.
In June 1997, 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 the 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 another
individual claiming existence of an employment and/or consulting arrangement.
The Company recognized a liability of $203,522 as of December 31, 1997,
related to the settlement. During 1998, the former officer and director
returned 1,032,000 shares and retained 350,000 unrestricted common shares,
subject to a tradeability schedule, in full settlement of the liability. No
gain or loss was recognized by the Company in the settlement of the liability.
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.
-68-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE I - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
----------
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 returned
his 1,032,000 remaining shares of the Company's common stock and the Company
reissued 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. This option was exercised on November 1, 1998.
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. In 1998, the Company made payment and CBS
released all of its prior claims and security interests against the Company.
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, to which the
former employee believes he is entitled, punitive damages (to be proved 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., alleging breach of certain terms of a
technology licensing agreement, between Intelligent Decision Systems, Inc. and
the Company. Intelligent Decision Systems, Inc. is requesting return of the
consideration previously paid as the initial license fee of $968,750, plus
interest from February 1995. Management intends to vigorously defend the case.
As no lawsuit or arbitration has been filed, the likelihood of an unfavorable
outcome cannot be determined at this time; therefore, no accrual has been
included in the accompanying consolidated financial statements.
-69-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE I - COMMITMENTS AND CONTINGENCIES (Continued)
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 made payments totaling $418,593. Effective January 1,
1998, Skysite executed a new agreement with the supplier requiring Skysite to
make future minimum purchases from the supplier as follows (assuming no
cancellation of the agreement under termination provisions described below).
<TABLE>
Year ending December 31,
--------------------------
<S> <C>
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 $ 9,438,000
=============
</TABLE>
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, Skysite may terminate its agreement with the supplier upon 90 days
written notice, in which case Skysite is required to pay a termination fee
equal to 30% of the remaining unpaid balance as of the date of cancellation.
In August 1998, Project 77 entered into a take or pay minute of use commitment
for three million minutes with Iridium North America. The minutes must be
taken or paid within fifteen months following the commercial launch of the
Iridium System. The impact on the consolidated financial statements cannot be
determined due to potential fluctuations in future rates.
-70-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE J - STOCK OPTIONS
The following table summarizes stock option activity under the Company's
various stock option arrangements.
<TABLE>
<CAPTION>
Weighted
average
Options Exercise price per exercise
outstanding share price
-------------- --------------------- --------------
<S> <C> <C> <C>
Balance, December 31, 1995 2,167,600 $ 0.625 $ 0.6250
Granted 1,145,000 0.625 0.6250
Granted (immediately
exercisable) 75,000 10.5625-11 10.7100
Exercised (400,000) 0.625 0.6250
Cancelled/Expired - - -
-------------- --------------------- --------------
Balance, December 31, 1996 2,987,600 0.625-11 0.8780
Granted 2,860,000 0-0.88 0.1500
Granted (immediately
exercisable) 568,000 0.3125-2.6250 0.9146
Exercised - - -
Cancelled/Expired (400,000) - 0.6250
-------------- --------------------- --------------
Balance, December 31, 1997 6,015,600 0-11 0.5100
Granted (immediately
exercisable) 1,266,000 0.3125-4.6875 1.6700
Exercised (505,000) 0.3125-0.625 0.5322
Cancelled/Expired (827,400) 0.625 0.6250
-------------- --------------------- --------------
Balance, December 31, 1998 5,949,200 $ 0-11 $ 0.7400
============== ===================== ==============
</TABLE>
-71-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE J - STOCK OPTIONS (Continued)
The following table summarizes the status of options outstanding as of
December 31, 1998.
<TABLE>
<CAPTION>
Weighted average
remaining Number
Exercise price Number contractual life exercisable
----------------- --------------- ------------------- -------------
<S> <C> <C> <C>
$ 0.0000 2,380,000 1.2 -
0.3125 378,000 3.1 378,000
0.4000 300,000 1.7 300,000
0.5000 120,000 3.3 120,000
0.6250 1,380,200 1.9 1,380,200
0.8733-0.9688 240,000 3.6 120,000
0.1.00-2.625 734,000 2.8 734,000
3.5000 22,000 2.9 22,000
4.0038-4.8672 320,000 4.6 320,000
10.563-11.0 75,000 2.3 75,000
------------- --------- ------- ---------
$ 0-11.0 5,949,200 2.1 3,449,200
============= ========= ======= =========
</TABLE>
The Company has adopted three stock option plans under which it has granted
options to purchase shares of the Company's Common Stock. In addition, the
Company has granted additional options to purchase shares of Common Stock
outside of any stock option plan. As of December 31, 1998, the shares
underlying the stock options have not been registered with the Securities and
Exchange Commission, or under the securities laws of any applicable state. The
Company has granted the foregoing options and permitted the issuance of 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 Section 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.
-72-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE J - STOCK OPTIONS (Continued)
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. During 1998, 150,000 options under the 1995 plan have been
exercised. In addition, during September 1995, 440,000 stock options were
granted to parties under various agreements at an exercise price of $0.625 per
share. These options expire in September 2000. During 1998, 120,000 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 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.
-73-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE J - STOCK OPTIONS (Continued)
The difference between the exercisable price and the fair value of the stock
as of the date of issuance represents deferred compensation which the Company
will 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 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 prorated 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 1,048,000 options to employees and
nonemployee directors. These options were issued under various arrangements
with different terms for the exercise price and vesting periods. During 1998,
150,000 options have been exercised.
In December 1997, in connection with the Series A issue of preferred stock,
the Company granted the placement agent 2,800,000 options for which the
placement agent could exchange each option for $.85 a share (see note F), or
2,380,000 shares, of the Company's common stock upon registration.
On February 21, 1998, the Board adopted the 1998 stock option plan which went
into effect on January 1, 1998. The number of shares reserved for stock
options was 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.
During 1998, the Company granted 1,266,000 options to employees and
nonemployee directors. The options were issued under various arrangements
with different terms and vesting periods. During 1998, 505,000 options were
exercised and 827,400 options were cancelled.
-74-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE J - STOCK OPTIONS (Continued)
Proforma 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, 1996, 1997 and
1998 was $10.14, $1.26 and $0.82, 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:
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- ---------
<S> <C> <C> <C>
Expected life (in years) 3 3 3
Risk-free interest rate 6.5% 6.1% 6.5%
Volatility factor 20.0% 150.0% 150.0%
</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 net loss per common share would have been
increased to the following proforma amounts:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1996 1997 1998
----------- --------------- ---------------
<S> <C> <C> <C>
Net loss available to common
stockholders
As reported $ (8,056,918) $ (6,315,101) $ (11,371,320)
Proforma (8,236,918) (6,703,585) (11,649,998)
Net loss per common share
As reported $ (0.37) $ (0.31) $ (0.69)
Proforma (0.38) (0.32) (0.70)
</TABLE>
-75-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE K - 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. agreed to 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 1998, 1997 or
1996.
As a result of various mergers and acquisitions, the Company's shares in
Digital Sciences, 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.
NOTE L - 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
sheets. 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.
-76-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE L - LICENSE FEE EXPENSE (Continued)
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 expired 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. Since the agreement was not terminated, it renewed for a
three-year period. The Company is required to pay usage royalties as defined
in the agreement. 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. As of
December 31, 1998, the Company has not utilized the license and, accordingly,
no usage royalties have been recorded by the Company.
NOTE M - SIGNIFICANT CUSTOMERS/SUPPLIERS
A significant portion of the Company's net revenue is derived from a limited
number of customers. During the year ended December 31, 1998, approximately
17% of the Company's total net revenue was derived from one customer. In
addition, as of December 31, 1998 one customer accounted for approximately 11%
of Trade accounts receivable.
In addition, during the year ended December 31, 1998, the Company purchased
its supplies from four suppliers - CBS Corporation (formerly Westinghouse
Electric), American Mobile Satellite Corporation, Mitsubishi Electronics
America and Iridium North America, L.P.
NOTE N - RELATED-PARTY TRANSACTIONS
During 1996, the Company made advances to stockholders of $116,478. The
advances were forgiven during 1996 and accounted for as compensation expense.
NOTE O - ADVANCES TO NON-AFFILIATES
In April and August 1998, the Company made loans totaling $510,000 to a target
company in a potential acquisition. The original notes bear interest at 10%
per annum and were due in December 1998. The notes were amended and extended
to March 31, 1999 and July 31, 1999. Management has recorded a reserve at
December 31, 1998 due to the target company's early state of development.
NOTE O - ADVANCES TO NON-AFFILIATES
-77-
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
In December 1997 and January 1998, the Company made advances totaling $25,000
and $136,000, respectively, to another target company in a potential
acquisition. The advances bear interest at 12% per annum and are secured by
the common stock of the target company. The advances were due in September
1998. In October 1998, the Company filed a lawsuit against the target company
to collect the outstanding amounts due to the Company. At December 31, 1998,
management has recorded a reserve against the amounts due to the Company.
NOTE P - SUBSEQUENT EVENTS
Series C Preferred Stock
------------------------
In January 1999, the Company again offered its Series C preferred stock and
warrants. The offering period expired February 28, 1999. In connection with
the second offering, the Company issued 200 shares of Series C preferred stock
and 6,600 warrants and received net proceeds of $178,000. Based on the
valuation of each on the date of issuance of the second offering, the Company
will fully allocate $188,120 to the preferred stock and $11,880 to the
warrants. In addition, the Company will record a beneficial conversion feature
of approximately $61,000.
Asset Acquisition
-----------------
In January 1999, the Company entered into an agreement with an unrelated
company to purchase certain assets and technology for $350,000. The Company
paid $50,000 in January 1999 and signed a $300,000 promissory note at 8% per
annum payable in installments of $100,000 in February 1999 and the remainder
in April 1999.
Employment Agreements
---------------------
In connection with the above asset acquisition, the Company entered into an
employment agreement with the founder of the unrelated company. The agreement
commenced on January 1, 1999 for a three year period ending December 31, 2001
for an annual salary of $160,000 plus a discretionary bonus. In addition, the
Company will grant 100,000 options to the founder at an exercise price of
$3.50 per share, vesting immediately and exercisable through December 31,
2001.
In addition, the Company entered into an employment agreement with an employee
commencing January 1, 1999 for an annual salary of $130,000 plus a
discretionary bonus. The employment agreement may be terminated with or
without cause by the Company or the employee and does not automatically renew.
-78-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors And Executive Officers
The following table sets forth the names, ages as of February 28, 1999 and
business experience of the directors and executive officers of the Company.
Directors of the Company hold their offices for a term of one year or until
their successors are elected and qualified. Officers of the Company serve at
the discretion of the Board of Directors of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------ -------- -----------------------------------------------------
<S> <C> <C>
Robert Wussler 61 Chairman of the Board, President and Chief Executive
Officer of the Company
Edward Kopf 51 Executive Vice President and Secretary of the Company
David Ives 46 Vice President, Treasurer and Controller of the Company
Charles Maynard 54 Chief Executive Officer of Insat
Philip Kernan 48 President and Chief Financial Officer of Insat
Lawrence Siegel 49 Director of the Company
Thomas Glenndahl 51 Director of the Company
Henrikas Iouchkiavitchious 63 Director of the Company
A. Frans Heideman 56 Director of the Company
</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 and of CBS Sports and is 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.
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<PAGE>
DAVID IVES. Mr. Ives joined the Company in November 1998 as Vice President,
Treasurer and Controller. Prior to that, from May 1997 to August 1998, Mr. Ives
was the Corporate Controller of Telco Communications Group, Inc. and was
Assistant Corporate Controller from November 1996 to May 1997. From February
1994 to October 1996 he was Controller of LCC International, Inc. Mr. Ives was
U.S. Corporate Controller of ADT INC from 1987 to 1993.
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.
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 and 1998. The Company intends to hold its
next annual meeting of shareholders in May 1999.
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<PAGE>
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); Mr. Maynard (Form 3);
Mr. Kernan (Form 3); Mr. Kopf (Form 3); Mr. Ives (Form 3); Mr. Heideman
(Form 3); and Mr. Iouchkiavitchious (Form 3).
-81-
<PAGE>
ITEM 11. Executive Compensation
The following table sets forth the annual and long-term compensation paid
by the Company for services performed on the Company's behalf for the fiscal
years ended December 31, 1996, 1997 and 1998, with respect to those persons who
were, as of December 31, 1998, the Company's Chief Executive Officer and the
Company's four other most highly compensated executive officers who earned over
$100,000 during the year (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long Term
Compensation Compensation Awards
--------------- -------------------
- ----------------------------------------------------------------------------------------------------------------------
Securities
Other Annual Underlying Options All Other
Name and Principal Position Year Salary Bonus Compensation (Number of Shares) Compensation
--------------------------- ---- ------ ----- ------------ ------------------ ------------
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert Wussler, 1998(1) $189,583 -- -- 80,000 $ 54,140
Chairman of the Board, President 1997 -- -- -- 160,000 --
and Chief Executive Officer of 1996 -- -- -- 25,000 --
the Company
- ----------------------------------------------------------------------------------------------------------------------
Lawrence Siegel, 1998(2) -- -- -- 160,000 112,497
President and Chief Executive 1997(2) 250,288 -- -- 160,000 --
Officer of the Company 1996 -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
William Buck, 1998 -- -- -- -- --
President and Chief Executive 1997(3) -- -- -- -- --
Officer of the Company 1996 60,000 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Charles Maynard, 1998 171,999 -- -- 60,000 --
Chief Executive Officer of Insat, 1997 64,000 -- -- 60,000 --
Skysite and Project 77 1996 -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Philip Kernan, 1998 161,020 -- -- 54,000 --
President and Chief Financial 1997 -- -- -- 54,000 --
Officer of Insat, Skysite and 1996 50,002 -- -- -- --
Project 77
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
_____________
(1) Mr. Wussler was appointed President and Chief Executive Officer in July
1998. Prior to July 1998, Mr. Wussler received payments as a consultant.
(2) 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 position until May 1998, when Mr.
Wussler succeeded him. During 1998, Mr. Siegel received payments as a
consultant.
(3) Mr. Buck resigned from his position as President and Chief Executive
Officer of the Company on January 8, 1997.
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<PAGE>
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 Non-Employee
Directors' Stock Option Plan (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 December 31, 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.
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.
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<PAGE>
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 December 31,
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
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<PAGE>
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, (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,
modify the employees or class of employees to participate under the 1998 Stock
Option Plan, or extend the maximum option term under the 1998 Stock Option Plan.
As of December 31, 1998, the Company has granted options to purchase
777,000 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 895,200 shares pursuant to
the 1995 Stock Option Plan, of which, 10,000 shares have been issued, 200,000
have been cancelled and 685,200 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.
Non-Employee Director Stock Option Grants
In 1996, an option to purchase 25,000 shares of Common Stock was awarded to
each of the non-employee directors under the original terms of the 1996 Non-
Employee Directors' Stock Option Plan. As of March 1997, the terms of that plan
were amended by the Board of Directors so as to award each non-employee Director
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. From the adoption of the 1996 Stock Option Plan through December 31,
1998, the Company has granted non-employee directors 300,000 options pursuant to
the terms of that plan, as amended, 480,000 options pursuant to the terms of the
1998 Stock Option, Deferred Stock and Restricted Stock Plan (the "1998 Stock
Option Plan") and 255,000 under no specific 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 $1,000 per meeting attended, as well as
reasonable expenses incurred in attending such meetings. No family
relationships exist between any of the Directors or executive officers of the
Company or Skysite.
-85-
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth certain information regarding options
granted under the Employee Stock Option Plan and under no specific plan during
the fiscal year ended December 31, 1998 to the Named Executive Officers:
OPTION GRANTS FOR YEAR ENDED DECEMBER 31, 1998
(Individual Grants in Fiscal Year)
<TABLE>
Number of Percent of Potential Realizable Value at
Securities Total Options Assumed Annual Rates of Stock
Underlying Granted to Exercise Price Appreciation for Option
Name Options in Employees in Price Expiration Date Term
Fiscal Year Fiscal 1998 Per Share
1998 (1) 0%($) 5% ($) 10% ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert Wussler/2/ 40,000 13.6 $ 1.41 1/1/03 - 15,582 34,433
40,000 13.6 $ 1.00 4/1/03 - 11,051 24,420
Lawrence Siegel/2/ 40,000 13.6 $ 1.41 1/1/03 - 15,582 34,433
40,000 13.6 $ 1.00 4/1/03 - 11,051 24,420
40,000 13.6 $ 4.86 7/1/03 - 53,709 118,683
40,000 13.6 $ 4.00 10/1/03 - 44,205 97,681
William Buck - 0 - - - - -
Charles Maynard/3/ 10,000 3.4 $0.3125 1/31/02 1,725 2,770 3,976
10,000 3.4 $0.3125 2/28/02 - 133 799
10,000 3.4 $0.3125 3/31/02 - 254 945
10,000 3.4 $0.3125 4/30/02 6,155 8,155 10,462
10,000 3.4 $0.3125 5/31/02 12,345 15,679 19,525
10,000 3.4 $0.3125 6/30/02 12,965 16,433 20,432
Philip Kernan/3/ 9,000 3.1 $0.3125 1/31/02 1,553 2,493 3,976
9,000 3.1 $0.3125 2/28/02 - 119 719
9,000 3.1 $0.3125 3/31/02 - 229 851
9,000 3.1 $0.3125 4/30/02 5,540 7,339 9,416
9,000 3.1 $0.3125 5/31/02 11,111 14,111 17,572
9,000 3.1 $0.3125 6/30/02 11,669 14,789 18,389
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL 354,000 120.4 63,061 233,685 440,735
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All grants of options have been made with exercise prices equal to or above
fair value as determined by the Company at date of grant.
(2) Grants vests 75 days after award and have a term of 5 years.
(3) Grants vest on award and have a term of 4 years.
Option Exercises And Year-End Option Values
No options were exercised in fiscal year 1998 by any of the Named Executive
Officers. The following table sets forth, as of December 31, 1998, the number
of stock options and the value of unexercised in-the-money stock options held by
the Named Executive Officers.
-86-
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options(1)
Name Options at December 31, 1998 at December 31, 1998
----- ----------------------------- --------------------
- ----------------------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ------------ --------------
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert Wussler 265,000 0 $ 78,752 0
Lawrence Siegel 320,000 0 $ 78,752 0
William Buck 0 0 0 0
Charles Maynard 120,000 0 $118,500 0
Philip Kernan 108,000 0 $106,715 0
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL: 813,000 0 $382,719 0
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The dollar value of the unexercised options has been calculated by
determining the difference between the fair market value of the securities
underlying the options and the exercise price of the option at fiscal year-
end.
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, 1998 were
Mr. Wussler, Mr. Siegel, Mr. Kopf, and Jerome Greenberg, the Company's former
Chairman of the Board, Vice President and Treasurer.
-87-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below is based on information obtained from the persons named
below with respect to the shares of Common Stock beneficially owned, as of
December 31, 1998 (except as noted below), by (i) each person known by the
Company to be the owner of more than 5% of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) each executive officer of the
Company and (iv) all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED4
- ------------------------------------------------- --------------------------- ----------------------------------
<S> <C> <C>
William Buck(1) 350,000 2.1
Robert Wussler (2) (3) 265,000 1.6
Edward Kopf 0 *
David Ives 0 *
Charles Maynard (3) 120,000 *
Philip Kernan (3) 108,000 *
Thomas Glenndahl (2) (3) 345,000 2.1
Lawrence Siegel (2) (3) 320,000 1.9
A. Frans Heideman (2) (3) 120,000 *
Henrikas Iouchkiavitchious (2) (3) 120,000 *
All directors and executive officers as a 1,748,000 9.6
group (8 persons)
</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 16,449,800
shares of Common Stock which were outstanding on December 31, 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 December 31, 1998 are deemed outstanding. Such shares,
however, are not deemed outstanding for purposes of computing percentage
ownership of any other person.
-88-
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
General
William Buck
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 requested 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.
Jerome Greenberg
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. As of
-89-
<PAGE>
January 31, 1999, the Company has only paid the first installment which was due
on September 1, 1998.
Donald Gilbreath
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.
Roger Remillard
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.
Robert Wussler
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. In December, 1998, the Board of Directors
approved an employment agreement between the Company and Mr. Wussler. For his
services as Chief Executive Officer and President, Mr. Wussler was to receive an
annual salary starting at $325,000, subject to increases each year, as well as
200,000 options annually to purchase common stock of the Company at a price of
$2.00 per share and a discretionary annual bonus. The contract provided that
additional options would be granted in relation to certain performance measures.
In addition, the Company was to lend Mr. Wussler $150,000 to be used for the
exercise of options currently held by Mr. Wussler to buy common stock of the
Company. The term of the agreement was five years starting on June 1, 1998.
For a description of the formation of the Company and transactions with
"Promoters" of the Company within the meaning of the regulations promulgated by
the Commission pursuant to the provisions of the Securities Act, see "Business -
Background" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
-90-
<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 consolidated financial statements of the Company and
its subsidiaries:
. Consolidated Balance Sheets at December 31, 1997 and 1998.
. Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998.
. Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended December 31, 1996, 1997 and 1998.
. Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.
. Notes to 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 7, 1998, was filed reporting
on Items 4 and 7, relating to a change in the Company's certifying
accountant.
A Current Report on Form 8-K, dated October 20, 1998, was filed
reporting on Items 4 and 7, relating to a change in the Company's certifying
accountant.
A Current Report on Form 8-K, dated December 11, 1998, was filed
reporting on Items 5 and 7, relating to correction to a press release
reporting the Company's financial results for the third quarter of 1998.
-91-
<PAGE>
(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 hareholders
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 *
-92-
<PAGE>
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 *
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.(3)
10.14 Lease, dated October 14, 1998 between the Company and Alliance
Business Centers, regarding 2 Wisconsin Avenue, Suite 700,
Chevy Chase, Maryland 20815 **
10.15 Sub-sublease, dated July 2, 1998, between U.S. Digital
Satellite, Inc. and IT Corporation, regarding 1575 Eye Street,
NW, Suite 425, Washington, DC **
10.16 Employment Agreement between the Company and Robert J. Wussler;
dated December 28, 1998. **
20.1 Corrected press release, dated December 11, 1998, with respect
to the financial results for the Company's third quarter and
nine months ended September 30, 1998.(4)
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.
(3) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Report on Form 10-Q dated December 7, 1998 and
incorporated herein by reference.
(4) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Current Report on Form 8-K dated December 11, 1998 and
incorporated herein by reference.
* Previously filed with Form 10-K filed with the Securities and Exchange
Commission on October 7, 1998 and incorporated herein by reference.
** Previously filed with Form 10-K/A filed with the Securities and Exchange
Commission on December 31, 1998 and incorporated herein by reference.
-93-
<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 31th day of
March, 1999.
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.
SIGNATURE TITLE DATE
- -------------------- ------- ------
/s/ ROBERT WUSSLER Chairman of the Board and Directors, March 31, 1999
- ------------------ President and Chief Executive Officer
Robert Wussler
/s/ Edward Kopf Executive Vice President and Secretary March 31, 1999
- ------------------- (Principal Accounting
Edward Kopf and Financial Officer)
/s/ Lawrence Siegel Director March 31, 1999
- -------------------
Lawrence Siegel
/s/ Thomas Glenndahl Director March 31, 1999
- -------------------
Thomas Glenndahl
/s/ A. Frans Heideman Director March 31, 1999
- -------------------
A. Frans Heideman
/s/ Henrikas Iouchkiavitchious Director March 31, 1999
- -------------------
Henrikas Iouchkiavitchious
-94-
<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 *
-95-
<PAGE>
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 *
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.(3)
10.14 Lease, dated October 14, 1998 between the Company and Alliance
Business Centers, regarding 2 Wisconsin Avenue, Suite 700,
Chevy Chase, Maryland 20815 **
10.15 Sub-sublease, dated July 2, 1998, between U.S. Digital
Satellite, Inc. and IT Corporation, regarding 1575 Eye Street,
NW, Suite 425, Washigton, DC **
10.16 Employment Agreement between the Company and Robert J. Wussler,
dated December 28, 1998.**
20.1 Corrected press release, dated December 11, 1998, with respect
to the financial results for the Company's third quarter and
nine months ended September 30, 1998.(4)
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.
(3) Previously filed with the Securities and Exchange Commision as an Exhibit
to the Company's Report on Form 10-Q dated December 7, 1998 and
incorporated herein by reference
(4) Previously filed with the Securities and Exchange Commision as an Exhibit
to the Company's Current Report on Form 8-K dated December 11, 1998 and
incorporated herein by reference
* Previously filed with Form 10-K filed with the Securities and Exchange
-96-
<PAGE>
Commission on October 7, 1998 and incorporated herein by reference.
** Previously filed with Form 10-K/A filed with the Securities and Exchange
Commission on December 31, 1998 and incorporated herein by reference.
-97-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K AS
OF DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,395,480
<SECURITIES> 20,312
<RECEIVABLES> 200,553
<ALLOWANCES> 13,330
<INVENTORY> 795,117
<CURRENT-ASSETS> 2,681,868
<PP&E> 237,883
<DEPRECIATION> 247,528
<TOTAL-ASSETS> 3,856,817
<CURRENT-LIABILITIES> 3,807,742
<BONDS> 0
0
37,073
<COMMON> 227,325
<OTHER-SE> 815,323
<TOTAL-LIABILITY-AND-EQUITY> 3,856,817
<SALES> 1,179,922
<TOTAL-REVENUES> 1,179,922
<CGS> 954,365
<TOTAL-COSTS> 7,671,638
<OTHER-EXPENSES> 9,630
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 148,905
<INCOME-PRETAX> (7,265,156)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,265,156)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,265,156)
<EPS-PRIMARY> (0.69)
<EPS-DILUTED> (0.69)
</TABLE>
