<PAGE>
As filed with the Securities and Exchange Commission on May 5, 1999
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________________
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
______________________
U.S. DIGITAL COMMUNICATIONS, INC.
(Name of Registrant as Specified in Its Charter)
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<S> <C> <C>
NEVADA 4812 52-2124492
(State or Other Jurisdiction of (Primary Standard Industry (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
2 WISCONSIN CIRCLE, SUITE 700, CHEVY CHASE, MD 20815
(301) 961-1540
(Address Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Execution Offices)
_______________________
Mr. Robert J. Wussler
Chairman of the Board of Directors, President and Chief Executive Officer
2 WISCONSIN CIRCLE, SUITE 700, CHEVY CHASE, MD 20815
(301) 961-1540
(Name, Address Including Zip Code, and Telephone Number, Including Area Code, of
Agent For Service)
______________________
Copies To:
ROGER MULVIHILL, ESQ.
DECHERT PRICE & RHOADS
30 Rockefeller Plaza
NEW YORK, NEW YORK 10112
(212) 698-3500
Approximate Date of Commencement of Proposed Sale to the Public: From time
to time after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_] ______________.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] ______________.
If this form is a post-effective amendment filed pursuant to Rule 462 (c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ____________.
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [-] ____________.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
______________________
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==========================================================================================================
PROPOSED PROPOSED
TITLE OF EACH MAXIMUM MAXIMUM
CLASS OF SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK, $.01 PAR VALUE 258,353 1.38 (1) $ 356,527 $ 99.11
- ----------------------------------------------------------------------------------------------------------
WARRANTS (2) 1,511,667 -- -- -- (2)
- ----------------------------------------------------------------------------------------------------------
COMMON STOCK, $.01 PAR VALUE,
UNDERLYING THE WARRANTS (3) 1,511,667 1.38 (1) $2,086,100 $ 579.94
- ----------------------------------------------------------------------------------------------------------
COMMON STOCK, $.01 PAR VALUE,
UNDERLYING THE SERIES B PREFERRED
STOCK (4) 5,000,000 1.38 (1) $6,900,000 $1,918.20
- ----------------------------------------------------------------------------------------------------------
COMMON STOCK, $.01 PAR VALUE,
UNDERLYING THE SERIES C PREFERRED
STOCK (5) 5,000,000 1.38 (1) $6,900,000 $1,918.20
- ----------------------------------------------------------------------------------------------------------
COMMON STOCK, $.01 PAR VALUE,
UNDERLYING PUT OPTION 1,600,000 1.38 (1) $2,208,000 $ 613.82
- ----------------------------------------------------------------------------------------------------------
COMMON STOCK, $.01 PAR VALUE,
UNDERLYING EMPLOYEE AND OTHER OPTIONS
TO PURCHASE COMMON STOCK 1,466,697 1.38 (1) $2,024,042 $ 562.68
- ----------------------------------------------------------------------------------------------------------
TOTAL REGISTRATION FEE $5,691.96
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
as amended, based on the average of the bid and asked prices of the Common
Stock on the OTC Bulletin Board on April 30, 1999.
(2) The Warrants may be exercised to purchase shares of Common Stock. The
number of shares of Common Stock that may be acquired upon the exercise of
the Warrants is included in the calculation of the number of shares of
Common Stock to be registered in note (3) below. No fee is required
pursuant to Rule 457(g).
(3) Issuable upon exercise of outstanding Warrants to be registered in Note (2)
above.
(4) Since the conversion price of the Series B Preferred Stock is subject to
adjustment based on the future market value of the Common Stock, the
Company is registering the maximum number of shares that it judges is
likely to be issuable under such adjustment.
(5) Since the conversion price of the Series C Preferred Stock is subject to
adjustment based on the future market value of the Common Stock, the
Company is registering the maximum number of shares that it judges is
likely to be issuable under such adjustment.
______________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 (A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8 (A), MAY DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED May 5, 1999
PROSPECTUS
U.S. DIGITAL COMMUNICATIONS, INC.
14,836,717 Shares of Common Stock
______________________
Investing In These Securities Involves A High Degree Of Risk.
See "Risk Factors" On Page 6.
______________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
______________________
Certain holders of securities of our company are hereby offering for resale
the following securities of our company:
. up to 258,353 shares of Common Stock held by them;
. up to 5,000,000 shares of Common Stock underlying the Series B
Preferred Stock;
. up to 5,000,000 shares of Common Stock underlying the Series C
Preferred Stock;
. up to 1,511,667 Warrants for purchase of Common Stock held by them;
. up to 1,511,667 shares of Common Stock underlying the Warrants; and
. up to 1,600,000 shares of Common Stock underlying the Put Option.
. up to 1,466,697 shares of Common Stock underlying Options to
purchase Common Stock
The selling stockholders may sell these securities at any time at any
price. We will not receive any proceeds from the resale of these securities.
We have agreed to pay for all expenses of this offering.
Our Common Stock is traded on the OTC Bulletin Board under the symbol
"USDI." On April 30, 1999, the closing price for our Common Stock on the OTC
Bulletin Board was $1.38 per share.
______________________
The date of this Prospectus is May 5, 1999
______________________
<PAGE>
TABLE OF CONTENTS
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<S> <C>
AVAILABLE INFORMATION................................................... i
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS......................... ii
PROSPECTUS SUMMARY...................................................... 1
RISK FACTORS............................................................ 6
USE OF PROCEEDS......................................................... 19
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................ 19
CAPITALIZATION.......................................................... 21
SELECTED CONSOLIDATED FINANCIAL DATA.................................... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............... 23
BUSINESS................................................................ 31
MANAGEMENT.............................................................. 41
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......... 53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................... 54
SELLING STOCKHOLDERS.................................................... 55
DESCRIPTION OF SECURITIES............................................... 57
PLAN OF DISTRIBUTION.................................................... 62
LEGAL MATTERS........................................................... 63
EXPERTS................................................................. 63
CHANGES IN INDEPENDENT PUBLIC ACCOUNTANTS............................... 63
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.............................. F-1
</TABLE>
<PAGE>
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith file
reports and other information with the Securities and Exchange Commission (the
"Commission"). You may read and copy such reports and other information at the
following locations:
. the Commission's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549;
. the Commission's regional office at 7 World Trade Center, New York, New
York 10048;
. the Commission's regional office at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and
. the offices of the OTC Bulletin Board at 1735 K Street, N.W., Washington,
D.C. 20006.
The Commission also maintains a Web site at http://www.sec.gov that contains
reports and other information regarding registrants that file electronically
with the Commission.
We have filed with the Commission a Registration Statement on Form S-1 (the
"Registration Statement") pursuant to the Securities Act of 1933, as amended,
(the "Securities Act") covering the securities being offered. This Prospectus is
part of the Registration Statement but does not contain all the information set
forth in the Registration Statement. For more information about us or the
securities being offered, you should read the Registration Statement and related
exhibits, annexes and schedules. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. Although this Prospectus describes the material terms of
certain contracts, agreements and other documents filed as exhibits to the
Registration Statement, you should read the exhibits for a more complete
description of the document or matter involved. You may inspect and copy the
Registration Statement and related exhibits, annexes and schedules from the
locations described above.
i
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this
Prospectus, including without limitation, such statements under "Summary,"
"Management's Discussion and Analysis or Plan of Operation" and "Business" with
respect to our business are forward-looking statements. Although we believe that
our expectations reflected in such forward-looking statements are reasonable, we
can give no assurance that they will prove to have been correct. Important
factors that could cause actual results to differ materially from expectations
("Cautionary Statements") are disclosed in this Prospectus, including, without
limitation, in connection with the forward-looking statements included in this
Prospectus and/or in the section "Risk Factors." The following additional
factors could cause actual results to differ materially from the results which
might be projected, forecast, estimated or budgeted by us in forward-looking
statements:
. dependence on product development;
. competitive products and pricing;
. new product development by competitors;
. product demand and industry capacity;
. rapid technological changes;
. risks of litigation;
. changes in governmental regulations;
. the Company's ability to raise additional capital when required; and
. general economic conditions.
All subsequent written and oral forward-looking statements attributable to
us or persons acting on our behalf are expressly qualified in their entirety by
the Cautionary Statements.
ii
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this Prospectus.
This summary is not complete and may not contain all of the information that you
should consider before purchasing our securities. You should carefully read
this entire Prospectus and the consolidated financial statements contained in
this Prospectus.
Unless the context otherwise requires, the terms "we," "our," "us" and "the
Company" refers 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").
THE COMPANY
U.S. Digital Communications, Inc. is a telecommunications industry company
based in Chevy Chase, Maryland. The Company is primarily a global satellite
communications firm that specializes in corporate applications. Specifically,
the Company is a provider of satellite telephone subscriber equipment and
services.
The Company's Operations
The Company, through INSAT, markets 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. The Company, through its
subsidiaries, works closely with satellite telephone manufacturers and systems
operators to provide solutions to communications needs of international business
travelers and companies with global, emergency and/or remote operations.
The Company has an extremely limited operating history upon which an
evaluation of the Company and its business can be based. 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 Company has incurred losses from operations in 1998, 1997, and
1996 of $7,446,081, $4,440,822, and $7,885,929, and net losses of $7,265,156,
$4,685,185, and $8,056,918, respectively. The satellite telephony industry is
still in its infancy and the eventual profitability of the Company will be
dependent, among other things, on the acceptance of the new communications
technologies it plans to provide. See "Risk Factors--Dependence on Key
Satellite Airtime Providers."
Historical Background
The Company's predecessor, Visual Information Services Corp., was
originally incorporated in Illinois in May 1990, and was founded to develop an
electronic device capable of adding modem, video data and telephone features to
an ordinary television receiver over a telephone line (the "Initial Products").
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"). The Transaction was consummated because the
common stock of GTCI traded on the OTC Bulletin Board, and thus, the Transaction
provided the Company an entity with an existing public presence. Pursuant to
the
1
<PAGE>
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.
During 1997, the Company concluded that the Initial Products would not
produce adequate revenue or profits if brought to market. A new interim
President was hired and specifically charged with developing a new business plan
that would allow the Company to utilize its assets more effectively than under
its original strategy of focusing on the Initial Products. The Company's new
business plan focused on reselling satellite telephone products and services.
Accordingly, the Company abandoned its development of the Initial Products in
order to focus on wireless satellite communications products and services.
In May 1997, Viscorp became involved in operating Skysite. Skysite was
initially created to market a new satellite-based telecommunications system
called Mobilesat. On June 20, 1997, the Company entered into an Agreement and
Plan of Reorganization under which the Company issued shares of its common stock
to the shareholders of Skysite, as well as options to purchase additional shares
of its common stock in exchange for 100% of the outstanding shares of common
stock of Skysite. The common stock of Skysite was transferred to the Company on
August 26, 1997.
On October 24, 1997, Viscorp changed its name to "U.S. Digital
Communications, Inc." In July 1998, the Company created INSAT to oversee its
satellite communications operations and transferred the common stock of Skysite
to INSAT and incorporated Project 77 as INSAT's other wholly-owned subsidiary.
Our principal offices are located at 2 Wisconsin Circle, Suite 700, Chevy
Chase, MD 20815, and our telephone number is (301) 961-1540. In addition to
corporate offices in Chevy Chase, Maryland, the Company has operations in
Burbank, California, and Washington, D.C.
Recent Developments
In order to develop its satellite telephone business, the Company
determined that it required a new long-term senior management team and a new
headquarters location. In the spring of 1998, a new CEO was hired and the
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 designed to increase the breadth and value of its product lines. 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 inability to devote capital resources at Skysite
contributed significantly to the Company's inability to produce significant new
revenues which in turn contributed to the Company's continued losses during
1998.
In the second half of 1997 and in 1998, the Company raised approximately
$11,089,728 in net proceeds through the sale of three series of convertible
preferred stock. As a result of the availability of funds from these offerings,
the Company began to develop marketing and service capabilities in order to
exploit opportunities in the satellite telephone business. The Company's
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.
2
<PAGE>
THE OFFERING
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<S> <C>
Securities Offered for Resale By
Certain Holders of Securities of Our
Company..................................... . up to 258,353 shares of Common Stock held by them;
. up to 5,000,000 shares of Common Stock underlying
the Series B Preferred Stock. The conversion
price for the Series B Preferred Stock is subject
to adjustment depending on the future market value
of the Common Stock. The 5,000,000 shares represent
the maximum number of shares of Common Stock that
the Company judges is likely to be issuable under
the adjustment;
. up to 5,000,000 shares of Common Stock underlying
the Series C Preferred Stock. The conversion price
for the Series C Preferred Stock is subject to
adjustment depending on the future market value of
the Common Stock. The 5,000,000 shares represent
the maximum number of shares of Common Stock that
the Company judges is likely to be issuable under
the adjustment;
. up to 1,511,667 Warrants for purchase of Common
Stock held by them;
. up to 1,511,667 shares of Common Stock underlying
the Warrants;
. up to 1,600,000 shares of Common Stock underlying
the Put Option; and
. up to 1,466,697 shares underlying Options to
purchase Common Stock
</TABLE>
We will not receive any of the proceeds from the resale of these
securities. See "Use of Proceeds" and "Selling Stockholders."
3
<PAGE>
RISK FACTORS
Investing in our securities involves a high degree of risk. You should
consider carefully the information under the caption "Risk Factors" beginning on
page 6 of this Prospectus in deciding whether to purchase the securities offered
under this Prospectus.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary financial data is based upon our consolidated
financial statements included elsewhere in this Prospectus. We have prepared our
consolidated financial statements in accordance with generally accepted
accounting principles. You should read this summary financial data in
conjunction with "Management's Discussion and Analysis or Plan of Operation,"
"Business" and our consolidated financial statements. The year ended December
31, 1996 has 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 consolidated 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 1998,
have been audited by Reznick Fedder & Silverman PC whose report for 1998
included an explanatory paragraph with respect to the Company's ability to
continue as a going concern. See "Changes in Independent Public Accountants."
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<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997 1998
<S> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Sales of equipment and services $ 0 $ 486,642 $ 1,179,922
Gross Profit 0 73,875 225,557
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), 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 0 (1,629,916) (4,106,164)
Net loss per common share (0.37) (0.31) (0.69)
Weighted average shares of common stock
outstanding 21,914,630 20,676,196 16,567,594
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998
<S> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents $ 545,790 $ 1,395,480
Working capital (3,522,622) (1,125,874)
Total assets 2,031,875 3,856,817
Notes payable (net of current portion) 1,617 600,000
Common stock 222,980 227,325
Preferred stock 28,822 37,073
Accumulated deficit (20,701,848) (32,073,150)
Total shareholders' equity (deficit) (2,397,670) (550,925)
</TABLE>
5
<PAGE>
RISK FACTORS
The securities offered under this Prospectus involve a high degree of risk.
You should carefully consider the risk factors set forth below, as well as the
other information appearing in this Prospectus, 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.
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, 1997 and
1998, the Company's net losses were $4,685,185 and $7,265,156, respectively.
6
<PAGE>
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 three
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, 1997, and December 31, 1998, the Company raised
$4,306,944 and $8,184,900 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 or Plan of Operation--Liquidity and Capital Resources"
and Consolidated 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;
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
7
<PAGE>
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.
There is no assurance as to when, or whether, we or our vendors can
successfully complete or implement such development. Further, there is no
assurance that we or our vendors can develop products in commercially salable
form within projected development or implementation schedules.
8
<PAGE>
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 ON 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 America, 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. Our heavy
reliance on Iridium is based on the marketing advantages resulting from its
offer of the first wireless telephone service that is purported to work
throughout the world with a convenient hand-held satellite telephone. This
contrasts with the more limited range and larger customer equipment associated
with American Mobile's service. Because Iridium began commercial service only in
November, 1998 and its telephone satellite system is experiencing technical
problems in its early operations, our reliance on that supplier exposes us to
heightened risks related to new and complex products and services. At the time
of commercial launch of the Iridium system in November, the ability of users to
successfully initiate a call ("call establishment") and to complete a call
without unintended disconnection (avoiding a "dropped call") appears to have
been below consumer expectations. (Iridium has reported that system performance
has improved with ongoing enhancements to the software. Iridium stated in
January 1999 that call establishment over the satellite network was then in
excess of 90 percent, the dropped call rate at about six percent and the Iridium
paging and cross-protocol cellular roaming services were operating at levels
that exceeded performance standards.) Iridium L.L.C. also recently disclosed it
had received a 60 day waiver of financial covenants from certain lenders and
will request modifications in those covenants. In addition, both the Chief
Executive Officer and Chief Financial Officer of Iridium have recently left that
company. We cannot predict with certainty the impact of these developments on
the growth or performance of the Iridium system. 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 effect on the Company's
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performance and operations. The loss of either provider or significant
shortcomings in the performance of their respective services would have a
material adverse affect on the Company.
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,
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 potential impact of this commitment
on the Company's performance will not be reasonably estimable until closer to
the end of its term.
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. The operational difficulties that the Iridium
service has been experiencing in its early months have depressed initial sales
of telephones and airtime and may adversely affect the Company's ability to meet
its commitments with that service.
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<PAGE>
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 "Management--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.
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
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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 or Plan of
Operation" 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 Common Equity and
Related Stockholder Matters."
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
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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 Exchange Act, 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 Common Equity
and Related Stockholder 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 or Plan of Operation-- Liquidity and Capital Resources."
SIGNIFICANT DILUTIVE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON MARKET PRICE
OF COMMON STOCK
As of April 30, 1999, there were 1,792,697 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 April 30, 1999, there were 695,200 shares of Common
Stock issuable upon the exercise of options under the stock option plan adopted
by the Company in 1995. See "Management--Stock Incentive Plans for Employees,
Directors and Consultants." Finally, as of April 30, 1999, there were 1,313,000
shares of Common Stock issuable upon the exercise of options granted outside any
of the Company's stock option plans.
In addition, as of April 30, 1999, the Company has issued and outstanding
2,393,666 shares of Series A Preferred Stock, 3,000 shares of Series B Preferred
Stock, and 3,200 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. See "Description of Securities."
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
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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. As of April 30, 1999, 100% of
the Series C Preferred Stock was convertible. The Common Stock underlying the
Series B and C Preferred Stock is being registered hereunder.
In connection with the sale of the Series A, Series B and Series C
Preferred Stock, the Company issued to subscribers and has outstanding, as of
April 30, 1999, 1,840,416, and 500,000 and 528,000 warrants, respectively,
convertible into an aggregate of 2,868,416 shares of Common Stock. Lastly, in
connection with each of the offerings of the Series B and Series C Preferred
Stock, respectively, the Company issued 250,000 and 266,666 warrants, for a
total of 516,666 warrants, to the placement agent thereof. The common stock
underlying all of the warrants related to the Series B and C Preferred Stock is
being registered hereunder. 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
expense or other charge for such issuances in its consolidated 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
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<PAGE>
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 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 April 30, 1999, over 165 days had passed since the closing of the Series C
Preferred Stock offering and the Company had not filed a registration statement
with the 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 -100% of which were eligible
for conversion as of the end of April 1999. See "Management's Discussion and
Analysis or Plan of Operation--Liquidity and Capital Resources."
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
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
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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
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
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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, through April 30,
1999, options were granted, net of cancellations, to employees and others to
purchase an aggregate of 2,946,250 shares of the Company's Common Stock. See
"Management--Stock Incentive Plans for Employees, Directors and Consultants." We
granted through April 30, 1999, net of cancellations, additional options to
purchase 3,057,000 shares of Common Stock outside of any stock option plan. In
addition, 2,380,000 options were granted to a placement agent in connection with
the Series A Preferred Stock, which options were exercised on March 19, 1999.
See "Risk Factors--Significant Dilutive Effect of Shares Eligible For Future
Sale on Market Price of Common Stock." 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, through April 30, 1999, the issuance of 4,582,353 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
development of cancer. To date, there have
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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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USE OF PROCEEDS
The selling holders of securities will receive all of the proceeds from the
sale of the securities offered hereby. We will not receive any proceeds from the
sale of such securities or the conversion of the Series B Preferred Stock and
the Series C Preferred Stock. We will, however, receive the proceeds, if any,
from the exercise of the Warrants and the Put Option. The net proceeds from any
exercise of either the Warrants or the Put Option will be used by the Company
for working capital and general corporate purposes. There is no assurance that
any or all of the Warrants or the Put Option will be exercised.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's shares have been traded on a limited basis on the OTC
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 OTC Bulletin Board under the symbol VICP. The following table sets
forth the range of high and low bid prices as reported on the OTC 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>
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
1999
----
First Quarter $3.91 $1.44
</TABLE>
There were 120 shareholders of record of the Common Stock as of April 9,
1999. As of April 9, 1999, the closing bid price of the Company's Common Stock
was $1.69 as quoted on the OTC Bulletin Board.
DIVIDENDS
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. The Company intends to retain future earnings, if any, for
reinvestment in the future operation and expansion of the Company's
19
<PAGE>
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 cash 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 cash dividends on the Series B or the Series C Preferred Stock.
20
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1998, and as adjusted to give effect to the assumed conversion of
the Company's Preferred Stock, Warrants and Options at a conversion price equal
to $1.75 per share and the Put Option at a sale price of $1.25 per share.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------
ACTUAL AS ADJUSTED
------------------- ----------------------
<S> <C> <C>
Short-term Obligations:
Notes payable, current portion.............................. $ 314,835 $ 314,835
Stockholders Loans, current portion......................... $ 500,000 $ 500,000
Other $ 511,100 $ 511,100
------------ ------------
$ 1,325,935 $ 1,325,935
Long-term Obligations:
Notes Payable and Stockholders Loans $ 600,000 $ 600,000
------------ ------------
$ 600,000 $ 600,000
Shareholders' Investment:
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; 3,707,332 and 3,701,332 issued and
outstanding................................................ $ 37,073 $ 37,013
Common stock, $0.01 par value, 50,000,000 shares
authorized; 22,732,500 and 36,545,050 shares issued and
16,830,800 and 30,642,850 shares outstanding............... $ 227,325 $ 365,451
Additional Paid-in-Capital.................................. $ 24,579,138 $ 28,447,077
Common stock warrants....................................... $ 6,899,337 $ 6,899,337
Accumulated other comprehensive loss........................ $ (20,638) $ (20,638)
Treasury stock (5,902,200 shares of common stock,
at cost).................................................... $ (10) $ (10)
Stockholders' receivables................................... $ (200,000) $ (200,000)
Accumulated Deficit......................................... $(32,073,150) $(32,073,150)
------------ ------------
Total Shareholders' Investment...................... $ (550,925) $ 3,655,080
------------ ------------
Total Capitalization (Long-term Obligations and
Shareholders' Investment)................... $ 49,075 $ 4,255,080
============ ============
</TABLE>
21
<PAGE>
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
consolidated financial statements of U.S. Digital Communications, Inc. and its
subsidiaries. The consolidated financial statements as of and for each of 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
consolidated 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
each of the years ended December 31, 1997 and 1998, have been audited by Reznick
Fedder & Silverman PC, whose report for 1998 included an explanatory paragraph
with respect to the Company's ability to continue as a going concern. See
"Changes in Independent Public Accountants."
<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>
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 1,617 600,000
Preferred stock 0 0 0 28,822 37,073
Common stock 2,566,167 212,080 221,280 222,980 227,325
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>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
consolidated financial statements and related notes, and the other financial
information, included elsewhere in this Prospectus.
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 "Prospectus Summary--The Company."
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 desirable opportunity in light of
novel and marketable features of its proposed telecommunications 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 its 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 8%
Cumulative Convertible Preferred Stock, pursuant to Regulation S promulgated
under the Securities Act. 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 under the Securities Act. 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.
23
<PAGE>
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 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
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.
24
<PAGE>
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.
25
<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 acquisition opportunities, although no specific acquisitions are
currently contemplated. Funds currently available for these purposes are
unlikely to suffice beyond the second quarter of 1999. The Company currently
anticipates a need for at least $15 million during 1999 to fund operating losses
and to provide working capital 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. There can be no assurance that
any of these will be successful. 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.
The Company's cash needs and its ability to meet them, if at all, at
acceptable cost and conditions 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 there is a potential of future delays.
This uncertainty raises the
26
<PAGE>
possibility that additional, unanticipated fundings may be required and may
dilute investors' or lenders' interests to a degree they could not foresee or
find acceptable. See "Risk Factors-- Dependence of Key Satellite Airtime
Providers."
PLAN OF OPERATION
The Company's plan of operation over the next 12 months focuses primarily
on selling the maximum number of Iridium telephones feasible. It will also
attempt to increase sales in the geostationary satellite-based products that it
offers. To this end, it will continue to expand its sales force and customer
service operations. The sale of large numbers of satellite telephones and
associated service plans would enable the Company to create the base of airtime
service customers that is essential to its long-term profitability. The sales
and marketing expense incurred in creating this customer base is expected to
contribute to operating costs that will exceed revenues in the near-term. The
Company therefore anticipates continued losses in 1999.
Large international organizations, public and private, are the Company's
primary marketing target for the coming year. The Company believes that in the
early stages of satellite telephone's growth these organizations are the most
likely to find the cost/benefit equation for relatively costly services
attractive. The Company is recruiting its sales and marketing staff with a
focus on experience and ability in working with large governmental and
commercial customers.
The Company intends to implement a value-added reseller marketing strategy
in the coming year and beyond. Because satellite telephones and airtime are
essentially commodities, a successful competitive sales effort in that business
requires a reseller to effectively differentiate itself from other resellers of
the same products. The Company will attempt to accomplish this in several
regards. As a specialist in satellite telephony, it believes it can offer
customers a larger range of products than most competitive firms and the
expertise to help customers select the appropriate solution to their needs. The
Company will continue to attempt to broaden its product offerings as additional
satellite telephony and related products join those offered by AMSC, Inmarsat
and Iridium. Its growing sales force, aided by highly-qualified product
specialists, is being trained to offer this wide range of product selections and
expertise at the level of world-wide corporate solutions. The Company is also
developing specific solutions to the known needs of certain target markets -
including transportation, communications and disaster recovery. It will
continue to acquire, license or resell technologies and systems that can be
combined with basic satellite telephone service to provide enhanced value. In
1999, the Company will continue to place emphasis on the integration of Global
Positioning technology and video with satellite services and on providing
customers with such front-end services as voice mail, facsimile service and
"find-me" service (that enables a caller to automatically seek the satellite
telephone user through home and office telephones and by satellite when
appropriate).
The Company's future performance will be subject to a number of business
factors, including those beyond the Company's control, such as economic
downturns and evolving industry needs and preferences, as well as the level of
competition and the ability of the Company to successfully market its products
and technology. There can be no assurance that the Company will be able to
successfully implement a marketing strategy, generate significant revenues or
achieve profitable operations. In addition, because the Company has had only
limited operations to date, there can be no assurance that its estimates will
prove to be accurate or that unforeseen events will not occur.
27
<PAGE>
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.
The Company has established a Year 2000 Program (the "Y2K Program") to
address the Year 2000 issue with respect to the following: (i) the Company's
information technology and operating systems; (ii) the Company's non-information
technology systems (such as buildings, plant, equipment and other infrastructure
systems that may contain embedded microcontroller technology); (iii) certain
systems of the Company's major vendors and material service providers (insofar
as they relate to the Company's business activities with such parties); and
(iii) the Company's 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: a) Awareness, b) Inventory and Risk Assessment,
c) Repair and Renovation, d) Verification and Validation, and e) 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
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 the Company
proceeds 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. The Company is 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 the Company to have a
significant impact on the business from a customer service, financial or legal
perspective. The Company's internal Y2K team is performing this phase. The
Company anticipates 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, the
Company anticipates 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 the Company's direct control, and for
which third parties such 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 the
Company business. Verification and testing of those systems under the Company's
direct control will be performed by the Company's internal Y2K team with the
support of its technicians and certain of the principal suppliers of those
systems. This phase is ongoing, but the
28
<PAGE>
Company expects all testing of those systems under its 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 the Company's 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, the Company's monitoring
activities will be on going.
State of Readiness
The Company's 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, the Company anticipates that these phases will proceed along the
schedule as contemplated by its Y2K Program.
Costs
The Company will utilize both internal and external resources to reprogram,
or replace, and test software for Year 2000 modifications. Total costs
associated with required modifications to become Year 2000 compliant is not
expected to be material to the Company's 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 the Company's services. Such failures could
materially and adversely affect the Company's 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 the Company's
knowledge concerning the Year 2000 readiness of third-parties such as its
service providers, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition. The Y2K Program is
expected to significantly reduce the Company's level of uncertainty about the
Year 2000 problem and, in particular, about the Year 2000 compliance and
readiness of its material partners. The Company believes that, with the
completion of the Y2K Program as scheduled, the potential of significant
interruptions of normal operations should be reduced.
Contingency Plans
29
<PAGE>
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, the Company
intends 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"), which establishes standards for reporting information about
operating segments in annual consolidated financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 was adopted by the Company
on December 31, 1998. The Company does not expect the adoption of SFAS No. 131
to have an impact on the presentation of the Company's results of operations,
financial position or cash flows.
In February 1998, FASB issued SFAS No. 132, "Employees' Disclosures about
Pension and Other Postretirement Benefits" ("SFAS No. 132"), which revises
employers' disclosures about pension and other postretirement benefit plans.
SFAS No. 132 does not change the measurement or recognition of those plans.
SFAS No. 132 is effective for fiscal years beginning after December 15, 1998.
The Company does not expect the adoption of SFAS No. 132 to have an impact on
the Company's results of operations, financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-
1 is effective for consolidated financial statements for years beginning after
December 15, 1998. SOP 98-1 provides guidance over accounting for computer
software developed or obtained for internal uses including the requirement to
capitalize specified costs and amortization of such costs. The Company does not
expect the adoption of this standard to have a material effect on the Company's
capitalization policy.
In April 1998, AICPA issued SOP 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start up
activities and organization costs to be expensed as incurred. As the Company
has expensed these costs historically, the adoption of this standard is not
expected to have a significant impact on the Company's results of operations,
financial position or cash flows.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" ("SFAS 133"), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company does not expect the adoption
of this statement to have a significant impact on the Company's results of
operations, financial position or cash flows.
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BUSINESS
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.
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Pursuant to its agreement with AMSC Subsidiary Corporation ("AMSC"), a
wholly-owned subsidiary of American Mobile Satellite Corporation, the Company
purchases and resells mobile satellite service on a private network basis. This
telephone service provides traditional voice, fax and data service through
satellite terminals that are similar to cellular phones. Telephone calls made
through the Skysite Satellite Telephone System on these mobile satellite
terminals initiate contact with the outside world through one L-Band (1.5Ghz)
GM/Hughes communications satellite in geo-synchronous orbit 22,300 miles above
the equator. The satellite is downlinked into the Public Switched Telephone
Network through a Westinghouse-built Communications Ground Segment ("CGS") earth
station located in Reston, Virginia. Within the satellite coverage area, which
encompasses most of North and Central America, Hawaii, the western Atlantic and
eastern Pacific oceans, the entire Caribbean basin and the northern portion of
Columbia and Venezuela, a subscriber can make or receive direct dial calls
generally to or from anywhere in the world. This is a dial-up-on-demand system
that charges the subscriber for the time actually used.
The Company also offers, on a non-exclusive basis, Iridium services
throughout the world pursuant to its agreement with Iridium North America, L.P.
This agreement is effective through December 6, 2000 and thereafter is renewal
for successive one-year periods unless either party gives notice of its
intention not to renew. 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 services was initiated in November, 1998.
When the Company began selling and shipping these 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," and "Risk Factors--Dependence on Key
Satellite Airtime Providers."
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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.
Furthermore, a satellite telephone has inherent advantages over cellular
telephones in preventing monitoring of calls or data. 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
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 planned 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 being
prepared for full scale marketing. The Company has not projected dates for
commercial launch of these products and they are not being relied upon in near-
term marketing projections.
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
33
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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
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.
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<PAGE>
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
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.
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<PAGE>
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.
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.
FACILITIES
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.
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
36
<PAGE>
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 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
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July 25, 1996, the Company filed a lawsuit in the United States District Court
for the Northern District of California, San Jose Division, case number C 96-
20593 RMW (EAI), against Interactive Video Publishing, Inc., David Serlin, Steve
Owens and Kaori Kuwata ("Defendants") for injunctive relief and damages of
approximately $7 million for misappropriation of trade secrets, conversion and
breach of fiduciary duty. Defendants filed counterclaims for declaratory
relief, intentional interference with economic advantage, breach of contract and
unfair competition claiming damages yet to be determined. On November 20, 1996,
David Serlin and Marvin Lerch filed suit against the Company and its former
officer, Jerome Greenberg, in the United States District Court, Northern
District of California, San Jose Division. The case is captioned Serlin v.
--------
Visual Information Service Corp., case number C 96-21073. David Serlin and
- -------------------------------
Marvin Lerch claimed damages in excess of $6.5 million in connection with the
alleged breach of their employment contracts, alleging breach of employment
contracts, breach of the implied covenant of good faith and fair dealing, fraud,
deceit and negligent misrepresentation among several causes of action. On June
25, 1997, a settlement conference was held in Visual Information Service Corp.
--------------------------------
v. Interactive Video Publishing, Inc. and Serlin v. Visual Information Service
- ------------------------------------- ------------------------------------
Corp. and a settlement was reached with all parties in both actions. On
- ----
September 26, 1997, Messrs. Serlin and Lerch entered into a settlement agreement
with the Company whereby the Company agreed to pay Messrs. Serlin and Lerch
$25,000 each, and granted each 400,000 stock options with an exercise price of
$1.50. The Company was unable to comply with the requirement because the Company
did not and does not have a registration statement on file with the Commission.
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.
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<PAGE>
Donald Gilbreath v. USDI, Viscorp and Corporate Stock Transfer, Inc. On
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December 19, 1997, Donald Gilbreath, a former director of the Company, filed a
complaint against the Company in the United States District Court, District of
Colorado, Case No. 97-WY-2667-CB, alleging a claim against the Company for
failing to remove restrictive legends on shares owned by Mr. Gilbreath. Mr.
Gilbreath requested that the Court hold that he was the lawful owner of
1,000,000 unrestricted shares of Common Stock of the Company, and 237,800
unrestricted options to acquire common shares. On July 2, 1998, the Company
entered into a settlement agreement with Mr. Gilbreath, whereby 500,000 of Mr.
Gilbreath's shares in the Company 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
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. 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
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<PAGE>
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.
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
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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 consolidated financial statements.
40
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages as of April 15, 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.
Name Age Position
---- --- --------
Robert Wussler 62 Chairman of the Board, President and Chief
Executive Officer of the Company
Edward Kopf 52 Executive Vice President and Secretary of the
Company
Timothy Rockwood(1) 40 Senior Vice President of the Company
David Ives 47 Vice President, Treasurer and Controller of
the Company
Charles Maynard 54 Chief Executive Officer of International
Satellite Group, Inc. ("INSAT"), a
wholly-owned subsidiary of the Company.
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
Irving Goldstein(2) 61 Nominated for Director of the Company
Thomas Wheeler(2) 53 Nominated for Director of the Company
(1) Mr. Rockwood will be recommended to the Board of Directors for election as
an officer at the Annual Meeting to be held on May 6, 1999.
(2) Messrs. Goldstein and Wheeler will be recommended to the Shareholders for
election as directors at the Annual Meeting to be held on May 6, 1999.
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 May 1998. From June 1995 to May 1998, Mr. Wussler
was the President and Chief Executive Officer of Affiliate Enterprises, Inc., a
company owned by ABC television affiliates. 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).
41
<PAGE>
EDWARD KOPF. Mr. Kopf has been the Executive Vice President and Secretary
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.
TIMOTHY ROCKWOOD. Mr. Rockwood joined the Company in December 1998 as
Senior Vice President with responsibilities for marketing, communications and
investor relations. Previously, he served as Acting Director of the Discovery
Health Channel and, earlier, as Vice President of Affiliate Enterprises, Inc., a
company owned by ABC television affiliates. Mr. Rockwood's experience includes
over 15 years of network television production and business development.
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 and of International Satellite Group, Inc, ("INSAT")
since its formation in 1998. 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.
LAWRENCE SIEGEL. Mr. Siegel has been a Director of the Company since
March 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. In 1982, Mr. Glenndahl founded the ASPECT Group, an international
education consortium, which was acquired in 1998 by Sylvan Learning Systems
(NASDAQ: SLVN). Mr. Glenndahl also co-founded Alpha Online, now part of the
Internet group Razorfish. He also serves on the Boards of Directors of Aksu
Pharmaceuticals in Turkey and Harling Properties in Sweden.
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
42
<PAGE>
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.
IRVING GOLDSTEIN. Mr. Goldstein served as Director General and Chief
Executive Officer of INTELSAT, the International Telecommunications Satellite
Organization, from 1992 to 1998. From 1966 to 1992, Mr. Goldstein was associated
with COMSAT, the Communications Satellite Corporation, where he served as
Chairman and Chief Executive Officer from 1985 to 1992. He is a Director of
Computer Associates International, Inc. (NYSE: CA) and IDT Corp. (NASDAQ: IDTC).
THOMAS WHEELER. Mr. Wheeler is President and CEO of the Cellular
Telecommunications Industry Association (CTIA), a position he has held since
1992. From 1976 to 1984, Mr. Wheeler was associated with the National Cable
Television Association (NCTA), where he was President from 1979 to 1984. In 1994
President Clinton appointed Mr. Wheeler to a six-year term on the Board of
Trustees of the John F. Kennedy Center for the Performing Arts. He is also a
Director of the U.S. Capitol Historical Society, National Captioning Institute,
and Tech Corps.
43
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
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 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------- --------------------
- --------------------------------------------------------------------------------------------------------------------
Securities
Underlying
Options
Other Annual (Number of All Other
Name and Principal Position Year Salary Bonus Compensation 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 the 1996 -- -- -- 25,000 --
Company
- --------------------------------------------------------------------------------------------------------------------
Lawrence Siegel, 1998(2) -- -- -- 160,000 112,497
President and Chief Executive 1997(2) 250,288 -- -- 160,000 --
Officer of the Company 1996 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Charles Maynard, 1998 171,999 -- -- 60,000 --
Chief Executive Officer of INSAT 1997 64,000 -- -- 60,000 --
1996 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Philip Kernan, 1998(3) 161,020 -- -- 54,000 --
President and Chief Financial 1997 50,002 -- -- 54,000 --
Officer of INSAT 1996 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
_____________
(1) Mr. Wussler was appointed President and Chief Executive Officer in May
1998. Prior to May 1998, Mr. Wussler received payments as a consultant.
(2) Mr. Siegel was elected 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. Kernan served as an officer of the Company's INSAT subsidiary through
December 31, 1998.
44
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding options
granted under the Employee Stock Option 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>
<CAPTION>
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term (2)
----------------- -------------------
Shares % of Total
Underlying Options Granted Exercise
Options to Employees in Price Per Expiration
Name Granted Fiscal Year Share(1) Date 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 34,443
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
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 (4) 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 market value as determined by the Company at date of grant.
(2) Grants vest 75 days after award and have a term of 5 years.
(3) Grants vest on award and have a term of 4 years.
(4) See "Management--Non-Employee Director Stock Option Plan," for a discussion
of certain option grants and cancellations subsequent to December 31, 1998.
45
<PAGE>
OPTION EXERCISE 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.(1)
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options(2)
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 --
Lawrence Siegel 320,000 0 $ 78,752 --
Charles Maynard 120,000 0 $118,500 --
Philip Kernan 108,000 0 $106,715 --
- ---------------------------------------------------------------------------------------------------
TOTAL: 813,000 0 $382,719 --
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Management--Non-Employee Director Stock Option Plan," for a discussion
of certain option grants and cancellations subsequent to December 31, 1998.
(2) 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.
DIRECTORS' COMPENSATION
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.
Non-Employee Director Stock Option Plan:
Since March 1997, each non-employee Director has received every quarter an
option to purchase up to 40,000 shares of Common Stock, with the options vesting
on the 15th day of the month preceding the following quarter, under the
provisions of the 1996 Non-Employee Directors' Stock Option Plan as amended (the
"1996 Stock Option Plan"). On March 25, 1999, the Company and the recipients of
options awarded under the 1996 Stock Option Plan (the "Participating Directors")
agreed to cancel all of the options outstanding that had been awarded under the
1996 Stock Option Plan and any other options that had been awarded to the
Participating Directors. A total of 1,250,000 options were cancelled. The
Company simultaneously awarded new options to the Participating Directors at a
ratio of 1.3 options for each option cancelled. Both the cancelled and newly
issued options were priced at the fair market value of the Company's Common
Stock at the time of issue and both were exercisable for five years from award.
Of the 1,625,050 options newly awarded, 300,000 options were awarded pursuant to
the terms of the 1996 Stock Option Plan and 1,325,050 pursuant to the terms of
the 1998 Stock Option, Deferred Stock and Restricted Stock Plan (the "1998 Stock
Option Plan").
The quarterly option grants to non-employee Directors described above will
continue to be awarded in 1999. None of the shares underlying any of the
Company's stock option plans have been
46
<PAGE>
registered with the Commission except as provided for herein. Furthermore, many
of the cancelled options described above, as well as certain other options still
outstanding, were not granted pursuant to a written plan. See "Management --
Stock Incentive Plans for Employees, Directors and Consultants - 1996 Stock
Option Plan."
No family relationships exist between any of the Directors or executive
officers of the Company, Skysite Communications Corporation, or International
Satellite Group, Inc. ("INSAT"), or any other subsidiary.
EMPLOYMENT AGREEMENTS OF EXECUTIVE OFFICERS
In December 1998, the Company entered into an employment agreement with the
Mr. Wussler, the President and Chief Executive Officer of the Company. The term
of the agreement was five years starting on June 1, 1998. In addition to an
annual salary and bonus starting at $325,000, subject to increases each year,
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 Mr. Wussler to be used to exercise options to purchase common stock
held by him at December 31, 1998. The Company cannot terminate Mr. Wussler
without cause except in the event of a change in control of the Company, in
which case Mr. Wussler is to continue to receive all compensation through May 1,
2003.
The Company does not have employment contracts with any of its other Named
Executive Officers.
STOCK INCENTIVE PLANS FOR EMPLOYEES, DIRECTORS AND CONSULTANTS
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 -- the 1995 Stock Option Plan.
1996 Stock Option Plan
Effective May 1996, the Board of Directors adopted the 1996 Stock Option
Plan. The 1996 Stock Option Plan provides for the grant of stock options to the
non-employee Directors of the Company. The terms of the 1996 Stock Option Plan
provide that the exercise price of any options granted shall be no less than the
fair market value of the Common Stock at the time of grant. The exercise period
for any options granted under the 1996 Stock Option Plan is five years.
The 1996 Stock Option Plan authorizes the grant of options to purchase
300,000 shares of Common Stock and as of December 28, 1998, 300,000 shares
underlying the outstanding 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
47
<PAGE>
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 $0.58 per share, the fair market value of the stock on
the date of grant as determined by the Company, vesting on the date of grant
under the 1996 Stock Option Plan. See "Management--Directors' Compensation," for
a discussion of non-employee directors' option grants and of certain grants and
cancellations subsequent to December 31, 1998.
1998 Stock Option Plan
Effective January 1998, the Board of Directors adopted, subject to the
approval of the Stockholders, 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 ("SARs") and limited stock appreciation rights awards
("LSARs," and together with ISOs, NQSOs, deferred stock, restricted stock and
SARs, "Awards"). The 1998 Stock Option Plan is proposed to be approved by the
Stockholders. The purpose of the 1998 Stock Option Plan is to enable the Company
and its subsidiaries to obtain and retain competent personnel who will
contribute to the Company's success by their ability, ingenuity and industry,
and to provide incentives to such personnel and other important persons that are
linked directly to increases in shareholder value, and will therefore inure to
the benefit of all shareholders of the Company.
Under the 1998 Stock Option Plan a maximum of 6,000,000 shares of the
Company's Common Stock have been authorized for the granting of Awards, subject
to adjustment upon certain corporate transactions, stock splits, or other events
affecting the Company's Common Stock. 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 such Award will again become
available for the issuance of further Awards under the 1998 Stock Option Plan.
The 1998 Stock Option Plan permits the Administrator to grant to eligible
employees stock options and/or SARs that are intended to qualify as
"performance-based compensation" under Section 162(m) of the Code. Section
162(m) of the Code limits the deductibility of compensation paid to the
Company's Chief Executive Officer and to each of the next four most highly paid
officers unless that
48
<PAGE>
compensation is "performance based." Shareholder approval of the 1998 Stock
Option Plan is necessary in order for compensation under the 1998 Stock Option
Plan to be deemed "performance based."
The following summary description of the 1998 Stock Option Plan is
qualified in its entirety by the full text of the 1998 Stock Option Plan, copies
of which may be obtained by the Stockholders upon request to the Office of the
Secretary of the Company.
Administration. The 1998 Stock Option Plan is administered by a committee of
- --------------
directors, who qualify as Non-Employee Directors as defined in Rule 16b-3
promulgated by the Commission, appointed by the Board of Directors or by the
full Board of Directors (the "Administrator"). The Administrator is authorized
to interpret and administer the 1998 Stock Option Plan and to act in selecting
from among the eligible participants the directors, employees, consultants and
advisors to whom Awards will be granted, in determining the type and amount of
Awards to be granted to each such person and the terms and conditions of such
Awards. In the event that option or SAR grants are intended to qualify as
performance-based compensation, as described above, the Administrator must be a
committee comprised solely of at least two directors who qualify as "outside
directors" under Section 162(m) of the Code, or the full unanimous Board of
Directors. The Board of Directors may from time to time revise or amend the 1998
Stock Option Plan and any outstanding Awards, and may suspend or discontinue the
1998 Stock Option Plan 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.
Eligibility. Officers and other key employees, directors, consultants and
- -----------
advisors of the Company, or a subsidiary or affiliate who are responsible for or
contribute to the management, growth, and/or profitability of the business of
the Company, would be eligible to receive NQSOs, deferred stock, restricted
stock, SARs and LSARs. Officers and other key employees of the Company or a
subsidiary or affiliate, including any director who is an employee would be
eligible to receive ISOs.
Awards. Under the 1998 Stock Option Plan, eligible participants may be awarded
- ------
stock options and/or SARs. Stock options may be either ISOs or NQSOs. Unless
otherwise determined by the Administrator, the per share price at which an
option or a SAR could be exercised would be at least equal to the fair market
value of a share of Common Stock (or 110% of fair market value for certain ISOs)
on the date of grant of the Award.
A SAR would entitle the recipient to receive a payment equal to the excess
of the fair market value of the shares of Common Stock covered by the SAR on the
date of exercise over the exercise price of the SAR. Such payment could be in
cash, in shares of Common Stock, or in any combination thereof, as the
Administrator may determine. A SAR could be awarded in tandem with options or
separately. Stock options and SARs would be exercisable over a period to be
designated by the Administrator, but not more than ten years (or five years for
certain ISOs) after the date of the Award. All ISOs awarded under the 1998 Stock
Option Plan would be non-transferable other than by will or by operation of the
laws of descent and distribution. The total number of shares of the Company's
Common Stock that would be available for option grants under the 1998 Stock
Option Plan is 6,000,000 shares (subject to adjustments as described above), and
no more than 4,000,000 shares could be made subject to options and SARs granted
to any one employee over the life of the plan.
Under the 1998 Stock Option Plan, the Company may make loans available to
stock option plan
49
<PAGE>
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.
The exercise price of any option granted under the 1998 Stock Option Plan
is payable in full (i) in cash, (ii) by surrender of shares of the Company's
Common Stock already owned by the option holder having a market value equal to
the aggregate exercise price of all shares to be purchased including, in the
case of the exercise of NQSOs, restricted stock subject to an Award under the
1998 Stock Option Plan, (iii) by cancellation of indebtedness owed by the
Company to the optionholder, (iv) by a full recourse promissory note executed by
the optionholder, (v) by requesting that the Company withhold whole shares of
Common Stock then issuable upon exercise of any option, (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.
Eligible participants also may be awarded LSARs under the 1998 Stock Option
Plan. A LSAR is an Award granted in tandem with either an option or a SAR which
may only be exercised within the 30-day period following a Change in Control, as
defined in the 1998 Stock Option Plan, and only to the extent the related option
or SAR, is exercisable. A LSAR permits the holder of an option or a SAR, as
applicable, to receive a cash payment equal to the difference between the Change
of Control Price, as defined in the 1998 Stock Option Plan, and the exercise
price of the option or SAR, as applicable. The exercise of a LSAR is in lieu of
the exercise of the related option or SAR. The terms of LSARs, subject to the
terms of the 1998 Stock Option Plan, will be determined by the Administrator at
the time of grant.
The 1998 Stock Option Plan authorizes the award of restricted stock and
deferred stock to eligible participants. Such restricted stock and deferred
stock shall be subject to such restrictions, as the Administrator may determine.
Except as otherwise determined by the Administrator, upon a termination of a
restricted or deferred stock holder's employment by the Company for any reason
during the applicable restricted period, all shares of restricted stock and all
shares of deferred stock still subject to restriction shall be forfeited to the
Company, and the participant shall only receive the amount, if any, paid by the
participant for such restricted stock and deferred stock, plus simple interest
on such amount at the rate of 8% per year. The Administrator may waive any or
all remaining restrictions with respect to such restricted stock or deferred
stock in its sole discretion, including but not limited to, upon the attainment
of certain performance goals, the participant's termination, death or
disability, or a Change of Control.
Change of Control. Upon a Change of Control, unless otherwise determined by the
- ------------------
Administrator or the Board of Directors prior the occurrence of such change, (i)
any SARs outstanding for at least six months and any outstanding options under
the 1998 Stock Option Plan shall become immediately vested and exercisable, (ii)
the restrictions applicable to any restricted stock or deferred stock awards
shall lapse and such shares shall be fully vested, (iii) any indebtedness
incurred in connection with the exercise of an option shall be forgiven and (iv)
at the discretion of the Administrator, all outstanding Awards shall be cashed
out at the Change of Control Price.
Term. The 1998 Stock Option Plan is, subject to the approval of the
- ----
Stockholders, effective as of January 1, 1998, and will remain in full force and
effect until the earlier of December 31, 2008 or the date it is terminated by
the Board of Directors.
50
<PAGE>
Federal Tax Treatment. Under the present federal tax laws, the federal income
- ---------------------
tax treatment of Awards under the 1998 Stock Option Plan would be as follows:
An employee would recognize no taxable income and the Company would not be
entitled to a deduction when an ISO is awarded or exercised. (However, the
exercise of an ISO (if the holding period rules described below were satisfied)
would give rise to income includable by the option holder in his or her
alternative minimum taxable income for purposes of the alternative minimum tax
in an amount equal to the excess of the fair market value of the stock acquired
on the date of the exercise of the option over the exercise price.) If an
employee were to sell Common Stock acquired upon exercise, after complying with
requisite holding periods, any gain or loss realized upon such sale would be
long-term capital gain or loss. The Company would not be entitled to take a
deduction as a result of any such sale. If the employee disposes of such Common
Stock before complying with requisite holding periods, the employee generally
will recognize ordinary income equal to the difference between the fair market
value of the Common Stock on the date of exercise and the exercise price, and
the Company will be entitled to a corresponding income tax deduction. Any excess
of the amount realized upon such a disqualifying disposition over the fair
market value at exercise would generally be long-term or short-term capital gain
depending on the holding period involved. Special rules may apply to
disqualifying dispositions where the amount realized is less than the value at
exercise. Also, notwithstanding the foregoing, in the event that exercise of the
option is permitted other than by cash payment of the exercise price, various
special tax rules may apply.
An option holder would recognize no taxable income and the Company would
not be entitled to an income tax deduction if a NQSO were awarded. Upon exercise
of a NQSO, the holder generally would realize ordinary income in an amount equal
to the excess of the fair market value of the Common Stock over the exercise
price, and, provided that the applicable conditions of Section 162(m) of the
Internal Revenue Code are met, the Company would be entitled to a corresponding
income tax deduction. Upon sale of the Common Stock acquired, the holder would
realize short-term or long-term capital gain or loss, depending upon whether the
stock had been held for more than one year, equal to the difference between the
sale price of the Common Stock and the fair market value of the Common Stock on
the date that the holder recognizes income with respect to the option exercise.
Notwithstanding the foregoing, in the event that the exercise of the option is
permitted other than by cash payment of the exercise price, various special tax
rules may apply.
The employee, director, consultant or advisor would recognize no taxable
income and the Company would not be entitled to an income tax deduction if a SAR
or LSAR were awarded. Upon exercise of a SAR or LSAR, the holder generally would
realize ordinary income in an amount equal to the difference between the fair
market value of the Common Stock on the date of exercise and the exercise price
under the SAR or LSAR, and, provided any applicable conditions of Section 162(m)
of the Internal Revenue Code were met, the Company would be entitled to a
corresponding income tax deduction.
Unless a holder of restricted stock makes an "83(b) election" (as discussed
below), there generally would be no tax consequences as a result of the grant of
restricted stock until the restricted stock is no longer subject to a
substantial risk of forfeiture or is transferable. Generally, upon the lapse of
the restrictions, the holder would recognize ordinary income, and the Company
would be entitled to a deduction, equal to the difference between the fair
market value of the stock at such time and the amount, if any, paid by the
holder for the restricted stock. Subsequently realized changes in the value of
the stock generally would be treated as long-term or short-term capital gain or
loss, depending on the length of
51
<PAGE>
time the shares were held prior to disposition of such shares. In general terms,
if a holder were to make an 83(b) election (under Section 83(b) of the Code)
upon the award of restricted stock, the holder would recognize ordinary income
on the date of the award of restricted stock, and the Company would be entitled
to a deduction, equal to (i) the fair market value of the restricted stock as
though the stock were (A) not subject to a substantial risk of forfeiture or (B)
transferable, minus (ii) the amount, if any, paid for the restricted stock. If
an 83(b) election were made, there would generally be no tax consequences to the
holder upon the lapse of the restrictions, and all subsequent appreciation in
the restricted stock would generally be eligible for capital gains treatment.
The deferred stock has been designed with the intention that there would
generally be no tax consequences as a result of the grant of a share of deferred
stock until payment is made with respect to such deferred stock. Generally, when
payment is made (and, it intended, not until such time), the holder of deferred
stock would recognize ordinary income, and the Company would be entitled to a
deduction, equal to the fair market value of the Common Stock and cash, as
applicable, received upon payment.
Additional special tax rules may apply to those Award holders who are
subject to the rules set forth in Section 16 of the Securities Exchange Act.
The foregoing tax discussion is a general description of certain expected
federal income tax results under current law, and all affected individuals
should consult their own advisors if they wish any further details or have
special questions.
1995 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 200,000 shares have been issued and 695,200 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.
52
<PAGE>
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 March
31, 1999 (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
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER(1) (5) (6) OWNED(2) OWNED(3)
-----------------------------------------------------------------------------
<S> <C> <C>
Robert Wussler 344,500 1.6
Charles Maynard 120,000 *
Philip Kernan (4) 108,000 *
Thomas Glenndahl 448,550 2.1
Lawrence Siegel 416,000 2.0
A. Frans Heideman 208,000 1.0
Henrikas Iouchkiavitchious 208,000 1.0
All directors and executive officers as a
group (9 persons) 1,745,050 7.8
</TABLE>
____________
* Less than one percent.
(1) 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.
(2) For each of such persons, represents currently vested but unexercised
options to purchase Common Stock.
(3) The percentage of beneficial ownership is calculated using 20,767,966
shares of Common Stock which were outstanding on March 31, 1999. Beneficial
ownership is determined in accordance with the rules of the 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
March 31, 1999 are deemed outstanding. Such shares, however, are not deemed
outstanding for purposes of computing percentage ownership of any other person.
(4) Mr. Kernan served as an officer of the Company's INSAT subsidiary through
December 31, 1998. Mr. Kernans' shares beneficially owned are therefore not
included in the listing of shares owned by all directors and executive officers
as a group.
(5) In connection with two private offerings of the Company's Series A
Preferred Stock, the Company's placement agent, Wincap, Ltd., an International
Business Company incorporated in the Bahamas ("Wincap"), received the right to
acquire 2,380,000 shares of Common Stock. On March 19, 1999, Wincap exercised
such right and directed the Company to issue Wincap 840,000 shares of Common
Stock and to issue the remaining 1,540,000 shares to each of eight sub-agents.
Each of Wincap and the eight sub-agents has separately advised the Company that
it disclaims beneficial ownership with respect to any securities not actually
issued to it.
(6) As of April 30, 1999, Irving Goldstein and Thomas Wheeler did not
beneficially own any shares of the Company's Common Stock.
53
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and change in
ownership with the Securities and Exchange Commission. Officers, directors and
greater than 10% shareholders are required by Securities and Exchange Commission
regulations to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on its understanding of the Section 16(a) filing requirements
and the absence of forms furnished to the Company, the Company believes that
during fiscal 1998 the following individuals failed to meet the Section 16(a)
filing requirements applicable to its directors, officers and greater than 10%
beneficial owners by not timely filing a Form 3, Initial Statement of Beneficial
Ownership of Securities and/or a Form 4, Statement of Changes of Beneficial
Ownership of Securities and/or a Form 5, Annual Statement of Beneficial
Ownership of Securities: Mr. Glenndahl, Hugh Jencks, Jerome Greenberg, Mr.
Wussler, Mr. Siegel, Mr. Maynard, Mr. Kernan, Mr. Kopf, Mr. Ives, Mr. Heideman,
and Mr. Iouchkiavitchious.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GENERAL
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 January 31, 1999, the
Company has only paid the first installment which was due on September 1, 1998.
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. See
"Management--Employment Agreements with Executive Officers," for a description
of that agreement.
54
<PAGE>
SELLING SHAREHOLDERS*
The following table sets forth certain information regarding beneficial
ownership of certain of the Company's securities (the "Securities") as of April
30, 1999. The Securities are being registered to permit public secondary trading
of such Securities, and each of the selling stockholders of the Company (the
"Selling Stockholders") may offer the Securities for resale from time to time.
See "Plan of Distribution." Upon completion of the offering and assuming the
sale by a Selling Stockholder of all of its Securities available for sale under
this Prospectus, such Selling Stockholder shall not own more than 1% of such
outstanding Securities of the Company.
SECURITIES HELD BY THE SELLING STOCKHOLDERS
-------------------------------------------
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING (5)
------------------------------------------------------------------- --------------------------
NAME OF Number of Number of Number of Number of Number of
BENEFICIAL Shares of Series B Series C Number of Securities Being Shares of Series B
OWNER Common Stock Preferred Stock Preferred Warrants or Offered (4) Common Preferred
(1) (2) Stock Options Stock Stock
(3)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Holden
Holdings
LTD. 279,762 250 0 41,667 -- 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
Thomson
Kernaghan &
Co. Ltd 839,286 750 0 125,000 -- 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
Austost
Ansalt
Schaan 559,523 500 0 83,333 -- 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
Balmore
Funds S.A. 559,523 500 0 83,333 -- 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
Dominion
Capital Fund 223,809 200 0 33,333 -- 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
Sovereign
Partners LP 223,809 200 0 33,333 -- 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
Canadian
Advantage LP 111,905 100 0 16,667 -- 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
Atlantis
Capital
Fund, Ltd. 111,905 100 0 16,667 -- 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
Sandro
Grimaldi 223,809 200 0 33,333 -- 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
GBS Equity
Fund 223,809 200 0 33,333 -- 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
WS
Marketing
and
Financial
Services 250,000 0 0 250,000 -- 0 --
- ----------------------------------------------------------------------------------------------------------------------------------
J. P. Carey
Securities 250,000 0 0 250,000 -- 0 --
- ----------------------------------------------------------------------------------------------------------------------------------
RBB Bank 2,115,714 0 2,000,000 330,000 -- 0 --
- ----------------------------------------------------------------------------------------------------------------------------------
Mohammed
Khalifa 1,057,857 0 1,000,000 165,000 -- 0 --
- ----------------------------------------------------------------------------------------------------------------------------------
Cache
Capital L.P. 195,238 0 200,000 16,667 -- 0 --
- ----------------------------------------------------------------------------------------------------------------------------------
Richard De
Braux 100,000 0 0 100,000 -- 0 --
- ----------------------------------------------------------------------------------------------------------------------------------
Thomas
Glenndahl 448,550 0 0 190,197 -- 0 --
- ----------------------------------------------------------------------------------------------------------------------------------
A. Frans
Heideman 208,000 0 0 208,000 -- 0 --
- ----------------------------------------------------------------------------------------------------------------------------------
Lawrence
Siegel 416,000 0 0 416,000 -- 0 --
- ----------------------------------------------------------------------------------------------------------------------------------
Robert
Wussler 344,500 0 0 344,500 -- 0 --
- ----------------------------------------------------------------------------------------------------------------------------------
Henrikas
Iouchkiavitchious 208,000 0 0 208,000 -- 0 --
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
AFTER THE OFFERING (5)
-------------------------------------------------
NAME OF Number of
BENEFICIAL Series C Number Of
OWNER Preferred Stock Warrants Or Options
- -------------------------------------------------------------------------------
<S> <C> <C>
Holden
Holdings
LTD. - 0
- -------------------------------------------------------------------------------
Thomson
Kernaghan &
Co. Ltd - 0
- -------------------------------------------------------------------------------
Austost
Ansalt
Schaan - 0
- -------------------------------------------------------------------------------
Balmore
Funds S.A. - 0
- -------------------------------------------------------------------------------
Dominion
Capital Fund - 0
- -------------------------------------------------------------------------------
Sovereign
Partners LP - 0
- -------------------------------------------------------------------------------
Canadian
Advantage LP - 0
- -------------------------------------------------------------------------------
Atlantis
Capital
Fund, Ltd. - 0
- -------------------------------------------------------------------------------
Sandro
Grimaldi - 0
- -------------------------------------------------------------------------------
GBS Equity
Fund - 0
- -------------------------------------------------------------------------------
WS
Marketing
and
Financial
Services - 0
- -------------------------------------------------------------------------------
J. P. Carey
Securities - 0
- -------------------------------------------------------------------------------
RBB Bank 0 0
- -------------------------------------------------------------------------------
Mohammed
Khalifa 0 0
- -------------------------------------------------------------------------------
Cache
Capital L.P. 0 0
- -------------------------------------------------------------------------------
Richard De
Braux - 0
- -------------------------------------------------------------------------------
Thomas
Glenndahl - 0
- -------------------------------------------------------------------------------
A. Frans
Heideman - 0
- -------------------------------------------------------------------------------
Lawrence
Siegel - 0
- -------------------------------------------------------------------------------
Robert
Wussler - 0
- -------------------------------------------------------------------------------
Henrikas
Iouchkiavitchious - 0
- -------------------------------------------------------------------------------
</TABLE>
* Information concerning the Selling Solders may change from time to time;
any changes of which the Company is advised will be set forth in a
Prospectus Supplement to the extent required.
_______________________
(1) Includes shares of Common Stock issuable upon conversion of the preferred
stock, exercise of the warrants and/or options beneficially owned by the
relevant Selling Shareholder.
55
<PAGE>
(2) The number of common shares beneficially owned upon conversion of Series B
Preferred Stock, at the current conversion price of approximately $1.05, is
reflected in "Number of Shares of Common Stock Before the Offering."
(3) The number of common shares beneficially owned upon conversion of Series C
Preferred Stock, at the current conversion price of approximately $1.12, is
reflected in "Number of Shares of Common Stock Before the Offering."
(4) All Securities listed in this table will be offered unless otherwise
indicated.
(5) Assumes the sale by the Selling Stockholders of all of the Securities
available for sale under this Prospectus.
Except as noted below, none of the Selling Stockholders has had a material
relationship with the Company or any of its affiliates within the past three
years other than as a result of the ownership of the Securities or as a result
of entering into agreements (the "Subscription Agreements") in connection with
the Company's private equity placements between April 1998 and January 1999,
pursuant to which the Selling Stockholders acquired the Series B Preferred
Stock, Series C Preferred Stock, the Warrants, and Common Stock (upon any
conversion of the Series B Preferred Stock or Series C Preferred Stock or
exercise of the Warrants or Put Option associated with them). See "Management's
Discussion and Analysis or Plan of Operation -- Liquidity and Capital
Resources." In connection with such private equity placement, each of the
Selling Stockholders has represented to the Company in writing that he, she or
it is an accredited investor within the meaning of the Securities Act.
The Selling Shareholders WS Marketing and Financial Services and J.P. Carey
Securities performed services for the Company in the private placement of the
Series B Preferred Stock and Series C Preferred Stock and received the Warrants
and Common Stock (upon any exercise of the Warrants associated with the Series B
Preferred Stock or Series C Preferred Stock) held by them as compensation
therefore. See "Recent Sales of Unregistered Securities - Preferred Stock." The
Selling Shareholders Robert Wussler, Thomas Glenndahl, Lawrence Siegel, A. Frans
Heideman and Henrikas Iouchkiavitchious have served as Directors and/or
Executive Officers of the Company and received the Options to purchase Common
Stock (and Common Stock upon exercise of said Options) held by them as
compensation for that service. See "Management - Directors and Executive
Officers, -- Compensation of Executive Officers, -- Directors' Compensation."
The Selling Shareholder Richard de Braux has served as a consultant to the
Company and received the Options to purchase Common Stock held by him as
compensation for that service.
The Securities offered hereby by the Selling Stockholders have been
acquired or will be acquired pursuant to the Subscription Agreements and/or upon
exercise of the Warrants, the Options or Put Option. In accordance with the
Subscription Agreements, the Company agreed to register the Securities sold in
the private placement of the Series B Preferred Stock and the Series C Preferred
Stock for resale by the Selling Stockholders to permit such resales from time to
time in the market or in privately-negotiated transactions.
The Company has agreed to bear certain expenses (other than broker
discounts and commissions, if any) in connection with the registration of the
Securities.
56
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized by its Articles of Incorporation, as amended, to
issue 50,000,000 shares of Common Stock and 10,000,000 shares of Preferred
Stock, par value $.01 per share (the "Preferred Stock"), which Preferred Stock
may be issued with such rights, designations and privileges as the Board of
Directors may from time to time determine. As of the date hereof, there were
21,374,319 shares of Common Stock issued and outstanding and 2,399,866 shares of
Preferred Stock outstanding.
The following summary descriptions are, to the extent applicable, qualified
in their entirety by reference to the Company's Articles of Incorporation, as
amended.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voting for the election of directors can
elect all of the directors then up for election. The holders of Common Stock
are entitled to receive ratably such dividends when, as and if declared by the
Board of Directors out of funds legally available therefor. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining which are available
for distribution to them after payment of liabilities and after provision has
been made for each class of stock, if any, having preference over the Common
Stock. Holders of Common Stock, as such, have no conversion, preemptive or
other subscription rights, and there are no redemption provisions applicable to
the Common Stock. All of the outstanding shares of Common Stock are validly
issued, fully paid and nonassessable.
PREFERRED STOCK
Series A Preferred Stock
In December 1996 and again in August 1997, the Company offered and
subsequently issued, through private offerings under Regulation S, 8 percent
cumulative convertible preferred stock ("Series A Preferred Stock"), $0.01 par
value per share. The Series A Preferred Stock is nonvoting. The Company issued
4,338,832 total shares of Series A Preferred Stock in the two offerings.
Series A preferred stockholders have the right to convert each share into
one share of common stock as follows: a) 25 percent of the shares 90 days
following the date the shares were issued (the "Series A Initial Conversion
Date") and b) 25 percent of the shares at the end of each of the three
consecutive 90-day periods following the Series A Initial Conversion Date. The
Company converted 637,500 shares of Series A Preferred Stock to an equal number
of shares of common stock through December 31, 1998.
Six months after the date of issuance of the Series A preferred shares, the
Company has the option to require the preferred stockholder to convert each of
such shares into one share of common stock. Upon such conversion, all of the
warrants attached to such shares shall become fully exercisable.
57
<PAGE>
Each Series A preferred stockholder is entitled to receive quarterly
dividends on the last day of March, June, September and December in an amount
equal to 8 percent per annum of the stated value of the Series A Preferred
stock.
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the Company (a "Liquidation"), 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 other subordinate class of Preferred Stock or 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.
Series B Preferred Stock
In April 1998, the Company created a Series B issue of Preferred Stock,
which it offered in a Regulation D Private Placement. The Company offered and
sold 3,000 shares of the 10,000,000 authorized shares of Preferred Stock at a
purchase price of $1,000 per share. Each share has a stated value of $1,000
("Series B Stated Value") and no par value ("Series B Preferred Stock"). The
Series B Preferred Stock does not pay dividends and is nonvoting stock. Each
share of Series B Preferred Stock is convertible into shares of the Company's
common stock based upon a [Conversion Formula, as defined in the Offering
Agreement].
Each holder of Series B Preferred Stock has the right to convert their
shares as follows: a) 50 percent of the shares on the effective date of
registration ("Series B Conversion Date") at the Series B Conversion Price
(lesser of (i) 25 percent [off of] the five-day average Closing Bid Price for
the Company's common stock immediately before conversion or (ii) 100 percent of
Closing Bid Price for the Company's common stock on the date of closing, but not
less than $.50 per share of the Company's common stock) and b) 50 percent of the
shares on the forty-fifth (45th) day after the effective date of registration at
the Series B Conversion Price. The holder shall be entitled to an additional
discount privilege equal to one percent (1%) per month, or fraction of a month,
from the time of closing until the Series B Conversion Date for any conversion
thirty (30) days after the Series B Conversion Date and one-half percent (.5%)
per month or fraction of a month for any conversions thereafter ("Series B
Additional Discount"). All shares outstanding on May 1, 2001 will be
automatically converted into common stock in accordance with the Conversion
Formula, at the Series B Conversion Price.
The Company has the right, in its sole discretion, to redeem in whole or in
part any shares of Series B Preferred Stock submitted for conversion. The
redemption price per share of common stock after conversion of the Series B
Preferred Stock shall be calculated as 133 percent of the face value plus any
accrued Series B Additional Discount.
In the event of 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 Series B Stated Value.
The Series B Preferred Stock subscription agreements contain a "put"
provision for common stock which 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
58
<PAGE>
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.
Series C Preferred Stock
In August 1998, the Company created a Series C issue of Preferred Stock.
The Company offered 4,000 shares, however when the offering ended on September
1, 1998, the Company had issued 3,000 shares at a purchase price of $1,000. In
a second offering ended February 28, 1999, an additional 200 shares were
purchased at the same price. Each Share has a stated value of $1,000 ("Series C
Stated Value") and no par value ("Series C Preferred Stock"). The Series C
Preferred Stock does not pay dividends and is nonvoting stock.
Fifty percent of each share of Series C Preferred Stock shall be
convertible on the earlier of the effective date of registration of the
Company's common stock ("Series C Conversion Date") or one-hundred and twenty
(120) days from the closing of the Series C Preferred Stock Offering. The
remaining fifty percent shall be convertible on the earlier of the forty-fifth
(45th) day after the effective date of registration or one-hundred and sixty-
five (165) from the closing of the Series C Preferred Stock Offering. The
Series C Conversion Price shall be either the discounted price (twenty-five
percent off of the five-day closing bid price) or $3.94, whichever is less.
However, in no event shall the conversion price be less than $1.875 per share.
In the event the stock is trading below $1.875, the floor price will be adjusted
to the lowest closing bid price for the Company's common stock during such five-
day period from which the holder shall be entitled to an additional discount.
The holder shall be entitled to an additional discount privilege equal to one
percent (1%) per month, or fraction of a month, from the time of closing until
the Series C Conversion Date for any conversion thirty (30) days after the
Series C Conversion Date and one-half percent (.5%) per month or fraction of a
month for any conversions thereafter ("Series C Additional Discount"). All
shares outstanding on June 1, 2001, will be automatically converted into Common
Stock on such date in accordance with the Conversion Formula and the Series C
Conversion Price then in effect.
The Company shall have the right in its sole discretion, to redeem, prior
to receipt of a notice of conversion from the holder in whole or in part any
shares of Series C Preferred Stock. The redemption price per share of Series C
Preferred Stock shall be the greater of (i) as 133 percent of the Series C
Stated Value [plus any unpaid penalty should the Company not effect the date of
registration 150 days from Closing] or (ii) the amount derived by multiplying
the number of shares of Common Stock into which the Series C Preferred Shares
could have been converted at the date of notice of conversion, by the closing
asking price of the Common Stock as of the date of notice. 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.
In the event of 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 Series C Stated Value.
59
<PAGE>
WARRANTS
In conjunction with the Series B 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.
Under the terms of the placement agent agreement related to the issuance of
Series B preferred stock, the placement agent was issued warrants to purchase
250,000 shares of common stock at a price and under the conditions of the Series
B preferred stock investors' warrants.
In conjunction with the Series C offering, 511,667 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. Under the
terms of the placement agent agreement related to the issuance of Series C
preferred stock, the placement agent was issued warrants to purchase 250,000
shares of common stock at a price and under the conditions of the Series C
preferred stock investors' warrants.
PUT OPTION
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 from time to time 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 Series B shareholders have the option not to fund any requested draw or some
defined part thereof if the price of the Company's common stock for the 20
trading days prior to the funding is less than defined levels and the average
trading volume is less than defined levels per day for the previous 20 trading
days. The Series B shareholders may opt not to fund a requested draw in any
amount if the price of the Company's common stock for the 20 trading days prior
to that 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 amount that the Company
can require to be funded by the Series B shareholders in a given draw increases
from a minimum of $250,000 when the minimum levels stated above are met to
$750,000 as higher price and trading volume criteria are met.
DIVIDENDS
To date, the Company has not declared or paid any dividends on its Common
Stock. The payment by the Company of dividends, if any, is within the
discretion of the Board of Directors and will depend on the Company's earnings,
if any, its capital requirements and financial condition, as well as other
relevant factors. The Board of Directors does not intend to declare any
dividends in the foreseeable future, but instead intends to retain earnings for
use in the Company's business operations.
60
<PAGE>
TRANSFER AGENT
The transfer agent for the Common Stock is Corporate Stock Transfer,
Republic Plaza, 370 17/th/ Street, Denver, Colorado.
61
<PAGE>
PLAN OF DISTRIBUTION
All or a portion of the Securities offered hereby by the Selling
Stockholders may be delivered and/or sold in transactions, or a series of
transactions, from time to time on the over-the-counter market, on the OTC
Bulletin Board, in negotiated transactions, or a combination of such methods of
sale, at market prices prevailing at the time, at prices related to such
prevailing prices or at negotiated prices. The Selling Stockholders may effect
such transactions by selling to or through one or more broker-dealers, and such
broker-dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Selling Stockholders. The Selling
Stockholders and any broker-dealers that participate in the distribution may
under certain circumstances be deemed to be "underwriters" within the meaning of
the Securities Act, and any commissions received by such broker-dealers and any
profits realized on the resale of Securities by them may be deemed to be
underwriting discounts and commissions under the Securities Act.
Any broker-dealer participating in such transactions as agent may receive
commissions from the Selling Stockholders (and, if they act as agent for the
purchaser of such Securities, from such purchaser). Broker-dealers may agree
with the Selling Stockholders to sell a specified number of Securities at a
stipulated price per share, and, to the extent such a broker-dealer is unable to
do so acting as agent for the Selling Stockholders, to purchase as principal any
unsold Securities at the price required to fulfill the broker-dealer commitment
to the Selling Stockholders. Broker-dealers who acquire Securities as principal
may thereafter resell such Securities from time to time in transactions (which
may involve crosses and block transactions and which may involve sales to and
through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market, in negotiated transactions or otherwise
at market prices prevailing at the time of sale or at negotiated prices, and in
connection with such resales may pay to or receive from the purchasers of such
Securities commissions computed as described above. To the extent required
under the Securities Act, a supplemental prospectus will be filed, disclosing
(a) the name of any such broker-dealers; (b) the number of Securities involved;
(c) the price at which such Securities are to be sold; (d) the commissions paid
or discounts or concessions allowed to such broker-dealers, where applicable;
(e) that such broker-dealers did not conduct any investigation to verify the
information set out or incorporated by reference in this Prospectus, as
supplemented; and (f) other facts material to the transaction.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale of Securities may not simultaneously
engage in market making activities with respect to the Securities of the Company
for a period of two business days prior to the commencement of such
distribution. In addition and without limiting the foregoing, the Selling
Stockholders will be subject to applicable provisions of the Exchange Act, and
the rules and regulations thereunder, including, without limitation, Regulation
M, which provisions may limit the timing of purchases and sales of the
Securities by the Selling Stockholders.
The Selling Stockholders will pay all commissions and certain other
expenses associated with the sale of the Securities by them. The Securities
offered hereby are being registered pursuant to contractual obligations of the
Company, and the Company has paid the expenses of the preparation of this
Prospectus.
62
<PAGE>
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Dechert Price & Rhoads, New York, New York.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1997 and
1998 and the related statements of operations and comprehensive loss, changes in
stockholders' equity (deficit) and cash flows for the years then ended included
in this Registration Statement, have been audited by Reznick Fedder & Silverman
PC, independent accountants, as stated in their report appearing herein, and are
included in reliance on the report of such firm given on their authority as
experts in accounting and auditing.
The statements of operations and comprehensive loss, changes in
stockholders' equity (deficit) and cash flows for the year ended December 31,
1996 included in this Registration Statement, have been audited by Blackman
Kallick Bartelstin, LLP independent accountants, and are included in reliance on
the report of such firm, given on their authority as experts in accounting and
auditing.
CHANGES IN INDEPENDENT PUBLIC ACCOUNTANTS
DECLINATION/RESIGNATION OF BLACKMAN KALLICK BARTELSTEIN, LLP.
The Company's former independent public accountants, Blackman Kallick
Bartelstein, LLP ("BKB"), declined to stand for re-election as the Company's
auditors for the fiscal year ended December 31, 1997.
The declination/resignation of BKB was effected by letter dated September
24, 1997.
BKB's Report to the Company for the fiscal year ended December 31, 1996 was
qualified with respect to the Company's ability to continue as a going concern.
BKB's report stated that the Company's consolidated financial statements had
been prepared assuming that it would continue as a going concern; that the
Company continues to be a development stage enterprise and to date has not
generated any revenues from product sales or positive cash flows from
operations; that the ultimate success of the Company is dependent upon its
ability to complete the development of its products and technology and to
successfully introduce its products to the consumer marketplace; and that the
Company must also be able to raise significant additional capital in debt or
equity markets for both the introduction and development of products and also to
sustain the day-to-day operations of the company. BKB concluded that these
factors raised substantial doubt about the Company's ability to continue as a
going concern.
The decision to change accountants was not recommended or approved by the
Company's Board of Directors or Audit Committee, although the Board understood
that since the Company had moved its operations to California, it was not
feasible to continue to have its books audited by a Chicago, Illinois based
accounting firm and therefore understood that BKB would probably voluntarily
resign or decline to stand for re-election as the Company's auditors.
During the two most recent fiscal years, namely the fiscal years ended
December 31, 1996, and December 31, 1997, and the subsequent interim periods
preceding the decision of BKB to decline to
63
<PAGE>
stand for re-election as the Company's auditors, there were no disagreements
with BKB on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure.
ENGAGEMENT/RESIGNATION OF ARTHUR ANDERSEN
On April 1, 1998, the Company engaged Arthur Andersen LLP as the Company's
principal accountants to audit the Company's and its subsidiaries' consolidated
financial statements for the fiscal year ended December 31, 1997. On September
30, 1998, the Company's auditors, Arthur Andersen LLP, resigned as the Company's
independent accountants. The change in accountant is a result of Arthur
Andersen LLP's resignation and was not recommended or approved by the Company's
Board of Directors, nor was such approval required in order to give effect to
the resignation.
Arthur Andersen LLP was engaged to perform an audit of the Company's and
its subsidiary's 1997 consolidated financial statements and had issued an
unqualified report, dated September 1, 1998, on the consolidated financial
statements of the Company and its subsidiary as of and for the year ended
December 31, 1997. That report, however, was not released by the Company, and
on September 30, 1998, Arthur Andersen LLP withdrew the report. Arthur Andersen
LLP's resignation and withdrawal were not related to the consolidated financial
statements. Further, there were no disagreements between the Company and Arthur
Andersen LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure or reportable events during
such periods or through the interim period ended September 30, 1998 (date of
resignation).
Arthur Andersen LLP has advised the Company that at the time of its
resignation, it was preparing to issue a management letter with comments and
suggestions for consideration related to the Company's internal controls. This
letter was to contain a reference to material weaknesses in the Company's
internal controls over financial reporting for the year ended December 31, 1997.
However, Arthur Andersen LLP had expanded the scope of its audit to take account
of the weaknesses in internal control so as to be able to issue an unqualified
report and its resignation and withdrawal of the report were unrelated to the
Company's financial reporting for the year ended December 31, 1997. Management
of the Company believes that it has begun to address the issues during 1998 with
the employment of qualified personnel in financial reporting positions.
On September 17, 1998, the Company became aware that persons affiliated
with WS Marketing and Financial Services, Inc., the placement agent used by the
Company during its Series B and C stock offerings in 1998, are currently under
Federal indictment concerning matters unrelated to the Placement Agent's
relationship with the Company. See "Risk Factors--Indictment of Persons
Associated with WS Marketing and Financial Services, Inc."
ENGAGEMENT OF REZNICK FEDDER & SILVERMAN
The Company on October 15, 1998 engaged Reznick Fedder & Silverman P.C. to
perform an audit of its consolidated financial statements for the fiscal year
ended December 31, 1997. Prior to October 15, 1998, the Company had not
consulted Reznick Fedder & Silverman P.C. regarding the application of
accounting principles to a specified transaction where a written report or oral
advice was provided to the Company that it considered an important factor in
reaching a decision as to any accounting auditing or financial reporting issue.
The Company subsequently engaged Reznick Fedder & Silverman P.C. to perform an
audit of its consolidated financial statements for the fiscal year ended
December 31, 1998.
64
<PAGE>
U.S. DIGITAL COMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Reports of Independent Auditors............................................................. F-2
Balance Sheets as of December 31, 1997 and 1998............................................. F-3
Consolidated Statements of Operations and Comprehensive Loss for the years ended
December 31, 1996, 1997 and 1998......................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended
December 31, 1996, 1997 and 1998......................................................... F-7
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998.. F-9
Notes to Consolidated Financial Statements.................................................. F-12
</TABLE>
F-1
<PAGE>
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 consolidated
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 plans 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
F-2
<PAGE>
U. S. Digital Communications, Inc.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
ASSETS
<TABLE>
<CAPTION>
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)
F-3
<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
F-4
<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
F-5
<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
F-6
<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
F-7
<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
F-8
<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)
F-9
<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)
F-10
<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
F-11
<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.
F-12
<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.
F-13
<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>
F-14
<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.
F-15
<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.
F-16
<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.
F-17
<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.
F-18
<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 a
llowances for potential credit losses. Actual losses and allowances have been
within management's expectations.
F-19
<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.
F-20
<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.
F-21
<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.
F-22
<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 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.
F-23
<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).
F-24
<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.
F-25
<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.
F-26
<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.
F-27
<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.
F-28
<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.
F-29
<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.
F-30
<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.
F-31
<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>
F-32
<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>
F-33
<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.
F-34
<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.
F-35
<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 Commission. On February 3, 1999, a new settlement
agreement was reached.
F-36
<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 tradeability 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.
F-37
<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.
F-38
<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>
<CAPTION>
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.
F-39
<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>
F-40
<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 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.
F-41
<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.
F-42
<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.
F-43
<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>
F-44
<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.
F-45
<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.
F-46
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE O - ADVANCES TO NON-AFFILIATES (Continued)
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.
F-47
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth various costs and expenses of the Company in
connection with the sale and distribution of the Securities being registered.
All of the amounts shown are estimates except for the Commission Registration
Fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee $ 5,692
Legal Fees and Expenses $ 100,000
Accounting Fees and Expenses $ 10,000
Other Expenses $ 10,000
Total Expenses $ 125,692
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 78.502(1) of the General Corporation Law of the State of Nevada
(the "Nevada Code") grants corporations the power to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, except an action by or in the right of the corporation, by
reason of the fact that he is or was a director or officer of the corporation,
or is or was serving at the request of the corporation as a director or officer
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with the
action, suit or proceeding if he acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and that, with respect to any criminal action or proceeding, he had
reasonable cause to believe that his conduct was unlawful.
Section 78.502(2) of the Nevada Code grants corporations the power to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director or officer of the corporation, or is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise against expenses,
including amounts paid in settlement and attorneys' fees actually and reasonably
incurred by him in connection with the defense or settlement of the action or
suit if he acted in good faith and in a manner which he reasonably believed to
be in or not opposed to the best interests of the corporation. Indemnification
may not be made for any claim, issue or matter as to which such a person has
been adjudged by a court of competent jurisdiction, after exhaustion of all
appeals therefrom, to be liable to the corporation or for amounts paid in
settlement to the corporation, unless and only to the extent that the court in
which the action or suit was brought or other court of competent jurisdiction
determines upon the application that in view of all the circumstances of the
case, the person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper.
To the extent that a director or officer of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections 1 and 2 of Section 78.502 of the Nevada
Code, or in defense of any claim, issue or matter therein, Section 78.502 (3) of
the Nevada Code requires that the corporation shall indemnify him against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection with the defense.
II-1
<PAGE>
Article IX of the Company's Certificate of Incorporation provides that "The
Corporation shall indemnify and hold the Officers and Directors of the
Corporation harmless and free from liability for any claims received against
said Officer and/or Director in the performance of their duties on behalf of the
Corporation and shall, further, reimburse said persons for any legal expenses
incurred in the defense of such claims pursuant to NRS 78, Section 2 and 3 as
amended."
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following paragraphs set forth certain information with respect to
securities sold by the Company within the past three years in transactions that
were not registered under the Securities Act pursuant to the provisions of
Section 4(2) of the Securities Act and/or Regulation D or Regulation S as
promulgated under the Securities Act. The proceeds of these sales were used to
provide working capital for the Company and to offset operating losses.
COMMON STOCK
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 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 and issued 50,000 common shares in connection with sale of
3,000 Series B preferred shares.
During 1999, through April 30, the Company issued 298,353 common shares
upon exercise of options, 1,307,666 common shares upon conversion of Series A
Preferred Stock, 490,000 common shares in settlement of a legal dispute, 25,000
common shares in consideration of services rendered to the Company and 2,423,000
common shares upon exercise of warrants.
II-2
<PAGE>
PREFERRED STOCK
Series A Preferred Stock
In December 1996 and again in August 1997, the Company entered into an
agreement with a placement agent to raise equity financing solely from non-U.S.
persons as defined in Regulation S promulgated by the Commission through private
offerings of the Company's 8 percent cumulative convertible preferred stock
("Series A Preferred Stock"), $0.01 par value per share. The Series A Preferred
Stock is nonvoting. For each two shares of Series A Preferred Stock, an investor
also received a warrant to purchase one share of the Company's Common Stock.
The first offering period, according to the December 1996 offering
memorandum, was to expire on June 30, 1997. However, the Company closed that
offering in February of 1997 after selling 2,031,832 shares of Series A
Preferred Stock with 1,015,916 warrants for a total consideration of $3,047,748.
In August of 1997, the Company again offered its Series A Preferred Stock and
warrants with the offering period to expire March 31, 1998. The August 1997
memorandum was subsequently amended and the offering period was extended to July
31, 1998. The Company raised $3,460,500 through the issuance of 2,307,000
additional shares of Series A Preferred Stock and 1,153,500 warrants. The
Company raised a total of $6,508,248 through the issuance of 4,338,832 total
shares of Series A Preferred Stock in the two offerings. Of this, $2,184,900 was
raised through the issuance of 1,456,600 shares during the first nine months of
fiscal year 1998.
For every two Series A preferred shares purchased, the stockholder received
one warrant (which shall expire three years after the date of execution of the
subscription agreement) to purchase one share of common stock at an exercise
price of $3.00 per share (the "Series A Preferred Stock Warrants"). The Series A
Preferred Stock Warrants shall become exercisable in the same increments and on
the same dates that the conversion rights with respect to the shares to which
they are attached become vested, as described below. As of December 31, 1998, a
total of 2,169,416 Series A Preferred Stock Warrants had been issued.
Shareholders exercised 286,000 warrants through December 31, 1998. The Company
received approximately $858,000 from these exercises less the related placement
fees of approximately $42,900.
The Company has allocated the equity raised in the Series A Preferred Stock
Offered between the preferred stock and the warrants. Based on the valuation of
each on the date of issuance, the Company has allocated approximately $2,868,000
to the preferred stock and $3,640,000 to the warrants for the entire proceeds
received under Series A through closing at July 31, 1998.
On the date of issuance of some of the Series A Preferred Stock, the
purchase price of the shares was less than the quoted market price of the
Company's common stock. Accordingly, the intrinsic value of this beneficial
conversion feature (approximately $7,650,000) is being accreted to preferred
stock over the conversion rights period. Accretion of the beneficial conversion
feature as of December 31, 1998 totaled $3,658,000 and is reflected as an
increase in the carrying value of the preferred stock and a dividend charge
against retained earnings.
Under the terms of the Placement Agent Agreement related to Series A, the
Placement Agent is entitled to (1) a Placement Fee based on a percentage of
capital raised, (2) options to purchase common stock of the Company and (3) five
percent of the proceeds related to exercise of warrants issued with the Series A
preferred shares. The total fees earned and the value of the options granted
through the closing at July 31, 1998, amounted to $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 $.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,
II-3
<PAGE>
if all warrants issued in the Series A offering are exercised, the placement
agent's 5 percent fee would increase by approximately $325,000.
Series B Preferred Stock
In April 1998, the Company created a Series B issue of Preferred Stock,
which it offered in a Regulation D Private Placement. The Company offered 3,000
shares of the 10,000,000 authorized shares of Preferred Stock at a purchase
price of $1,000 per share. Each share had a stated value of $1,000 and no par
value ("Series B Preferred Stock"). The offer of Series B Preferred Stock closed
on May 28, 1998. The Company accepted subscriptions for all 3,000 shares for
$3,000,000, resulting in $2,670,000 net cash proceeds to the Company. The Series
B Preferred Stock will not pay dividends and is nonvoting stock.
Each share of Series B Preferred Stock shall be convertible into shares of
the Company's common stock based upon a Conversion Formula, as defined in the
Offering Agreement.
In conjunction with the offering, 500,000 warrants were issued to the
Series B shareholders proportionate to each investor's number of shares
purchased to the total shares offered. Each warrant entitles the holder to
purchase shares of the Company's common stock at a price 110 percent of the
closing bid price as of the closing of the Series B offering. The exercise price
is $4.34. The exercise price and number of shares to be purchased may be
adjusted from time to time based on computations included in the warrant
agreement. Such warrants are exercisable for three years after closing of the
Series B offering.
The Company has allocated the equity raised in the offering of the Series B
Preferred Stock between the preferred stock and the warrants. Based on the
valuation of each on the date of issuance, the Company will allocate
approximately $955,000 to the preferred stock and $2,045,000 to the warrants.
On the date of issuance of the Series B Preferred Stock, the conversion
price of certain of the Series B Preferred Stock was less than the quoted market
price of the Company's common stock. Accordingly, had the shares been converted
as of the issuance date, the intrinsic value of this beneficial conversion
feature would have been approximately $1,288,000. The eventual accretion of the
intrinsic value of the beneficial conversion feature will be recorded as an
increase in the carrying value of the preferred stock and a dividend charge to
retained earnings over the conversion rights period.
The Series B Preferred Stock subscription agreements contain a "put"
provision for common stock which allows the Company to raise an additional
$3,000,000. The provision specifies that 75 days after the effective date of the
registration of additional common shares to be used under this provision, the
Company may sell common stock (the "Put Stock") to the Series B subscribers. The
price of the Put Stock is determined by taking the lower of (1) 80 percent of
the lowest closing bid price for the previous 20 trading days prior to funding
or (2) 80 percent of the closing bid price on the day of funding. The minimum
draw is $250,000 and the maximum draw is $750,000. If the price of the Company's
common stock for the 20 trading days prior to the funding is less than $1.25 and
the average trading volume is less than $300,000 per day for the previous 20
trading days, the Series B shareholders have the option not to fund the
requested draw. These minimums increase as the amount of the funds requested by
the Company increase from $250,000 to $750,000.
On the date of issuance of the Series B Preferred Stock with the put
provision, the conversion price under the put provision was less than the quoted
market price of the Company's common stock. Accordingly, had the put provision
been exercised at the date of issuance of the Series B Preferred Stock, the
intrinsic value of the beneficial conversion feature would have been
approximately $483,000. The put provision will be recorded as an offsetting
charge to shareholders' equity. The stock put rights will be amortized over the
period of the put provision with an offsetting charge to retained earnings. The
accretion of the intrinsic value of the beneficial conversion feature will be
recorded ratably over the term of the put contract (two years from execution of
the subscription agreement) based on the earliest dates the Company may put its
shares.
II-4
<PAGE>
Under the terms of the Placement Agent Agreement related to the issuance of
Series B Preferred Stock, the Placement Agent was paid fees equal to 11 percent
of the funded amount of $3 million or $330,000 for the placement of the 3,000
shares of Series B Preferred Stock, 50,000 shares of common stock of the
Company, valued at approximately $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 percent
of the cash actually invested at each funding. If the entire Line of Credit is
used, the Placement Agent would earn an additional $240,000.
Series C Preferred Stock
In August 1998, the Company created a Series C issue of Preferred Stock.
The Company offered 4,000 shares of the 10,000,000 authorized shares of
Preferred Stock at a purchase price of $1,000 and no par value ("Series C
Preferred Stock"). When the offering ended on September 1, 1998, the Company had
issued 3,000 shares for $3,000,000, resulting in $2,670,000 net cash proceeds to
the Company. The Series C Preferred Stock will not pay dividends and is
nonvoting stock.
In January 1999, the Company again offered its Series C Preferred Stock and
warrants with the offering period to expire February 28, 1999. During January
1999, in connection with the second offering, the Company raised net cash
proceeds of $178,000 through the issuance of 200 additional shares of Series C
Preferred Stock and 6,600 warrants.
In conjunction with the offering, 528,000 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 number of shares to be purchased may be adjusted from time to time
based on computations included in the warrant agreement. Such warrants are
exercisable for three years after closing of the Series C offering.
The Company has allocated the equity raised in the offer of the Series C
Preferred Stock between the preferred stock and the related warrants. Based on
the valuation of each on the date of issuance of the first offering, the Company
has as of December 31, 1998 fully allocate $1,802,000 to the preferred stock and
$1,198,000 to the warrants. Based on the valuation of each on the date of
issuance of the second offering in 1999, the Company fully allocated $188,120 to
the preferred stock and $11,880 to the warrants.
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 on the first and second offerings would have been approximately $263,000
and $61,000, respectively. The eventual accretion of the intrinsic value of the
beneficial conversion feature will be measured at the date of conversion and
will be recorded as an increase in the carrying value of the Series C Preferred
Stock and a dividend charge to retained earnings over the conversion rights
period.
Under the terms of the placement agent agreement related to the first
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 initial closing date.
Under the terms of the placement agent agreement related to the second
issuance of Series C Preferred Stock, the placement agent was paid fees equal to
11% of the funded amount of $200,000 or $22,000 for the placement of the 200
shares of Series C Preferred Stock. In addition the placement agent will receive
warrants to purchase shares of common stock at a price and under the conditions
of the Series C Preferred Stock investors' warrants. The number
II-5
<PAGE>
of warrants to be issued to the placement agent is dependent on the number of
Series C Preferred Stock that has been issued by the Company when the second
offering period ends.
II-6
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------
<S> <C>
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 *
8.1 Opinion of counsel to the Company concerning the validity
of the Securities being offered***
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 *
</TABLE>
II-7
<PAGE>
<TABLE>
<S> <C>
10.7 Distributor Agreement between Skysite and Westinghouse
Electronic Corporation, dated February 21, 1996 *
10.8 Agreement between Skysite and Mitsubishi Electronics
America, Inc., dated November 7, 1997 *
10.9 Service Provider Agreement between Skysite and Iridium
North America, dated December 1, 1997, as amended*
10.10 Agreement between Skysite and PTT Telecom BV, dated
September 15, 1997 *
10.11 Distribution Agreement between Skysite and CUE Paging
Corporation, dated January 26, 1998 *
10.12 Bulk Seller Agreement between Skysite and ARDIS Company,
dated February 23, 1998 *
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.**
21 Subsidiaries *
23.1 Consent of Accountants***
23.2 Consent of Accountants***
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*
</TABLE>
_______________________
(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
II-8
<PAGE>
incorporated herein by reference.
(3) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Current 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 incorpoarted 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.
*** To be filed as an amendment
ITEM 17. UNDERTAKINGS
(a) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the county of Montgomery, State of
Maryland, on May 5, 1999.
U.S. DIGITAL COMMUNICATIONS, INC.
By: /S/ Robert J. Wussler
-------------------------
ROBERT J. WUSSLER
CHAIRMAN OF THE BOARD, PRESIDENT,
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- --------- -------- ----
<S> <C> <C>
/S/ ROBERT J. WUSSLER CHAIRMAN OF THE BOARD, PRESIDENT, CHIEF May 5, 1999
- ----------------------------- EXECUTIVE OFFICER
ROBERT J. WUSSLER
/S/ EDWARD KOPF SECRETARY (PRINCIPAL ACCOUNTING AND May 5, 1999
- ----------------------------- FINANCIAL OFFICER)
EDWARD KOPF
/S/ LAWRENCE SIEGEL DIRECTOR May 5, 1999
- -----------------------------
LAWRENCE SIEGEL
/S/ THOMAS GLENNDAHL DIRECTOR May 5, 1999
- -----------------------------
THOMAS GLENNDAHL
/S/ A. FRANS HEIDMAN DIRECTOR May 5, 1999
- -----------------------------
A. FRANS HEIDEMAN
/S/ HENRIKAS IOUCKIAVITCHIOUS DIRECTOR May 5, 1999
- -----------------------------
HENRIKAS IOUCHKIAVITCHIOUS
</TABLE>
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------
<S> <C>
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 *
8.1 Opinion of counsel to the Company concerning the validity
of the Securities being offered***
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
</TABLE>
II-11
<PAGE>
<TABLE>
<S> <C>
Corporation, dated February 25, 1998 *
10.7 Distributor Agreement between Skysite and Westinghouse
Electronic Corporation, dated February 21, 1996 *
10.8 Agreement between Skysite and Mitsubishi Electronics
America, Inc., dated November 7, 1997 *
10.9 Service Provider Agreement between SkysIte and Iridium
North America, dated December 1, 1997, as amended*
10.10 Agreement between Skysite and PTT Telecom BV, dated
September 15, 1997 *
10.11 Distribution Agreement between Skysite and CUE Paging
Corporation, dated January 26, 1998 *
10.12 Bulk Seller Agreement between Skysite and ARDIS Company,
dated February 23, 1998 *
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.**
21 Subsidiaries *
23.1 Consent of Accountants***
23.2 Consent of Accountants***
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*
</TABLE>
_______________________
(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
II-12
<PAGE>
to the Company's Current Report on Form 8-K dated August 20, 1998
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 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
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.
*** To be filed as an amendment
_______________________
The information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
II-13
