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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
ESAT, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEVADA 95-0344604
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number
16520 HARBOR BOULEVARD, BLDG G 92708
FOUNTAIN VALLEY, CALIFORNIA (Zip code)
(Address of Principal Executive Offices)
714-418-3200
(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act:
Title Of Each Class Name Of Each Exchange On Which
To Be So Registered Each Class Is To Be Registered
------------------- ------------------------------
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.001
(Title of Class)
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TABLE OF CONTENTS. (LIST)
GLOSSARY.
"T-1" or "T-1 line" means a communication line, such as telephone lines
or telephone cables, whether consisting of copper, other metals, or optic fiber,
which can carry digital bits of information at the rate of 1.2 megabits per
second. A T-1 line is generally considered to be a high speed line.
"Cable" means the co-axial cable used to deliver television signals to
cable TV subscribers. Cable has the technical capacity to deliver 10 megabits
per second, but typically delivers 500 kilobits per second to 1 megabit per
second
"Managed Educational Content" means that the content available for
school children has been screened to assure propriety for school children.
"GSI" means the Company's Global Satellite Internet gateway. A gateway
is a service that allows someone to access the Internet. GSI refers to the
Company's service of providing access to the Internet through satellite
transmissions around the world.
"LAN" means local area network, which usually consists of a network of
computers within a single workplace.
"ISP" means Internet Service Provider. A person accesses the Internet
through a gateway provided by an Internet Service Provider.
"ISDN" means Integrated Services Digital Network. It is a service
offered by telecommunications 128 kilobits per second compared to 56 kilobits
per second, companies that allow higher speed data transfer than standard dial
up modems, 128 kilobits per second compared to 56 kilobits per second, but not
as fast as T-1 lines or cable lines.
"DSL" means Digital Subscriber Line. It is a service offered by
telecommunications services to compete for high speed Internet access. DSL is a
different technical standard but offers data transfer speeds at 416 kilobits per
second.
"S.A.M.S." means Satellite Accessed Material for Schools, which provides
managed educational content of over 60,000 pre-screened web pages accessible to
students over eSat's satellite system.
"Multicasting Technology" means technology which allows a user to
broadcast large data and video files to multiple locations simultaneously
without being available to everyone everywhere. This may be contrasted with
broadcast technology which is designed to reach large numbers of recipients.
"Plug and Play Format" is a format based on hardware and software
standards designed to allow computers and computer peripherals to be "plugged"
together and the computer will automatically or with little effort by the user
configure the computer peripheral to operate properly.
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"High speed", when used in this Registration Statement, means connection
with access to the Internet, access at rates at or higher than 128 kilobits per
second. For example, dial up modems typically offer up to 56 kilobits per
second. ISDN offers 128 kilobits per second. DSL offers 416 kilobits per second.
A T-1 line offers up to 1.2 megabits per second. Cable offers up to 10 megabits
per second, but typically delivers between 500 kilobits per second and 1 megabit
per second.
"Satellite Internet Transmission System" means the Company's system for
transmitting data to customers via satellites. The Company provides equipment
for an "uplink" transmission of Internet data to communications satellites. The
Company leases time on transponders on these communications satellites which
retransmit the data to the Company's customers who receive the data through
small 18 inch diameter receiving antennas. At the present time, the Company uses
only one satellite. As demand and geographic coverage increase, the Company will
lease additional transponders on additional satellites.
"Kbps" means kilobits per second or a thousand bits per second data
transmission rate. A bit corresponds to a "one" or a "zero" in digital
information.
"Mbps" means a megabit or million bits per second data transmission
rate.
"VAR" means value added retailer. A VAR such as Galaxy Internet markets
the products and adds additional value, such as consulting, hardware, software,
or other products and services.
"Bandwidth" means the capacity of a system to carry digital or analogue
data. The greater the bandwidth, the greater is the capacity to carry data.
ITEM 1. BUSINESS.
Forward Looking Statements
This Item contains forward-looking statements. Please review the
information in light of the risk factors and other cautionary statements
identifying important factors that could cause actual results to differ
materially from those in the forward-looking statements. In particular, please
see "Risk Factors" in Item 1.
Overview
eSat, Inc. ("eSat" or "Company") is a high-speed satellite Internet
Service Provider, or ISP, and satellite Internet access equipment and services
developer for businesses, educational institutions and government. The Company's
product line is based on its Global Satellite Internet (GSI(TM)) gateway and
DigiNXT(TM) Internet gateway which provide any existing local area network (LAN)
with high-speed Internet access rivaling T-1 and cable. The Company's
ChannelCasting(TM) product will provide the simultaneous broadcast of large
video and data files to multiple destinations over eSat's high-speed satellite
transmission system. eSat's SAMS(TM) product (Satellite Accessed
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Material for Schools) provides managed educational content of over 60,000
pre-screened web pages accessible to students over eSat's satellite system.
Within the next 18 months, the Company plans to be a worldwide satellite
Internet Service Provider. The Company believes it is reasonable to achieve this
goal since the Company has been approached by several parties who have expressed
an interest in providing the service in Europe and Asia. The Company expects to
finance the expansion either through financing provided by the parties wishing
to provide the service internationally, or through capital generated by
operations and/or issuing additional securities. See Item 1, Risk Factors: "The
Company Might Not Be Successful In Implementing Its Domestic and Worldwide
Proposed Expansion".
The Company has a history of significant losses totaling over $3 million
since 1996. Furthermore, the Company anticipates incurring additional losses in
the foreseeable future as the Company grows its business. The Company operates
in a highly competitive market and the success of the business of the Company
will depend on its ability to compete in this marketplace. See Item 1, Risk
Factors, "The Company Incurred Significant Operating Losses"; "The Company Has
No Assurance of Market Acceptance of Its Products"; "The Company Has No
Assurance That Its Marketing and Distribution Methods Will Be Successful"; and
"The Company Faces Formidable Competition".
ESAT'S STRATEGY
As dependence on the Internet as an information source grows, the
Company anticipates growth in demand for fast, cost-effective Internet access.
Dial-up modems operate at relatively slow transmission speeds. ISDN, although
faster than dial-up modems, has significant transmission speed limitations. DSL
is not widely available and requires extensive infrastructure modifications. DSL
subscribers generally must be within two miles of a central telephone switch.
While T-1, cable, and fiber connections can provide speed, they are costly
and/or not always available. The Company is positioning itself to fill the
market need for high-speed low cost Internet access.
eSat's strategy is to provide products and services for high-speed
satellite Internet access and data delivery. Customers include businesses,
educational institutions, government agencies and eventually home users,
although at this time, the Company does not offer services to home users and the
Company has no immediate plans to do so. By leveraging satellite technology, the
Company is positioned to become a worldwide provider in the Internet access
industry. Product lines were developed to fill voids in the Internet access and
high-speed data delivery arena with applications both domestically and
internationally. The Company's intent is for businesses and organizations to
benefit from the affordability, ease of use, and high-speed access to the
Internet by using the Company's products and services. See Item 1, Risk Factors:
"The Company Must Do Business In a Developing Market and Face New Entrants" and
"The Company Faces Formidable Competition".
eSat has designed ChannelCasting(TM) which uses multicasting technology
to broadcast large data and video files to multiple locations simultaneously via
eSat's high-speed satellite Internet transmission system. The Company plans to
offer
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ChannelCasting(TM) as a new solution to broadcasting a single stream of data to
multiple locations at a low cost. The Company plans to capture significant
revenue from this product. ChannelCasting(TM) is an ideal solution for large
corporations, content providers, government agencies and distance learning
applications. This solution is ideal because these customers, which typically
need to transmit large amounts of data to multiple locations simultaneously,
will now be able to do so without building their own systems or resorting to
other less convenient methods. ChannelCasting will enable customers to create
ChannelCasting(TM) networks to efficiently distribute secure and high quality
content. See Item 1, Risk Factors: "The Company Has No Assurance of Market
Acceptance of Its Products", "The Company Has No Assurance That Its Marketing
and Distribution Methods Will Be Successful", and "The Company Is Dependent On
Successful New Products and Product Enhancements Introductions and May Suffer
Product Delays".
The Company's international strategy is to form joint ventures with
partners in Asia, Europe, Latin America, the Middle East and Africa. At this
time, the Company has not formed any of the joint ventures. See Item 1, Risk
Factors: "The Company Might Not Be Successful In Implementing Its Domestic and
Worldwide Proposed Expansion".
The Company's sales strategies are designed to address the Internet
access needs of the different segments of the marketplace. The Global Satellite
Internet ("GSI(TM)") and DigiNXT(TM) gateways target businesses and government
agencies. Satellite Accessed Material for Schools ("SAMS(TM)") was specifically
developed to address the demand for educational access solutions. SAMS(TM)
brings high-speed Internet access to schools in a managed educational
environment. All products are designed and built to offer ease of installation
and use with a plug and play format, and high-speed Internet access.
Historical Summary of the Company
The Company is a high-speed satellite Internet Service Provider and
satellite Internet access equipment and services developer for businesses,
educational institutions and government.
eSat was incorporated on June 23, 1995, pursuant to the laws of the
State of Nevada, as U. S. Connect 1995, Inc., for the purposes of marketing and
servicing transaction processing services, prepaid long distance cards, ATM
machines and payment systems to small-to-medium sized merchants. In October
1995, the Company consummated a public offering of its securities from which it
derived gross proceeds of approximately $100,000. Prior to October 1998, the
Company had not commenced operations and was seeking to establish a new
business. On October 8, 1998, the Company consummated an Agreement and Plan of
Merger ("Merger") with Technology Guardian, Inc., a California corporation
("TGI"), whereby all the issued and outstanding shares of TGI were exchanged for
shares of the Company's Common Stock. In
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connection with the Merger, the Company changed its name to Technology Guardian,
Inc., and succeeded to the business of TGI immediately prior to the Merger. The
Company amended its certificate of incorporation to change its name to "eSat,
Inc." on January 26, 1999.
The Company's research and development began in late 1996 for the
satellite Internet access products and services. The Company also engaged in
reselling network computer related products concurrently with the early stage
development of the Company's satellite Internet products and services. The
development of the satellite Internet products and services continued during
1997 and into the first quarter of 1998. In the 1st quarter of 1998, the Company
terminated its sales of network computer related products and concentrated
entirely on the completion of its satellite Internet access products and
services. In the second quarter of 1998, the Company started beta sales and
installation of its initial satellite Internet access products. Beta sales and
installation involves the sales of products and services which have been
developed in a laboratory setting but have not been tested in actual use. Beta
sales and installation means the first installations in a commercial setting,
often at a discount or at no cost in order for the Company to obtain additional
information for improving and completing the products and services. Also in
1998, the Company developed the Satellite Accessed Materials for Schools
("SAMS(TM)"), described below. The SAMS(TM) system was installed in two schools
for beta testing and the SAMS(TM) system is currently installed in 13 additional
schools. Through the end of 1998, the Company beta tested its satellite Internet
products and continued the development of the product. This product development
was completed in January 1999, and was incorporated into all the Company's
products and services known as the Global Satellite Internet ("GSI(TM)"),
DigiNXT(TM), SAMS(TM) and Internet Kiosks. In the fourth quarter of 1998, as the
development of the GSI(TM) neared completion, the Company decided to halt the
beta distribution of its initial product in anticipation of the introduction of
the new GSI(TM) product which was introduced in January 1999. The Company has
upgraded a number of the original installations made in 1998 with the GSI(TM)
product, and the GSI(TM)/DigiNXT(TM) is now the flagship product sold by the
Company.
In the fourth quarter of 1998, the Company began the development of its
ChannelCasting(TM) product described below.
In the fourth quarter of 1998, the Company completed installation of its
equipment at its Network Operations Center ("NOC") in Durham, North Carolina.
The NOC houses the Company's computer equipment and software, and functions as a
junction point for all the Internet related data traffic from the Company's
customers using the Company's service and acts as the uplink to the satellites.
The Company contracts outside for these services.
PRODUCTS AND SERVICES
Global Satellite Internet ("GSI(TM)") /DigiNXT(TM) Internet Gateway
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The Company's flagship product, the Global Satellite Internet ("GSI(TM)")
gateway, uses satellite technology to download Internet services at speeds
comparable to T-1 and cable at an affordable cost. The Company offers services
with download speeds of 500 kbps, compared to a T-1 line that can deliver
downloads up to 1.2 mbps. However, in most applications, the difference in speed
is not material to the user and therefore appears comparable. Cable can deliver
download speeds up to 10 mbps. The GSI(TM) gateway system consists of a computer
server configured with the Company's hardware and software, a satellite dish,
and appropriate satellite dish mounting equipment. The Company capitalizes on
the imbalance between the small amount of data sent to access the Internet and
the large amount returned. For example, a typical upstream or outbound request
to an Internet server might require 25 characters, but the downstream response
would include an entire web page, including text and graphics. The Company can
couple any type of outbound method such as dial-up modems, ISDN, DSL, frame
relay, or T-1 connections for the small amount of upstream data, with its small
satellite dish for downloads of large amounts of downstream data and provide
high-speed Internet access for an entire local area network (LAN). The delivery
system for all of the Company's products, the GSI(TM), connects to an existing
local area network to provide high-speed Internet access to each workstation.
The GSI(TM) is delivered completely pre-configured as a plug and play module for
local area networks and is compatible with Microsoft Windows operating systems,
Apple's Macintosh operating systems and UNIX operating systems. The GSI(TM) is
designed to incorporate ease of installation and use with a plug and play
format, and quality high speed Internet access.
The DigiNXT(TM) Internet gateway is eSat's retail product that uses the
GSI(TM) satellite technology. DigiNXT(TM) is currently being sold nationwide
through CompUSA stores and gives the retailer a high-speed Internet access
solution for their commercial business customers.
The Company currently offers a GSI(TM) gateway for local area networks
serving up to 250 users per system with contracts of up to a three year
duration. The current price per month for this service is $395 per installation.
This price may change from time to time depending on a number of market factors.
Therefore, for a system with 250 users, the price per month can be as low as
$1.58 per user. The Company deems this to be a low cost Internet access system.
ChannelCasting(TM)
In the fourth quarter of 1998, the Company commenced the development of
ChannelCasting(TM). ChannelCasting(TM) provides the ability to broadcast large
data and video files to multiple locations simultaneously using the Company's
GSI(TM) products. The data and video files are transmitted over the Internet to
the Company's Network Operations Center (NOC), where it will uplink these files
to the Company's satellite network and transmit these files to the specified
destinations. ChannelCasting(TM) provides an ideal solution for large
corporations, content providers, government agencies and distance learning
applications. eSat will enable customers to create ChannelCasting(TM)
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networks to efficiently distribute secure and high quality content. With
ChannelCasting(TM), the large data and video files are downloaded via the
satellite transmission. This allows the customer to use its bandwidth
efficiently without purchasing additional bandwidth, since the large data and
video files are being delivered via the Company's ChannelCasting product, and
not over the a customer's conventional data transmission system. The Company
provides a conditioned satellite receiver card and additional software installed
in the GSI(TM) gateway. A conditioned satellite card is a computer card that
processes digital data to be sent over the Company's system. This enhanced
product provides an additional benefit to the high-speed, low cost satellite
Internet service offered with the GSI(TM) gateway. Customers may use the
ChannelCasting(TM) product as a stand alone feature or use it as an additional
enhancement with the satellite Internet access. The Company has developed and
tested ChannelCasting(TM) and released its beta version on April 30, 1999.
Satellite Accessed Material for Schools (SAMS(TM))
The Company's educational tool, Satellite Accessed Material for Schools
("SAMS"), is designed for schools and educational institutions. By packaging its
GSI(TM) gateway with managed educational content from third-party providers, the
Company provides quality high-speed Internet access to schools at a cost which
the Company believes will be acceptable to school boards and administrators.
With SAMS(TM), up to 250 students per gateway are able to access the
Internet in a protected, managed environment at high speeds. The school-based
setting protects the students from misuse of the Internet and access to
inappropriate material on the Internet. SAMS(TM) educational content consists of
over 60,000 web-based pages suitable for students in grades Kindergarten through
12. Teachers may choose to keep students within the protected environment or to
allow full Internet access.
Satellite Internet Kiosks
The Company has developed an Internet Kiosk for the purpose of creating
a high-speed public access Internet solution. These easy-to-use Kiosks are
intended to provide an on-demand solution and convenient way to send e-mail or
browse the Internet. Because these kiosks will always be functional and open to
the public, customers can use the kiosk at any time when they are away from
their own usual access to the Internet. The Company's future plans include
installation of its Satellite Internet Kiosks in such public places as airport
terminals and hotels. Although prototypes have been developed, the Company has
not yet implemented this aspect of its business plan.
Core Technology
The Company's technology consists of a configuration of software and a
satellite receiver card that allows a user to implement satellite access to the
Internet by splitting the outbound traffic over any conventional method, from
the in-bound traffic received via
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satellite. This hybrid technology allows a user access to the Internet at high
speeds from their local workstation. The GSI(TM) connects outbound through a
single connection via modem, cable connection, ISDN or DSL lines, or other
connections to the Internet. High-speed download is achieved via satellite and
the GSI(TM) connected to a local network, which connects to the desktop user.
One portion of the Company's technology manages the returning data by directing
the data to be sent through a satellite uplink facility to an orbiting
satellite, which transmits the returning data from the satellite to the user.
The user receives this data through a small satellite dish, typically a round
18-inch dish mounted on the roof at the user's facility, which is linked to the
GSI(TM).
There are at this time no material patents, however, the Company holds
and has applied for trademarks and licenses.
The Company's GSI(TM) gateway system includes a server pre-loaded with
the software and preconfigured for use, a satellite receiver card installed in
the server, and the satellite dish. The customer may contract with a local
installer for the installation of the satellite dish, or the Company will make
the arrangements to furnish and install the satellite dish. The Company then
delivers the GSI(TM) gateway in a plug and play condition, requiring only that
the customer change its routing of data flows on the its workstations to utilize
the Company's Internet gateway. This simple procedure for the one-time
installation by the customer does not require the Company's personnel to make an
on-site visit for purposes of installing the Company's GSI(TM) gateway.
Marketing and Sales
The Company sells or plans to sell its products to the commercial
markets including: businesses, schools, libraries, hotels, tract home
developers, hospitals, medical facilities, government agencies and more. There
are no consumer/home products or services at this time, although, the Company is
exploring possible application in this area.
The Company distributes its products through value-added resellers
("VARs") and independent sales organizations. The Company recently entered into
a contract with Galaxy Internet (a subsidiary of Arrow Technologies), to market
and resell the Company's products and services. Galaxy has an exclusive right to
sell the Company's products to CompUSA. Galaxy has agreed not to sell any other
competing satellite-based product to CompUSA. If Galaxy sells 1,000 Product
units by January 15, 2000, then Galaxy shall have an option to purchase 100,000
shares of the Company's common stock at $11.50 per share. The contract is
designed with incentives for Galaxy Internet to generate revenues for the
Company in excess of $15,000,000 in 1999 and $20,000,000 in the subsequent three
years.
In cooperation with Galaxy Internet as the VAR, CompUSA is set up to
begin selling to its business customers the Company's DigiNXT(TM) high-speed
satellite Internet gateway. The DigiNXT(TM) product is now available through the
business services departments in CompUSA's stores nationwide.
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The Company's GSI(TM) products are also distributed through independent
sales organizations. The Company has entered into agreements with Advantage
Associates, Inc. in Washington, D.C. Advantage Associates, Inc. will market the
products primarily to Federal Government agencies, and other large businesses
and institutions. The compensation under this contract is based on stock options
contingent on the level of sales achieved. Under this contract, Advantage
Associates receives an option to purchase 150,000 shares of the Company's common
stock at $2.00 per share. However, this option may not be exercised unless the
east coast office of the Company (which works primarily with Advantage
Associates) sells 1,000 Units by March 1, 2000. However, if 1,000 Units have
been sold by August 1, 1999, then Advantage Associates shall receive options on
an additional 50,000 shares at the same price. See Item 6, Executive
Compensation. William Sarpalius, a principal of Advantage Associates, Inc., is a
member of the board of directors of the Company. See Item 5, Directors and
Executive Officers. See Item 1, Risk Factors: "The Company Has No Assurance of
Market Acceptance of Its Products" and "The Company Has No Assurance That Its
Marketing and Distribution Methods Will Be Successful".
Federal Agency Market
The Company is actively marketing its products to the federal
government. The contracting and sales cycle with government agencies can often
require a year to complete. There are no sales currently pending. In April,
1999, the Company entered into a standard reseller contract with Dyncorp, a
large government contractor. Dyncorp is marketing the Company's products and
services to the federal government as part of its regular government contracts
business. Because Dyncorp is an existing contractor with existing contracts and
relationships, the marketing and sales cycle can be substantially shortened in
some circumstances. However, there is no assurance that the Company will make
any sales to the federal government in the near term. See Item 1, Risk Factors:
"The Company Has No Assurance of Market Acceptance of Its Products" and "The
Company Has No Assurance That Its Marketing and Distribution Methods Will Be
Successful".
The Educational Market
The Federal Government's "E-RATE" program provides $1.8 billion of
federal funding for schools and libraries to be used exclusively for providing
Internet access to schools. The Company's SAMS(TM) marketing efforts are geared
toward taking advantage of the Federal E-RATE Program. The Federal Government
allocates E-RATE funds to the states in block grants, which must use the funds
in a "fair and equitable" format. The requirement means that educational sites
throughout a state must have uniform speeds and pricing. Once states receive
funding, the E-RATE Program has an anticipated duration of 18 months. At this
date, the Company believes it meets all government guidelines for providing
Internet access to schools in the manner required by the E-RATE program. The
Company currently has the SAMS(TM) Internet gateway
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operating in fifteen schools nationwide. See Item 1, Risk Factors: "The Company
Has No Assurance of Market Acceptance of Its Products" and "The Company Has No
Assurance That Its Marketing and Distribution Methods Will Be Successful".
The International Market
The Company plans for joint ventures with one or more parties
headquartered in various countries to be eSat international partners. The
Company plans for international joint ventures to contribute significant
revenue. The Company has identified major satellite broadcast footprints to
create international joint ventures establishing eSat satellite Internet
service. A satellite broadcast footprint is the area of the world capable of
receiving transmissions from a geo-stationary satellite. The planned joint
ventures would establish eSat satellite service in the international regions as
follows: Asia North, Asia South, Europe, Eastern Europe/Russia, India, Central
America, Latin America, the Middle East, and Africa. The initial funding for a
joint venture is expected to be provided by the partner in the headquartered
country, for example, Asia South would establish "eSat-Asia South." eSat-Asia
South would provide the Company's high-speed satellite Internet products and
services under the eSat name and branding. Through such ventures, eSat-Asia
South would be positioned to provide services to other countries in the Pacific
Rim basin including Hong Kong, China, Australia, New Zealand, Singapore,
Malaysia, Thailand, Philippines, Indonesia and other regions.
Joint venture partners would receive exclusive rights to market and
distribute the Company's products and services. The partner pays the Company an
initial funding amount to cover various costs including the costs associated
with establishing a dedicated Network Operations Center (NOC). The joint venture
would be a minimum of 40% or more owned by the Company. The partner would
purchase the GSI(TM) gateway and other eSat products from the Company, and would
be required to sell a minimum number of systems annually. The Company would
receive a license and royalty fee calculated as a portion of gross revenues. The
joint venture partner would pay monthly fees to the Company to cover satellite
time, maintenance of the NOC, and maintenance of the fiber connection to the
NOC.
The joint venture licensing rights would be contingent on achieving
specific future sales revenue to the Company. The realization of these revenues
will depend upon the successful implementation by the joint venture partner of
its business plan. The joint venture would be managed by the joint venture
partner and the Company would not have direct control for implementing the joint
venture's business plan.
The details and actual terms of agreements with companies for
international marketing will vary from contract to contract. However, the
initial contract entered into by the Company with Lion Monaco, described below,
follows these general guidelines established by the Company.
The Company has been in discussions and anticipates starting joint
ventures in Europe, Asia and Latin America in the middle to late 1999. The
Company anticipates
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starting joint ventures in the remaining international joint venture footprint
countries sometime in 1999. See Item 1, Risk Factors: "The Company Might Not Be
Successful In Implementing Its Domestic and Worldwide Proposed Expansion".
As part of its international marketing, in April, 1999, the Company
signed a Memorandum of Understanding with Lion Monaco, Inc., a Delaware
corporation, with its principal place of business in England. Under this
Memorandum, Lion Monaco and the Company contemplate a joint venture
("eSat-Europe") to be 40% owned by the Company to market and distribute the
Company's products in Europe. Under this Memorandum, eSat-Europe would be
required to sell a minimum of 500 systems annually. eSat Europe would pay a
license fee to the Company based on a percentage of gross sales. In addition,
Lion Monaco would pay the Company a fee of $2,000,000. The consummation of this
transaction is dependent upon the satisfactory completion by the Company of its
due diligence investigation of Lion Monaco.
Diversification of Business
The Company is not dependent on any one customer or group of customers.
However, the Company's business plan calls for significant orders from the
Federal Government, the E-RATE program and large corporations. See Item 1, Risk
Factors: "The Company Has No Assurance of Market Acceptance of Its Products" and
"The Company Has No Assurance That Its Marketing and Distribution Methods Will
Be Successful".
Backlog of Orders
The Company currently does not have a backlog of orders.
Revenue Recognition Policies
Hardware and Software. The Company recognizes revenue from hardware and
software sales as products are shipped. The Company, subject to certain
limitations, permits its customers to exchange products or receive credits
against future purchases. The Company offers its customers several sales
incentive programs, which, among others, include funds available for
cooperative promotion of product sales. Customers earn credit under such
programs based on the volume of purchases. The allowance for sales returns and
costs of customer incentive programs are accrued concurrently with the
recognition of revenue.
Internet Access. The Company also generates revenue by selling
high-speed Internet access. This service is purchased by customers on either a
one, two or three year service subscription contract. Revenue is recognized as
the service is provided using the straight-line method over the life of the
contract. A related liability is recorded for the unearned portion of service
revenue received. Costs that are directly related to the acquisition of the
contracts are deferred and charged to expense also using the straight-line
method over the life of the contract.
The Company reports income and expenses on the accrual basis for both
financial and income tax reporting purposes.
Competition
The Company competes in the market for providing Internet access
services to the business, government, school, and nonprofit sectors.
The Company anticipates competition from Internet Service Providers
which provide satellite downlink data transmission in the commercial/business,
government and education sectors. A major competitor is DirecPC from Hughes
Network Systems which
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provides satellite-based Internet and data delivery service to home consumers,
businesses and schools.
The Company's competitors also include the established Internet service
providers which provide high speed connections. These providers include firms
offering ISDN, DSL, frame relay, cable modem, T-1, and direct fiber connections.
There are numerous providers of these services and no one provider dominates the
market. Many service providers are affiliated with telephone companies, which
provide capital resources and customer marketing opportunities unavailable to
the Company. At this time, the Company believes no competitor has a dominant
position in the worldwide ISP market segment.
The Company has no established competitive position in the market place,
since the Company has only recently commenced the marketing and sales of its
products. However, in the niche for satellite-based Internet access, there are
only a few competitors, with DirecPC described as the most widely known
competitor.
The Company competes principally on price and performance. The Company
offers a plug and play format, with each gateway delivered pre-configured for
the customer's geographic location, local connection to the Internet, and
connection to a local area network.
The Company's pricing of products and services is subject to change in
accordance with market changes and competitive conditions.
The positive factors pertaining to the Company's competitive position
include offering a product that can be expanded to 250 users for a relatively
low price (currently $395 per month, subject to change to meet competitive
circumstances), widespread availability, high speed data flows, and plug and
play format. The negative factors pertaining to the Company's competitive
position are lack of product awareness and of brand recognition among potential
customers, lack of widespread user-base, and lack of customer track record.
Research and Development
The Company plans to devote significant resources to continued research
and development of various Internet related products and services. See Item 1,
Risk Factors: "The Company Is Dependent on Successful New Products and Product
Enhancements Introductions and May Suffer Product Delays".
Employees
The Company currently has twenty-four employees. Eighteen employees are
located at the Company's headquarters in Fountain Valley, California, four
employees in the Company's Washington, D.C., office, and two regional employees
at various locations around the country.
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<PAGE> 14
Available Information
Prior to the effectiveness of this Registration Statement, the Company
has not been required to file periodic reports with the Securities and Exchange
Commission.
RISK FACTORS
THE COMPANY INCURRED SIGNIFICANT OPERATING LOSSES.
For the fiscal year ended December 31, 1998, the Company incurred a loss
of $3,290,336 as compared to a loss of $453,798 for the fiscal year ended
December 31, 1997. The loss was primarily due to: (i) employee compensation
which increased because of additional sales and operations staff hired by the
Company in 1998 in anticipation of future growth of the Company's operations;
and, (ii) expenses related to marketing. In addition, the Company incurred
significant research and development costs associated with its new products.
There can be no assurance that the Company will be able to generate sufficient
revenues to operate profitably in the future or to pay the Company's debts as
they become due. The Company is dependent upon successful completion of future
capital infusions to continue operations. See "Management's Discussion and
Analysis of Financial Condition" and "Financial Statements."
THE COMPANY MIGHT NOT BE SUCCESSFUL IN IMPLEMENTING ITS DOMESTIC AND WORLDWIDE
PROPOSED EXPANSION.
The Company intends to expand its operations domestically and
internationally, and will seek to expand the range of its services and penetrate
new geographic markets; however, the Company has no experience in effectuating
rapid expansion or in managing operations which are geographically dispersed.
There can be no assurance the Company's current management, personnel and other
corporate infrastructure will be adequate to manage the Company's growth.
Expansion internationally will require joint venture partners outside the United
States who will provide capital and personnel to fund the operations
internationally. The Company has very limited experience in international joint
venture transactions. The Company executed a letter of intent with Lion Monaco
in April, 1999, for expansion into Europe. The Company has no other joint
venture partners at this time. There can be no assurance that Lion Monaco will
perform its contemplated duties in Europe, that the Company will be able to
successfully joint venture with other entities in other parts of the world, or
that joint venture partners will be able to raise the capital and employ the
personnel required to successfully implement worldwide operations. Accordingly,
there is significant risk that the Company will not be able to meet its goal of
substantial international expansion within the next twelve months.
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<PAGE> 15
THE COMPANY LACKS A LONG OPERATING HISTORY.
The Company has a limited operating history upon which an evaluation of
the Company can be based. The Company's prospects are subject to the risks,
expenses and uncertainties frequently encountered by companies in the new and
rapidly evolving markets for Internet and interactive media products and
services. In addition, the Company will be subject to all of the risks,
uncertainties, expenses, delays, problems and difficulties typically encountered
in the growth of an emerging business and the development and commercialization
of new products. There can be no assurance that unanticipated expenses, problems
or technical difficulties will not occur which would result in material delays
in product commercialization or that the Company's efforts will result in
successful product commercialization.
THE COMPANY MAY HAVE INSUFFICIENT CAPITAL FOR FUTURE OPERATIONS.
The Company anticipates, based on its current proposed plans and
assumptions relating to its operations, that current cash reserves, together
with projected cash flow from operations, will be sufficient to satisfy its
contemplated cash requirements for through the third quarter of 1999.
Thereafter, the Company will require substantial additional financial resources
to fund its operations. The expansion into new product areas will also require
substantial financial funding. The failure to acquire additional funding when
required will have a material adverse effect on the Company's business
prospects. The Company currently relies on American Express Acceptance
Corporation for the nonrecourse (meaning that the finance company will have no
recourse against the Company if the customer fails to pay the contract in full)
financing of customer contracts to generate cash for the Company. Changes in the
economy generally, or in the Internet access field in particular, might make
financing of customer contracts unavailable, or if available, at unfavorable
rates. Without the proper financing of customer contracts by a finance company,
the Company is likely to have difficulty in funding its on-going operations.
THE COMPANY HAS NO ASSURANCE OF MARKET ACCEPTANCE OF ITS PRODUCTS.
The Company is at an early stage of development and its earnings growth
depends primarily upon market acceptance of its products and services, including
the Global Satellite Internet gateway, DigiNXT gateway, SAMS(TM) programs
offered to school systems, and ChannelCasting(TM). There can be no assurance
that the Company's product development efforts will progress further with
respect to any potential new products or that they will be successfully
completed. In addition, there can be no assurance that the Company's potential
new products will be capable of being produced in commercial quantities at
reasonable costs or that they will achieve customer acceptance.
THE COMPANY HAS NO ASSURANCE THAT ITS MARKETING AND DISTRIBUTION METHODS WILL BE
SUCCESSFUL.
There can be no assurance that the Company's products will be
successfully marketed. The Company is dependent on value-added resellers, VARs
and distributors in addition to its direct sales force to market its products.
There is no assurance that Galaxy Internet or any other VAR will be successful
in marketing the Company's products.
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<PAGE> 16
The Company's success is dependent in part on its ability to sell its
products to governmental agencies, including public school districts, and large
business organizations. Selling to governmental agencies and larger companies
generally requires a long sales process, with multiple layers of review and
approval. Often nonbusiness factors enter into the decision to purchase
products. Such factors might include the residence and origin of the supplier of
the products, the nature of the supplier and the distributor, the ethnic and
gender characteristics of personnel and owners of the Company selling or
distributing the products, political and other contacts, and other peculiar
factors. Accordingly, the success of selling to these potential customers is
uncertain.
The Company does not have sufficient experience in marketing its
products to determine the optimum distribution methods. It is unclear whether
marketing through VARs or mass retailers such as CompUSA will result in
acceptable sales levels. Accordingly, the Company might be in a position
requiring change in its sales, distribution, and marketing strategies and
implementation.
THE COMPANY IS DEPENDENT ON SUCCESSFUL NEW PRODUCTS AND PRODUCT ENHANCEMENTS
INTRODUCTIONS AND MAY SUFFER PRODUCT DELAYS.
The Company's success in the Internet access business depends on, among
other things, the timely introduction of successful new products or enhancements
of existing products to replace declining revenues from products at the latter
stage of a product cycle. Consumer preferences for software products are
difficult to predict, and few consumer software products achieve sustained
market acceptance. If revenues from new products or enhancements do not replace
declining revenues from existing products, the Company's business, operating
results and financial condition could be materially adversely affected. The
process of developing Internet access products such as those offered by the
Company is extremely complex and is expected to become more complex. A
significant delay in the introduction of one or more new products or
enhancements could have a material adverse effect on the ultimate success of
such products and on the Company's business, operating results and financial
condition.
THE COMPANY MUST DO BUSINESS IN A DEVELOPING MARKET AND FACE NEW ENTRANTS
The market for Internet products and computer software is rapidly
evolving and is characterized by an increasing number of market entrants who
have introduced or developed products and services. The diverse segments of the
Internet market might not provide opportunities for more than one supplier of
products and services similar to those of the Company. It is possible that a
single supplier may dominate one or more market segments.
THE COMPANY FACES FORMIDABLE COMPETITION
The Company competes with many other Internet access providers. The
Company will face competition from numerous sources, online and Internet service
providers and others with the technical capabilities and expertise which would
encourage them to develop and
16
<PAGE> 17
commercialize competitive products and services. Certain of such competitors
have substantially greater financial, technical, marketing, distribution,
personnel and other resources than the Company. Increased competition, resulting
from, among other things, the timing of competitive product releases and the
similarity of such products to those of the Company, may result in significant
price competition, any of which could have a material adverse effect on the
Company's business, operating results or financial condition. Current and future
competitors with greater financial resources than the Company may be able to
carry larger inventories, undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and make higher offers or guarantees to
software developers and co-development partners than the Company. There can be
no assurance that the Company will have the resources required to respond
effectively to the market or technological changes or to compete successfully
with current or future competitors or that competitive pressures faced by the
Company will not materially and adversely affect the Company's business,
operating results or financial condition.
THE COMPANY MIGHT BE SUBJECT TO GOVERNMENT REGULATION WHICH COULD HARM THE
COMPANY'S PROSPECTS.
The Company is not currently subject to direct regulation by any
government agency in the United States, other than regulations applicable to
businesses generally, and there are currently few laws or regulations directly
applicable to access to or commerce on the Internet. Due to the increasing
popularity and use of the Internet, it is possible that laws and regulations may
be adopted with respect to the Internet, covering issues such as user privacy,
pricing and characteristics and quality of products and services. For example,
although the Communications Decency Act was held to be unconstitutional, there
can be no assurance that similar legislation will not be enacted in the future.
Such laws or regulations could also limit the growth of the Internet, which
could in turn decrease the demand for the Company's proposed products and
services and increase the Company's cost of doing business. Inasmuch as the
applicability to the Internet of the existing laws governing issues such as
property ownership, libel and personal privacy is uncertain, any such new
legislation or regulation or the application of existing laws and regulations to
the Internet could have an adverse effect on the Company's business and
prospects.
THE SUCCESS OF THE COMPANY IS DEPENDENT ON MICHAEL C. PALMER, CHESTER L.
NOBLETT, AND LAWRENCE C. EARLY.
The success of the Company will be dependent largely upon the personal
efforts of its Chief Executive Officer, Michael C. Palmer, its Chief Operating
Officer, Secretary, and Treasurer, Chester L. Noblett, and its Chief Financial
Officer, Lawrence C. Early. The loss of their services could have a material
adverse effect on the Company's business and prospects. The success of the
Company is also dependent upon its ability to hire and retain additional
qualified management, marketing, technical, financial and other personnel.
Competition for qualified personnel is intense and there can be no assurance
that the Company will be able to hire or retain qualified personnel. Any
inability to attract and retain qualified management and other personnel could
have a material adverse effect on the Company.
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<PAGE> 18
THE COMPANY MIGHT FACE LIABILITY FOR INFORMATION SERVICES.
Because materials may be downloaded by the online or Internet services
operated or facilitated by the Company and may be subsequently distributed to
others, there is a potential that claims will be made against the Company for
defamation, negligence, copyright or trademark infringement, personal injury or
other theories based on the nature and content of such materials. Such claims
have been brought, and sometimes successfully pressed, against online service
providers in the past. The Company's general liability insurance might not cover
potential claims of this type or might not be adequate to indemnify the Company
for all liability that may be imposed. Any imposition of liability or legal
defense expenses that are not covered by insurance or in excess of insurance
coverage could have a material adverse effect on the Company's business,
operating results and financial condition.
INVESTORS WILL SUFFER DILUTION OF THEIR INVESTMENT FROM EXERCISE OF WARRANTS.
The Company has a total of 16,293,215 shares of Common Stock
outstanding. The Company has issued 7,168,914 outstanding warrants to purchase
shares of common stock at a weighted average price of $2.64 per share. This
price is substantially below the current public market price of $10.625 as of
May 6, 1999. Accordingly, if and when the warrants are exercised, there will be
substantial dilution of the current common stock holders.
AUTHORIZATION OF PREFERRED STOCK ALLOWS THE COMPANY TO ISSUE PREFERRED STOCK
WITHOUT THE INVESTORS' CONSENT.
The Company's Board of Directors is authorized to issue up to 10,000,000
shares of preferred stock without any need for approval of shareholders. The
Board of Directors has the power to establish the dividend rates, liquidation
preferences and voting rights of any series of preferred stock and these rights
may be superior to the rights of holders of the Common Stock. The Board also may
establish redemption and conversion terms and privileges with respect to any
shares of preferred stock. The issuance of any shares of preferred stock having
rights superior to those of the Common Stock may result in a decrease in the
value or market price of the Common Stock, should such a market develop, and
could be used by the Board as a device to prevent a change in control of the
Company.
THE COMPANY WILL PAY NO DIVIDENDS TO THE INVESTORS.
The Company has not paid and does not expect to pay any dividends in the
foreseeable future.
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<PAGE> 19
MANY SHARES WILL BECOME ELIGIBLE FOR FUTURE SALE, WHICH MIGHT ADVERSELY AFFECT
THE MARKET PRICE FOR THE SHARES.
As of May 6, 1999, there are 13,8486,126 "restricted shares" of the
Company's Common Stock issued and outstanding as that term is defined under Rule
144 promulgated under the Act. Restricted shares are those shares issued without
being registered with the SEC. Such shares may not be resold unless an exemption
is available, or unless the requirements of Rule 144 are met. Of these shares,
5,652,080 shares are held by directors, officers, or 10% shareholders. 10%
shareholders are shareholders who have beneficial ownership of 10% or more of
the outstanding shares, including shares subject to an option held by them.
8,196,046 shares are held by other shareholders. These shares were deemed issued
upon the consummation of the merger on October 8, 1998. The Company has issued
1,395,089 shares of the Company's Common Stock pursuant to the exemption from
registration provided under Rule 504 promulgated under Regulation D of the
Securities and Exchange Act of 1933, as amended (the "Act") ("Rule 504"). Ninety
days after this Form 10 Registration Statement becomes effective, the shares
held by the nonaffiliate shareholders will become eligible for trading, subject
to the volume limitations and other applicable limitations of Rule 144. The
Company is unable to predict the effect that sales of such shares may have on
the then prevailing market price of the Common Stock. Nonetheless, the
possibility exists that the sale of these shares may have a depressive effect on
the price of the Company's Common Stock.
THE COMPANY WILL REMAIN IN THE CONTROL OF PRESENT SHAREHOLDERS.
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<PAGE> 20
The officers and directors and the two largest shareholders of the
Company have in the aggregate beneficial ownership of 36.37% of the outstanding
shares of Common Stock of the Company, and 41.24% of shares on a fully diluted
basis. These shareholders are described under "Item 4 -- Security Ownership of
Certain Beneficial Owners and Management". The Company does not have cumulative
voting in the election of directors; and the minority shareholders will not be
able to elect any director to the Company's Board of Directors.
ANTI-TAKEOVER PROVISIONS MAY THWART TAKE-OVER OR ACQUISITION OFFERS WHICH
INVESTORS MIGHT OTHERWISE WISH TO ACCEPT.
The Company's Board of Directors can, without obtaining shareholder
approval, issue shares of Preferred Stock having rights that could adversely
affect the voting power of the Common Stock. The possible issuance of shares of
Preferred Stock can be used to oppose hostile takeover attempts.
ITEM 2. FINANCIAL INFORMATION
Forward Looking Statements
This Item contains forward-looking statements. Please review the
information in light of the risk factors and other cautionary statements
identifying important factors that could cause actual results to differ
materially from those in the forward-looking statements.
Selected Financial Data
Set forth below are selected financial data for the Company for each of
the last three fiscal years.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales $ 341,047 $ 1,201,044 $ 1,529,518
Income (loss) from continuing operations $(2,727,172) $ (316,307) $ (164,005)
Income (loss) from continuing operations per share $ (0.17) $ (0.03) $ (0.02)
Total Assets $ 3,261,387 $ 453,920 $ 131,371
Total Current Assets $ 2,920,921 $ 427,965 $ 101,436
Long Term Liabilities $ 0 $ 119,265 $ 21,353
Cash Dividends $ 0 $ 0 $ 0
</TABLE>
The comparisons between 1998 and 1997 should be evaluated in light of
four significant factors: (1) the Company merged with TGI in October 1998, and
the selected financial data reflect primarily the activities of TGI; (2) the
decision in 1997 to discontinue the sale of networking equipment and focus all
efforts on the GSI(TM) product line; (3) the decision in 1998 to discontinue the
sale in the fourth quarter of 1998 of all initial products of the Company
pending the completion of the GSI(TM) product; and (4) private placements of
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<PAGE> 21
equity securities by the Company in 1998 that raised significant equity capital.
See Item 1, Historical Summary of the Company; Item 2, Management's Discussion
and Analysis of Financial Condition, and Item 10, Recent Sales of Unregistered
Securities. As a result, the comparison of the data is not particularly
meaningful.
The comparisons with 1996 should be evaluated in light of the factors
set forth above, and in addition, in light of the fact that the financial data
for 1996 reflect only the operations of TGI and have not been combined and
restated as a result of the merger. As a result, the comparison of the data is
not particularly meaningful.
The merger between TGI and the Company is the merger of a private
operating company into a non-operating public shell with nominal assets. See
Item 2, "Description of the Merger".
Management's Discussion and Analysis of Financial Condition
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND
NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT
Overview
The Company is a high-speed satellite Internet Service Provide (ISP),
and satellite Internet access equipment and services developer for businesses,
educational institutions and government. The Company's product line is based on
its Global Satellite Internet (GSI(TM)) gateway and DigiNXT(TM) Internet gateway
which provide any existing local area network (LAN) with high-speed Internet
access rivaling T-1 and cable. The Company's SAMS(TM) product provides managed,
educational content of over 60,000 pre-screened web pages accessible to students
over the Company's satellite system. The Company's ChannelCasting(TM) product
will provide the simultaneous broadcast of large video and data files to
multiple destinations over the Company's high-speed satellite transmission
system. Within the next 18 months, the Company plans to be a worldwide satellite
Internet Service Provider. Currently, the Company has created a high-speed
satellite Internet gateway system with a satellite footprint that encompasses
the United States, and parts of Canada and Mexico. See Item 1, Risk Factors:
"The Company Might Not Be Successful In Implementing Its Domestic and Worldwide
Proposed Expansion".
The Company has experienced net losses from operations of $3,344,975 or
$0.23 per share (basic and diluted), since its inception in February 1996, as
Technology Guardian, Inc., through the end of 1998. The Company anticipates that
it will continue to incur net losses into the third quarter of 1999. The Company
expects to achieve operating profits in the fourth quarter of 1999 and to
maintain profitability throughout the year 2000.
The Company continues to expend substantial resources on sales and
marketing in its attempts to increase its market share in the satellite ISP
market. There can be no
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<PAGE> 22
assurances, however, that the Company will achieve or sustain profitability or
positive cash flow from its operations. See Item 1, Risk Factors: "The Company
Lacks a Long Operating History", "The Company May Have Insufficient Capital for
Future Operations," "The Company Has No Assurance of Market Acceptance of
Its Products" and "The Company Has No Assurance That Its Marketing and
Distribution Methods Will Be Successful".
The market for the Company's services is rapidly evolving and is
characterized by an increasing number of new technologies, which include ground
based Internet Service Provider (ISP) technologies that may represent
competition to the Company's service. The Company and its prospects must be
considered in light of the risks, expenses and difficulties encountered by
companies in the new and rapidly evolving market for Internet services and
products. See Item 1, Risk Factors, generally.
U.S. Connect 1995 Prior To The Merger With The Company
The Company was formed in June 1995, as U.S. Connect 1995, with the
intention of engaging in the telephony business. However, there was never any
substantial business generated by the Company and the Company remained dormant
with no operations from its inception until the merger with Technology Guardian,
Inc., a California corporation. The Company changed its name to eSat, Inc., in
January 1999.
This discussion and analysis refers to the past operating history of
Technology Guardian, Inc., a California corporation, and not that of U.S.
Connect 1995.
Description Of The Merger
The Company finalized a reverse merger with U.S. Connect 1995 (OTC BB:
USCJ) on October 8, 1998. Prior to that date, the two companies were separate
and had no combination of business activities. The stock trading prior to that
date reflected only U.S. Connect 1995, until October 1998, when the merger was
consummated.
The transaction was the merger of a private operating company into a
non-operating public shell corporation with nominal net assets. The owners of
Technology Guardian, Inc., obtained operating control of the merged companies
after the transaction. The transaction constituted a reverse acquisition.
The transaction was accounted for as reverse acquisition, except that
no goodwill or other intangibles were recorded. Under these terms, the nominal
assets and equity of U.S. Connect 1995, Inc. were consolidated with those of
Technology Guardian, Inc., a California corporation, and reflected as such as of
the date of closing.
Results Of Operations
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenue* $ 341,047 $ 1,201,044 $ 1,529,518
Cost of Sales $ (685,570) $ (345,491) $ (875,124)
</TABLE>
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<PAGE> 23
<TABLE>
<S> <C> <C> <C>
Gross Profit $ (344,523) $ (855,553) $ (654,394)
Sales and Marketing, General and Administrative, $(2,351,382) $(1,171,860) $ (812,663)
and other operating expenses
Net Loss (Basic and Diluted) $(2,695,905) $ (453,998) $ (164,005)
</TABLE>
* - This revenue decline is directly attributable to the shift in the Company's
focus to high-speed satellite Internet products and services and away from the
sale of networking and computing product and services. In the first quarter
1998, the Company stopped selling networking and computing products and
services. In the fourth quarter 1998, the Company stopped selling its initial
satellite Internet products and services altogether, pending the completion of
its GSI(TM) products. During 1998, the Company engaged in capital raising
efforts and the development of its GSI(TM) Internet related products and
services along with beta marketing and testing.
Liquidity
At March 1, 1999, the Company had cash on hand of $3,406,015. The current
short-term cash needs of the Company are approximately $400,000 per month
without accounting for sales revenue. Depending on the amount and timing of
future sales and receipts, the company may need additional capital prior to the
beginning of the fourth quarter 1999. Currently, the company has no commercial
lines of credit established, other than that mentioned in the following
paragraphs under Revenue.
Except as discussed in this Item, there are no material trends, needs,
requirements or commitments which would require further disclosure or analysis
The Company has signed a letter of intent with Tradeway Securities
Group, Inc., pursuant to which Tradeway Securities Group will assist the Company
in raising additional capital pursuant to Regulatian D. The terms of the letter
intent provide for the Company issuing 1,500,000 shares at $8.00 per share, for
a total capital raise of $12,000,000, less commissions and expenses of 13%.
Tradeway Securities Group would also receive options to purchase 375,000 shares
of common stock of the Company at $11.625 per share, for a term of five years.
Revenue
The Company generates its revenue by selling high speed Internet
access. This service is purchased by customers on either a one, two or three
year service subscription contract. Revenue is recognized as the service is
provided using the straight-line method over the life of the contract. A related
liability is recorded for the unearned portion of service revenue received.
Costs that are directly related to the acquisition or sale of the contract are
deferred and charged
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<PAGE> 24
to expense also using the straight-line method over the life of the contract.
Upon completion of the contract, the equipment providing the service can be
returned to the Company or purchased for the residual value of the depreciated
equipment.
When a customer makes an application for a subscription contract, the
applicant's credit is reviewed by the Company's contracted financial services
company. Upon approval of the customer's credit, the Company accepts the
customer's subscription. The Company then has the option to submit the
appropriate sales documentation to a finance company that advances funds to the
Company, less finance and related fees. This amount may vary depending on normal
commercial factors, such as prevailing interest rates. Under this method, it is
contemplated that in most cases funds will be received from the finance company
on a nonrecourse basis and the finance company will handle all billing and
collection activities. See Item 1, Risk Factors: "The Company May Have
Insufficient Capital for Future Operations".
The Company submits the customer's applications for approval to the
finance company upon receipt. After approval, the Company will ship within ten
days. After receipt of the shipping documents, the finance company will remit
funds directly to the Company. The Company books this revenue in the current
quarter and makes provisions for the long-term liability of providing the
customer high-speed satellite Internet service. If the contracts are retained by
the Company, revenue is recognized as the services are provided according to the
terms of the agreement.
Typically, the Company includes in its satellite service, its GSI(TM)
gateway server and satellite dish at a set price. The customer pays for the
installation of the satellite dish. The typical installation costs are those of
a standard mini-satellite dish or approximately $300. The GSI(TM) gateway is a
simple installation with plug and play format that requires no contracted
installation service.
Cost of Sales
The cost of sales includes three primary elements. Typically, the first
element includes the computer server, utilizing Windows NT and Intel Pentium
CPUs, including assembly and shipping. The server assembly is performed by
subcontractors and the software is installed and configured by the Company.
There is no customer installation of hardware or software required. The second
item includes the sales commissions paid to VARs and other distributors. The
commissions are paid quarterly during the duration of the contract. The Company
reserves against the unpaid commissions. The third element is the cost to the
Company of providing Internet access to its customers for a three year period.
This amount is reserved by the Company over the life of the contract. The
reserved funds are kept in interest bearing bank accounts. They are booked as an
asset of the Company with an offsetting liability.
These costs may change as a result of changes in the marketplace. The
cost of sales may increase with increased marketing personnel and additional
sales commissions or other factors.
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<PAGE> 25
Sales and Marketing
Sales and Marketing expenses consist primarily of sales commissions,
salaries, cost promotional material, travel, VAR/Distributor commissions and
advertising. The Company's sales and marketing expenses will grow rapidly as the
Company expands the sales and marketing efforts nationwide and internationally.
The Company expects to hire additional sales personnel in 1999. The Company does
not defer sales, marketing or other direct costs associated with the acquisition
of customers. For 1998, the sales and marketing expenses were $340,820. These
were primarily for the beta marketing and beta sales efforts of the Company's
GSI(TM) products and services.
General and Administrative
General and Administrative expenses consist primarily of costs
associated with the accounting and human resources needs, professional expenses,
leasing of facilities, insurance, legal, depreciation expenses, and payroll. In
1998, this amounted to $2,351,382.
Change In Products And Sales
With the formation of Technology Guardian, Inc., in February 1996, the
Company made a strategic decision to sell and market networking and computing
related products and services which were not Internet related. This strategy
provided the Company with cash flow for operations and its own research and
development in the area of high-speed satellite Internet access. This resulted
in the following sales:
<TABLE>
<CAPTION>
Revenue
-------
<S> <C>
1996 $1,529,518
1997 $1,201,044
1998 $ 341,047
</TABLE>
The sales for 1996 were almost exclusively for the networking and
computing related products and services. The sales in 1997 were mostly for the
networking and computing related products and services. In 1997, the company
sold approximately $150,000 of its initial satellite Internet products and
services.
The Company decided in the first quarter 1998 to halt the sales of
networking and computing products and services. The Company focused on the
development of its high-speed satellite Internet related technology. During this
period, the Company obtained financing through private offerings of its
securities. See Item 10, Recent Sales of Unregistered Securities.
25
<PAGE> 26
Capital Resources
The Company has not generated net cash from its operations since
inception. The Company has funded its operations and development of its product
and services primarily through sales of non-satellite Internet related products
and services, and private sales of equity securities and lease financing. Cash
used in operations are $812,663, $237,717 and $2,799,627 for the years 1996
through 1998 respectively.
Year 2000 Compliance.
The Company has assessed its year 2000 readiness and believes its
systems are compliant. The Company has purchased or procured its essential
equipment, software, systems, and inventory within the past 18 months. The
Company has sought and received confirmation from its key third-party suppliers
and vendors that the hardware, software, products, and services furnished by
these vendors are year 2000 compliant. These vendors include the manufacturer of
the Company's proprietary computer boards and the vendors of the servers used in
the Company's products, the software publisher of the software licensed by the
Company, and satellite and communications companies that transmit data on behalf
of the Company. In addition, the vendors of the Company's own internal network,
computer, accounting, and other systems have assured the Company that their
products are year 2000 compliant.
The worst case for the Company with respect to year 2000 compliance
would be the general failure of the country's telecommunications infrastructure.
The Company relies on the general communications infrastructure maintained by
the established telecommunications companies to transmit its data to it NOC
uplink site, to uplink to a satellite, and for rebroadcast by the satellite to
the Company's customers. Accordingly, if the telecommunications companies and
satellite operators do not have their systems year 2000 compliant, then the
Company and its customers could suffer the consequences of the failure of one or
more components of the telecommunications infrastructure in common with other
users. For the Company, the consequences could be that customers will refuse to
pay for the Company's services and products and the Company will suffer a
decline in revenues. Costs would go up as the Company would seek to mitigate its
problems. The Company could lose its good will, reputation for reliability, and
some or all of its customer base.
Total costs incurred in connection with the Company's year 2000
compliance efforts have not been material and the Company expects minimal
additional costs in calendar year 1999 to assure year 2000 readiness. The
Company will conduct ongoing testing of new features, components, and systems as
they are added to the Company's products.
The Company has only generalized contingency plans for year 2000
contingencies. In general, the Company expects that any year 2000 problems will
occur in the telecommunications infrastructure. If such problems occur which
interrupt the Company's services to its customers, the Company intends to
immediately seek to obtain such services from telecommunications companies that
are able to continue offering services. Since the Company cannot know which
Companies will have year 2000
26
<PAGE> 27
services interruptions, the Company has not made specific plans for alternate
service providers at this time.
ITEM 3. PROPERTIES.
The Company does not own any materially important physical properties.
The Company leases its headquarters under the terms of a commercial lease for
office space. The lease term expires in October 2003. The Company could move its
headquarters without any material adverse affect on the Company. The Company
leases space from Microspace Corporation in Durham, North Carolina, which houses
computer equipment owned by the Company in connection with the uplink to the
satellite network. The Company could replace the Durham NOC without any material
adverse effect on the Company.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of May 6, 1999, the ownership of the
Company's Common Stock by (i) each director and executive officer of the
Company, (ii) all executive officers and directors of the Company as a group,
and (iii) all persons known by the Company to beneficially own more than 5% of
the Company's Common Stock.
<TABLE>
<CAPTION>
Amount and Percent of Class
Nature of of total
Beneficial Shares and
Title of Class Name and Address of Beneficial Owner Ownership (1) options
<S> <C> <C> <C>
Common David B. Coulter (2) 4,475,000 25.11%
16520 Harbor Blvd, Bldg. G
Fountain Valley, California 92708
Common Chester (Chet) L. Noblett Jr. (3) 2,614,913 14.76%
16520 Harbor Blvd, Bldg. G
Fountain Valley, California 92708
Common Salvatore Piraino (4) 136,103 0.83%
16520 Harbor Blvd, Bldg. G
Fountain Valley, California 92708
Common William Sarpalius (5) 1,331,838 7.60%
908 Pennsylvania Avenue, S.E.
Washington, D.C. 20003
Common Jeffrey Hecht (6) 382,912 2.31%
16520 Harbor Blvd, Bldg. G
Fountain Valley, California 92708
</TABLE>
27
<PAGE> 28
<TABLE>
<S> <C> <C> <C>
Common Gary Pan (7) 20,000 .12%
C/o United Asia Capital Partners
Suite 201 - 290 Fu Hsing North Road
Taipei 104, Taiwan
Common Michael C. Palmer (9) 110,000 .67%
16520 Harbor Blvd, Bldg. G
Fountain Valley, California 92708
Common Lawrence C. Early (10) 270,000 1.63%
16250 Harbor Blved, Bldg. G
Fountain Valley, California 92708
Common Jim Mack (8) 324,294 1.95%
16520 Harbor Blvd, Bldg. G
Fountain Valley, California 92708
Common Montefort Investissments 1,072,969 6.57%
Rue De Rhone 78
Ch 1204
Geneva, Switzerland
Common Directors and Executive Officers as a group 4,920,060 25.96%
</TABLE>
(1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934. Unless otherwise stated below, each such person has sole voting
and investment power with respect to all such shares. Under Rule
13d-3(d), shares not outstanding which are subject to options,
warrants, rights or conversion privileges exercisable within 60 days
are deemed outstanding for the purpose of calculating the number and
percentage owned by such person, but are not deemed outstanding for the
purpose of calculating the percentage owned by each other person
listed.
(2) Includes options to purchase: (i) 1,500,000 shares of the Company's
common stock at $3.00 per share for a period of five years from August
22, 1998..
(3) Includes options to purchase; (i) 762,802 shares of the Company's
common stock at $0.7168 per share for a period of five years from date
of grant, and, (ii) 333,333 shares of the Company's common stock at
$3.00 per share for a period of five years from date of grant; and,
(iii) 300,000 shares of the Company's common stock at $3.00 per share
for a period of five years from date of grant contingent upon the
Company achieving $30,000,000 gross revenues in 1999.
(4) Includes options to purchase 16,103 shares of the Company's common
stock at $0.7168 per share for a period of five years from date of
grant; and, (ii) 20,000 shares of the Company's common stock at $17.41
per share for a period of five years from date of grant
28
<PAGE> 29
(5) Includes options to purchase: (i) 26,838 shares of the Company's common
stock at $0.7168 per share for a period of five years from date of
grant; and, (ii) 20,000 shares of the Company's common stock at $17.41
per share for a period of five years from date of grant; and, (iii)
200,000 shares of the Company's common stock at $2.00 per share for a
period of 18 months from date of grant if the following performance
criteria are met:
<TABLE>
<S> <C>
----------------------------------------------------------------------------------
Shares subject to purchase: If the Company achieves the following
gross revenues in conjunction with the
East Coast Sales office:
----------------------------------------------------------------------------------
150,000 $15,000,000 between March 1, 1999,
and August 31, 2000.
----------------------------------------------------------------------------------
50,000 $30,000,000 between March 1, 1999, and
February 29, 2000.
</TABLE>
This total includes options to purchase 360,000 shares of the Company's
common stock at $2.00 per share for a period of 18 months for from date
of grant, held in the name of Carol Sarpalius, spouse of William
Sarpalius. 300,000 of these shares may be purchased if the following
performance criteria are met:
<TABLE>
<S> <C>
----------------------------------------------------------------------------------
Shares subject to purchase: If the Company achieves the following
gross revenues in conjunction with the
East Coast Sales office:
----------------------------------------------------------------------------------
250,000 $750,000 between January 1, 1999, and
June 30, 2000.
----------------------------------------------------------------------------------
50,000 $15,000,000 in 1999.
</TABLE>
60,000 of these shares may be purchased by Carol Sarpalius for a period
of five years from date of grant.
This total includes options granted on October 8, 1998, to purchase
600,000 shares of the Company's common stock at $2.00 per share for a
period from the date of grant to August 24, 2003, if the following
performance criteria are met:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Shares subject to purchase: If the Company achieves the following sales:
------------------------------------------------------------------------------------------
<S> <C>
150,000 1,000 Units of the Company's products
within one year from date of grant.
------------------------------------------------------------------------------------------
50,000 1,000 Units of the Company's products
within six months of the date of grant.
------------------------------------------------------------------------------------------
150,000 2,000 Units of the Company's products
within one year from the date of grant.
------------------------------------------------------------------------------------------
50,000 2,000 Units of the Company's products
within six months of the date of grant.
------------------------------------------------------------------------------------------
100,000 3,000 Units of the Company's products by
December 31, 2000.
------------------------------------------------------------------------------------------
100,000 4,000 Units of the Company's products by
December 31, 2000.
------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 30
(6) Includes options to purchase: (i) 27,912 shares of the Company's common
stock at $0.7168 per share for a period of five years from date of
grant; and, (ii) 225,000 shares of the Company's common stock at $3.00
per share for a period of five years from date of grant
(7) Includes options to purchase 20,000 shares of the Company's common
stock at $17.41 per share for a period of five years from date of
grant.
(8) Includes options to purchase: (i) 4,294 shares of the Company's common
stock at $0.7168 per share for a period of five years from date of
grant; and, (ii) 300,000 shares of the Company's common stock at $2.00
per share for a period of five years from date of grant.
(9) Includes options to purchase 100,000 shares of the Company's common
stock at $9.75 per share for a period of five years from date of grant.
(10) Includes options to purchase 240,000 shares of the Company's common
stock at $3.00 per share for a period of ten years from the date of
grant.
Item 5. Directors and Executive Officers.
The following table sets forth the names and positions of the directors
and executive officers and key employees of the Company:
<TABLE>
<CAPTION>
Officer Name Age Position Since
- ------------ --- -------- -----
<S> <C> <C> <C>
Michael C. Palmer 50 CEO and Director 1999
Lawrence C. Early 34 Chief Financial Officer 1999
Chester (Chet) L. Noblett, Jr. 55 COO, Secretary, Treasurer 1997
and Director
Salvatore A. Piraino 72 Director 1997
William C. Sarpalius 50 Director 1997
Gary Pan 53 Director 1998
Jeffrey Hecht 47 Vice President of 1998
Operations
Jim Mack 26 Chief Technology Officer 1998
</TABLE>
30
<PAGE> 31
The directors of the Company are elected to hold office until the next
annual meeting of shareholders and until their respective successors have been
elected and qualified. Officers of the Company are elected annually by the Board
of Directors and hold office until their successors are elected and qualified.
The following sets forth biographical information concerning the
Company's directors and executive officers for at least the past five years.
MICHAEL C. PALMER has been the Chief Executive Officer and a director
of the Company since March 1999. Mr. Palmer has held the position of Chief
Financial Officer since November 1998 and has been affiliated with the Company
since December 1997. Since 1978, Mr. Palmer has been a partner of Parks, Palmer,
Turner and Yemenedjian, a firm of Certified Public Accountants. Mr. Palmer
previously served as a director of Western Waste Industries (NYSE: WW). He
received a B.S. degree in Business Administration in 1972 and a M.S. degree in
Business Taxation in 1975 from the University of Southern California.
LAWRENCE C. EARLY has been Vice President - Finance, Chief Financial
Officer since May 1999. Prior to assuming the position Mr. Early was the
Company's independent auditor from 1996 - 1999. From 1994 - 1999 Mr. Early was a
managing partner of Lichter and Associates, Certified Public Accountants. During
the course of his time with Lichter and Associates Mr. Early was responsible for
all aspects of management of the firm and served as the SEC Audit Partner for
the firm overseeing a million dollar audit practice comprised of publicly-traded
Internet concerns and broker/dealers in the securities industry. Prior to being
made partner at Lichter and Associates, Mr. Early was the Chief Financial
Officer of IDOC, Inc, a multinational software concern based in Los Angeles. Mr.
Early holds a master of International Management from the American Graduate
School of International Management, a Master of Business Administration from the
Wharton School, University of Pennsylvania, and a Bachelor of Science (Finance)
from California State University - Fresno.
CHESTER (CHET) L. NOBLETT, JR. has been Chief Operating Officer,
Treasurer, Secretary and a Director of the Company since June 1997. From 1990 to
1996, Mr. Noblett was employed as the chief executive officer for Tradom
International, a subsidiary of an Asahi Shouian, Inc., an international food
brokerage company. From 1975 to 1990, he was chief executive officer of C.
Noblett & Associates, a food brokerage company. Mr. Noblett is also president
and a director of Cyber Village Network, a computer software company. Mr.
Noblett received a B.S. degree in Business Administration from the University of
Southern California in 1971.
SALVATORE A. PIRAINO has been a director of the Company since December
1997. From September 1992 to the present, Mr. Piraino has operated Management
and Technical Services, a management consultant firm providing management,
engineering and manufacturing expertise to a number of small companies. From
1974 to 1992, Mr.
31
<PAGE> 32
Piraino was employed as a director, program manager, product line manager and
assistant division manager for Hughes Aircraft Company. Mr. Piraino received a
B.E. degree in Engineering from Loyola University in 1950.
WILLIAM C. SARPALIUS has been a director of the Company since December
1997. From 1995 to present, Mr. Sarpalius has served as president and chief
executive officer of Advantage Associates, Inc., a lobbying firm located in
Washington, D.C. Previously, Mr. Sarpalius served as a U. S. Congressman from
the State of Texas from 1989 to 1995. In 1995, Mr. Sarpalius received a
presidential appointment to the United States Department of Agriculture as
Western Regional Director. Mr. Sarpalius received a bachelors degree in
Agriculture Science from Texas Tech University in 1972 and a masters degree in
Agriculture Science from West Texas State in 1978.
GARY (GUO AN) PAN has been a director of the Company since September
1998. From 1997 to present, Mr. Pan has served as the managing director for
United Asia Capital Partners, an investment management and financial services
firm. From 1993 to 1997, Mr. Pan served as president of Sunridge International,
Inc., and from 1992 to 1993, as senior vice president of the Great Wall Group.
Mr. Pan currently serves as a director on the following privately held
corporations: United Asia Capital Partners, Harvest Communications, and Quadra
Pharmaceuticals, Inc. Mr. Pan received a B.S. degree in Electrical Engineering
from National Taiwan University, a M.S. degree in Electrical Engineering from
University of Waterloo, and his Ph.D. in Management from the University of
California at Los Angeles.
JEFFREY HECHT was appointed as the Company's Vice President of
Operations in March 1998. From March 1997 to March 1998, Mr. Hecht was vice
president of operations for ACOM Computer Inc., a software development company
in Long Beach, California. From December 1993 to February 1997, Mr. Hecht served
as the vice president and chief information officer for Strategic Mortgage
Services, a financial services company. Mr. Hecht received a B.S. in Business
Administration from Arizona State University in 1976.
JIM MACK was appointed as the Company's Chief Technology Officer in
September 1998. From May 1997 to September 1998, Mr. Mack was the Senior Systems
Engineer for Versant, Inc., a manufacturer of object-oriented database
technologies. From February 1995 to May 1997, Mr. Mack was Object Technology
Specialist with IBM, working with such firms as Kodak and MCI. Mr. Mack received
a B.S. degree in Computer Science from University of Missouri-Rolla in 1994.
32
<PAGE> 33
ITEM 6. EXECUTIVE COMPENSATION.
<TABLE>
<CAPTION>
All Other
Annual Compensation Long Term Compensation Compensation
----------------------------------------------------------------------------------------------
Awards Payouts
Other --------------------------
Annual Restricted Securities
Name and Compen- Stock Underlying LTIP
Principal Position Year Salary Bonus sation Awards Options/SARs Payouts
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David B. Coulter 1998 166,407 0 56,250 0 3,535,890* 0 0
Chester L. Noblett, Jr 1998 114,750 0 48,750 0 1,095,802 0 0
</TABLE>
* Please see Item 7, below, and Note K to the Financial Statements
regarding the cancellation of Mr. Coulter's options in March, 1999.
33
<PAGE> 34
OPTION GRANTS IN FISCAL YEAR 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Individual Grants Potential Realizable Value at Assumed
Annual Rates of Stock Price
Appreciation for Option Term
- ----------------------------------------------------------------------------------------------------------------------------------
Percent of Market
Number of Total Options Market Closing price
Shares Granted to Exercise of Price on on May
Underlying Employees in Base Price Date of Expiration 6,1999, of
Name Options Fiscal Year ($/Sh) Grant (1) Date $10.625 5% ($) 10% ($)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David C. Coulter, 1,910,885 31.19 $ .7168 $ .7168 August, 2003 $18,933,431 $3,120,409 $3,937,572
President
- ----------------------------------------------------------------------------------------------------------------------------------
David C. Coulter, 1,500,000 27.14% $ 3.00 $ 3.00 October, 2003 $11,437,500 $5,743,267 $7,247,295
President
- ----------------------------------------------------------------------------------------------------------------------------------
Chester Noblett 762,802 12.45% $ .7168 $ .7168 August, 2003 $7,557,995 $ 697,841 $ 880,589
- ----------------------------------------------------------------------------------------------------------------------------------
Chester Noblett 633,000 10.33% $ 3.00 $ 3.00 October, 2003 $4,826,625 $2,423,659 $3,058,359
- ----------------------------------------------------------------------------------------------------------------------------------
Jeff Hecht 27,912 0.46% $ .7168 $ .7168 August, 2003 $ 276,558 $ 25,535 $ 32,222
- ----------------------------------------------------------------------------------------------------------------------------------
Jeff Hecht 225,000 3.67% $ 3.00 $ 3.00 October, 2003 $1,715,625 $ 861,490 $1,087,094
- ----------------------------------------------------------------------------------------------------------------------------------
Jim Mack 4,294 0.07% $ .7168 $ .7168 August, 2003 $ 42,546 $ 3,928 $ 4,957
- ----------------------------------------------------------------------------------------------------------------------------------
Jim Mack 300,000 4.90% $ 3.00 $ 3.00 October, 2003 $2,287,500 $1,148,653 $1,449,459
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The options granted to the officers and directors set forth in the
foregoing chart were granted by Technology Guardian, Inc. ("TGI"), a
California corporation, prior to the merger with the Company. There was
no market for the TGI stock at that time. The exercise price of $.7168
of the options reflected the price of the TGI shares at the time as
measured by the price at which TGI was then issuing stock in a private
offering. The exercise price of $3.00 reflected the judgment of the
board of directors of TGI of the value of the shares of TGI immediately
prior to the merger with the Company. The Company assumed the
obligation to honor the options granted by TGI.
34
<PAGE> 35
In determining the compensation of David B. Coulter and Chet Noblett,
the board of directors took the following factors into account. Mr. Coulter and
Mr. Noblett served as officers of Technology Guardian, Inc., a California
corporation, prior to the merger of TGI into the Company. Prior to the merger,
TGI was a privately held company. The salaries paid to Mr. Coulter and Mr.
Noblett by TGI prior to the merger were set at the rate of $300,000 per year,
and $225,000 per year, respectively. In connection with the pending merger of
TGI into the Company and in connection with the private offering of stock of TGI
prior to the merger, and the subsequent private offering of stock of the Company
subsequent to the merger, Mr. Coulter and Mr. Noblett agreed to reduce their
salaries to $150,000 and $130,000 respectively. In addition, Mr. Coulter agreed
to cancel a net total of 5,288,553 of his shares of common stock of TGI prior to
the merger.
In consideration for the reduction in salary and the cancellation of
shares, and in order to induce Mr. Noblett to accept full-time employment with
the Company, the Company and TGI agreed to grant to Mr. Coulter an option to
purchase 1,500,000 shares of common stock at $0.7168 per share and to Mr.
Noblett an option to purchase 500,000 shares of common stock at $0.7168, the
price at which TGI was then selling shares of common stock in a private
offering.
In addition, the board of directors of TGI granted Mr. Noblett an
option to purchase 333,000 shares of common shares exercisable at $3.00 per
share in connection with his services in guiding TGI through the merger process
with the Company. Finally, the board of directors of the Company approved the
grant to Mr. Noblett of an option to purchase 300,000 shares of common stock at
$3.00 per share subject to the Company achieving $30 million in revenues in
1999.
The Company has entered into an employment agreement with Chester
(Chet) L. Noblett for a period of five years commencing September 25, 1997.
Under the agreement, Mr. Noblett receives a salary of $130,000 per year plus an
automobile allowance of $750 per month and health insurance benefits of $200 per
month. The employment agreement includes a cost-of-living increase at the rate
of 2 1/2 percent per annum, plus any other increase which may be determined from
time to time in the discretion of the Company's Board of Directors. Pursuant to
the employment agreement, Mr. Noblett is provided with a car on such lease terms
to be determined by the Company, provided that the monthly operating costs
(including lease payments) to be paid by the Company will not exceed $750.
Salvatore A. Piraino, who serves as the audit committee, receives a
payment of $500 per month for his services. This compensation commenced in
September, 1998.
Prior to the merger of Technology Guardian, Inc., a California
corporation, into the Company, TGI granted shares of common stock to the
following members of its board of directors as compensation for serving on the
board of directors:
35
<PAGE> 36
<TABLE>
<CAPTION>
Name Shares Granted:
- ---- ---------------
<S> <C>
Salvatore A. Piraino 25,000
Frank Moy 25,000
Gil Siegel 12,500
Don Sriro 12,500
</TABLE>
The Company also reimburses members of the board of directors for their
travel, entertainment, and other out-of-pocket expenses incurred on behalf of
the Company.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In April 1997, Technology Guardian, Inc., entered into a settlement
agreement among TGI, Cyber Village Network, Inc. ("CVN") and Chet Noblett in
which CVN and Chet Noblett agreed to release TGI from all potential claims
arising from: (i) a certain option agreement dated August 6, 1997 ("Option
Agreement"); and, (ii) an agreement entered into among TGI, David Coulter, as
TGI's then President, CVN and Chet Noblett as agent for CVN ("Commission
Agreement"), in exchange for the issuance of 849,750 shares of TGI's Common
Stock.
The Option Agreement granted options to CVN to purchase shares equal to
10% of TGI's issued and outstanding shares in exchange for forgiveness of a
$100,000 promissory note held by CVN, as well as the option to purchase shares
equal to 30% of TGI's issued and outstanding shares in exchange for $1,200,000.
Further, the Option Agreement provided that David Coulter, TGI's former
president, had the right to repurchase shares from CVN equal to 15% of TGI's
common stock following the exercise of the option by CVN in exchange for
$1,200,000. Mr. Coulter offset his obligation to pay CVN $1,200,000 by the
$1,200,000 payable to TGI by CVN pursuant to its exercise of options. The
Commission Agreement provided that TGI and Mr. Coulter, TGI's then President,
would pay Mr. Noblett, as agent for CVN, an amount equal to 6% of the gross
proceeds received by TGI from any underwriting arranged by Andrew Glashow and
Joe Py, including bridge financing, and subsequently, Mr. Noblett would rebate
one-third of aforementioned fees to Mr. Coulter. The Option Agreement was
subsequently canceled and the parties released each other from all claims.
Prior to the issuance of the 1,030,000 shares of TGI's stock as a
result of the exercise of the option agreement by CVN and the 849,750 shares
received in consideration for the Settlement Agreement, for a total of 1,879,750
Shares, Mr. Noblett, as agent for CVN, assigned 1,060,000 shares to certain
persons as consideration for loans made to CVN. In March 1998 TGI completed
payment to Mr. Noblett of a bonus in the amount of $100,000 for certain services
provided in assisting TGI with obtaining additional capital.
In May, 1998 David Coulter transferred 379,250 shares of his stock to
Cyber Village Network. Mr. Coulter then canceled 5,414,172 shares of common
stock of TGI in connection with the pending private placement of shares of TGI.
Of these shares canceled, TGI reissued 125,619 to him in August 1998, prior to
completion of the merger described in Item 1 ("Merger").
36
<PAGE> 37
The cancellation of the option described above was part of the over-all
consideration given in settling the disputes between Mr. Noblett and Mr.
Coulter. The transactions had no impact on the operations of the Company. These
transactions only resolved disputed issues between Mr. Noblett and Mr. Coulter.
At that point in time, there were fewer than ten shareholders of the Company,
all of whom were closely associated with the Company. Accordingly, there were no
public shareholders affected in any way by these transactions.
In connection with the Merger, the Company assumed the obligations of
TGI to issue options to purchase 2,000,000 shares of TGI common stock on a pro
rata basis to all TGI shareholders as of August 30, 1998, at an exercise price
of $.7168 per share, exercisable for five (5) years from date of grant. In
addition, the Company assumed the obligations of TGI for options to purchase
1,500,000 shares of TGI common stock to Mr. Coulter, then-President of TGI, and
500,000 shares of TGI common stock to Mr. Noblett, the Vice President and Chief
Operating Officer of TGI, at an exercise price of $.7168 per share, exercisable
for five (5) years from date of grant. On October 13, 1998 the Board of
Directors of the Company authorized the issuance of additional options to
purchase 1,000,000 shares of Common Stock to Mr. Coulter, and 333,333 shares of
Common Stock to Mr. Noblett, at an exercise price of $3.00 per share,
exercisable for five (5) years from date of grant subject to the Company
achieving $30,000,000 in sales in 1999.
On March 22, 1999, David B. Coulter resigned as a director and officer
of the Company. Pursuant to a resignation agreement, Mr. Coulter agreed to
cancel 1,767,769 shares of common stock, reducing the number of shares he holds
to 3,000,000 shares of common stock. The 3,000,000 shares retained by Mr.
Coulter are nonvoting. In addition, Mr. Coulter agreed to cancel all options
held by him to purchase 3,410,885 shares of common stock. The canceled options
included options on 1,400,000 shares exercisable at $3.00 per share, options on
2,010,885 shares at $0.7168 per share. Mr. Coulter agreed to accept in lieu
thereof options to purchase 1,500,000 shares of common stock, with an exercise
price of $3.00 per share, for five years from August 22, 1999. Mr. Coulter
agreed to the termination of his employment agreement, together with a severance
payment provided by the employment agreement. The Company agreed to pay Mr.
Coulter a severance payment of $150,000, payable at the rate of $30,000 per
month from the time of resignation, and to pay Mr. Coulter for consulting with
the Company at the rate of $10,000 per month for a total of 36 months,
commencing upon his resignation. The Company and Mr. Coulter have entered into a
general mutual release of claims.
ITEM 8. LEGAL PROCEEDINGS.
None.
37
<PAGE> 38
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The Company's Common Stock, par value $.001 per share, is not eligible
for listing on the Nasdaq system; however, the Company's Common Stock is traded
on the Electronic Bulletin Board under the trading symbol " ASAT". The following
table sets forth the high and low bid prices for the Company's Common Stock
since the beginning of the fiscal year 1997, as adjusted for the 1:50 reverse
stock split. The quotations reflect inter-dealer prices, with no retail mark-up,
mark-down or commissions, and may not represent actual transactions. The
information presented has been derived from National Quotation Bureau, Inc.
38
<PAGE> 39
<TABLE>
<CAPTION>
1997 FISCAL YEAR High Bid Low Bid
- ---------------- -------- -------
<S> <C> <C>
FIRST QUARTER 25.00 6.25
SECOND QUARTER 12.50 1.56
THIRD QUARTER 12.50 1.56
FOURTH QUARTER 12.50 1.00
</TABLE>
<TABLE>
<CAPTION>
1998 FISCAL YEAR
- ----------------
<S> <C> <C>
FIRST QUARTER 1.00 .05
SECOND QUARTER .05 .05
THIRD QUARTER 5.50 .625
FOURTH QUARTER 16.00 5.00
</TABLE>
On December 31, 1998, the last reported bid and asked prices for the Common
Stock were $15.50 and $15.75, respectively.
As of March 31, 1999, there were 434 active holders of record of the
Company's Common Stock.
The Company has never declared a dividend on its Common Stock, and it
is anticipated that any earnings which might be available for distribution as
Common Stock dividends will be retained for the Company's operations for the
foreseeable future.
The transfer agent for the Company's Common Stock is Pacific Stock
Transfer Co., 5844 South Pecos Road, Suite D, Las Vegas, Nevada 89120.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
Technology Guardian, Inc., a California corporation, which was merged
into the Company, entered into an Agreement with Pacific Capital Group Ltd.
("Pacific Capital"), to sell shares pursuant to the terms of a Confidential
Offering Memorandum dated July 2, 1998 ("Pacific Capital Offering"). Pacific
Capital purchased 2,092,500 shares at $0.7168 per share for a total of
$1,500,000, of which 754,045 shares were sold under Rule 504 of Regulation D,
and the remaining 1,338,455 under Regulation S.
39
<PAGE> 40
In connection with the Merger, the Company assumed the obligations of
TGI to honor options to purchase 2,000,000 shares of TGI Common Stock, $.001 par
value per share, on a pro rata basis to all TGI shareholders as of August 30,
1998, at an exercise price of $.7168 per share, exercisable for five (5) years
from date of grant. In addition, the Company assumed the obligations of TGI
wherein TGI issued options to purchase 1,500,000 shares of TGI Common Stock,
$.001 par value per share, to David B. Coulter, President of TGI, and 500,000
shares of TGI Common Stock, $.001 par value per share, to Chester L. Noblett,
the Vice President and COO of TGI, at an exercise price of $.7168 per share,
exercisable for five (5) years from date of grant. On October 13, 1998 the Board
of Directors authorized the issuance of additional options to purchase 1,000,000
shares of Common Stock to Mr. Coulter, and 333,333 shares of Common Stock to Mr.
Noblett, at an exercise price of $3.00 per share, exercisable for five (5) years
from date of grant. See Item 7, "Certain Relationships and Related
Transactions".
The Merger was consummated on October 8, 1998. Under Rule 145
promulgated by the Securities and Exchange Commission, the shares of the Company
received by the shareholders of TGI in connection with the Merger are deemed
newly issued shares. Of the shares of the Company outstanding after the merger,
1,050,400 shares are attributed to the original shareholders of U.S. Connect
1995, and 9,315,000 shares were issued to shareholders of TGI. Of these shares,
1,338,455 shares were issued under Regulation S, and 7,976,545 shares were
issued under Regulation D.
After the merger the Company issued 2,092,500 shares of common stock
under Regulation S according to its agreement with Corporate Financial
Enterprises at $0.7168 per share. These shares were issued to investors in
Europe.
On October 28, 1998, the Company commenced a private placement for
2,000,000 shares of common stock under Rule 506, at $2.40 per share. Tradeway
Securities, Inc., acted as the placement agent. The Company completed this
offering in January 1999, with gross proceeds of $4,800,000. Tradeway Securities
Group, Inc., acted as placement agent and received commissions of $480,000, plus
a $144,000 nonaccountable expense allowance, warrants to purchase 500,000 shares
of common stock at $2.64 per share exercisable through January, 2004.
The Company has agreed to issue Loyalty Options to acquire up to
500,000 shares of the Company's Common Stock to be granted to those shareholders
who retain ownership of the shares within the Units purchased in a private
offering commenced October 28, 1998, for two years from the date of purchase
(the Loyalty period). The options will be issued on the basis of one option for
each 25 shares purchased. The options are exercisable at an exercise price of
$4.80 per share for a period of three years from the date of issue. No Loyalty
Options have been issued at this time.
In January, 1999, David B. Coulter transferred warrants to purchase
650,000 shares at $0.7168 per share to Corporate Financial Enterprises, which
then exercised the
40
<PAGE> 41
option. The shares were issued pursuant to Section 4(2) of the Securities Act of
1933, as amended.
In the period of November, 1998, through April 1, 1999, four holders of
warrants exercised their warrants in a cashless exercise with respect to 612,614
shares of common stock. These shares were issued pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
On February 8, 1999, a shareholder exercised options to purchase 25,000
shares at an exercise price of $0.7168. The Company received proceeds of
$17,920. These shares were issued pursuant to Section 4(2) of the Securities Act
of 1933, as amended.
Pursuant to an agreement of September, 1998, the Company issued 33,482
shares to the Pacific Capital Group for proceeds of $24,000. These shares were
issued pursuant to Regulation S.
In February, 1999, the Company issued 205,000 shares under Regulation S
to investors residing in Asia.
On January 4, 1999, the Company issued one share to an investor for
$15.50. This share was issued pursuant to Section 4(2) of the Securities Act of
1933, as amended.
In December 1998 as partial compensation for work installing and
configuring telephone systems for the Company, the Company sold 1,000 shares at
a discount to the market. The differential between the market price on that date
of issuance and the realized value of $.85 was recorded as consulting expense in
1998. The Company issued these 1,000 shares to Dave Gallie at $0.85 per share
for total proceeds of $850 on December 18, 1998. These shares were issued
pursuant to Section 4(2) of the Securities Act of 1933, as amended.
In January and February, 1999, the Company issued 18,487 shares of
common stock to Asian investors pursuant to Regulation S. The shares were sold
for $2.45 cents per share, with the Company retaining net proceeds of $1.55 per
share, and paying a commission of $0.90 per share to Corporate Financial
Enterprises, Inc., pursuant to an agreement executed by David B. Coulter and
Corporate Financial Enterprises on October 15, 1998. The gross proceeds to the
Company amounted to $45,293 and the net proceeds amounted to $28,654.85. CFE
received $16,638.15 in commissions.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
Common Stock
The Company is authorized to issue up to 50,000,000 shares of Common
Stock, $.001 par value. Each share of Common Stock is entitled to share pro rata
in dividends and distributions, if any, with respect to the Common Stock when,
as and if declared by the Board of Directors from funds legally available
therefor, subject to the preferential
41
<PAGE> 42
rights of holders of shares of any series of outstanding Preferred Stock. The
Company has never paid any dividends on its Common Stock and does not intend to
do so in the foreseeable future. No holder of Common Stock has any preemptive
right to subscribe for any securities of the Company. Upon liquidation,
dissolution or winding up of the Company, each share of the Common Stock is
entitled to share ratably in the amount available for distribution to holders of
Common Stock. All shares of Common Stock presently outstanding are fully paid
and nonassessable.
Each holder of Common Stock is entitled to one vote per share with
respect to all matters that are required by law to be submitted to shareholders.
Shareholders are not entitled to cumulative voting in the election of directors.
Accordingly, the holders of more than 50% of the shares voting for the election
of directors can elect 100% of the directors if they choose to do so; and, in
such event, the holders of the remaining shares voting for the election of the
directors will be unable to elect any person to the Board of Directors.
As of May 6, 1999, the Company had issued and outstanding 16,293,215
shares of Common Stock and had reserved: 7,178,914 shares of Common Stock for
issuance upon exercise of outstanding options.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation limit the liability of
directors to shareholders for monetary damages for breach of a fiduciary duty
except in the case of liability: (i) for any breach of their duty of loyalty to
the Company or its shareholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) for
certain unlawful distributions; or, (iv) for any transaction from which the
director derived an improper personal benefit.
The Company's Articles of Incorporation and Bylaws provide for the
indemnification of directors and officers of the Company to the maximum extent
permitted by law. The Bylaws provide generally for indemnification as to all
expenses incurred or imposed upon them as a result of actions, suits or
proceedings if they act in good faith and in a manner they reasonably believe to
be in or not opposed to the best interests of the Company. These agreements,
among other things, indemnify the Company's employees, officers and directors
for certain expenses (including attorneys' fees), judgments, fines and
settlement amounts incurred by such person in any action or proceeding,
including any action by or in the right of the Company, on account of services
as any employee, officer or director of the Company or as an employee, officer
or director of any affiliate of the Company. The Company believes that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and officers.
There is no pending litigation or proceeding involving a director,
officer, employee or other agent of the Company as to which indemnification is
being sought,
42
<PAGE> 43
and the Company is not aware of any pending or threatened litigation that may
result in claims for indemnification by any director, officer, employee or other
agent.
The Company has purchased Directors and Officers liability insurance to
defend and indemnify Directors and Officers who are subject to claims made
against them for their actions and omissions as directors and officers of the
Company. The insurance policy provides standard Directors and Officers Liability
insurance in the amount of $5,000,000.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 15.
ITEM 1. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This Form 10 contains certain forward-looking statements. The Company's
forward-looking statements include the plans and objectives of management for
future operations, including plans and objectives relating to the Company's
planned marketing efforts and future economic performance of the Company and
future capital raising activities of the Company. The forward-looking statements
and associated risks set forth in this Form 10 include or relate to the ability
of the Company to: (i) obtain meaningful consumer acceptance and a successful
market for the product on a national and international basis at competitive
prices; (ii) develop and maintain an effective national and international sales
network; (iii) forecast demand for its product; (iv) maintain pricing and
thereby maintain adequate profit margins; and, (v) achieve adequate intellectual
property protection.
The forward-looking statements herein are based on current expectations
that involve a number of risks and uncertainties. Such forward-looking
statements are based on assumptions that: (i) the Company will obtain equity
and/or debt capital; (ii) there will be no material adverse competitive or
technological change in condition of the Company's business; (iii) there will be
a demand for the Company's product; (iv) the Company's forecasts accurately
anticipate market demand; and, (v) there will be no material adverse change in
the Company's operations, business or governmental regulation affecting the
Company or its suppliers. The foregoing assumptions are based on judgments with
respect to, among other things, future economic, competitive and market
conditions, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the Company's
control. Accordingly, although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any such assumption
could prove to be
43
<PAGE> 44
inaccurate and therefore there can be no assurance that the results contemplated
in forward-looking statements will be realized. In addition, as disclosed
elsewhere in "Risk Factors", there are a number of other risks inherent in the
Company's business and operations which could cause the Company's operating
results to vary markedly and adversely from prior results, or the results
contemplated by the forward-looking statements. Management decisions, including
budgeting, are subjective in many respects and periodic revisions must be made
to reflect actual conditions and business developments, the impact of which may
cause the Company to alter its marketing, capital investment and other
expenditures, which may also materially adversely affect the Company's results
of operations. In light of significant uncertainties inherent in forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
Company's objectives or plans will be achieved.
44
<PAGE> 45
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) The Company's financial statement for the year ending December 31,
1998, is filed as part of this Registration Statement.
(b) The exhibits required by Item 601 of Regulation S-K are set forth
below.
45
<PAGE> 46
TECHNOLOGY GUARDIAN, INC.
(SUBSEQUENTLY CHANGED TO ESAT, INC.)
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<PAGE> 47
[LICHTER AND ASSOCIATES LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Technology Guardian, Inc.
Fountain Valley, California
Members of the Board:
We have audited the accompanying balance sheets of Technology Guardian, Inc.
("the Company") as of December 31, 1998 and 1997, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Technology Guardian, Inc. as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the years in the period ended December 31, 1998 and 1997 in
conformity with generally accepted accounting principles.
As discussed in Note P to the financial statements, the Company's 1998
Additional Paid in Capital previously reported as $6,614,398 should have been
$6,051,234. This discovery was made subsequent to the issuance of the financial
statements. The financial statements have been restated to reflect this
correction.
/s/ LICHTER AND ASSOCIATES
--------------------------------------
February 23, 1999, except for Note P, as to which the date is June 14, 1999
Los Angeles, California
<PAGE> 48
TECHNOLOGY GUARDIAN, INC.
BALANCE SHEETS
As of December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS
1998 1997
------------ ----------
<S> <C> <C>
Current Assets
Cash $ 2,567,697 $ 0
Accounts Receivable 48,964 256,986
Inventories 289,260 148,479
Note Receivable 15,000 22,500
----------- -----------
Total Current Assets 2,920,921 427,965
----------- -----------
Fixed Assets (Net of accumulated depreciation of
$41,965 and $17,306, respectively) 293,251 23,928
----------- -----------
Total Fixed Assets 293,251 23,928
----------- -----------
Other Assets
Deposits 47,215 2,027
----------- -----------
Total Other Assets 47,215 2,027
----------- -----------
Total Assets $ 3,261,387 $ 453,920
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Cash $ 0 $ 11,827
Accounts Payable and Accrued Expenses 235,866 341,772
Sales Tax Payable 10,801 6,569
Payroll Taxes Payable 168,891 137,346
Deferred Revenue 117,070 0
Income Tax Payable 0 800
Short Term Debt (includes current portion
of long term debt) 6,414 164,093
----------- -----------
Total Current Liabilities 539,042 662,407
----------- -----------
Long Term Liabilities
Notes Payable (net of current portion) 0 119,265
----------- -----------
Total Long Term Liabilities 0 119,265
----------- -----------
Stockholders' Equity
Common Stock, Par Value $.001 Per Share,
Authorized 40,000,000 Shares Common
Stock, 10,000,000 Preferred Stock,
Issued and Outstanding 16,085,936
and 10,755,350 Common, respectively 16,086 10,755
Additional Paid in Capital 6,051,234 279,296
Retained (Deficits) (3,344,975) (617,803)
----------- -----------
Total Stockholders' Equity 2,722,345 (327,752)
----------- -----------
Total Liabilities and
Stockholders' Equity $ 3,261,387 $ 453,920
=========== ===========
</TABLE>
Accountant's report and notes are an integral part of these financial
statements.
<PAGE> 49
TECHNOLOGY GUARDIAN, INC.
STATEMENTS OF INCOME AND EXPENSE
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Sales $ 341,047 $ 1,201,044
Cost of Goods Sold (net of inventory adjustment of
$140,780 and $140,000, respectively) 685,570 345,491
------------ ------------
Gross Profit (Loss) (344,523) 855,553
Selling, General and Administrative Expenses
Advertising 175,647 125,934
Auto expense 23,427 15,538
Commissions 46,753 115,921
Equipment rental 42,375 11,726
Freight and delivery 49,103 11,549
Insurance 35,537 11,193
Legal and accounting 157,955 92,936
Other operating 109,010 152,098
Payroll taxes 201,454 43,837
Rent 45,464 25,900
Repairs and maintenance 14,496 2,738
Travel and entertainment 165,173 45,652
Utilities 68,236 45,463
Wages and salaries 1,216,751 471,375
------------ ------------
2,351,382 1,171,860
------------ ------------
(Loss) from operations (2,695,905) (316,307)
Other Income and (Expense)
Interest expense (11,371) (19,145)
Depreciation (24,659) (12,546)
Bad debt (237,426) (105,000)
------------ ------------
(273,456) (136,691)
------------ ------------
(Loss) before extraordinary income and income taxes (2,969,362) (452,998)
Extraordinary income, net of income tax effect of $0 242,990 0
------------ ------------
(Loss) before income taxes (2,726,372) (452,998)
Income taxes 800 800
------------ ------------
Net (Loss) $ (2,727,172) $ (453,798)
============ ============
Net (Loss) Per Share (Basic and Diluted)
Basic $ (0.17) $ (0.04)
Diluted $ (0.17) $ (0.04)
Weighted Average Number of Shares
Basic 16,085,936 10,755,350
Diluted 16,085,936 10,755,350
</TABLE>
Accountant's report and notes are an integral part of these financial
statements.
<PAGE> 50
TECHNOLOGY GUARDIAN, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from
Operating Activities:
Net (Loss) $(2,727,172) $ (453,798)
Adjustments to reconcile net income to net cash (used in) operating activities:
Depreciation and amortization 24,659 12,546
(Increase) decrease in accounts receivable 208,022 (241,405)
(Increase) decrease in inventories (92,820) (139,651)
(Increase) decrease in notes receivable 7,500 52,500
(Increase) decrease in deposits (45,188) 0
Increase (decrease) in payroll taxes payable (31,545) 137,346
Increase (decrease) in accounts payable (105,906) 127,989
Increase (decrease) in sales tax payable 4,232 6,569
Increase (decrease) in deferred revenue 117,070 0
Increase (decrease) in income tax payable (800) 800
Increase (decrease) in short term debt (157,679) 259,387
----------- -----------
Net Cash (Used in) Operations (2,799,627) (237,717)
----------- -----------
Cash Flows From Financing Activities
Sale of common stock (net cash) 5,673,131 253,363
----------- -----------
Net Cash Provided by
Financing Activities 5,673,131 253,363
----------- -----------
Cash Flows From Investing Activities:
Purchase of equipment (293,980) (6,539)
Purchase of stock 0 (12,000)
----------- -----------
Net Cash (Used in)
Investing Activities (293,980) (18,539)
----------- -----------
Net Increase (Decrease)
in Cash 2,579,524 (2,893)
----------- -----------
Cash - Beginning (11,827) (8,934)
----------- -----------
Cash - Ending $ 2,567,697 $ (11,827)
=========== ===========
</TABLE>
Accountant's report and notes are an integral part of these financial
statements.
<PAGE> 51
TECHNOLOGY GUARDIAN, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Retained (Deficits)
Balance at beginning of year $ (617,803) $ (164,005)
Net (loss) (2,727,172) (453,798)
Dividends declared on common stock 0 0
----------- -----------
Balance at end of year (3,344,976) (617,803)
----------- -----------
Common Stock (Par Value $.001) (thousands of shares)
Balance at beginning of year 10,755 10,000
Common stock issued 5,331 755
----------- -----------
Balance at end of year 16,086 10,755
----------- -----------
Additional Paid in Capital
Balance at beginning of year 279,296 38,688
Sale of common stock 5,771,938 240,608
----------- -----------
Balance at end of year 6,051,234 279,296
----------- -----------
Total Stockholders' Equity at end of year $ 2,722,345 $ (327,752)
=========== ===========
</TABLE>
Accountant's report and notes are an integral part of these financial
statements.
<PAGE> 52
TECHNOLOGY GUARDIAN, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
Note A - Nature Of Activities
Formed February 22, 1996, as a California Corporation, Technology
Guardian, Inc. (the Company) is a "C" Corporation as organized under
the Internal Revenue Code. Technology Guardian, Inc. is a technology
company whose primary purpose is to provide high-speed satellite
Internet access products and services. Its customers include
businesses, educational institutes, and government.
The Company's product lines were developed to fill voids in the
Internet access arena, and have applications both domestically and
internationally. In the United States, businesses and organizations can
benefit from the Company's affordability, ease of use, and true
high-speed access. In many countries there is a lack of even marginal
communications infrastructure to support high-speed Internet access.
The Company's potential appears to be very positive in these markets.
The Company's three sales divisions are designed to address the
Internet access needs of the different segments of the marketplace. The
Galactic Satellite Internet (GSI) division targets businesses and
governmental sectors. Satellite Accessed Material for Schools (SAMS)
was specifically created to address the tremendous demand for
educational access solutions. SAMS brings quality high-speed access to
our schools in a managed educational environment.
In October 1998, the Company relocated to its new corporate
headquarters in Fountain Valley, California. This 11,000 square foot
facility serves as the Company's new headquarters and will provide
additional office space as well as a substantial R & D area. Later that
same month, the Company established its presence on the East Coast with
the opening of a 1,864 square foot branch office in Washington, D.C.
A new Vice President of Business Development was brought in at the end
of 1998 to strengthen the Company's Partners Program. Through its VAR
network, the company has access to CompUSA's business customers and has
been approved for resale through Hewlett Packard's distribution
channels.
In late 1998, the Company introduced the DigiNXT product line, designed
specifically for sale to commercial customers at the retail level.
Retailers with a national presence will now have a high-speed Internet
product for their commercial business customers. CompUSA is leading the
way with plans to sell the DigiNXT nationwide.
<PAGE> 53
TECHNOLOGY GUARDIAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note B - Summary of Significant Accounting Policies
Revenue Recognition, Returns and Sales Incentives
Hardware and Software- The Company recognizes revenue from hardware and
software sales as products are shipped. The Company, subject to certain
limitations, permits its customers to exchange products or receive
credits against future purchases. The Company offers its customers
several sales incentive programs which, among others, include funds
available for cooperative promotion of product sales. Customers earn
credit under such programs based on the volume of purchases. The
allowance for sales returns and costs of customer incentive programs
are accrued concurrently with the recognition of revenue.
Internet Access- The Company also generates revenue by selling
high-speed internet access. This service is purchased by customers on
either a one, two or three year service subscription contract. Revenue
is recognized as the service is provided using the straight-line method
over the life of the contract. A related liability is recorded for the
unearned portion of service revenue received. Costs that are directly
related to the acquisition of the contract are deferred and charged to
expense also using the straight-line method over the life of the
contract.
The Company reports income and expenses on the accrual basis for both
financial and income tax reporting purposes.
Risks and Uncertainties
The Company is subject to substantial risks from, among other things,
intense competition in the Internet industry in general and the
provisions of Internet access specifically, other risks associated with
the Internet industry, financing, liquidity requirements, rapidly
changing technology, limited operating history, year 2000 compliance
and the volatility of public markets.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and summations that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses due in the reporting period. Actual results could differ
from those estimates. Significant estimates include collectibility of
accounts receivable, inventory, accounts payable, sales returns and
recoverability of long-term assets.
<PAGE> 54
TECHNOLOGY GUARDIAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note B - Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard No. 128. "Earnings
per Share" ("SFAS 128"), which is effective for financial statements
issued for periods ending after December 15, 1997. SFAS 128 simplifies
the previous standards for computing earnings per share ("EPS") and
requires the disclosure of basic and diluted earnings per share. The
Company has adopted SFAS 128 in presenting EPS disclosure for 1998 and
1997. Because of the dilutive effect the Company's equity instruments
have on EPS in the years presented, basic and diluted EPS are both
computed by dividing the net loss by the weighted average number of
shares outstanding.
In June 1997, the FASB issued Statement of Financial Accounting
Standard No. 130, "Reporting for Comprehensive Income" ("SFAS 130").
SFAS 130 requires a statement of comprehensive income to be included in
the financial statements for fiscal years beginning after December 15,
1997. The Company has determined that there are no implications or
modifications which would result from the implementation of the
Statement to their financial statements for the periods presented.
In addition, in June of 1997, the FASB issued Statement of Financial
Accounting Standard No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"), which requires
disclosure of certain information about operating segments, geographic
area in which the Company operated, major customers and products and
services. The Company has determined that it falls below the threshold
limit for full implementation of this Statement. There is no effect to
the financial statements for the periods presented due to the adoption
of this Statement.
In addition, in February 1998, the FASB issued Statement of Financial
Accounting Standards No. 132, "Employer's Disclosures about Pensions
and Other Post-retirement Benefits" (amendment of FASB Statements Nos.,
87, 88, and 106), which standardizes the disclosure requirements for
pensions and other post retirement benefits to the extent practicable.
To the extent applicable the Company has adopted the disclosure
provisions of this Statement for the periods presented.
<PAGE> 55
TECHNOLOGY GUARDIAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note B - Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements (continued)
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities, and
is effective for fiscal years beginning after June 15, 1999. The
Company is currently determining the additional disclosures, if any,
that may be required under this pronouncement.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed of Obtained for Internal Use."
This standard requires companies to capitalize qualifying computer
software costs, which are incurred during the application development
stage and amortize them over the software's estimated useful life. The
Company is currently evaluating the impact of SOP 98-1 on its financial
statements and related disclosures.
Allowance for Doubtful Accounts
All accounts are current and have been determined to be fully
collectible and no adjustment or allowance has been made for bad debts.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation.
The Company capitalizes all direct costs incurred in the construction
of facilities and the development and installation of new computer and
management systems. Such amounts include the costs of materials and
other direct construction costs, purchased computer hardware and
software, outside programming and consulting fees, direct employee
salaries and interest. Depreciation is provided on the straight-line
method over the estimated useful lives of the assets, as follows:
<TABLE>
<S> <C>
Furniture and Fixtures 3 to 10 years
Office Equipment 3 to 10 years
Leasehold Improvements Length of the lease at the time of installation
Automobiles 5 years
</TABLE>
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
initial maturities of three months or less to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market; cost is
determined on the weighted average method.
<PAGE> 56
TECHNOLOGY GUARDIAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note B - Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk
Financial instruments which subject the Company to credit risk consist
primarily of cash equivalents and trade accounts receivable.
Concentration of credit risk with respect to trade accounts receivable
are generally diversified to the large number of entities comprising
the Company's customer base and their geographic dispersion. The
Company performs ongoing credit evaluations of its customers, maintains
an allowance for the potential credit losses. The Company actively
evaluates the creditworthiness of the financial institutions with which
it conducts business.
Advertising
Advertising costs are expensed in the year incurred.
Earnings Per Share
Earnings per share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during each
period. Earnings per share is computed using the treasury stock method.
The options to purchase commons shares are considered to be outstanding
for all periods presented but are not calculated as part of the
earnings per share.
Stock-based Compensation
The Company accounts for stock-based employee compensation arrangements
in accordance with the provisions of Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and
complies with the disclosure provisions of Statement of Financial
Accounting Standards (SFAS) 123, "Accounting for Stock-Based
Compensation." Under APB 25, compensation cost is recognized over the
vesting period based on the difference, if any, on the date of grant
between the fair value of the Company's stock and the amount an
employee must pay to acquire the stock.
Business Combinations
In October 1998, the Company completed a reverse acquisition with U.S.
Connect 1995, Inc. (reorganized as Technology Guardian, Inc., a Nevada
Corporation). A total of 11,407,507 common shares were exchanged in a
1:1 ratio. All issued and outstanding shares of the Technology
Guardian, Inc. were converted into the right to receive shares of US
Connect 1995, Inc. upon completion of the merger. The transaction has
been accounted for as a reverse acquisition. The transaction is a
merger of a private operating company (old TGI) into a non-operating
public shell corporation with nominal assets. The owners of old TGI
obtained operating control of the combined company after the
transaction.
<PAGE> 57
TECHNOLOGY GUARDIAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note C - Cash
The Company maintains its cash balances at banks and a brokerage
located in Los Angeles, and Costa Mesa, California. The balances are
insured by the Federal Deposit Insurance Corporation and the Securities
Investor Protection Corporation up to $100,000 and $10,000,000,
respectively. As of December 31, 1998, the uninsured portion of the
balances held at the bank was $283,238.
Note D - Inventories
As of December 31, 1998 and 1997, inventories consisted of the
following classes of components:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Finished Goods $117,517 $148,479
Raw Materials 171,743 -0-
-------- --------
Total $289,260 $148,479
======== ========
</TABLE>
Note E - Furniture and Equipment
Furniture, Equipment, and Automobiles consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Furniture and Fixtures $ 99,172 $ 16,199
Leasehold improvements 24,018 -0-
Equipment 192,700 16,910
Automobiles 19,326 8,125
--------- ---------
335,216 41,234
Accumulated Depreciation (41,965) (17,306)
--------- ---------
Total $ 293,251 $ 23,928
========= =========
</TABLE>
Note F - Commitments and Contingencies
The Company leases certain of its facilities and equipment under
non-cancelable operating leases. Future minimum rental payments, under
leases that have initial or remaining non-cancelable lease terms in
excess of one year are $599,845 in 1999, $569,066 in 2000, $573,990 in
2001, $131,042 in 2002, and $102,660 thereafter. Certain of the leases
contain inflation escalation clauses and requirements for the payment
of property taxes, insurance and maintenance expenses. Rent expense for
the years ended December 31, 1998 and 1997 was $45,500 and $25,900,
respectively.
<PAGE> 58
TECHNOLOGY GUARDIAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note F - Commitments and Contingencies (continued)
In May 1996 the Company filed a lawsuit against Peripherals Plus, Inc.
(Defendant) for the recovery of damages due to breach of contract. The
Defendant cross-complained for breach of contract and related damages.
Both matters have been removed from the court's calendar and submitted
to binding arbitration. The matter has not been set for arbitration
hearing and is still pending. The Company intends to seek an
out-of-court settlement to resolve the matter. Given the nature of the
cross-complaints there is not expected to be a material financial
impact on the Company in the event of an unfavorable settlement.
In August 1998 Supercom, Inc. filed a lawsuit against the Company
seeking the recovery of goods sold to the Company in the amount of
$47,000. The Company has filed a cross-complaint against Supercom
seeking damages of $50,000 on the grounds that the goods delivered by
Supercom were defective and that Supercom failed to fulfill its service
and repair obligations. The case is set for trial in July 1999. The
Company intends to vigorously defend itself against Supercom's claims
and to prosecute its cross-complaint, but will not foreclose the
possibility of settlement. Due to the early stage of both matters, a
determination regarding the likelihood of a favorable or unfavorable
outcome cannot be made as of the date of issuance of this report.
In October 1998 Softbank Comdex, Inc. filed a lawsuit against the
Company seeking the recovery of $27,000 for alleged breach of contract.
The Company has denied the claim and intends to defend the case
vigorously based on its merits. It is expected that the case will be
assigned a trial date in the latter part of 1999. Due to the early
stage of the matter, a determination regarding the likelihood of a
favorable or unfavorable outcome cannot be made as of the date of
issuance of this report. There is not expected to be a material
financial impact on the Company in the event of an unfavorable
settlement. In June 1998, a former employee filed a complaint with the
California Department of Industrial Relations Division of Labor
Enforcement against the Company alleging breach of contract and asking
for damages in the amount of $90,000. Please see Note J Subsequent
Events for the outcome of this case.
The Company is involved in certain other legal proceedings arising from
the ordinary course of business, none of which is expected to have a
material impact on the financial condition or business of the Company.
<PAGE> 59
TECHNOLOGY GUARDIAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note G - Employee Stock Options and Benefit Plans
In December 1997, the Company's stockholders approved the Technology
Guardian 1997 Stock Option and Stock Bonus Plan ("the Stock Award and
Incentive Plan"). Under the Stock Award and Incentive Plan, incentive
non-qualified stock options may be granted to employees, directors, and
consultants. The options, option prices, vesting provisions, dates of
grant and number of shares granted under the plans are determined
primarily by the Board of Directors or the committee authorized by the
Board of Directors to administer such plans, although incentive stock
options must be granted which are no less than the fair market value of
the Company's Common Stock at the date of the grant. Outstanding
options have 3- to 5-year terms. The Stock Award and Incentive Plan
also permits payment for options exercised in shares of the Company's
common stock and the granting of incentive stock options.
The Company applies APB No. 25 and its related interpretations for its
plan. Accordingly, compensations cost has been recognized for the plan
in the amount of $525,000 for the year ended December 31, 1998. In
1998, had the Company recorded a charge for the fair value of options
consistent with SFAS No. 123, net income would have been reduced by
$6,000,000 and basic net income per common share by $.50. The income on
net income per common share, assuming full dilution, is $.50 in 1998.
Prior to the completion of the Company's reverse acquisition, the fair
value of each option grant was determined on the date of grant using
the minimum value method. Subsequent to the offering, the fair value
was determined using the Black-Scholes model. The weighted average fair
market value of an option granted during 1998 and 1997 was $1.51 and
$.72, respectively. The following assumption were used to perform the
calculations:
<TABLE>
<S> <C>
Risk-free interest rate 5.4%
Expected option lives 4.8 years
Expected volatility 19.2%
Expected dividend yield 0.0%
</TABLE>
Because additional stock options are expected to be granted each year,
the above pro forma disclosures are not representative of pro forma
effects on reported financial results for future years.
<PAGE> 60
TECHNOLOGY GUARDIAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note G - Employee Stock Options and Benefit Plans (continued)
A summary of the status of the Company stock option plans at December
31, 1998 as follows:
<TABLE>
<CAPTION>
Weighted Average
(thousands of shares) Shares Exercise Price
--------------------- ------ ----------------
<S> <C> <C>
Outstanding at beginning of year -0- N/A
Granted 6,070 $1.51
Exercised -0- N/A
Canceled -0- N/A
------
Outstanding at year-end 6,070
======
Options exercisable at year-end 5,525
Weighted average fair value of options
granted during the year $ 1.51
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1998.
<TABLE>
<CAPTION>
Weighted Average
Number Remaining
Range of Outstanding Years of
Exercise Prices (thousands) Contractual Life
--------------------- ----------- ----------------
<S> <C> <C>
$ .71-2.99 3,937 4.7 years
3.00-5.00 2,133 5.0 years
-----------
$ .71-5.00 6,070 4.8 years
</TABLE>
Note H - Debt
The Company has entered into certain revolving debt instruments of a
short-term nature which, as of December 31, 1998, had an aggregate
outstanding amount of $6,400. Such revolving debt instruments provide
for interest at the rate of approximately 22.4% per annum and are
repayable in 48 monthly installments that commenced in February, 1996.
These instruments are not collateralized and are therefore subordinate
to all other liabilities of the Company, including trade payables.
The Company has failed to remit employee payroll taxes withheld and the
employers' portion of both State and Federal payroll taxes for a
portion of the year 1998. As of December 31, 1998 an unpaid tax
liability in the amount of $168,900 exists, including penalties and
interest. Refer to Note J - Subsequent Events.
<PAGE> 61
TECHNOLOGY GUARDIAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note I - Compensated Absences
Employees can earn annual vacation leave at the rate of five (5) days
per year for the first year. Upon completion of the first year of
employment, employees can earn annual vacation leave at the rate of ten
(10) days per year for years two through seven. Upon completion of the
eighth year of employment, employees can earn annual vacation leave at
the rate of fifteen (15) days per year. At termination, employees are
paid for any accumulated annual vacation leave. As of December 31, 1998
and 1997 the total vacation liability totaled $29,600 and $13,430,
respectively.
Note J - Subsequent Events
Subsequent to the year ended December 31, 1998, the Company completed a
change in name from Technology Guardian, Inc. to eSat, Inc. The NASDAQ
Bulletin Board trading symbol of the Company was likewise changed from
TEGI to ASAT.
Subsequent to the year ended December 31, 1998, the complaint filed by
a former employee of the Company alleging breach of contract was
dismissed in favor of the Company.
Subsequent to the year ended December 31, 1998, the Company remitted
all employee payroll taxes withheld and the employers' portion of both
State and Federal payroll taxes for a portion of the year 1998 which
was outstanding and unpaid as of the year end. As of the date of this
report no outstanding payroll tax liability exists for the prior year.
Subsequent to the year ended December 31, 1998, the former counsel of
the Company filed a lawsuit against the Company alleging nonpayment of
attorneys' fees in the amount of $80,000. The Company has filed
counter-claims against the firm, and third party claims against its
principal, for damages and rescission based on what the Company alleges
to have been the fraudulent inducement by the firm and its principal to
enter into a contract modification by which the firm received shares of
the Company's stock. The Company's claims will be vigorously
prosecuted. The matter has been set for binding arbitration. There is
not expected to be a material financial impact on the Company in the
event of an unfavorable settlement.
Subsequent to the year ended December 31, 1998, the Company entered
into an agreement with an underwriting firm to raise an additional
twelve million dollars ($12,000,000) in operating capital through a
private placement of one million five hundred thousand (1,500,000)
shares of restricted Common Stock at eight dollars ($8.00) per share.
Such shares are restricted from public sale under Rule 144 of the
Securities Act of 1993 for a period not less than one year from the
date of issuance. The offering is a firm commitment from the
underwriter with an expiry for complete funding of August 30, 1999.
<PAGE> 62
TECHNOLOGY GUARDIAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note J - Subsequent Events (continued)
Subsequent to the year ended December 31, 1998, the Chairman, President
and Chief Executive Officer, Mr. David Coulter, resigned effective
March 22, 1999. In conjunction with his resignation Mr. Coulter entered
into a consulting agreement with the Company for a term of thirty six
(36) months at a pay rate of ten thousand ($10,000) dollars per month.
In the event the Company is sold, Mr. Coulter would be paid the
difference between three hundred sixty thousand dollars ($360,000) and
the cumulative amount of the consulting fees paid to the date of sale.
In conjunction with the termination of his prior employment agreement,
Mr. Coulter shall be paid one hundred fifty thousand dollars ($150,000)
in five equal installments, the first payment to be made upon the
effective date of his resignation.
Mr. Coulter shall retain three million (3,000,000) shares of nonvoting
common stock. All other shares owned by Mr. Coulter as of the effective
date of resignation shall be canceled. Mr. Coulter shall retain
warrants to purchase 1,500,000 shares of common stock at three dollars
($3.00) per share. All other warrants previously issued to Mr. Coulter
are canceled.
Note K - Related Party Transactions
Throughout the history of the Company, certain members of the Board of
Directors, members of the immediate family of management, and general
management have made loans to the Company to cover operating expenses
or operating deficiencies.
In April 1997, the Company entered into a settlement agreement between
Cyber Village Network, Inc.(CVN), a company controlled by an officer of
the corporation, and this same officer individually. Wherein both
parties agreed to release the Company from all potential claims arising
from a certain Option Agreement, and an agreement entered into by and
among the Company, the Company's President, CVN, and the aforementioned
officer of the Company, in exchange for the issuance of 849,750 shares
of the Company's Common Stock.
The aforementioned option agreement granted options to CVN to purchase
shares equal to 10% of the Company's outstanding shares in exchange for
the forgiveness of a $100,000 loan held by CVN. Additionally, CVN was
granted the option to purchase up to 30% of the outstanding shares of
the Company in exchange for $1,200,000. Further, this same option
agreement provided that the president of the Company had the right to
repurchase shares from CVN equal to 15% of the Company's common stock
following the exercise of the option by CVN in exchange for $1,200,000.
This Option Agreement was subsequently canceled and the parties
released each other from all claims.
<PAGE> 63
TECHNOLOGY GUARDIAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note K - Related Party Transactions (continued)
In October 1997, an officer of the Company who is also a member of the
Board of Directors received a commission in the amount of $100,000 for
the referral of an investment group related to a recapitalization of
the Company. This same officer is the controlling shareholder of a
corporation which had previously loaned the Company $100,000 and was
granted 849,750 shares of the Company Common Stock in settlement for
the release from potential claims arising from the aforementioned
Option Agreement. A fair market value of $.10 per share was used for
purposes of calculating the total amount of expense recorded related to
the settlement. This value was determined based on private purchases of
the Company's common stock made within a 10 day time period of the date
of settlement. Settlement expense in the amount of $84,975 was expensed
in the year 1998.
During the year 1998, the Company granted to the Company's then
president 3,935,885 options at strikes prices ranging from $.71 to
$3.00, expiring five years from the date of issuance. These options
contain strike prices and fair market values as determined by use of
the Black-Scholes model as follows:
<TABLE>
<S> <C> <C> <C> <C>
Date of Option 10/1/98 8/24/98 8/10/98 9/15/98
Options granted 1,000,000 1,035,885 1,500,000 400,000
Strike price $3.00 $0.72 $0.72 $3.00
Fair Value per share $0.22 $0.46 $0.46 $0.22
</TABLE>
During the year 1998, the Company granted to the Company's chief
operating officer 1,095,802 options at strike prices ranging from $.71
to $3.00, expiring five years from the date of issuance. These options
contain strike prices and fair market values as determined by use of
the Black-Scholes model as follows:
<TABLE>
<S> <C> <C> <C>
Date of Option 8/31/98 10/1/98 10/7/98
Options granted 262,802 500,000 333,000
Strike price $0.72 $0.72 $3.00
Fair Value per share $0.22 $0.46 $0.46
</TABLE>
<PAGE> 64
TECHNOLOGY GUARDIAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note L - Income Taxes
Total Federal and State income tax expense for the years ended December
31, 1998 and 1997 amounted to $800 in each year. These represent the
minimum annual tax liability under Federal and State tax code. No
future benefit for the realization of an operating loss carry forward,
in the form of an asset, has been recognized due to the ongoing nature
of the losses and the potential inability for the Company to ever
realize their benefit. For the years ended December 31, 1998 and 1997,
there is no difference between the federal statutory tax rate and the
effective tax rate. At years ended December 31, 1998 and 1997 the
Company had available net operating loss carry forwards of $2,926,600
and $199,500 respectively, after adjusting for limitation, to be offset
against future taxable income. The operating loss carry forwards will
expire at various dates through the year 2014.
Note M - Other Income and Expense
During the year ended December 31, 1998, the Company recorded a
one-time revenue write down of a contract with a foreign government in
the amount of $236,700.
Note N - Extraordinary Income
During the year ended December 31, 1998, the Company was released from
a liability to a factoring company and recorded extraordinary income of
$242,990 related to this.
The original agreement with the factoring organization called for
factor to purchase receivables at a price equal to 80% of the face
value of acceptable accounts from the Company. Under the terms of the
Agreement, factor earned a fee equal to 14% of the face amount of the
accounts purchased and such fee shall be taken at the time of
collection of an invoice. Factor shall reserve and hold 2.5% of the
face value of purchased accounts for bad debts. Factor shall be
entitled to immediate and full recourse against the Company to demand
payment with respect to a purchase account in the event that the
purchase account is not paid in full within 75 days. During the course
of the relationship with the factor, the Company's largest client filed
a Chapter 7 bankruptcy liquidation resulting in more than $100,000 in
purchased accounts going unpaid. In accordance with the terms of the
Agreement factor made demand upon the Company for immediate payment
plus accrued unpaid fees and interest through the date of Company's
payment.
The Company was released from its liability to the factoring
organization because during the year 1998 it was unable to make payment
under the terms of the agreement, which had been entered into. Upon
breach of the agreement, the liability was transferred to the
individual who had provided a personal guarantee, Mr. David Coulter.
This individual subsequently settled all outstanding obligations with
the factoring organization through the transfer of 25,000 shares of
restricted Rule 144 stock from his name into the name of the factoring
organization and the payment of $89,000 out of his personal account.
<PAGE> 65
TECHNOLOGY GUARDIAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note O - Other Matters
During the year ended December 31, 1998, the Company saw a substantial
decline in revenue due to a decision by management to terminate sales
until the new GSI could be tested and launched into the marketplace.
This decision was based on forecasts, which indicated that sales
revenue realized would be offset in future periods by upgrades of the
new GSI.
Note P - Additional Paid in Capital Correction
The original audited balance of additional paid in capital was reduced
by $563,164. This amount represents the cost of raising capital that
was incurred during the year ended December 31,1998 and which was
originally expensed by the Company
<PAGE> 66
eSat, Inc.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
REVIEWED FINANCIAL STATEMENTS
MARCH 31, 1999
<PAGE> 67
[LICHTER AND ASSOCIATES LETTERHEAD]
To the Board of Directors
eSat, Inc.
Fountain Valley, California
We have reviewed the accompanying balance sheet of eSat, Inc. (formerly known
as Technology Guardian, Inc.) ("the Company") as of March 31, 1999, and the
related statement of income, changes in stockholders' equity, and cash flows for
the three months then ended, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants. These financial statements are the responsibility of the
Company's management.
A review consists principally of inquiries of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material adjustments that should be
made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
/s/ LICHTER AND ASSOCIATES
-----------------------------------
Los Angeles, California
June 14, 1999
<PAGE> 68
eSat, Inc.
(Formerly Known as Technology Guardian, Inc.)
BALANCE SHEET
As of March 31, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets
Cash $ 2,661,694
Accounts Receivable 788,029
Inventories 297,164
Receivables 13,735
Prepaid Expenses and Other Current Assets 83,985
-----------
Total Current Assets 3,844,607
-----------
Fixed Assets
Equipment (Net of accumulated
depreciation of $63,893) 420,656
-----------
Total Fixed Assets 420,656
-----------
Total Assets $ 4,265,263
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Accrued Expenses $ 140,774
Payroll Taxes Payable 49,616
Deferred Revenue 104,995
Note Payable, Current Portion 4,016
-----------
Total Current Liabilities 299,401
Note Payable, Net of Current Portion 28,558
-----------
Total Liabilities 327,959
-----------
Stockholders' Equity
Common Stock, Par Value $.001, Per Share
Authorized 40,000,000 Shares Common
Stock, 10,000,000 Preferred Stock, 22,446,998
Issued and Outstanding Common 22,447
Additional Paid in Capital 9,073,337
Retained Earnings (Deficit) (5,158,480)
-----------
Total Stockholders' Equity 3,937,304
-----------
Total Liabilities and
Stockholders' Equity $ 4,265,263
===========
</TABLE>
Accountant's report and notes are an integral part of these financial
statements.
<PAGE> 69
eSat, Inc.
(Formerly Known as Technology Guardian, Inc.)
STATEMENT OF INCOME AND STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<S> <C>
Sales $ 962,123
Cost of Goods Sold 250,015
------------
Gross Profit (Loss) 712,108
Selling, General and Administrative Expenses 2,433,537
------------
Operating (Loss) (1,721,429)
Other (Income) and Expense 91,276
------------
(Loss) Before Income Taxes (1,812,705)
Provision for Income Taxes 800
------------
Net (Loss) (1,813,505)
Retained (Deficit)-Beginning (3,344,975)
------------
Retained (Deficit)-Ending $ (5,158,480)
============
Net (Loss) Per Share (Basic and Diluted)
Basic $ (0.08)
Diluted $ (0.06)
Weighted Average Number of Shares
Basic 22,446,998
Diluted 29,910,695
</TABLE>
Accountant's report and notes are an integral part of these financial
statements.
<PAGE> 70
eSat, Inc.
(Formerly Known as Technology Guardian, Inc.)
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<S> <C>
Cash Flows from
Operating Activities:
Net Income (Loss) $(1,813,505)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 21,928
Issuance of options 1,226,800
(Increase) decrease in accounts receivable (739,065)
(Increase) decrease in inventories (7,904)
(Increase) decrease in notes receivable 15,000
(Increase) decrease in other receivables (13,735)
(Increase) decrease in prepaid expenses and other assets (36,770)
Increase (decrease) in payroll taxes payable (119,275)
Increase (decrease) in accounts payable (103,092)
Increase (decrease) in sales tax payable (10,801)
Increase (decrease) in deferred revenue (12,075)
Increase (decrease) in note payable, current portion 4,016
Increase (decrease) in short term debt 1,586
-----------
Net Cash Provided by (Used in) Operations (1,586,892)
-----------
Cash Flows From Financing Activities
Sale of common stock (net cash) 1,801,665
Note payable, equipment 28,558
-----------
Net Cash Provided by
Financing Activities 1,830,223
-----------
Cash Flows From Investing Activities:
Purchase of Equipment (149,334)
-----------
Net Cash Provided (Used) by
Investing Activities (149,334)
-----------
Net Increase (Decrease)
in Cash 93,997
-----------
Cash - Beginning 2,567,697
-----------
Cash - Ending $ 2,661,694
===========
</TABLE>
Accountant's report and notes are an integral part of these financial
statements.
<PAGE> 71
eSat, Inc.
(Formerly Known as Technology Guardian, Inc.)
STATEMENT OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<S> <C>
Retained Deficit
Balance at January 1, 1999 $(3,344,975)
Net income (loss) (1,813,505)
Dividends declared on common stock 0
-----------
Balance at March 31, 1999 (5,158,480)
-----------
Common Stock (Par Value $.001)
Balance at January 1, 1999 16,086
Sale of common stock 6,361
-----------
Balance at March 31, 1999 22,447
-----------
Additional Paid in Capital
Balance at January 1, 1999 6,051,234
Sale of common stock 1,795,303
Issuance of options 1,226,800
-----------
Balance at March 31, 1999 9,073,337
-----------
Total Equity at March 31, 1999 $ 3,937,304
===========
</TABLE>
Accountant's report and notes are an integral part of these financial
statements.
<PAGE> 72
eSat, Inc.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
Note A - Nature Of Activities
Formed February 22, 1996, as a California Corporation, eSat, Inc.
(formerly known as Technology Guardian, Inc.) (the Company) is a "C"
Corporation as organized under the Internal Revenue Code. eSat, Inc. is
a technology company whose primary purpose is to provide high-speed
satellite Internet access products and services. Its customers include
businesses, educational institutions, and government.
The Company's product lines were developed to fill voids in the Internet
access arena, and have applications both domestically and
internationally. In the United States, businesses and organizations can
benefit from the Company's affordability, ease of use, and true
high-speed access. In many countries there is a lack of even marginal
communications infrastructure to support high-speed Internet access. The
Company's potential appears to be very positive in these markets.
The Company's three sales divisions are designed to address the Internet
access needs of the different segments of the marketplace. The Galactic
Satellite Internet (GSI) division targets businesses and governmental
sectors. Satellite Accessed Material for Schools (SAMS) was specifically
created to address the tremendous demand for educational access
solutions. SAMS brings quality high-speed access to our schools in a
managed educational environment.
In October 1998, the Company relocated to its new corporate headquarters
in Fountain Valley, California. This 11,000 square foot facility serves
as the Company's new headquarters and will provide additional office
space as well as a substantial R & D area. Later that same month, the
Company established its presence on the East Coast with the opening of a
1,864 square foot branch office in Washington, D.C.
A new Vice President of Business Development was brought in at the end
of 1998 to strengthen the Company's Partners Program. Through its VAR
network, the company has access to CompUSA's business customers and has
been approved for resale through Hewlett Packard's distribution
channels.
In late 1998, the Company introduced the DigiNXT product line, designed
specifically for sale to commercial customers at the retail level.
Retailers with a national presence will now have a high-speed Internet
product for their commercial business customers. CompUSA is leading the
way with plans to sell the DigiNXT nationwide.
<PAGE> 73
eSat, Inc.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
Note B - Summary of Significant Accounting Policies
Revenue Recognition, Returns and Sales Incentives
Hardware and Software- The Company recognizes revenue from hardware and
software sales as products are shipped. The Company, subject to certain
limitations, permits its customers to exchange products or receive
credits against future purchases. The Company offers its customers
several sales incentive programs which, among others, include funds
available for cooperative promotion of product sales. Customers earn
credit under such programs based on the volume of purchases. The
allowance for sales returns and costs of customer incentive programs are
accrued concurrently with the recognition of revenue.
Internet Access- The Company also generates revenue by selling
high-speed internet access. This service is purchased by customers on
either a one, two or three year service subscription contract. Revenue
is recognized as the service is provided using the straight-line method
over the life of the contract. A related liability is recorded for the
unearned portion of service revenue received. Costs that are directly
related to the acquisition of the contract are deferred and charged to
expense also using the straight-line method over the life of the
contract.
The Company reports income and expenses on the accrual basis for both
financial and income tax reporting purposes.
Risks and Uncertainties
The Company is subject to substantial risks from, among other things,
intense competition in the Internet industry in general and the
provisions of Internet access specifically, other risks associated with
the Internet industry, financing, liquidity requirements, rapidly
changing technology, limited operating history, year 2000 compliance and
the volatility of public markets.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and summations that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses due in the reporting period. Actual results could differ
from those estimates. Significant estimates include collectibility of
accounts receivable, inventory, accounts payable, sales returns and
recoverability of long-term assets.
<PAGE> 74
eSat, Inc.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
Note B - Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard No. 128. "Earnings per
Share" ("SFAS 128"), which is effective for financial statements issued
for periods ending after December 15, 1997. SFAS 128 simplifies the
previous standards for computing earnings per share ("EPS") and requires
the disclosure of basic and diluted earnings per share. The Company has
adopted SFAS 128 in presenting EPS disclosure for 1998 and 1997. Because
of the dilutive effect the Company's equity instruments have on EPS in
the years presented, basic and diluted EPS are both computed by dividing
the net loss by the weighted average number of shares outstanding.
In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 130, "Reporting for Comprehensive Income" ("SFAS 130"). SFAS 130
requires a statement of comprehensive income to be included in the
financial statements for fiscal years beginning after December 15, 1997.
The Company has determined that there are no implications or
modifications which would result from the implementation of the
Statement to their financial statements for the periods presented.
In addition, in June of 1997, the FASB issued Statement of Financial
Accounting Standard No. 131, "Disclosure about Segments of an Enterprise
and Related Information" ("SFAS 131"), which requires disclosure of
certain information about operating segments, geographic area in which
the Company operated, major customers and products and services. The
Company has determined that it falls below the threshold limit for full
implementation of this Statement. There is no effect to the financial
statements for the periods presented due to the adoption of this
Statement.
In addition, in February 1998, the FASB issued Statement of Financial
Accounting Standards No. 132, "Employer's Disclosures about Pensions and
Other Post-retirement Benefits" (amendment of FASB Statements Nos., 87,
88, and 106), which standardizes the disclosure requirements for
pensions and other post retirement benefits to the extent practicable.
To the extent applicable the Company has adopted the disclosure
provisions of this Statement for the periods presented.
<PAGE> 75
eSat, Inc.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
Note B - Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements (continued)
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities, and is
effective for fiscal years beginning after June 15, 1999. The Company is
currently determining the additional disclosures, if any, that may be
required under this pronouncement.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed of Obtained for Internal Use." This
standard requires companies to capitalize qualifying computer software
costs, which are incurred during the application development stage and
amortize them over the software's estimated useful life. The Company is
currently evaluating the impact of SOP 98-1 on its financial statements
and related disclosures.
Allowance for Doubtful Accounts
All accounts are current and have been determined to be fully
collectible and no adjustment or allowance has been made for bad debts.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
The Company capitalizes all direct costs incurred in the construction of
facilities and the development and installation of new computer and
management systems. Such amounts include the costs of materials and
other direct construction costs, purchased computer hardware and
software, outside programming and consulting fees, direct employee
salaries and interest. Depreciation is provided on the straight-line
method over the estimated useful lives of the assets, as follows:
<TABLE>
<S> <C>
Furniture and Fixtures 3 to 10 years
Office Equipment 3 to 10 years
Leasehold Improvements Length of the lease at the time of installation
Automobiles 5 years
</TABLE>
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
initial maturities of three months or less to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market; cost is
determined on the weighted average method.
<PAGE> 76
eSat, Inc.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
Note B - Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk
Financial instruments which subject the Company to credit risk consist
primarily of cash equivalents and trade accounts receivable.
Concentration of credit risk with respect to trade accounts receivable
are generally diversified to the large number of entities comprising the
Company's customer base and their geographic dispersion. The Company
performs ongoing credit evaluations of its customers, maintains an
allowance for the potential credit losses. The Company actively
evaluates the creditworthiness of the financial institutions with which
it conducts business.
Advertising
Advertising costs are expensed in the year incurred.
Earnings Per Share
Earnings per share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during each
period. Earnings per share is computed using the treasury stock method.
The options to purchase commons shares are considered to be outstanding
for all periods presented but are not calculated as part of the earnings
per share.
Stock-based Compensation
The Company accounts for stock-based employee compensation arrangements
in accordance with the provisions of Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and complies
with the disclosure provisions of Statement of Financial Accounting
Standards (SFAS) 123, "Accounting for Stock-Based Compensation." Under
APB 25, compensation cost is recognized over the vesting period based on
the difference, if any, on the date of grant between the fair value of
the Company's stock and the amount an employee must pay to acquire the
stock.
Business Combinations
In October 1998, the Company completed a reverse acquisition into U.S.
Connect 1995, Inc. (reorganized as Technology Guardian, Inc., a Nevada
Corporation). A total of 11,407,507 common shares were exchanged in a
1:1 ratio. All issued and outstanding shares of the Technology Guardian,
Inc. were converted into the right to receive shares of US Connect 1995,
Inc. upon completion of the merger. The transaction has been accounted
for as a reverse acquisition. The transaction is a merger of a private
operating company (old TGI) into a non-operating public shell
corporation with nominal assets. The owners of old TGI obtained
operating control of the combined company after the transaction.
<PAGE> 77
eSat, Inc.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
Note C - Cash
The Company maintains its cash balances at banks and a brokerage located
in Los Angeles, and Costa Mesa, California. The balances are insured by
the Federal Deposit Insurance Corporation and the Securities Investor
Protection Corporation up to $100,000 and $10,000,000, respectively. As
of March 31, 1999, there were no uninsured cash balances.
Note D - Inventories
As of March 31, 1999, inventories consisted of the following classes of
components:
<TABLE>
<S> <C>
Finished Goods $103,639
Raw Materials 193,525
--------
Total $297,164
========
</TABLE>
Note E - Fixed Assets
Furniture and Equipment consist of the following:
<TABLE>
<S> <C>
Furniture and Fixtures $ 97,902
Leasehold improvements 28,491
Equipment 358,156
----------
484,549
Accumulated Depreciation (63,893)
----------
Total $ 420,656
==========
</TABLE>
Note F - Commitments and Contingencies
The Company leases certain of its facilities and equipment under
non-cancelable operating leases. Future minimum rental payments, under
leases that have initial or remaining non-cancelable lease terms in
excess of one year are $590,236 in 2000, $570,379 in 2001, $463,285 in
2002, $131,671 in 2003, and $68,417 thereafter. Certain of the leases
contain inflation escalation clauses and requirements for the payment of
property taxes, insurance and maintenance expenses. Rent expense for the
three months ended March 31, 1999 was $143,045.
<PAGE> 78
eSat, Inc.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
Note F - Commitments and Contingencies (continued)
In May 1996 the Company filed a lawsuit against Peripherals Plus, Inc.
(Defendant) for the recovery of damages due to breach of contract. The
Defendant cross-complained for breach of contract and related damages.
Both matters have been removed from the court's calendar and submitted
to binding arbitration. The matter has not been set for arbitration
hearing and is still pending. The Company intends to seek an
out-of-court settlement to resolve the matter. Given the nature of the
cross-complaints there is not expected to be a material financial impact
on the Company in the event of an unfavorable settlement. Please see
subsequent event footnote.
In August 1998 Supercom, Inc. filed a lawsuit against the Company
seeking the recovery of goods sold to the Company in the amount of
$47,000. The Company has filed a cross-complaint against Supercom
seeking damages of $50,000 on the grounds that the goods delivered by
Supercom were defective and that Supercom failed to fulfill its service
and repair obligations. The case is set for trial in July 1999. The
Company intends to vigorously defend itself against Supercom's claims
and to prosecute its cross-complaint, but will not foreclose the
possibility of settlement. Due to the early stage of both matters, a
determination regarding the likelihood of a favorable or unfavorable
outcome cannot be made as of the date of issuance of this report. Please
see subsequent event footnote.
In October 1998 Softbank Comdex, Inc. filed a lawsuit against the
Company seeking the recovery of $27,000 for alleged breach of contract.
The Company has denied the claim and intends to defend the case
vigorously based on its merits. It is expected that the case will be
assigned a trial date in the latter part of 1999. Due to the early stage
of the matter, a determination regarding the likelihood of a favorable
or unfavorable outcome cannot be made as of the date of issuance of this
report. There is not expected to be a material financial impact on the
Company in the event of an unfavorable settlement. Please see subsequent
event footnote.
In January 1999, the former legal counsel of the Company filed a lawsuit
against the Company alleging nonpayment of fees in the amount of
$80,000. The Company has filed counter-cliams against the firm and third
party claims against its principal, for damages and rescission based on
what the Company alleges to have been the fraudulent inducement by the
firm and its principal to enter into a contract modification by which
the firm received shares of the Company's stock. The Company's claims
will be vigorously prosecuted. The matter has been set for binding
arbitration. There is not expected to be a material financial impact on
the Company in the event of an unfavorable settlement. Please see
subsequent event footnote.
<PAGE> 79
eSat, Inc.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
Note F - Commitments and Contingencies (continued)
On March 22, 1999, the Company entered into an agreement with its former
president and chief executive officer related to his resignation. This
agreement includes a consulting contract with the Company for a term of
thirty six (36) months, at a rate of $10,000 per month. If the Company
were to be sold, he would be paid the difference between $360,000 and
the cumulative amount of the consulting fees paid to the date of the
sale. He will also be paid $150,000 in five (5) equal monthly
installments of $30,000, starting March 22, 1999.
Note G - Employee Stock Options and Benefit Plans
In December 1997, the Company's stockholders approved the Technology
Guardian 1997 Stock Option and Stock Bonus Plan ("the Stock Award and
Incentive Plan"). Under the Stock Award and Incentive Plan, incentive
non-qualified stock options may be granted to employees, directors, and
consultants. The options, option prices, vesting provisions, dates of
grant and number of shares granted under the plans are determined
primarily by the Board of Directors or the committee authorized by the
Board of Directors to administer such plans, although incentive stock
options must be granted which are no less than the fair market value of
the Company's Common Stock at the date of the grant. Outstanding options
have 3- to 5-year terms. The Stock Award and Incentive Plan also permits
payment for options exercised in shares of the Company's common stock
and the granting of incentive stock options.
The Company applied APB 25 and related interpretations in accounting for
its plans. Accordingly, compensation cost in the amount of $1,226,800
for the three months ended March 31, 1999 has been recognized for its
the Stock Award and Incentive Plan in its results of operations. In
1999, had the Company recorded a charge for the fair value of options
granted consistent with SFAS 123, net income would have been reduced by
$808,000 and basic net income per common share by $.04. The impact on
net income per common share, assuming full dilution, is $.03 in 1999.
The fair value of each option grant for the Company's plans is estimated
on the date of the grant using the Black-Scholes option pricing model,
with the following weighted average assumptions used for grants in 1999:
<TABLE>
<S> <C>
Risk-free interest rate 5.25%
Expected option lives 3 years
Expected volatility 65.86%
Expected dividend yield 0.0%
</TABLE>
<PAGE> 80
eSat, Inc.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
Note G - Employee Stock Options and Benefit Plans (continued)
A summary of the status of the Company stock option plans at March 31,
1999 as follows:
<TABLE>
<CAPTION>
Weighted Average
(thousands of shares) Shares Exercise Price
--------------------- ------ --------------
<S> <C> <C>
Outstanding at beginning of year 6,070 $ 1.51
Granted 1,943 $ 4.61
Exercised (63) $ 1.57
Canceled (3,832) $ 1.68
------
Outstanding at year-end 4,119
======
Options exercisable at March 31, 1999 1,293
Weighted average fair value of options
granted during the three months ended March 31, 1999 $ 20.69
</TABLE>
The following table summarizes information about fixed stock options
outstanding at March 31, 1999.
<TABLE>
<CAPTION>
Weighted Average
Number Remaining
Range of Outstanding Years of
Exercise Prices (thousands) Contractual Life
--------------- ----------- ----------------
<S> <C> <C>
$ .72 1,303 4.45
$2.00 1,148 4.75
$2.64 500 5.0
$3.00 1,008 4.75
$9.25-$15.00 160 5.0
----- ----
4,119 4.70
===== ====
</TABLE>
Note H - Debt
The Company has entered into certain revolving debt instruments of a
short-term nature which, as of March 31, 1999, had an aggregate
outstanding amount of $8,000. Such revolving debt instruments provide
for interest at the rate of approximately 22.4% per annum and are
repayable in 48 monthly installments that commenced in February, 1996.
These instruments are not collateralized and are therefore subordinate
to all other liabilities of the Company, including trade payables.
<PAGE> 81
eSat, Inc.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
Note I - Compensated Absences
Employees can earn annual vacation leave at the rate of five (5) days
per year for the first year. Upon completion of the first year of
employment, employees can earn annual vacation leave at the rate of ten
(10) days per year for years two through seven. Upon completion of the
eighth year of employment, employees can earn annual vacation leave at
the rate of fifteen (15) days per year. At termination, employees are
paid for any accumulated annual vacation leave. As of March 31, 1999 the
total vacation liability totaled $21,636.
Note J - Subsequent Events
Subsequent to March 31, 1999 the Company settled the pending legal
matter with Peripherals Plus, Inc. The settlement which included a
mutual release was entered into on May 24, 1999. The Company made a one
time payment of $18,700.
Subsequent to March 31, 1999 the Company settled the pending legal
matter with Supercom, Inc. The settlement was entered into on June 8,
1999 in the amount of $35,000. The amount is to be paid in monthly
installments of $5,000 from June 20, 1999 to September 20, 1999.
Subsequent to March 31, 1999 the Company settled the pending legal
matter with Softbank Comdex, Inc. The settlement was entered into on May
18, 1999 and required a one time payment of $20,000 in full and final
satisfaction.
Subsequent to March 31, 1999 the Company settled the pending legal
matter with their former legal counsel. The settlement was entered into
on June 8, 1999. The Company was required to make a one time payment of
$127,300. In addition, the former legal counsel surrendered back to the
Company 100,000 shares of stock of the Company that had previously been
issued to them.
On June 11, 1999 the Company entered into an agreement with an
Engineering firm for the production of specified products. The Company
is to pay $325,000 for the production of the prototypes, fifty percent
(50%) to be paid as deposit and the remaining balance to be paid upon
approval of the prototype. The agreement also has a specified purchase
price for the Company should they order the products to sell to their
customers. In addition, the agreement specifies a royalty payment to the
Company should the engineering firm sell any of these products to
unrelated accounts.
<PAGE> 82
eSat, Inc.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
Note J - Subsequent Events (continued)
On May 18, 1999 the Company entered into an exclusive distribution
agreement for a specified territory with another Organization. The term
is for three years with a three year option. The agreement calls for a
nonrefundable deposit in the amount of $500,000 payable to the Company
by June 17, 1999 and an additional $1,500,000 payable by September 18,
1999 as a license fee. Upon payment in full of their deposit the
Organization has the right to purchase up to 1,000,000 shares of the
Company at a price of $5 per share. The Company is also to receive a
five percent (5%) royalty of gross revenues of this Organization. The
agreement also calls for the Organization to pay in advance, on a
monthly basis, certain costs of Satellite access, Network Operating
Center expenses and maintenance fees to the Company.
On June 4, 1999 the Company entered into an Equity Purchase Agreement
(EPA) and Promissory Note Agreement (PNA) with an Organization. The EPA
allows the Organization to purchase from the Company 2,500,000 shares of
restricted 144 stock for $10 per share. The PNA is for $25,000,000,
interest at the prime rate plus one percent (1%) payable quarterly,
principal due and payable in one payment five years from date of funding
of note. The Company is to deposit 9,500,000 shares of its stock held in
safekeeping as secured collateral on the PNA.
Note K - Related Party Transactions
On March 22, 1999, the Company entered into an agreement with its former
president and chief executive officer related to his resignation. This
agreement includes a consulting contract with the Company for a term of
thirty-six (36) months, at a rate of $10,000 per month. If the Company
were to be sold, he would be paid the difference between $360,000 and
the cumulative amount of the consulting fees paid to the date of the
sale. He will also be a paid $150,000 in five (5) equal monthly
installment of $30,000, starting March 22, 1999.
The former executive will also retain 3,000,000 shares of stocks, but
will not be entitled to vote the shares on any matter. These shares may
be sold after one year. He will retain warrants to purchase an
additional 1,500,000 shares at $3 per share. The term shall be five (5)
years. All other previous warrants to the executive are cancelled. Due
to the distortion that the effect of the cancellation of these warrants
would have on the Company's financial statements, no related amounts
have been recorded.
<PAGE> 83
eSat, Inc.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
Note K - Related Party Transactions (continued)
During the three months ended March 31, 1999, the Company granted
options at strike prices ranging from $2.64 to $17.41, expiring three
years from the date of issuance. These options contain strike prices and
fair market values as determined by use of the Black-Scholes model as
follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Date of Option 1/4/99 1/20/99 2/9/99 2/9/99 2/15/99 3/1/99
Options Granted 5,000 500,000 300,000 60,000 35,000 35,000
Strike Price $ 15.00 $ 2.64 $ 3.00 $ 17.41 $ 15.75 $ 11.87
Fair Value Per Share $ 15.50 $ 23.38 $ 17.41 $ 17.41 $ 15.75 $ 13.25
</TABLE>
Note L - Income Taxes
Total Federal and State income tax expense for the three months ended
March 31, 1999 amounted to $800. This represents the minimum annual tax
liability under Federal and State tax code. No future benefit for the
realization of an operating loss carry forward, in the form of an asset,
has been recognized due to the ongoing nature of the losses and the
potential inability for the Company to ever realize their benefit. For
the three months ended March 31, 1999, there is no difference between
the federal statutory tax rate and the effective tax rate. At years
ended December 31, 1998 and 1997 the Company had available net operating
loss carry forwards of $3,489,800 and $199,500 respectively, after
adjusting for limitation, to be offset against future taxable income.
The operating loss carry forwards will expire at various dates through
the year 2014.
<PAGE> 84
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
ESAT, INC.
(Registrant)
Date: July 8, 1999 By /s/ Michael C. Palmer
--------------------------------
Michael C. Palmer,
Chief Executive Officer,
Chief Financial Officer
46
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number Description Page
- --------------------------------------------------------------------------------
<S> <C> <C>
(2) a. Agreement of Merger, incorporated by reference from
Exhibit (2.a) to Form 10 filed by the Company on
May 11, 1999.
b. Articles of Merger, incorporated by reference from
Exhibit (2.b) to Form 10 filed by the Company on
May 11, 1999.
(3) a. Amended and Restated Articles of Incorporation,
incorporated by reference from Exhibit (3.a) to
Form 10 filed by the Company on May 11, 1999.
b. Amendment to Articles of Incorporation, incorporated
by reference from Exhibit (3.b) to Form 10 filed
by the Company on May 11, 1999.
c. Bylaws, incorporated by reference from Exhibit (3.c)
to Form 10 filed by the Company on May 11, 1999.
(10) a. Galaxy Contract, incorporated by reference from
Exhibit (10.a) to Form 10 filed by the Company on
May 11, 1999.
b. Advantage Associates Option Contracts, incorporated
by reference from Exhibit (10.b) to Form 10 filed by
the Company on May 11, 1999.
c. William Sarpalius Option Contract, incorporated by
reference from Exhibit (10.c) to Form 10 filed by
the Company on May 11, 1999.
d. Lori Walker Option Contracts, incorporated by
reference from Exhibit (10.d) to Form 10 filed by
the Company on May 11, 1999.
e. Carol Sarpalius Option Contracts, incorporated by
reference from Exhibit (10.e) to Form 10 filed by
the Company on May 11, 1999.
f. David Coulter Resignation Agreement, incorporated by
reference from Exhibit (10.f) to Form 10 filed by
the Company on May 11, 1999.
g. Chester Noblett Employment Agreement, incorporated by
reference from Exhibit (10.g) to Form 10 filed by
the Company on May 11, 1999.
h. David Coulter Option Agreement, incorporated by
reference from Exhibit (10.h) to Form 10 filed by
the Company on May 11, 1999.
i. Chester Noblett Option Agreement, incorporated by
reference from Exhibit (10.i) to Form 10 filed by the
Company on May 11, 1999.
(23) Consent of Independent Accountant, incorporated by
reference from Exhibit (23) to Amendment No. 2 to
Form 10 filed by the Company on June 28, 1999.
</TABLE>
