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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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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 1.54 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 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 3.5 mbps.
"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.
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"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.
"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 3.5 mbps. Cable offers
up to 10 megabits per second, but typically delivers between 500 kilobits per
second and 1 megabit per second. A T-1 line offers up to 1.54 megabits 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 22 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 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.
Bi-directional means the ability to send data in two directions, both
inbound and outbound.
DES 56 means a standard form of encryption using 56 bit symbols.
Dish is an acronym for a parabolic antenna used to transmit or receive
communications to or from a satellite network.
Encryption is a method of sending data in a different format so that it
may not be readily understood without reversing the encryption.
Downlink means the path from a satellite to a master earth station.
Earth Station means the transmission or reception equipment for sending
or receiving data to or from a satellite.
Master Earth Station (Hub) means a central node for the transmission,
retransmission and channeling of a spider configuration VSAT network.
Mission Critical means that something is necessary to allow business to
be conducted.
Satellite in this context means a device that orbits the Earth that is
used for "reflecting" transmission from one earth terminal back to another
earth terminal.
Terrestrial means bound to the earth, or attached to the ground. For
example: telephone lines are physically connected to earthbound devices and are
required for them to operate.
Outroute means a carrier (channel) assigned to data transmission by
satellite that includes the uplink from the Master Earth Station (Hub) and the
downlink to a VSAT group.
Parabolic means dish shaped.
Spider network VSAT is the most common VSAT type and depends on the
operation of the Master Earth Station (Hub) (has a large diameter parabolic
antenna) for data retransmission. Individual VSATs cannot receive direct
transmissions from each other, but communicate exclusively with the Master
Earth Station (Hub).
Systems Integrator is a business that integrates multiple products and
services into a combined system to deliver a solution to customers.
Uplink is synonymous with inroute. Uplink refers to the path from
non-master earth station to the master earth station.
Very Small Aperture Terminal (VSAT): The VSAT is an earth station used
for communications through satellites in the fixed (geostationary) orbits.
Wide Area Network (WAN) means a network of computers connected over
some distance other than through local cabling, e.g. between two or more
buildings.
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.
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Overview
eSat, Inc. ("eSat" or "Company") is a 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, Nexstreams,
Channel Casting, and DigiNXT(TM) Internet gateway which provide existing local
area networks (LAN) with Internet access "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. Nexstreams uses very small aperture terminals ("VSAT"), which allows
for bi-directional data transfer for remote locations needing Internet access or
a private network. The Company's ChannelCasting(TM) product provides the
simultaneous broadcast of large video and data files to multiple destinations
through the use of eSat's GSI gateway and DigiNXT Internet gateway as the means
of transmission of the data files. eSat's SAMS(TM) product (Satellite Accessed
Material for Schools) provides managed educational content of over 60,000
pre-screened web pages accessible to students through the use of eSat's GSI
gateway and DigiNXT Internet gateway as the means of transmission of the web
pages. "Managed Educational Content" means that the content available for school
children has been screened to assure propriety for school children. The Company
plans to be a geographically diverse satellite Internet Service Provider through
the establishment of joint venture partners in various countries. 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 incurred significant losses totaling over $7.5 million
since 1996. Furthermore, the Company anticipates incurring additional losses in
the foreseeable future as the Company grows its business and completes the
development of its products. 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 and The Company Has No Assurance That Its Marketing and
Distribution Methods Will Be Successful, and The Company Faces Formidable
Competition.
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eSAT'S STRATEGY
The Company anticipates growth in demand for Internet access. The
Company is positioning itself to help satisfy this market need for Internet
access through the use of eSat's GSI gateway, Nexstreams, ChannelCasting, and
DigiNXT Internet gateway as the means of Internet access and transmission of
data.
eSat's strategy is to provide products and services for 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. The Company developed it's GSI, DigiNXT, Nexstreams,
and ChannelCasting products to help satisfy voids in the Internet access and
data delivery market. The Company's intent is for businesses and organizations
to benefit from 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 satellite Internet transmission system. This system transmits data up to
8 mbps (megabits per second), using the Company's uplink facility to send the
data to a satellite, which retransmits the data to the user. The Company leases
transmission capacity on one satellite for its system. As demand grows, the
Company anticipates it will need to expand its system by leasing transmission
capacity on additional satellites. The Company offers ChannelCasting(TM) as a
new solution to broadcasting a single stream of data to multiple locations.
ChannelCasting(TM) is a solution for large corporations, content providers,
government agencies and distance learning applications. These organizations and
distance learning applications, typically need to transmit large amounts of data
to multiple locations simultaneously. ChannelCasting(TM) enables customers to
create ChannelCasting(TM) networks to efficiently distribute content. See Item
1, Risk Factors: "Market Acceptance", "Dependence on New Products and "Product
Enhancement Introductions; 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 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 Company Is Dependent On Successful New Products and Product
Enhancements Introductions And May Suffer Product Delays".
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)"), Nexstreams, ChannelCasting, and DigiNXT(TM) gateways
target businesses and government agencies. Satellite Accessed Material for
Schools ("SAMS(TM)") was specifically developed to address the demand for
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educational access solutions. SAMS(TM) brings Internet access to schools. "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. All products are designed and built to offer ease of installation and use
with a plug and play format, and high-speed Internet access. "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.
Historical Summary of the Company
The Company is a 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 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. Prior to the merger, Technology Guardian
had been engaged in providing computer network installation services and the
related sale of personal computers and telecommunications equipment necessary
for the configuration of a local area network (LAN), and in research and
development of the products currently offered by eSat Inc.. 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 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
(first generation) 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. Through the
end of 1998, the Company beta tested its first generation
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satellite Internet product and services. Beta testing on the first generation of
products was terminated in December 1998, such testing having been completed to
the to the satisfaction of the Company.
In fourth quarter of 1998 the Company initiated development of a second
generation satellite Internet product and related satellite Internet service.
Development of the second generation of satellite Internet products and services
and beta testing of same was completed to the satisfaction of the Company in
January 1999, and was incorporated into all the Company's products and services
known as the Global Satellite Internet ("GSI(TM)"), DigiNXT(TM), and SAMS(TM),
described below. 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 first generation 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. "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. 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 said testing was completed in January of 1999 and
completed to the satisfaction of the Company and the SAMS(TM) system is
currently installed in 13 additional schools.
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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. During the second quarter of
1999, the Company launched its Channel Casting technology followed by the
initial beta testing of the bi-directional Nexstreams product in the third
quarter of 1999.
PRODUCTS AND SERVICES
Global Satellite Internet ("GSI(TM)") /DigiNXT(TM) Internet Gateway
The Company's flagship product, the Global Satellite Internet
("GSI(TM)") gateway and Nexstreams, uses satellite technology to download
Internet services at speeds that compete with the speed of T-1 and cable. A
gateway is a service that allows someone to access the Internet. GSI and
Nexstreams refer to the Company's service of providing access to the Internet
through satellite transmissions around the world. The Company offers services
with download speeds of up to 8 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 user is still required to pay the cost
of an Internet connection for the "outbound" data. This cost should be factored
in when comparing the costs of the Company's products and services with the cost
of competing services. "LAN" means local area network, which usually consists of
a network of computers within a single workplace. The delivery system for all of
the Company's products, the GSI(TM), connects to an existing local area network
(LAN) to provide 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. "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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The DigiNXT(TM) Internet gateway is eSat's retail product that uses the GSI(TM)
satellite technology.
The Company currently offers a GSI(TM) gateway for local area networks
with contracts of up to a three year duration. The current standard price per
month for this service is $495 per installation. This price may change from time
to time depending on a number of market factors.
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. With standard delivery of data and video files over the
Internet, each destination point requires its own stream of data, a uni-cast.
ChannelCasting(TM) uses the broadcast properties of satellite transmission to
send a single stream which is received at many locations, a multi-cast. An
example would be a large video file which needed to be delivered to many
schools. The file(s) would be transmitted to eSat's ChannelCasting(TM) servers
through the Internet or a private network connection and then uplinked at the
Company's Network Operations Center (NOC) as a single stream to a satellite, and
then transmitted to the specified multiple destinations simultaneously. At the
present time, the Company only leases broadcast capacity on one satellite, but
the satellite is capable of broadcasting the data for reception to numerous
locations. ChannelCasting(TM) provides a solution for large corporations,
content providers, government agencies and distance learning applications. eSat
will enable customers to create ChannelCasting(TM) networks to distribute
content. 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.. 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. 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.
NEXSTREAM
In the second quarter of 1999, the Company commenced development of
Nexstreams, which uses Very Small Aperture Terminal (VSAT) satellite dishes to
enable bi-directional data communications. This means that the user can both
receive data and transmit data through the Company's satellite system. The
result is a secure, transportable, cost-effective communications system,
especially for organizations with offices and facilities in remote geographic
areas. Nexstream has a flexible bandwidth of 16 Kbps to 384 Kbps uplink to the
satellite and up to 8 mbps downlink from the satellite. It uses DES 56
encryption and short deployment timeframes. (See the Glossary for a further
definition of terms.)
Nexstream provides significant benefits to businesses requiring
connections to remote offices and locations with high-speed data delivery
capability. Connectivity for Internet access, for a virtual private network or
as a private network is possible. The technology is especially effective where
privacy and security are a concern, or where mission-critical applications
dictate having a non-ground based system. The Nexstream may be employed as an
effective back up for ground based communication lines in case of a potential
disaster, or as the primary link to remote areas before and after a disaster.
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.
"Managed Educational Content" means that the content available for school
children has been screened to assure propriety for school children.
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With SAMS(TM), students 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.
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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 satellite. This hybrid technology allows a
user access to the Internet 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. "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, which is equivalent to the GSI.
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 22-inch dish mounted on the
roof at the user's facility, which is linked to the GSI(TM). Nexstreams uses
VSAT satellite dishes to enable bi-directional data communications with flexible
bandwidth of 16 kbps up to 384 kbps uplink speed and up to 8 mbps downlink from
the satellite.
There are at this time no patents, however, the Company holds and has
applied for trademarks and licenses.
The Company's GSI(TM) and Nexstreams gateway systems 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 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 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. The Nexstreams is currently being installed by the Company's personnel,
since the installation requires greater technical know-how.
Marketing and Sales
The Company markets its products and services to several markets
including: businesses, schools, libraries, hotels, tract home developers,
hospitals, medical facilities, government agencies and more through a
three-pronged distribution channel consisting of in-house sales persons,
value-added resellers (VARs) and independent sales organizations. The Company's
sales to businesses comprise 60 percent of the Company's sales. Sales to schools
comprise 40 percent of the Company's sales. There are no consumer/home products
or services at this time.
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The Company employs an in-house sales staff consisting of 10 people, who
concentrate their sales activity on the generation of leads, the establishment
of contacts, and the closure of sales to a variety of small, medium and large
businesses. In-house means they are employees of the Company, although they may
be located in sites other than the Company's headquarters located at 16520
Harbor Boulevard Building G Fountain Valley, California. Three sales persons are
located in the Company's office at 908 Pennsylvania Ave SE Washington DC and in
addition to these activities also attempt to develop leads, contacts, and sales
to Federal governmental agencies and concentrate their sales activities to a
variety of small, medium and large businesses on a geographically regional
basis. Currently, the regions served by these sales persons are the Southeast,
Northwest and Midwest sections of the United States.
Additionally, the Company distributes its products through value-added
resellers ("VARs") and independent sales organizations. VARs and independent
sales organizations allow the Company to increase its visibility and sales of
products and services by entering into contracts for the VARs and independent
sales organizations to undertake sales activities for a percentage commission of
any sale realized. Approximately 50 percent of the Company's sales to date have
originated and been completed through the VAR and independent sales organization
distribution channel. Currently, the Company has approximately 17 VAR and
independent sales organization contractual relationships, no single one of which
is material to the Company's operations. Sales through the VAR channel have
been modest, with the majority of the Company's sales having been realized on a
direct sale basis. VARs' expertise varied widely and the Company has re-focused
on enhancing this distribution channel with traditional Wide Area Network (WAN)
VARs and systems integrators. The result of this effort has been a significant
increase in both quantity and size of contracts under negotiation. The Company
intends to enter into contracts with between one hundred to two hundred VARs
within the next twelve months. The Company expects to realize the majority of
domestic (North American) revenues through this channel.
The Company from time to time employs a telemarketing team to initially identify
institutions that could potentially benefit from the Company's products and
services. Telemarketing means unsolicited telephone calls are made to
institutions for purposes of business development. The Company employs a variety
of media, business development and promotional methods to achieve these goals.
The Company also benefits from public relations activities as well as online and
traditional advertising, including radio, in-flight advertisements and print
media. 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".
Government 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. The Company has completed an installation with the
San Bernardino County, California, Sheriff's Department and with the U.S.
Department of Forestry in Dubois, Idaho. These systems are currently under
evaluation. The sales of units to these agencies depends on their favorable
evaluation. There is no assurance that the Company will make any significant
sales to government agencies in the near term. See Item 14, Risk Factors: "The
Company Has No Assurance of Market Acceptance Of Its Products and
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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 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 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. At the present time, the
Company does not have any existing joint venture in the international market and
has not entered into any written agreement for international satellite service.
See Item 1, Risk Factors: "The Company might not be Successful in Implementing
its Domestic and Worldwide Proposed Expansion".
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
Government 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".
<PAGE> 14
Backlog of Orders
The Company currently does not have a backlog of orders.
Revenue Recognition Policies
Hardware and Software. The Company generates its revenue by selling
Internet access and its related hardware and software. Revenue is recognized on
product and software at the time the products are shipped, if purchased
separately. Satellite Internet access can be purchased by customers separately
on either a monthly, quarterly, one, two or three year service subscription
contract. When satellite service is purchased separately, 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 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. Revenue is also recognized on a
bundled basis wherein the hardware, software and related satellite Internet
accessed is purchased together. In a bundled sale, revenue is recognized as the
satellite Internet access 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 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 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 connections. These providers include firms offering
ISDN, DSL, frame relay, cable modem, T-1, and direct fiber connections. "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
<PAGE> 15
information at the rate of 1.54 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. There are numerous providers of these
services and no one provider dominates the market. Many service providers are
affiliated with telephone companies, which provides 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. As a result, potential customers are unable to evaluate other
customer's experiences in using the Company's products. This lack of track
record might dissuade some customers from purchasing the Company's products
until there is a greater customer base and a broader evaluation of the quality
and effectiveness of the Company's products and services.
The Company competes principally on price, performance, and availability
of service. The service is available in any location, particularly remote
locations, due to the wide satellite broadcast footprint. 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 for a price of $495 per month, subject to change to
meet competitive circumstances, widespread availability, 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 employees. Seventeen employees are
located at the Company's headquarters in Fountain Valley, California, and three
employees are located in the Company's Washington, D.C., office.
Available Information
<PAGE> 16
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 DEPENDS ON SATELLITE TRANSMISSION AND IS SUBJECT TO THE RISK OF
SATELLITE FAILURE.
The Company currently uses a single satellite to provide its satellite
Internet services. There is risk associated with this dependence. There are two
types of possible failures to the satellite: a failure of the individual
transponder that is used and a failure of the entire satellite. The Company has
purchased transponder protected service. This means that if there is a failure
of a transponder, the satellite operator will move the Company to on another
transponder. This would create a minimum interruption to customers, likely less
than 24 hours. If the satellite itself completely fails, the Company will move
its services to another satellite. The Company's transmissions conform to
industry standards so there are several possible alternative satellites. The
Company's current uplink provider engages in quarterly reviews of available
like-satellite space and is ready to contract for that space if needed. If the
entire satellite were to fail, a one to five day outage of services might occur
depending on the availability of other satellites. Additionally, a repointing of
the receiving dishes on the ground would likely be required. The repointing of
the receiving dishes on the ground would cost the Company $300 per customer. In
the event of any service disruption due to satellite failure, the Company's
customers would be credited for the dollar value of the amount of time they are
without the satellite Internet service. Based on a standard contract paying $495
per month for the use of the equipment and related satellite Internet service,
this would be equal to $16.50 per day per customer. In the event of a satellite
failure, the Company could be liable for loss-of-business claims, due to the
reliance by business customers on the satellite Internet services the Company
provides. A sustained disruption in satellite service could materially impact
the ability of the Company to continue operations.
THE COMPANY INCURRED SIGNIFICANT OPERATING LOSSES.
For the six months ended June 30, 1999, the Company incurred a loss of
$4,222,883, including all research and development costs. 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 losses
were 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; (ii) expenses related
to marketing; and (iii) lack of product sales. 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."
<PAGE> 17
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 might 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 has no joint venture partners at this time.
There can be no assurance that the Company will be able to successfully joint
venture with 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 twenty-four months.
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 and the sale of additional securities,
will be sufficient to satisfy its contemplated cash requirements through the
fourth 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.
<PAGE> 18
Without the proper financing of customer contracts by a finance company or
additional equity, the Company is likely to have difficulty in sustaining its
on-going operations.
THE COMPANY'S FINANCIAL STATEMENTS CONTAIN A "GOING CONCERN" QUALIFICATION
The Audit Report accompanying the Company's Financial Statements
contains a qualification that certain conditions indicate that the Company might
not be able to continue as a going concern. The Financial Statements do not
contain any adjustments that might be necessary in such a case. Note N to the
Financial Statements indicates that recurring operating losses, working capital
deficiencies and significant bad debts from accounts receivable account for this
uncertainty. Many investment bankers and investors view companies with a "going
concern" qualification as less desirable for investment. Accordingly, the
Company might have a more difficult time raising equity capital or borrowing
capital at all or on favorable terms. Suppliers to the Company might be less
willing to extend credit. Potential customers of the Company might be less
willing to purchase the Company's products if they believe that the Company will
not be viable enough to provide service, support, back-up, and follow-on
products when needed. Furthermore, the Company might be disadvantaged in
recruiting employees who might be concerned about the stability of employment
with the Company. Therefore, the "going concern" qualification can have severe
adverse consequences on the Company.
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, Nexstreams, SAMSTM
programs offered to school systems, and ChannelCastingTM. 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 any VAR will be successful in marketing the Company's
products.
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 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.
<PAGE> 19
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 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.
<PAGE> 20
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 OTHER SENIOR MANAGERS.
The success of the Company will be dependent largely upon the personal
efforts of its Chief Executive Officer, Michael C. Palmer, its Chief Financial
Officer and Treasurer, Chester L. Noblett,, and other senior managers. 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.
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 COULD SUFFER DILUTION OF THEIR INVESTMENT FROM EXERCISE OF WARRANTS.
As of July 22, 1999, the Company has a total of 17,660,284 shares of
Common Stock outstanding. The Company has issued 6,971,968 outstanding warrants
to purchase shares of common stock at a weighted average price of $5.59 per
share.
<PAGE> 21
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 the 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.
MANY SHARES WILL BECOME ELIGIBLE FOR FUTURE SALE, WHICH MIGHT ADVERSELY AFFECT
THE MARKET PRICE FOR THE SHARES.
As of July 22, 1999, there are 13,875,046 "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,
5,034,781 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.
8,840,265 shares are held by other shareholders. These shares will become
eligible for trading under Rule 144 at various dates commencing on October 8,
1999. 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.
<PAGE> 22
The officers and directors and the two largest shareholders of the
Company have in the aggregate beneficial ownership of 21.56% of the outstanding
shares of Common Stock of the Company, and 44.25% 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
equity securities by the Company in 1998 that raised significant equity capital.
"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. 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.
Page 22
<PAGE> 23
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)) and Nexstreams gateways and DigiNXT(TM)
Internet gateway which provide any existing local area network (LAN) with
high-speed Internet access. "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. 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 24 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 losses from operations of $7,567,859 or
$0.43 per share (basic and diluted), since its inception as U.S. Connect 1995,
Inc. The Company anticipates that it will continue to incur net losses through
the end of 1999. The Company expects to achieve operating profits in 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 assurances, however, that the Company will achieve or
sustain profitability or positive cash flow from its operations. See Item 1,
Risk Factors: "Lack of Operating History", "Insufficient Capital", and "Market
Acceptance".
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
Page 23
<PAGE> 24
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)
Gross Profit $ (344,523) $ (855,553) $ (654,394)
Sales and Marketing, General and
Administrative, and other operating
expenses $(2,351,382) $(1,171,860) $ (812,663)
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,
Page 24
<PAGE> 25
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 and Capital Resources
The Company's operations have been financed from internally generated cash, the
sale of stock in 1999 and 1998 and, to a lesser extent, capital equipment lease
arrangements. At June 30, 1999, the Company had cash on hand of $671,385,
compared to $2,567,697 at December 31, 1998 and ($11,827) at December 31, 1997.
Net cash used in operating activities of $2,949,829 for the six months
ended June 30, 1999, and $2,799,627 and $237,717 for the years ended December
31, 1998 and 1997, respectively, was primarily attributable to operating losses,
issuance of options, and increase in deferred revenue, offset to some degree by
decreases in accounts receivable, payroll taxes, accounts payable, and other
current liabilities.
Net cash used in investing activities was $525,411, for the six months
ended June 30, 1999, and $298,980 and $18,539 for the years ended December 31,
1998 and 1997, respectively, and consisted of purchases of fixed assets and net
repurchases of common stock.
Net cash provided by financing activities of $1,578,928, for the six
months ended June 30, 1999 resulted from the net proceeds of the sale of common
stock, repurchase of shares from the former Chief Executive Officer, and the
issuance of an obligation in connection with the acquisition of fixed assets.
Net cash provided by financing activities of $5,673,131 for the year ended
December 31, 1998 resulted from the sale of common stock. Net cash provided by
financing activities of $253,363 for the year ended December 31, 1997 resulted
from the sale of common stock.
As of June 30, 1999 the Company's principal source of liquidity
consisted of $671,385 of cash. As of that date, the Company's principal
commitments consisted of obligations in connection with the purchase of fixed
assets, operating leases, payroll taxes payable, and liabilities created by the
prepayment of satellite Internet access by customers. Under leases that have
initial or remaining non-cancelable lease terms in excess of one year, the
Company's payment obligations are $590,236 in the year 2000, $570,379 in 2001,
$436,285 in 2002, $131,671 in 2003, and $68,417 thereafter. The Company has no
long term debt, nor balloon payments, nor existing demands nor commitments
extending beyond 12 months, other than described above. However, the Company
anticipates an increase in its expenditures for personnel, capital equipment,
and product research and development consistent with anticipated growth in
operations and infrastructure.
The Company believes that current cash balances along with stock
purchase commitments and future sales will be sufficient to meet its anticipated
cash needs for the next 12 months nor the lease commitments in excess of one
year described above. However, any projection of future cash needs and future
cash flows are subject to uncertainty. The current short-term cash needs of the
Company are approximately $400,000 per month without accounting for sales
revenue. To the extent the Company's revenues increase in the coming twelve
months, the Company anticipates significant increases in the operating expenses
and working capital requirements to purchase additional fixed assets, for
financing of associated accounts receivable and unbilled receivables, and for
the purchase of other assets, offset by increases in accounts payable, deferred
revenue and other current liabilities. The cost to purchase additional fixed
assets, primarily satellite transmission and receiving equipment, finance
accounts receivable, unbilled receivables, and other assets offset by increases
in accounts payable, deferred revenue and other liabilities is approximately
$15,000,000. The Company also anticipates the need to construct its own network
of Network Operations Centers (NOCs). The NOC is the location of the operations
equipment, which receives and transmits data from and to a satellite. The
construction of a NOC costs approximately $2,000,000 per location. Depending on
the amount and timing of future sales and receipts, the Company will need
additional capital. The Company has entered into an agreement with Vantage
Capital for the purpose of raising capital for the Company. Vantage Capital has
arranged for an infusion of $4.0 million into the Company, payable at the rate
of $500,000 per month. To date, the Company has received $1,500,000. In return,
the Company is issuing its Preferred Shares at $2.00 per share. The Preferred
Stock is 12% convertible preferred stock, with a liquidation preference of $2.00
per share. The Preferred Stock bears 12% cumulative annual dividends. The
Preferred Stock may be converted into shares of Common Stock at the lower of
$2.00 per share or 70% of the bid price of the Common stock on the date of a
notice to convert as reported by the exchange or the market on which the shares
of Common Stock are traded. The Preferred Stock contains standard antidilution
and price protection provisions and standard piggy back rights. There is no firm
agreement in place requiring the balance of the anticipated investment to be
made; however the Company expects that the full amount of the anticipated
investment will be made. Vantage Capital is owned by Michael C. Palmer, the
President of the Company. See Item 7 -- Certain Relationships and Related
Transactions.
The Company believes that the receipt of the net proceeds of the
offering described above plus cash generated internally from sales combined
with the cash as of June 30, 1999, will be sufficient to satisfy its future
operating, working capital, and existing lease commitment cash requirements for
both short-term and long-term needs.
The Company may need to raise additional capital if the Company expands
more rapidly than initially planned, to develop new or enhanced products and/or
services, to respond to competitive pressures or to acquire complementary
products, businesses or technologies. If additional funds are raised through
the sale of equity or convertible debt securities, the percentage ownership of
the Company's stockholders will be reduced, the Company's stockholders may
experience additional dilution and these securities may have rights,
preferences or privileges senior to those of the Company's stockholders. There
can be no assurance that additional financing will be available, or available
on terms favorable to the Company. If adequate funds are not available or are
not available on acceptable terms, the Company's ability to fund expansion,
take advantage of unanticipated opportunities, develop or enhance products or
services or otherwise respond to competitive pressures could be significantly
reduced.
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<PAGE> 26
Continuing As a Going Concern
The financial statements and the opinion expressed by the Company's
independent accountants disclose that the financial statements have been
prepared assuming the Company will continue to operate as a going concern which
contemplates the realization of assets and the settlement of liabilities in the
normal course of business.
The Company has implemented significant cost reductions where possible
in order to reduce losses from its continuing operations. Management believes
that the sales of products introduced in the first quarter of 1999 have not been
fully realized to date, due to the long sales lead time of the product, and the
focus away from direct sales to sales through value-added resellers ("VARS").
The total number of VARS the Company have relationships with the Company is now
17 compared to 4 at December 31, 1998. Sales in 1999 and recurring satellite
access revenues may not be adequate to finance the 1999 cash flow requirements.
Additional debt or equity financing will be required. Management is developing
plans which include, but are not limited to, merging with another company and
obtaining additional debt or equity financing.
Revenue
The Company generates its revenue by selling high speed Internet access
and its related hardware and software. Revenue is recognized on product and
software at the time the products are shipped, if purchased separately.
Satellite Internet access can be purchased by customers separately on either a
monthly, quarterly, one, two or three year service subscription contract. When
satellite revenue is purchased separately, 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 to expense also using the straight-line method
over the life of the contract. Revenue is also recognized on a bundled basis
wherein the hardware, software and related satellite Internet accessed is
purchased together. In a bundled sale, 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 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 and Nextreams servers 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.
Page 26
<PAGE> 27
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 satellite Internet access to its customers for the term of
the contractual relationship. 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. For the six months ended June 30, 1999 costs of sales totaled
$465,346, for the years ended December 31, 1998 and 1997 the costs of sales
totaled $685,570 and $345,491, respectively. 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.
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 2000. The Company does
not defer sales, marketing or other direct costs associated with the acquisition
of customers. For the six months ended June 30, 1999 sales and marketing
expenses totaled $309,204, for the years ended December 31, 1998 and 1997, sales
and marketing expenses totaled $340,820 and $201,934, respectively. These were
primarily for the beta marketing and beta sales efforts of the Company's first
generation 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.
Page 27
<PAGE> 28
Change In Products And Sales
With the formation of Technology Guardian, Inc., 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:
Revenue
<TABLE>
<S> <C>
1996 $1,529,518
1997 $1,201,044
1998 $ 341,047
1999 $1,167,059
</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.
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 $46,898, $237,717, $2,799,627 and $2,949,829 for the
years 1996 through 1998 and the six months ended June 30, 1999, 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 communications infrastructure. The
Company relies on the general communications infrastructure maintained by the
established communications 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 communications companies and satellite operators
do not have their systems year 2000 compliant, then the
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<PAGE> 29
Company and its customers could suffer the consequences of the failure of one or
more components of the communications 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 communications 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 communications companies that are
able to continue offering services. Since the Company cannot know which
Companies will have year 2000 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 October 28, 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
Nature of Class 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) 3,950,000 20.57%
15555 Huntington Village Lane, #239,
Building 9, Huntington Beach, CA 92647
Common Chester (Chet) L. Noblett Jr. (3) 2,467,302 12.92%
16520 Harbor Blvd, Bldg. G
Fountain Valley, California 92708
Common Salvatore Piraino (4) 136,103 0.77%
</TABLE>
Page 29
<PAGE> 30
<TABLE>
<S> <C> <C> <C>
16520 Harbor Blvd, Bldg. G
Fountain Valley, California 92708
Common William Sarpalius (5) 1,141,838 6.07%
908 Pennsylvania Avenue, S.E.
Washington, D.C. 20003
Common Jeffrey Hecht (6) 382,912 2.13%
16520 Harbor Blvd, Bldg. G
Fountain Valley, California 92708
Common Gary Pan (7) 20,000 .11%
C/o United Asia Capital Partners
Suite 201 - 290 Fu Hsing North Road
Taipei 104, Taiwan
Common Michael C. Palmer (9) 2,493,242 12.35%
16520 Harbor Blvd, Bldg. G
Fountain Valley, California 92708
Common Jim Mack (8) 324,294 1.80%
16520 Harbor Blvd, Bldg. G
Fountain Valley, California 92708
Common Directors and Executive Officers as a 6,965,691 28.24%
group
</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.
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<PAGE> 31
(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 total market value of $150,000,000 in 1999, or $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
(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>
<S> <C>
------------------------------------------------------------------------
Shares subject to purchase: If the Company achieves the
following sales:
------------------------------------------------------------------------
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.
------------------------------------------------------------------------
</TABLE>
Page 31
<PAGE> 32
<TABLE>
<S> <C>
------------------------------------------------------------------------
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>
(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 600,000 shares of the Company's common
stock for a period of five years from date of grant, exercisable at
prices from $4.25 per share to $8.50 per share. In addition, the Company
has agreed to issue 1,000,000 shares of convertible Preferred Stock to
Vantage Capital, which at the current conversion price of $1.625 would
allow Vantage Capital to receive 1,758,242 shares of Common Stock. Mr.
Palmer is an affiliate of Vantage Capital. See Item 7, Certain
Relationships and Related Transactions.
(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, President, Secretary 1999
and Director
Chester (Chet) L. Noblett, Jr. 55 COO, Chief Financial Officer, 1997
Treasurer 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
</TABLE>
Page 32
<PAGE> 33
<TABLE>
<S> <C> <C> <C>
Jim Mack 26 Chief Technology Officer 1998
</TABLE>
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 April 1999. Mr. Palmer has held the position of Chief
Financial Officer commencing 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.
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. 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
Page 33
<PAGE> 34
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 studied
Computer Science and Aerospace Engineering from University of Missouri-Rolla in
1994.
ITEM 6. EXECUTIVE COMPENSATION.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
----------------------------------- ------------------------------------
Awards Payouts
--------- ---------
Other
Annual Restricted Securities
Compen- Stock Underlying LTIP All Other
Name and Principal Position Year Salary Bonus sation Awards Options/SARs Payouts Compensation
- - --------------------------------------------------------------------------------------------------------------------------------
<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.
OPTION GRANTS IN FISCAL YEAR 1998
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Potential Realizable
Individual Grants Value at
Percent of Market Assumed Annual Rates of
Number of Total Options Market Closing price Stock Price Appreciation
Shares Granted to Exercise of Price on on May for Option Term
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>
</TABLE>
Page 34
<PAGE> 35
<TABLE>
<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 appropriate value of the shares of TGI
for subsequent exercises of the options. The Company assumed the
obligation to honor the options granted by TGI.
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<PAGE> 36
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, 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:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
Name Shares Granted:
- - --------------------------------------------------------------------------------
<S> <C>
</TABLE>
Page 36
<PAGE> 37
<TABLE>
<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").
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<PAGE> 38
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. A dispute arose between Messrs. Noblett and Coulter with regard to
Mr. Noblett's right to purchase 30% of the outstanding stock of Technology
Guardian, Inc. Due to what Mr. Coulter perceived to be the increasing potential
of Technology Guardian, he did not want TGI to honor TGI's prior commitment. 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. As a result of an alleged breach of the
resignation agreement by Mr. Coulter, the Company has suspended the payment of
$10,000 per month to Mr. Coulter.
Corporate Financial Enterprises and Vantage Capital, Inc. (the
"Consultant") are working together as joint venture partners pursuant to an
exclusive Consulting Agreement entered into between the Consultant and the
Company, dated September 17, 1999. The Consulting Agreement commenced on
September 15, 1999 and will terminate no earlier than September 15, 2002.
The Consulting Agreement states that the duties of the Consultant
include: (1) identifying, analyzing, structuring, negotiating and financing
business sales and/or acquisitions, including without limitation, merger
agreements, stock purchase agreements, and any agreements relating to financing
and/or the placement of debt or equity securities of the Company; (2) assisting
the Company in its corporate strategies; and (3) assisting the Company in the
implementation of its business plan, in each case as requested by the Company.
The Consultant shall receive as compensation as follows: (1) A
non-refundable monthly retainer of $5,000, payable in cash, restricted Common
Stock, or registered Common Stock (at the Company's option) at a price of $2.00
per share, (2) Expenses reasonably incurred during the consulting period by the
Consultant. (3) Warrants to purchase 1,200,000 shares of Common Stock (the
"Warrants"), with exercise prices equal to (a) as to 300,000 warrants, $4.25,
(b) as to 300,000 warrants, $5.25, (c) as to 200,000 warrants, $6.25, and (d) as
to 400,000 warrants, $8.50, and which may be exercised by Consultant at any time
through the payment of (i) cash, (ii) a promissory note bearing interest at 6%
per annum, or (iii) by tendering share of Common Stock equal to the aggregate
exercise price divided by the last closing price of the Common Stock. Such
Warrants as are exercised shall vest immediately if paid in cash or Common
Stock, and on a pro rata basis in accordance with receipt of cash or Common
Stock in the event Warrant is exercised with a promissory note, (4) Fees equal
to 10% of the total aggregate consideration paid for any acquisition or sale by
the Company of any business, corporation or division (a "Target"), including,
but not limited to, acquisitions by stock purchase agreement, merger agreement,
plan of reorganization or asset purchase agreement, or any other transaction
involving the sale of assets out of the ordinary course (measured by either
magnitude or classification) or the sale, transfer or license of technology
(collectively, a "Transaction"), which fee shall be due upon closing of the
Transaction. Further, Consultant shall also be entitled to a financing fee equal
to 10% of any private or public placement of debt or equity securities of the
Company, including without limitation, promissory notes, debentures, convertible
debt, common stock or preferred stock, or any other securities owned by the
Company, including without limitation securities of other corporations. (5) A
share of any fees or commissions payable by third parties on any Transaction
contemplated by the Consulting Agreement, including, but not limited to, any
fees payable by a third party lender, financing partner, or other party, or a
seller of a corporation or business, including, without limitation, investment
banking fees or commissions, business brokerage fees or commissions, finders
fees, or any other fee payable by a third party for any reason including the
identification of the Company as a potential purchaser or seller of such
corporation or business (a "Transaction Commission").
The Company, at its option, may pay fees due in cash, or by issuance of
Restricted Common Stock or freely tradable, registered Common Stock. Restricted
Common Stock shall be issued at a rate equal to the lesser of (i) 50% of the
average Bid Price for the five trading days prior to the closing date of a
Transaction which entitles the Consultant to receive such fees, or (ii) $5.00.
Freely tradable, registered Common Stock, pursuant to an effective and current
registration statement, shall be issued at the rate equal to the lesser of (i)
70% of the average Bid Price for the five trading days prior to the closing date
of a Transaction which entitles the Consultant to receive such fees, or (ii)
$7.50.
Michael Palmer, President of Consultant, is also the Chief Executive
Officer and on the Board of Directors of the Company, and therefore the
possibility of conflict of interest exists. In the event of a conflict arises
and if for any reason Consultant is unable to continue performing the services
as per the terms of the Consulting Agreement, Corporate Financial Enterprises
will act in Consultant's stead. Corporate Financial Enterprises will assume all
the duties and obligations set forth in the Consulting Agreement and shall be
entitled to receive the benefits related thereto. The Company has waived any
conflict of interest that may arise from a relationship between Consultant and
any entity with which Consultant is affiliated.
The Company has agreed to issue 2,000,000 shares of 12% Convertible Preferred
Stock to Corporate Financial Enterprises, Inc., and Vantage Capital, Inc., in
equal allotments of 1,000,000 shares each. The Company has issued 375,000 shares
of Preferred Stock to date. The purchase price was paid with a promissory note,
payable in monthly installments of $500,000. The Preferred Stock has a
liquidation preference of $2.00 per share, bears cumulative 12% dividends, and
may be converted into Common Stock at the lower of $2.00 per share or 70% of the
bid price of the Common Stock on the date of a notice to convert as reported by
the exchange or the market on which the shares of Common Stock are traded. At a
bid price of $1.625 on October 29, 1999, Vantage Capital would be entitled to
convert the 1,000,000 shares of Preferred Stock into 1,758,242 shares of Common
Stock.
ITEM 8. LEGAL PROCEEDINGS.
On July 23, 1999, Orvin Nordness ("Nordness") filed a lawsuit against
the Company alleging breach of contract with respect to a Subscription
Agreement and Investment Letter which Nordness and the Company had executed on
November 9, 1998. Under the terms of the Subscription Agreement, Nordness
agreed to purchase 2,092,500 shares of common stock at $1.30 per share.
Pursuant to the Subscription Agreement, Nordness stated that he "hereby
delivers a check or money order for $2,720,250 payable to the order of
'Technology Guardian, Inc.'" Nordness failed to deliver a check or money
order. On December 14, 1998, the Company communicated with Nordness that he
must deliver payment within 48 hours or the Subscription Agreement would be
revoked. On December 16, 1998, after Nordness failed to deliver payment within
48 hours, the Company communicated to Nordness that the Subscription Agreement
was revoked. Nordness claims that the Subscription Agreement gave him the right
to purchase the shares at any time and that the Company did not have the right
to revoke the Subscription Agreement. Nordness seeks to recover damages in
excess of $10,000,000, or alternatively, seeks to require the Company to issue
2,092,250 shares of common stock to him. The Company believes the claims of
Nordness are without merit and intends to vigorously defend the lawsuit. The
Company has not accrued any reserve with respect to this lawsuit due to the
early nature of the proceedings.
Page 38
<PAGE> 39
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.
<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
1998 FISCAL YEAR
FIRST QUARTER 1.00 .05
SECOND QUARTER .05 .05
THIRD QUARTER 5.50 .625
FOURTH QUARTER 16.00 5.00
1999 FISCAL YEAR
FIRST QUARTER 22.69 13.50
SECOND QUARTER 13.81 8.9375
THIRD QUARTER 11.375 4.375
</TABLE>
On December 31, 1998, the last reported bid and asked prices for the Common
Stock were $13.88 and $13.50, respectively.
As of June 30, 1999, there were 582 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 Harris Trust
Company of California 601 S. Figueroa Street 49th Floor Los Angeles, CA 90017
(213) 239-0673.
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"),
Page 39
<PAGE> 40
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.
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.
Page 40
<PAGE> 41
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 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 July 22, 1999, seven holders of
warrants exercised their warrants in a cashless exercise with respect to 754,683
shares of common stock. These warrant holders included Tim Shulburn as to 8,033
shares, Chuck Wolf as to 7,949 shares, Ed Lamb as to 18,974 shares, Tom Jandt as
to 10,350 shares, Andrew Glashow as to 6,143 shares, Lawrence C. Early as to
28,837 shares, and Corporate Financial Enterprises as to 339,093 shares. These
shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
On February 8, 1999, a shareholder, Claude E. Lamb, 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 16 investors residing in Asia.
On January 4, 1999, the Company issued one share to an investor, Andrea
Marti, 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 15 Asian investors pursuant to Regulation S. The shares were
sold for $2.45 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.
The Company has agreed to issue 2,000,000 shares of 12% Convertible
Preferred Stock to Corporate Financial Enterprises, Inc. and Vantage Capital,
Inc., in equal allotments of 1,000,000 shares each. The purchase price was paid
with a promissory note, payable in monthly installments of $500,000. The
Preferred Stock has a liquidation preference of $2.00 per share, bears
cumulative 12% dividends, and may be converted into Common Stock at the lower of
$2.00 per share or 70% of the bid price of the Common Stock on the date of a
notice to convert as reported by the exchange or the market on which the shares
of Common Stock are traded. The shares were issued pursuant to Regulation D,
Rule 506 and Sections 4(2) and 18(b) of the Securities Act of 1933, as amended.
In October 1999, the Company issued 5,800 shares of Common Stock to
Richard Singer in connection with a services contract entered into between
Richard Singer and the Company. The shares were issued pursuant to Rule 504 of
Regulation D.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
Common Stock
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<PAGE> 42
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 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 July 22, 1999, the Company had issued and outstanding 17,660,284
shares of Common Stock and had reserved: 6,971,968 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.
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<PAGE> 43
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, 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
Page 43
<PAGE> 44
forward-looking statements are reasonable, any such assumption could prove to be
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.
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.
Page 44
<PAGE> 45
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<PAGE> 46
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
eSat, Inc. (Formerly Technology Guardian, Inc.)
Fountain Valley, California
Members of the Board:
We have audited the accompanying balance sheets of eSat, Inc. (Formerly
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 provide 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 eSat, Inc. (Formerly 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 Q to the financial statements, the Company has suffered
recurring losses, a decline in revenue and cash shortages. These issues raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note Q. The financial
statements do not include any adjustment that might result from the outcome of
this uncertainty.
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.
February 23, 1999, except for Note P, as to which the date is June 14, 1999
And Notes J, K and Q as to which the date is October 22, 1999
Los Angeles, California.
/s/ LICHTER & COMPANY
<PAGE> 47
eSat, Inc.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
BALANCE SHEETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
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 11,407,507 Common, respectively 16,086 11,408
Additional Paid in Capital 6,051,235 278,643
Retained (Deficits) (3,344,976) (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> 48
eSat, Inc.
(FORMERLY KNOWN AS 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 11,407,507
Diluted 16,085,936 11,407,507
</TABLE>
Accountant's report and notes are an integral part of these financial
statements.
<PAGE> 49
eSat, Inc.
(FORMERLY KNOWN AS 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> 50
eSat, Inc.
(FORMERLY KNOWN AS 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)
Balance at beginning of year 11,408 10,653
Common stock issued in reverse acquisition
(1,050,400 shares) 1,050 0
Common stock issued (3,628,029 shares and
755,350 respectively) 3,628 755
------------ ------------
Balance at end of year 16,086 11,408
------------ ------------
Additional Paid in Capital
Balance at beginning of year 278,643 278,643
Sale of common stock 5,772,592 0
------------ ------------
Balance at end of year 6,051,235 278,643
------------ ------------
Total Stockholders' Equity at end of year $ 2,722,345 $ (327,752)
============ ============
Common shares outstanding at end of year 16,085,936 11,407,507
</TABLE>
Accountant's report and notes are an integral part of these financial
statements.
<PAGE> 51
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
institutions, and government agencies.
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> 52
ESAT, INC.
(FORMERLY KNOWN AS 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> 53
ESAT, INC.
(FORMERLY KNOWN AS 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.
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.
<PAGE> 54
ESAT, INC.
(FORMERLY KNOWN AS 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 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> 55
ESAT, INC.
(FORMERLY KNOWN AS 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 and maintains an
allowance for any 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 common 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> 56
ESAT, INC.
(FORMERLY KNOWN AS 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 house
located in Los Angeles, and Costa Mesa, California. The bank balances
are insured by the Federal Deposit Insurance Corporation and
the brokerage accounts by 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> 57
ESAT, INC.
(FORMERLY KNOWN AS 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. Please see Note J for the
outcome of this case.
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. Please see Note J for the outcome of this
case.
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 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> 58
ESAT, INC.
(FORMERLY KNOWN AS 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, as
determined by the table below:
<TABLE>
<CAPTION>
Grant Number of Exercise Fair Market APB 25
Date Shares Price Value Compensation
-------- --------- -------- ----------- ------------
<S> <C> <C> <C> <C>
08/28/98 1,035,885 0.72 0.72 $ 0
08/31/98 564,115 0.72 0.72 0
09/15/98 985,000 2.00 0.72 0
09/01/98 100,000 11.00 0.72 0
09/28/98 80,000 0.72 0.72 0
09/28/98 72,000 2.00 0.72 0
09/28/98 300,000 3.00 0.72 0
09/28/98 25,000 1.00 0.72 0
10/01/98 1,000,000 3.00 0.72 0
10/01/98 500,000 0.72 0.72 0
10/07/98 875,000 0.72 0.72 0
10/07/98 433,000 3.00 0.72 0
11/30/98 100,000 9.63 14.88 525,000
--------- ----------
6,070,000 $ 525,000
========= ==========
</TABLE>
<PAGE> 59
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note G - Employee Stock Options and Benefit Plans (continued)
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.
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>
<PAGE> 60
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
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.
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 matter was settled in binding arbitration. The
Company made a payment to former counsel in the amount of $127,300.
<PAGE> 61
ESAT, INC.
(FORMERLY KNOWN AS 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 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. This agreement expired with no
funding as of August 30, 1999.
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. As of September 1999 the Company has ceased
making the required monthly payments under this agreement.
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.
On July 23, 1999 the Company was named as a defendant in a lawsuit
alleging breach of contract and requesting general and specific damages
and costs of suit. In addition, the suit is requesting the Company issue
2,092,500 shares of common stock to the plaintiff, at $1.30 per share,
according to the original contract. No dollar amount for the general and
specific damages has been provided at this time. The Company intends to
vigorously defend itself against this claim and as such has not made any
provision for loss in the financial statements.
Subsequent to the year ended December 31, 1998 the Company sold products
to customers in the ordinary course of business. The Company wrote-off
uncollectible accounts receivable related to particular sales of
$118,722 in 1999 and created an allowance for bad debt of $850,000
related to the remaining accounts receivable as of June 30, 1999. The
allowance was based on the age of accounts receivable and managements'
determination of collectibility.
Subsequent to the year ended December 31, 1998 the Company wrote-off
$42,624 of inventory. Due to the redesign and upgrading of the product
line certain items held in the Company's inventory were determined to be
obsolete and were written-off.
<PAGE> 62
ESAT, INC.
(FORMERLY KNOWN AS 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 Company entered into
settlement agreements regarding Peripherals Plus, Inc., Supercom, Inc.
and Softbank Comdex, Inc. through binding arbitration. The Company made
a payments related to these matters in the amount of $43,700.
Subsequent to December 31, 1998 Corporate Financial Enterprises and
Vantage Capital, Inc. (the "Consultant") are working together as joint
venture partners pursuant to an exclusive Consulting Agreement entered
into between Vantage Capital, Inc., and eSat, Inc. (the "Company"),
dated September 17, 1999. The Consulting Agreement shall commence on
September 15, 1999 and shall terminate no earlier than September 15,
2002.
The Consulting Agreement states that the duties of the consultant
include: (1) identifying, analyzing, structuring, negotiating and
financing business sales and/or acquisitions, including without
limitation, merger agreements, stock purchase agreements, and any
agreements relating to financing and/or the placement of debt or equity
securities of the Company; (2) assist the Company in its corporate
strategies; and (3) assist the Company in the implementation of its
business plan, in each case as requested by the Company.
The Consultant shall receive as compensation as follows: (1) Retainer.
The company shall pay to Consultant a non-refundable monthly retainer of
$5,000, payable in cash, Restricted Common Stock, or Registered Common
Stock (at the Company's option) based on the terms of the Agreement (2)
Expenses. eSat, Inc., shall pay all such expenses reasonably incurred
during the consulting period by the Consultant. (3) Warrants. The
company shall issue to Consultant or its designees warrants to purchase
1,200,000 shares of Common Stock (the "Warrants"), with exercise prices
equal to (a) as to 300,000 warrants, $4.25, (b) as to 300,000 warrants,
$5.25, (c) as to 200,000 warrants, $6.25, and (d) as to 400,000
warrants, $8.50, and which may be exercised by Consultant at any time
through the payment of (i) cash, (ii) a promissory note bearing interest
at 6% per annum, or (iii) by tendering shares of Common Stock equal to
the aggregate exercise price divided by the last closing price of the
Common Stock. Such Warrants as are exercised shall vest immediately if
paid in cash or Common Stock, and on a pro rata basis in accordance with
receipt of cash or Common Stock in the event Warrant is exercised with a
promissory note. (4) Fees for Acquisition Opportunities. The Company
shall pay to the Consultant a fee equal to 10% of the total aggregate
consideration paid for any acquisition or sale by the Company of any
business, corporation or division (a "Target"), including, but not
limited to, acquisitions by stock purchase agreement, merger agreement,
plan of reorganization or asset purchase agreement, or any other
transaction involving the sale of assets out of the ordinary course
(measured by either magnitude or classification) or the sale, transfer
or license of technology (collectively, a "Transaction"), which fee
shall be due upon closing of the Transaction.
<PAGE> 63
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Note J - Subsequent Events (continued)
Further, Consultant shall also be entitled to a financing fee equal to
10% of any private or public placement of debt or equity securities of
the Company, including without limitation, promissory notes, debentures,
convertible debt, common stock or preferred stock, or any other
securities owned by the Company, including without limitation securities
of other corporations. (5) Third Party Commissions.
Consultant and/or its Affiliates shall be entitled to share in any fees
or commissions payable by third parties on any Transaction contemplated
by the Consulting Agreement, including, but not limited to, any fees
payable or Consultant by a third party lender, financing partner, or
other party, or a seller of a corporation or business, including,
without limitation, investment banking fees or commissions, business
brokerage fees or commissions, finders fees, or any other fee payable by
a third party to Consultant for any reason including the identification
of the Company as a potential purchaser or seller of such corporation or
business (a "Transaction Commission"). The Company hereby waives any
conflict of interest that may arise due to any Transaction wherein
Consultant receives such a Transaction Commission, including, but not
limited to, any conflict of interest which may arise as a result of the
dual representation by Consultant of the seller or purchaser of a
corporation or business on the one hand, and the Company on the other.
(6) Fees Paid in Common Stock. The Company, at its option, may pay fees
due in cash, or by issuance of Restricted Common Stock or freely
tradable, registered Common Stock. Restricted Common Stock shall be
issued at a rate equal to the lesser of (i) 50% of the average Bid Price
for the five trading days prior to the closing date of a Transaction
which entitles the Consultant to receive such fees, or (ii) $5.00.
Freely tradable, registered Common Stock, pursuant to an effective and
current registration statement, shall be issued at the rate equal to the
lesser of (i) 70% of the average Bid Price for the five trading days
prior to the closing date of a Transaction which entitles the Consultant
to receive such fees, or (ii) $7.50.
Michael Palmer, President of Vantage Capital, Inc., is also the Chief
Executive Officer and on the Board of Directors of eSat, Inc., and
therefore the possibility of conflict of interest exists. In the event
of a conflict arises and if for any reason Vantage is unable to continue
performing the services as per the terms of the Consulting Agreement,
Corporate Financial Enterprises shall act in Vantage Capital, Inc.'s
stead. Corporate Financial Enterprises will assume all the duties and
obligations set forth in the Consulting Agreement and shall be entitled
to receive the benefits related thereto. eSat, Inc. waives any conflict
of interest that may arise from a relationship between Consultant and
any entity which Consultant is affiliated with.
<PAGE> 64
ESAT, INC.
(FORMERLY KNOWN AS 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, eSat, Inc. (the
"Company"), sold 2,000,000 shares of 12% Convertible Preferred Stock to
Corporate Financial Enterprises, Inc. and Vantage Capital, Inc. (the
"Purchasers"), in equal allotments of 1,000,000 shares each. Purchasers
purchased 2,000,000 shares of 12% Convertible Preferred Stock ("the
Preferred Stock") for the sum of $4,000,000, payable pursuant to a
promissory note providing for eight equal monthly payments of $500,000,
commencing on the Closing Date, and funding on the 17th of each month
thereafter. The Preferred Stock has a stated value and liquidation
preference of $2.00 per share, bears cumulative dividends at the rate of
12% per annum, and is convertible into shares of Common Stock of the
Company (the "Common Stock") at the lessor of (a) the rate of $2.00 per
share of Common Stock, or (b) 70% of the bid price of the Common Stock
on the date of a notice to convert, as reported by the exchange upon
which the Common Stock is then listed. The Preferred Stock contains
certain anti-dilution and price protection provisions, and has piggyback
registration rights.
Subsequent to December 31, 1998, a Warrant Agreement (the "Agreement")
was entered into on September 15, 1999 between eSat, Inc. (the
"Company") and Corporate Financial Enterprises, Inc. (the "Consultant").
The Company granted to Consultant Warrants to purchase 600,000 shares of
Common Stock equal to the Exercise Quantity, as may be adjusted from
time to time as set forth in the Agreement. The Warrant holder has the
right to exercise the warrants at any time and from time to time after
December 31, 2000 until September 1, 2009.
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> 65
ESAT, INC.
(FORMERLY KNOWN AS 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>
Subsequent to December 31, 1998 the Company entered into an Agreement
with Vantage Capital, Inc., which is wholly owned by Michael Palmer. Mr.
Palmer is Chief Executive Officer of eSat, Inc. and serves on its Board
of Directors. For details to this agreement see Note J.
<PAGE> 66
ESAT, INC.
(FORMERLY KNOWN AS 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. In accordance with SFAS 4 the Company
recorded extraordinary income in the amount of $242,990.
The 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. The Company therefore would
appropriately record the transaction as a sale of receivables with
proceeds of the sale reduced by the fair value of the recourse
obligation. 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> 67
ESAT, INC.
(FORMERLY KNOWN AS 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.
Note Q - Going Concern
The Company has suffered recurring losses, a decline in revenue, cash
shortages and has a net deficiency in Stockholders' Equity. These
issues, among others, raise substantial doubt about its ability to
continue as a going concern.
Management has prepared the following plan in order to address these,
and other operating, issues: On September 15, 1999 the Company entered
into an agreement with Vantage Capital, Inc. for an equity investment in
the amount of $4,000,000 through the sale of two million shares of 12%
Convertible Preferred Shares. Vantage has already delivered the first
$500,000 of the funding as of September, 1999, the remaining is to be
paid in installments over the next seven months.
In addition, management has temporarily reduced by forty percent its
workforce and made other operational cuts in order to reduce its
operating capital requirements.
The Company has deferred the construction of its own satellite uplink
facility until such time as it has sufficient investment capital and a
customer base that will yield and adequate utilization factor.
The Company feels that with the reduction in overhead, personnel,
operating expenses, and deferral of capital spending along with the
recent infusion of operating capital and an anticipated increase in
sales that they will be able to continue as a going concern.
<PAGE> 68
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
<PAGE> 69
To the Board of Directors
eSat, Inc.
Fountain Valley, California
We have reviewed the accompanying balance sheets of eSat, Inc. (formerly known
as Technology Guardian, Inc.) ("the Company") as of June 30, 1999 and 1998, and
the related statements of income, changes in stockholders' equity and cash flows
for the six 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.
As discussed in Note O, certain conditions indicate that the Company may be
unable to continue as a going concern. The accompanying financial statements do
not include any adjustments to the financial statements that might be necessary
should the company be unable to continue as a going concern.
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.
Los Angeles, California
August 12, 1999, revised October 22, 1999
/s/ LICHTER & COMPANY
<PAGE> 70
eSat, Inc.
(Formerly known as Technology Guardian, Inc.)
BALANCE SHEET
JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
----------- -----------
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $ 671,385 19,370
Accounts Receivable (Net of allowance for losses
of $850,000 in 1999) 80,156 428,337
Inventory 321,325 204,797
Other Current Assets 25,379 15,747
----------- -----------
Total Current Assets 1,098,245 668,251
----------- -----------
Equipment (Net of accumulated depreciation of
$118,900 and $26,326 respectively) 741,757 29,470
Note Receivable 250,000 22,500
Other Assets 83,766 0
----------- -----------
Total Assets $ 2,173,768 $ 720,221
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 745,922 $ 303,675
Accrued Expenses 52,616 438,353
Deferred Revenue 62,178 0
Short Term Debt 0 313,822
Note Payable, Current Portion 4,309 0
----------- -----------
Total Current Liabilities 865,025 1,055,850
Note Payable, Net of Current Portion 27,364 0
----------- -----------
Total Liabilities 892,389 1,055,850
----------- -----------
Stockholders' Equity
Common Stock, Par Value $.001, Per Share
Authorized 40,000,000 Shares Common
Stock, 10,000,000 Preferred Stock, 17,570,792
Issued and Outstanding Common 29,571 11,120
Additional Paid in Capital 9,066,214 748,782
Treasury Stock (246,546) 0
Retained Earnings (Deficit) (7,588,434) (1,095,531)
----------- -----------
Total Stockholders' Equity 1,260,805 (335,629)
----------- -----------
Total Liabilities and
Stockholders' Equity $ 2,153,194 $ 720,221
=========== ===========
</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 INCOME AND EXPENSE
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net Sales $ 1,167,059 $ 693,646
Cost of Goods Sold 465,346 373,857
------------ ------------
Gross Profit 701,713 319,789
Selling, General and Administrative Expenses 3,807,456 786,217
------------ ------------
Operating (Loss) (3,105,743) (466,428)
------------ ------------
Other (Income) and Expense
Interest Income (52,346) 0
Interest Expense 7,590 10,500
Litigation Settlements 171,000 0
Bad Debt 968,722 0
Obsolete Inventory 42,624 0
Gain on Sale of Equipment (675) 0
------------ ------------
1,136,915 10,500
------------ ------------
(Loss) Before Income Taxes (4,242,658) (476,928)
Provision for Income Taxes 800 800
------------ ------------
Net (Loss) (4,243,458) (477,728)
Retained (Deficit)-Beginning (3,344,976) (617,803)
------------ ------------
Retained (Deficit)-Ending ($ 7,588,434) ($ 1,095,531)
============ ============
Net (Loss) Per Share (Basic and Diluted)
Basic ($ 0.19) ($ 0.04)
Diluted ($ 0.14) ($ 0.04)
Weighted Average Number of Shares
Basic 22,446,998 11,120,350
Diluted 29,910,695 11,120,350
</TABLE>
Accountant's report and notes are an integral part
of these financial statements.
<PAGE> 72
eSat, Inc.
(Formerly known as Technology Guardian, Inc.)
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Cash Flows from
Operating Activities:
Net Income (Loss) $(4,243,458) $(477,728)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 76,935 9,020
Issuance of options 1,228,868 0
Increase in allowance for doubtful accounts 850,000 0
(Increase) decrease in accounts receivable (881,192) (171,351)
(Increase) decrease in inventories (32,065) (56,318)
(Increase) decrease in notes receivable (250,000) (2,418)
(Increase) decrease in other assets (46,930) (11,302)
Increase (decrease) in payroll taxes payable (168,891) 51,374
Increase (decrease) in accounts payable 510,056 199,287
Increase (decrease) in sales tax payable 41,815 4,079
Increase (decrease) in deferred revenue (54,892) 0
Increase (decrease) in note payable, current portion 4,309 0
Increase (decrease) in income tax payable 0 800
Increase (decrease) in short term debt (6,414) 30,464
----------- ---------
Net Cash Provided by (Used in) Operations (2,971,859) (424,093)
----------- ---------
Cash Flows From Financing Activities
Sale of common stock (net cash) 1,820,140 457,852
Note payable, equipment 27,364 0
Treasury Stock (246,546) 12,000
----------- ---------
Net Cash Provided by Financing Activities 1,600,958 469,852
----------- ---------
Cash Flows From Investing Activities:
Purchase of Equipment (525,411) (14,562)
----------- ---------
Net Cash Provided (Used) by
Investing Activities (525,411) (14,562)
----------- ---------
Net Increase (Decrease) in Cash (1,896,312) 31,197
----------- ---------
Cash - Beginning 2,567,697 (11,827)
----------- ---------
Cash - Ending $ 671,385 $ 19,370
=========== =========
</TABLE>
Accountant's report and notes are an integral part
of these financial statements.
<PAGE> 73
eSat, Inc.
(Formerly known as Technology Guardian, Inc.)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Retained Deficit
Balance at January 1, $(3,344,975) $ (617,803)
Net income (loss) (4,243,458) (477,728)
----------- -----------
Balance at June 30, (7,588,433) (1,095,531)
----------- -----------
Common Stock (Par Value $.001)
Balance at January 1, 16,086 11,408
Stock purchased 0 4,127
Stock recalled 0 (4,415)
Stock options excercised 13,485 0
----------- -----------
Balance at June 30, 29,571 11,120
----------- -----------
Treasury Stock
Balance at January 1, 0 0
Stock repurchased (246,546) 0
----------- -----------
Balance at June 30, (246,546) 0
----------- -----------
Additional Paid in Capital
Balance at January 1, 6,051,234 278,643
Sale of common stock 1,795,303 470,139
Stock options excercised 1,226,800 0
----------- -----------
Balance at June 30, 9,073,337 748,782
----------- -----------
Total Equity at June 30, $ 1,267,929 $ (335,629)
=========== ===========
</TABLE>
Accountant's report and notes are an integral part
of these financial statements.
<PAGE> 74
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
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 agencies.
eSat, Inc. 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 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.
Prior to the Merger, Technology Guardian had been engaged in providing
computer network installation services and the related sale of personal
computers and telecommunications equipment necessary for the
configuration of a local area network (LAN), and in research and
development of the products currently offered by eSat, Inc.. The Company
amended its certificate of incorporation to change it's name to "eSat,
Inc." on January 26,1999.
eSat, Inc. ("eSat" or "Company") is a satellite Internet Service
Provider, or ISP and satellite Internet access equipment and services
developer for businesses, educational institutions and government
agencies. The Company's product line is based on its Global Satellite
Internet (GSI(TM)) gateway, Nexstreams Channel Casting and DigiNXT(TM)
Internet gateway which provide existing local area networks (LAN) with
Internet access. "GSI" means the Company's Global Satellite Internet
gateway. The Company's ChannelCasting(TM) product will provide the
simultaneous broadcast of video and data files to multiple destinations
through the use of eSat's GSI gateway, Nexstream's bi-directional
gateway and DigiNXT Internet gateway as the means of transmission of the
data files. eSat's SAMS(TM) product (Satellite Accessed Material for
Schools) provides managed educational content of over 60,000
pre-screened web pages accessible to students through the use of eSat's
GSI gateway, Nexstream Channel Casting and DigiNXT Internet gateway as
the means of transmission of the web pages. "Managed Educational
Content" means that the content available for school children has been
screened to assure propriety of school children. The Company plans to be
a geographically diverse satellite Internet Service Provider through the
establishment of joint venture partners in various countries. 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 operation and/or issuing additional
securities.
<PAGE> 75
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 1998
Note A - Nature of Activities (continued)
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.
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.
<PAGE> 76
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 1998
Note B - Summary of Significant Accounting Policies (continued)
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.
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.
<PAGE> 77
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 1998
Note B - Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements (continued)
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.
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
Adequate allowance has been made for those accounts determined to be
doubtful as of the balance sheet date.
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>
<PAGE> 78
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 1998
Note B - Summary of Significant Accounting Policies (continued)
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.
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.
<PAGE> 79
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 1998
Note B - Summary of Significant Accounting Policies (continued)
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
Note C - Cash
The Company maintains its cash balances at banks and a brokerage house
located in Los Angeles, and Costa Mesa, California. The bank balances
are insured by the Federal Deposit Insurance Corporation and the
brokerage account by the Securities Investor Protection Corporation up
to $100,000 and $10,000,000, respectively. As of June 30, 1999 and 1998,
there were no uninsured cash balances.
Note D - Accounts Receivable
Accounts receivable balance at June 30, 1999, before allowance for
losses was $930,156 from the sales of goods and services to customers.
Approximately 95% of the balance at June 30, 1999 was from one customer.
An allowance for losses was accrued based on the uncollected balance of
material accounts receivable which were over 60 days old at June 30,
1999.
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Accounts Receivable $ 930,156 $428,337
Allowance for Losses (850,000) -0-
--------- --------
$ 80,156 $428,337
========= ========
</TABLE>
Note E - Inventory
As of June 30, 1999, inventory consisted of the following classes of
components:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Finished Goods $ 97,050 $ 48,859
Raw Materials 224,275 155,938
-------- --------
Total $321,325 $204,797
======== ========
</TABLE>
During the second quarter of 1999 it was determined that certain items held in
the Company's inventory were obsolete due to the redesign and updating of the
product-line. This inventory was written down by $42,624.
<PAGE> 80
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 1998
Note F - Fixed Assets
Furniture and Equipment consist of the following:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Furniture and Fixtures $ 104,261 $ 16,369
Leasehold improvements 28,491 20,102
Equipment 727,905 19,325
--------- --------
860,657 55,796
Accumulated Depreciation (118,900) (26,326)
--------- --------
Total $ 741,757 $ 29,470
========= ========
</TABLE>
Note G - Commitments and Contingencies
The Company leases certain of its facilities, equipment and satellite
usage under non-cancelable operating leases. Future minimum lease
payments, under leases that have initial or remaining non-cancelable
lease terms in excess of one year are $579,965 in 2000, $570,379 in
2001, $351,595 in 2002, $131,214 in 2003, and $36,310 thereafter.
Certain of the leases contain inflation escalation clauses and
requirements for the payment of property taxes, insurance and
maintenance expenses. Lease expenses for the six months ended June 30,
1999 and 1998 were $345,158, and $14,886 respectively.
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. This matter was settled on June 8, 1999. The
Company was required to pay $35,000 to Supercom, Inc. in seven monthly
installments of $5,000 beginning June 20, 1999.
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. As of September 1999
the Company has stopped making the required monthly payments.
<PAGE> 81
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 1998
Note G - Commitments and Contingencies (continued)
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.
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 section 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. The
certificates are to be held in escrow, unissued, until the PNA agreement
is funded. As of the date of this report, no funding under the PNA has
been received.
The Company, in the normal course of business, is a party to litigation
relating to trademark and patent infringement, contract-related
disputes, service liability, and other actions. It is the Company's
policy to vigorously defend all such claims and enforce its rights in
these areas. The Company does not believe any of these actions either
individually or in aggregate, will have a material adverse effect on the
Company's results of operations or financial condition.
During the second quarter of 1999 the Company settled several matters of
litigation through binding arbitration. The Company was required to make
payments related to them that amounted to $171,000 in full settlement.
The matters settled were with Peripherals Plus, Inc., Softbank Comdex,
Inc., Supercom, Inc. and the Company's former attorney.
Note H - 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. As of June 30, 1998, a
total of 222,659 options were outstanding expiring at various dates in
the year 1999.
<PAGE> 82
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 1998
Note H - Employee Stock Options and Benefit Plans (continued)
The Company applied APB 25 and related interpretations in accounting for
its plans. Accordingly, compensation cost in the amount of $1,228,868
for the six months ended June 30, 1999 has been recognized for 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
$1,908,402 and basic net income per common share by $.11. The impact on
net income per common share, assuming full dilution, is $.08 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 the
period ending June 30, 1999:
<TABLE>
<S> <C>
Risk-free interest rate 5.25%
Expected option lives 4.7 years
Expected volatility 58.62%
Expected dividend yield 0.0%
</TABLE>
A summary of the status of the Company stock option plans at June 30,
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 3,195 $8.31
Exercised (63) $1.57
Canceled (3,832) $1.68
------
Outstanding at June 30, 1999 5,370
======
Options exercisable at June 30, 1999 1,407
</TABLE>
Weighted average fair value of options granted during the six months
ended June 30, 1999: $8.31
The following table summarizes information about fixed stock options
outstanding at June 30, 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
$8.69-$15.00 1,411 5.0
----- ----
5,370 4.70
===== ====
</TABLE>
<PAGE> 83
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 1998
Note I - Debt
The Company entered into certain revolving debt instruments of a
short-term nature, which, as of June 30, 1999 and 1998, had aggregate
outstanding balances of $3,000 and $67,175, respectively. 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.
At June 30, 1999 and 1998, the Company had promissory notes outstanding
in the aggregate amount of $246,647, payable as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Payable to an individual, 18% per annum, $ 0 $ 50,000
Due December 31, 1997, all assets of the
Company have been pledged as collateral
for this obligation.
Payable to a Corporation, 10% per annum, 0 100,000
Due January 14, 1998, a Personal Guarantee
of the Chief Executive Officer has been
pledged as collateral for this obligation.
Payable to an individual, 10% per annum, 0 32,072
Due May 1, 1999, all assets of the Company
have been pledged as collateral for this
obligation. A Uniform Commercial Code Lien
has been placed against all assets of the
Company to satisfy this obligation. A
Personal Guarantee of the Chief Executive
Officer has been pledged as additional
collateral for this obligation. Certain
covenants of this loan restrict the
Company from entering into new debt
obligations, restrict the hiring or firing
of certain employees, restrict the sale of
additional securities of the Company, and
restrict the terms of employment of the
Chief Executive Officer.
Payable to an individual, 0% per annum, 0 50,075
Due March 30, 1998, Purchase Orders of a
customer have been pledged as collateral
for this obligation.
</TABLE>
<PAGE> 84
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 1998
Note I - Debt (continued)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Payable to an individual, 0% per annum, 0 14,500
Due December 31, 1997, no security has
been pledged to collateralize this
obligation.
-------- --------
Total $ 0 $246,647
======== ========
</TABLE>
In March 1996 the Company entered into a factoring arrangement with J&R
Financial, Inc. (Factor) . The terms of this agreement called for the
Company to, from time to time, sell to Factor the Company's rights,
title and interest in and to certain Accounts to Factor, together with
all moneys due or which may become due upon such Accounts. Factor agrees
to purchase Acceptable Accounts from the Company at a price equal to
eighty (80%) percent of the face value thereof. Factor is to be paid a
fee equal to 14% of the face amount of the Accounts purchased. Factor
shall be entitled to immediate and full recourse against the Company and
to demand payment with respect to an Account for the full Purchase Price
paid in the event of the following conditions: nonpayment within 75
days, a Credit Problem, a Credit Dispute, breach of any warranty,
representation or promise in that certain Agreement by and between the
parties dated March 14, 1996. As of June 30, 1998 the unpaid balances
resulting from this agreement was $242,990. As of June 30, 1998 the
Company was in breach of contract. The Company was subsequently released
from its liability and, accordingly, recognized extraordinary income at
that time.
Note J - 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 June 30, 1999 and
1998 the total vacation liability totaled were $21,636 and $2,600
respectively.
<PAGE> 85
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 1998
Note K - Subsequent Events
On July 23, 1999 the Company was named as a defendant in a lawsuit
alleging breach of contract and requesting general and specific damages
and costs of suit. In addition, the suit is requesting the Company issue
2,092,500 shares to the plaintiff, at $1.30 per share, according to the
contract. No dollar amount for the general and specific damages has been
provided at this time. The Company intends to vigorously defend itself
against this claim and as such has not made any provision for loss in
the financial statements.
Subsequent to June 30, 1999 Corporate Financial Enterprises and Vantage
Capital, Inc. (the "Consultant") are working together as joint venture
partners pursuant to an exclusive Consulting Agreement entered into
between Vantage Capital, Inc., and eSat, Inc. (the "Company"), dated
September 17, 1999. The Consulting Agreement shall commence on September
15, 1999 and shall terminate no earlier than September 15, 2002.
The Consulting Agreement states that the duties of the consultant
include: (1) identifying, analyzing, structuring, negotiating and
financing business sales and/or acquisitions, including without
limitation, merger agreements, stock purchase agreements, and any
agreements relating to financing and/or the placement of debt or equity
securities of the Company; (2) assist the Company in its corporate
strategies; and (3) assist the Company in the implementation of its
business plan, in each case as requested by the Company.
The Consultant shall receive as compensation as follows: (1) Retainer.
The company shall pay to Consultant a non-refundable monthly retainer of
$5,000, payable in cash, Restricted Common Stock, or Registered Common
Stock (at the Company's option) based on the terms of the Agreement (2)
Expenses. eSat, Inc., shall pay all such expenses reasonably incurred
during the consulting period by the Consultant. (3) Warrants. The
company shall issue to Consultant or its designees warrants to purchase
1,200,000 shares of Common Stock (the "Warrants"), with exercise prices
equal to (a) as to 300,000 warrants, $4.25, (b) as to 300,000 warrants,
$5.25, (c) as to 200,000 warrants, $6.25, and (d) as to 400,000
warrants, $8.50, and which may be exercised by Consultant at any time
through the payment of (i) cash, (ii) a promissory note bearing interest
at 6% per annum, or (iii) by tendering shares of Common Stock equal to
the aggregate exercise price divided by the last closing price of the
Common Stock. Such Warrants as are exercised shall vest immediately if
paid in cash or Common Stock, and on a pro rata basis in accordance with
receipt of cash or Common Stock in the event Warrant is exercised with a
promissory note. (4) Fees for Acquisition Opportunities. The Company
shall pay to the Consultant a fee equal to 10% of the total aggregate
consideration paid for any acquisition or sale by the Company of any
business, corporation or division (a "Target"), including, but not
limited to, acquisitions by stock purchase agreement, merger agreement,
plan of reorganization or asset purchase agreement, or any other
transaction involving the sale of assets out of the ordinary course
(measured by either magnitude or classification) or the sale, transfer
or license of technology (collectively, a "Transaction"), which fee
shall be due upon closing of the Transaction.
<PAGE> 86
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 1998
Note K - Subsequent Events (continued)
Further, Consultant shall also be entitled to a financing fee equal to
10% of any private or public placement of debt or equity securities of
the Company, including without limitation, promissory notes, debentures,
convertible debt, common stock or preferred stock, or any other
securities owned by the Company, including without limitation securities
of other corporations. (5) Third Party Commissions.
Consultant and/or its Affiliates shall be entitled to share in any fees
or commissions payable by third parties on any Transaction contemplated
by the Consulting Agreement, including, but not limited to, any fees
payable or Consultant by a third party lender, financing partner, or
other party, or a seller of a corporation or business, including,
without limitation, investment banking fees or commissions, business
brokerage fees or commissions, finders fees, or any other fee payable by
a third party to Consultant for any reason including the identification
of the Company as a potential purchaser or seller of such corporation or
business (a "Transaction Commission"). The Company hereby waives any
conflict of interest that may arise due to any Transaction wherein
Consultant receives such a Transaction Commission, including, but not
limited to, any conflict of interest which may arise as a result of the
dual representation by Consultant of the seller or purchaser of a
corporation or business on the one hand, and the Company on the other.
(6) Fees Paid in Common Stock. The Company, at its option, may pay fees
due in cash, or by issuance of Restricted Common Stock or freely
tradable, registered Common Stock. Restricted Common Stock shall be
issued at a rate equal to the lesser of (i) 50% of the average Bid Price
for the five trading days prior to the closing date of a Transaction
which entitles the Consultant to receive such fees, or (ii) $5.00.
Freely tradable, registered Common Stock, pursuant to an effective and
current registration statement, shall be issued at the rate equal to the
lesser of (i) 70% of the average Bid Price for the five trading days
prior to the closing date of a Transaction which entitles the Consultant
to receive such fees, or (ii) $7.50.
Michael Palmer, President of Vantage Capital, Inc., is also the Chief
Executive Officer and on the Board of Directors of eSat, Inc., and
therefore the possibility of conflict of interest exists. In the event
of a conflict arises and if for any reason Vantage is unable to continue
performing the services as per the terms of the Consulting Agreement,
Corporate Financial Enterprises shall act in Vantage Capital, Inc.'s
stead. Corporate Financial Enterprises will assume all the duties and
obligations set forth in the Consulting Agreement and shall be entitled
to receive the benefits related thereto. eSat, Inc. waives any conflict
of interest that may arise from a relationship between Consultant and
any entity which Consultant is affiliated with.
<PAGE> 87
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 1998
Note K - Subsequent Events (continued)
Subsequent to June 30, 1999, eSat, Inc. (the "Company"), sold 2,000,000
shares of 12% Convertible Preferred Stock to Corporate Financial
Enterprises, Inc. and Vantage Capital, Inc. (the "Purchasers"), in equal
allotments of 1,000,000 shares each. Purchasers purchased 2,000,000
shares of 12% Convertible Preferred Stock ("the Preferred Stock") for
the sum of $4,000,000, payable pursuant to a promissory note providing
for eight equal monthly payments of $500,000, commencing on the Closing
Date, and funding on the 17th of each month thereafter. The Preferred
Stock has a stated value and liquidation preference of $2.00 per share,
bears cumulative dividends at the rate of 12% per annum, and is
convertible into shares of Common Stock of the Company (the "Common
Stock") at the lessor of (a) the rate of $2.00 per share of Common
Stock, or (b) 70% of the bid price of the Common Stock on the date of a
notice to convert, as reported by the exchange upon which the Common
Stock is then listed. The Preferred Stock contains certain anti-dilution
and price protection provisions, and has piggyback registration rights.
Subsequent to June 30, 1999, a Warrant Agreement (the "Agreement") was
entered into on September 15, 1999 between eSat, Inc. (the "Company")
and Corporate Financial Enterprises, Inc. (the "Consultant"). The
Company granted to Consultant Warrants to purchase 600,000 shares of
Common Stock equal to the Exercise Quantity, as may be adjusted from
time to time as set forth in the Agreement. The Warrant holder has the
right to exercise the warrants at any time and from time to time after
December 31, 2000 until September 1, 2009.
Note L - 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 common stock,
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> 88
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 1998
Note L - Related Party Transactions (continued)
During the six months ended June 30, 1999, the Company granted options
to officers, directors and others classified as insiders at strike
prices ranging from $2.64 to $17.41, expiring three to five years from
the date of issuance. $1,228,868 in other compensation expense was
recorded in association with the granting of these options in accordance
with APB No. 25.
Throughout the history of the Organization, 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. As of June 30, 1998 total indebtedness to
related parties consisted of notes payable totaling $14,500.
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 consideration for
the extension of the original loan.
Subsequent to June 30, 1999 the Company entered into an Agreement with
Vantage Capital, Inc., which is wholly owned by Michael Palmer. Mr.
Palmer is Chief Executive Officer of eSat, Inc. and serves on its Board
of Directors. For details to this agreement see Note K.
Note M - Income Taxes
Total Federal and State income tax expense for the six months ended June
30, 1999 and 1998 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 six months ended June 30, 1999 and 1998, there is no difference
between the federal statutory tax rate and the effective tax rate.
Note N - Notes Receivable
As of June 30, 1999 and 1998 the Company has notes receivable
outstanding, detailed as follows:
<TABLE>
<CAPTION>
1999 1998
------------ -------
<S> <C> <C>
Note Receivable from employee, interest
Of 0% per annum, a deed of trust
with assignment has been pledged to
collateralize this obligation. $ 250,000 $ 0
Note receivable from a corporation,
18% per annum, no security has been
pledged to collateralize this obligation. 0 15,000
</TABLE>
<PAGE> 89
ESAT, INC.
(FORMERLY KNOWN AS TECHNOLOGY GUARDIAN, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999 AND 1998
Note N - Notes Receivable (continued)
<TABLE>
<CAPTION>
1999 1998
------------ -------
<S> <C> <C>
Note receivable from a corporation,
0% per annum, no security has been
pledged to collateralize this obligation. 0 7,500
------------ -------
Total $ 250,000 $22,500
============ =======
</TABLE>
Note O - Going Concern
The Company as of June 30, 1999 has had recurring operating losses, is
experiencing working capital deficiencies and has had significant bad
debts from accounts receivable. It is uncertain at this time whether the
Company will be able to continue as a going concern.
Management has prepared the following plan in order to address these,
and other operating issues: On September 15, 1999 the Company entered
into an agreement with Vantage Capital, Inc. for an equity investment in
the amount of $4,000,000 through the sale of two million shares of 12%
Convertible Preferred Shares. Vantage has already delivered the first
$500,000 of the funding as of September, 1999, the remaining is to be
paid in installments over the next seven months.
In addition, management has temporarily reduced its workforce by forty
percent and made other operational cuts in order to reduce its operating
capital requirements.
The Company has deferred the construction of its satellite uplink
facility until such time as it has sufficient investment capital and a
customer base that will yield an adequate utilization factor.
The Company feels that with the reduction in overhead, personnel,
operating expenses and deferral of capital spending, along with the
recent infusion of operating capital and an anticipated increase in
sales, that they will be able to continue as a going concern.
<PAGE> 90
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: November 8, 1999 By /s/ Michael C. Palmer
Michael C. Palmer, Chief Executive Officer
EXHIBIT INDEX
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------
Number Description Page
<S> <C> <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.
- - ------------------------------------------------------------------------------------------
(10) a.
- - ------------------------------------------------------------------------------------------
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. Vantage Capital Consulting Agreement, incorporated by reference
from Exhibit (10.i) to Form 10 filed by the Company on
October 29, 1999.
- - ------------------------------------------------------------------------------------------
(23) Consent of Independent Accountants.
</TABLE>
Page 45
<PAGE> 91
<TABLE>
<S> <C> <C> <C>
- - ------------------------------------------------------------------------------------------
j. 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
- - ------------------------------------------------------------------------------------------
</TABLE>
Page 46
<PAGE> 1
EXHIBIT 23
LICHTER AND ASSOCIATES
Certified Public Accountants
November 8, 1999
ESat, Inc.
16520 Harbor Boulevard
Building G
Fountain Valley, CA 92708
Re: Consent of Independent Accountants
Dear Mr. Noblett:
We consent to the incorporation of our independent accountant's report in eSat,
Inc.'s Form 10 as it relates to our review report dated October 22, 1999, for
the six months ended June 30, 1999, and to our audit report dated October 22,
1999, for the year ended December 31, 1998.
Sincerely,
/s/ Lawrence P. Lichter
