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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File Number 000-26039
eSAT, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 95-0344604
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 UNIVERSAL CITY PLAZA, SUITE 1130, UNIVERSAL CITY, CA 91608
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(Address of principal executive offices, including zip code)
(818) 464-2600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
PAR VALUE $.001 21,818,990
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(Class of Common Stock) (Outstanding at May 8, 2000)
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eSAT, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NUMBER
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999 3
Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 20
SIGNATURE 21
</TABLE>
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eSAT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
CURRENT ASSETS: (UNAUDITED)
<S> <C> <C>
Cash and cash equivalents $1,053,742 $3,458,561
Accounts receivable, net 540,064 18,669
Inventory, net 395,182 135,189
Deposits 317,385 420,747
Other current assets 78,697 23,066
---------- ----------
Total current assets 2,385,070 4,056,232
---------- ----------
PROPERTY AND EQUIPMENT, NET 879,035 749,744
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OTHER ASSETS:
Note receivable - employee 142,139 250,000
Other assets 96,121 100,493
Media licenses, net 235,010 --
---------- ----------
473,270 350,493
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$3,737,375 $5,156,469
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
CURRENT LIABILITIES: (UNAUDITED)
<S> <C> <C>
Accounts payable $ 1,050,977 $ 791,467
Accrued expenses 366,436 161,713
Unearned revenue 74,052 78,161
Current portion of obligations
under capital lease 22,714 28,401
Other current liabilities -- --
Payroll taxes payable -- --
Commission payable -- 160,000
Note payable related party -- 90,250
Severance pay payable -- 90,000
Settlement payable 59,866 83,866
Current portion of accrued media licenses 135,357 --
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Total current liabilities 1,709,402 1,483,858
------------ ------------
LONG-TERM LIABILITIES 62,976 59,416
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COMMITMENTS AND CONTINGENCIES -- --
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock - Series C -
cumulative, fully participating
convertible, $0.01 par value
Authorized - 50,000 shares Issued
and outstanding - 50,000 shares
(Aggregate liquidation preference
$4,999,500 in 1999) 500 500
Preferred stock - Series A,
cumulative, fully participating,
convertible, $0.01 par value
Authorized - 2,000,000 shares
Issued and outstanding - 1,000,000
(Aggregate liquidation preference
$1,990,000 in 1999) 10,000 10,000
Common stock - $0.001 par value
Authorized - 50,000,000 shares
Issued and outstanding - 18,345,214
shares at December 31, 1999 18,472 18,345
Additional paid-in capital 22,088,700 25,764,947
Retained deficit (20,298,024) (20,899,587)
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1,819,648 4,894,205
Less: Subscriptions receivable (558,510) (1,558,510)
Minority interest in equity of subsidiary 703,859 277,500
------------ ------------
Total stockholders' equity 1,964,997 3,613,195
------------ ------------
$ 3,737,375 $ 5,156,469
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</TABLE>
The accompanying notes are an integral part of the financial statements.
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eSAT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
SALES $ 563,310 $ 86,352
COST OF SALES 547,452 287,436
------------ ------------
Gross margin 15,858 (201,084)
GENERAL AND ADMINISTRATIVE
EXPENSES 2,753,738 1,342,204
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Loss from operations (2,737,880) (1,543,288)
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OTHER INCOME (EXPENSE)
Compensation adjustment recognized
under APB 25 3,315,787 13,149,509
Other income 15,088 14,082
Interest income 10,355 31,159
Gain on sale of assets -- 675
Minority interest in loss of subsidiary 19,941 --
Interest expense (10,061) (7,148)
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3,351,110 13,188,277
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Income before income taxes 613,230 11,644,989
PROVISION FOR INCOME TAXES -- 800
------------ ------------
Net income $ 613,230 $ 11,644,189
============ ============
EARNINGS PER COMMON SHARE -- BASIC:
Net income $ 0.03 $ 0.63
============ ============
EARNINGS PER COMMON SHARE -- DILUTED:
Net income $ 0.03 $ 0.45
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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eSAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION> THREE MONTHS ENDED
MARCH 31,
2000 1999
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 613,230 $ 11,644,189
Adjustments to reconcile income (loss) to net cash used
in operating activities-
Noncash items included in net income (loss):
Depreciation and amortization 107,731 40,089
Gain on sale of assets -- (675)
Compensation - stock issued for services 539,667 --
Compensation adjustment recognized under APB 25 (3,315,787) (13,149,509)
Minority interest in subsidiary (19,941) --
Bad debt expense 107,861 --
Net change in operating assets and liabilities (533,412) (38,064)
------------ ------------
Net cash used in operating activities (2,500,651) (1,503,970)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of fixed assets (265,091) (147,582)
Proceeds from sale of fixed assets -- 13,580
Increase in notes receivable -- 15,000
Purchase of stock -- --
------------ ------------
Net cash used in investing activities (265,091) (119,002)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in notes payable (69,001) --
Decrease in capital lease obligations (4,710) (4,247)
Preferred stock dividend paid (11,666) --
Proceeds from issuance of minority interest in subsidiary 446,300 --
Proceeds from issuance of preferred stock -- --
Proceeds from issuance of common stock -- 1,721,348
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Net cash provided by financing activities 360,923 1,717,101
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,404,819) 94,129
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,458,561 2,567,697
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,053,742 $ 2,661,826
============ ============
</TABLE>
See accompanying notes.
5
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ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000 AND 1999 (UNAUDITED)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements of eSat, Inc. (the "Company") include all
adjustments (consisting only of normal recurring adjustments) considered
necessary to present fairly its financial position as of March 31, 2000
and 1999, and the results of operations, stockholders' equity and cash
flows for the three months ended March 31, 2000 and 1999. The results of
operations for the three months ended March 31, 2000 and 1999, are not
necessarily indicative of the results to be expected for the full year
or for any future period.
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant inter-company transactions
and balances have been eliminated in consolidation. The consolidated
financial statements and notes included herein should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Stock-Based Compensation
The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of APB 25, Accounting
for Stock Issued to Employees, and complies with the disclosure
provisions of SFAS 123, Accounting for Stock-Based Compensation.
Under APB 25, compensation cost is recognized on fixed plans 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. For variable plans, APB 25
requires recognition of compensation cost over the vesting period
based on the difference, if any, on the period-end date between the
fair value of the Company's stock and the amount an employee must pay
to acquire the stock. Forfeitures of variable plan options result in
a reversal of previously recognized compensation cost.
Due to the large number of variable plan options granted by the
Company in 1998 and the significant difference between the exercise
price of those options and the fair value of the Company's stock at
December 31, 1998, the Company recognized a substantial amount of
non-cash compensation cost in 1998. Subsequently, a large number of
forfeitures and the re-pricing to market of those options in 1999 and
2000 caused a considerable reversal of the previously recognized
non-cash compensation cost. The resulting net income for the three
month periods ended March 31, 2000 and 1999, should not be construed
as profitable operations during those periods (See Note 3 for Going
Concern disclosure).
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ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000 AND 1999 (UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b) Net Earnings or Loss Per Share
The following data show the amounts used in computing earnings per
share and the effect on income and the weighted average number of
shares of dilutive potential common stock:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Income available to common stockholders before
adjustments $ 613,230 $11,644,189
Adjustments (11,667) --
------------ -----------
Income available to common stockholders used in
basic EPS $ 601,563 $11,644,189
============ ===========
Weighted average number of common
shares used in basic EPS 18,447,110 18,641,509
Effect of dilutive securities:
Stock options 1,317,855 5,713,264
Warrants 2,008,281 1,542,000
Convertible preferred stock - Series A 550,000 --
Convertible preferred stock - Series C 2,000,000 --
------------ -----------
Weighted average number of common shares and
dilutive potential common stock used in
dilutive EPS 24,323,246 25,869,773
============ ===========
</TABLE>
The following transactions occurred after March 31, 2000, which, had
they taken place during the first quarter, would have changed the
number of shares used in the computations of earnings per share: (1)
options to purchase 2,419,712 common shares were issued to employees;
(2) warrants to purchase 1,539,246 common shares were awarded to
non-employees; and (3) on April 13, 2000 the Company issued 75,000
shares of Series D convertible preferred stock which is convertible
into common stock at a conversion price equal to the lesser of 125%
of the closing bid price of the common stock on the trading day
immediately preceding the issue date or 85% of the 5-day average
quoted price for the 5 trading days immediately preceding the
conversion notice date; provided however that for a period ending 15
months from the issue date the conversion price shall not be less
than $2.50 per share.
7
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ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000 AND 1999 (UNAUDITED)
(3) GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which
contemplate continuation of the Company as a going concern; however, the
Company has sustained substantial operating losses in recent years. In
view of this matter, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet
its financing requirements, and the success of its future operations.
Management believes that actions presently being taken to revise the
Company's operating and financial requirements provide the opportunity
for the Company to continue as a going concern. In April 2000, the
Company sold $7,500,000 of Series D preferred stock to its existing
Series C preferred shareholder. A $12.5 million equity line of credit is
available with this same shareholder. The Company feels that these and
subsequent financing arrangements coupled with product and services
market introductions will provide sufficient cash to meet its operating
and business expansion requirements in 2000.
(4) NOTE RECEIVABLE - EMPLOYEE
Note receivable - employee consists of a $250,000 note receivable from
an employee dated June 9, 2000, due in monthly payments of $1,580,
including interest at 6.5%, secured by personal property of the
employee, matures June 9, 2030. Subsequent to year-end the employee left
the Company. The former employee will forfeit to the Company 34,988
shares of the Company's stock, in exchange for the Company's forgiveness
of the debt. At March 31, 2000 a valuation allowance of $107,867 was
placed on the note receivable.
(5) SUBSEQUENT EVENTS
On April 12, 2000 the Company rescinded its letter of intent to redeem
all outstanding share of Series C Preferred Stock. The Company issued
Amended and Restated Certificate of Designations for the Series C
Convertible Preferred Stock.
On April 13, 2000 all of the outstanding shares of Series A 12%
convertible preferred stock were converted into 550,000 shares of common
stock. The conversion price was $2 per share.
In April 2000 the Company agreed to accept 34,988 shares of Company
stock held by a former employee in payment of his $250,000 employee note
receivable. The value of the stock was $142,139 at that date.
8
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ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000 AND 1999 (UNAUDITED)
(5) SUBSEQUENT EVENTS (CONTINUED)
On April 13, 2000 the Company acquired InterWireless, Inc. in a business
combination accounted for as a purchase. The purchase price of
$4,045,662 exceeded the fair value of the net assets by $4,000,000,
which will be amortized as goodwill using the straight-line method over
7 years. The results of operations of InterWireless, Inc. will be
included with the results of the Company beginning April 13, 2000.
On April 13, 2000 the Company acquired all of the outstanding common
stock of PacificNet Technologies, Inc. in exchange for 2,750,000 shares
of the Company's common stock, in a business combination accounted for
as a pooling of interests. Historical financial information presented in
future reports will be restated to include PacificNet Technologies, Inc.
Assuming these acquisitions had occurred on January 1, 2000 the
Company's net sales, net income, basic and diluted earnings per share
would have been $1,605,967, $444,488, $0.02 and $0.02 respectively
for three months ended March 31, 2000.
After March 31, 2000 the private placement agreement for the sale of
$12,000,000 of common stock was cancelled.
On April 13, 2000 the Company issued $75,000 shares of 6% Series D
preferred stock. This stock has a par value of $0.001,is fully
participating and convertible into shares of common stock . The proceeds
were partially used to finance the acquisition of InterWireless.
9
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eSAT, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues totaled $563,310 and $86,352 for the three months ended March
31, 2000 and 1999, respectively. The 2000 revenue reflects primarily media
billings and "click-through" revenue generated by the Company's i-Xposure
subsidiary, and to a lesser extent, sales of the Company's disaster recovery
products and services. The prior year balance reflects sales of the Company's
first-generation satellite products and services.
For the three months ended March 31, 2000 and 1999, cost of sales was
$547,452 and $287,436, respectively. The 2000 cost of sales reflects satellite
access fees and various distribution and provider service fees. The 1999 balance
is comprised primarily of satellite access fees and hardware costs.
General and administrative expenses totaled $2,753,738 for the period
ended March 31, 2000 as compared to $1,342,204 for the prior year period. The
increase in expenses is due to higher levels of staffing and compensation,
increases in professional fees paid to outside attorneys and accountants,
increased research and development expenditures and the recognition of SFAS 123
expense relating to the issuance of common stock warrants.
Other income, which represents primarily a compensation adjustment
recognized under APB 25, totaled $3,351,787 and $13,188,277 for the three
months ended March 31, 2000 and 1999, respectively.
10
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eSAT, INC.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have historically been financed from the sale of
preferred and common stock. At March 31, 2000, the Company had cash and cash
equivalents on hand of $1,053,742 and working capital of $675,668 as compared to
cash and cash equivalents of $3,458,561 and working capital of $2,572,374 at
December 31, 1999.
Net cash used in operating activities of $2,500,651 and $1,503,970 for
the three months ended March 31, 2000 and 1999, respectively, is attributable
primarily to operating losses as adjusted for compensation expense recognized
under APB 25 and FAS 123.
Net cash used in investing activities of $265,091 and $119,002 for the
three months ended March 31, 2000 and 1999, respectively, is attributable
primarily to the purchase of fixed assets.
Net cash provided by financing activities of $360,923 for the three
months ended March 31, 2000 is due primarily to the sale of common stock of our
i-Xposure subsidiary as offset by a repayment of notes payable. Net cash
provided by financing activities of $1,717,101 in the prior year reflects net
proceeds from the sale of common stock.
To the extent our revenues increase in the remainder of the fiscal year,
we anticipate significant increases in operating expenses, working capital and
capital expenditures. The cost to purchase additional fixed assets, primarily
satellite transmission and receiving equipment, and to finance working capital
requirements is approximately $20,000,000. We also anticipate the need to
construct our own network of Network Operations Centers (NOCs). An NOC is the
location of the operations equipment, which receives and transmits data from and
to a satellite. The construction of an NOC costs approximately $2,000,000 per
location.
In April 2000, all of the outstanding Series A Preferred Stock was
converted into 550,000 shares of common stock.
In April 2000, we entered into an agreement with the holder of the
Series C Preferred Stock for the purpose of raising additional capital. Pursuant
to that agreement, a total of $7,500,000 of Series D 6% Convertible Preferred
Stock was sold. In addition to the shares purchased, the agreement calls for the
issuance of warrants to purchase 1,283,422 shares of common stock at an initial
exercise price of $3.9844 per share.
We believe that the receipt of the net proceeds from the preferred stock
described above plus cash generated internally from sales and externally from
other financing arrangements will be sufficient to satisfy our future operating,
working capital and other cash requirements for at the remainder of the fiscal
year. We believe that we have sufficient internal and external resources to fund
current operations, develop new or enhanced products and/or services, and to
respond to competitive pressures and acquire complementary products, businesses
or technologies.
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eSAT, INC.
IMPACT OF YEAR 2000
We experienced no interruptions in our operations when the calendar year
changed to the year 2000. We believe that our products and services, and
products which we purchase from third party vendors, are designed to operate
continuously regardless of date changes.
12
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eSAT, INC.
RISK FACTORS
WE HAVE REPORTED LOSSES FROM OPERATIONS FOR OUR LAST THREE YEARS AND FOR THE
THREE MONTHS ENDED MARCH 31, 2000, AND, IF WE DO NOT BECOME PROFITABLE, OUR
BUSINESS WILL BE ADVERSELY AFFECTED AND THE VALUE OF YOUR INVESTMENT WILL
DECLINE.
For the three months ended March 31, 2000, we incurred a loss from
operations of $2,737,880, including all research and development costs. For
the fiscal year ended December 31, 1999, we incurred a loss from operations
of $8,925,896 as compared to a loss from operations of $2,957,991 for the
fiscal year ended December 31, 1998. The losses were primarily due to: (i)
employee compensation, which increased because of additional sales and
operations staff hired in 1998 in anticipation of future growth of our
operations; (ii) expenses related to marketing; and (iii) lack of product
sales. In addition, we incurred significant research and development costs
associated with new products. There can be no assurance that we will be able
to generate sufficient revenues to operate profitably in the future or to
pay our 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."
The Company's net income in 1999 and for the three months ended March 31,
2000 are primarily a result of its method of accounting for stock-based
compensation. The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of APB 25, Accounting for
Stock Issued to Employees, and Complies with the disclosure provisions of
SFAS 123, Accounting for Stock-Based Compensation. Under APB 25,
compensation cost is recognized on fixed plans 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. For variable plans, APB 25 requires recognition of compensation cost
over the vesting period based on the difference, if any, on the period-end
date between the fair value of the Company's stock and the amount an
employee must pay to acquire the stock. Forfeitures of variable plan options
result in a reversal of previously recognized compensation cost.
Due to the large number of variable plan options granted by the Company in
1998 and the significant difference between the exercise price of those
options and the fair value of the Company's stock at December 31, 1998, the
Company recognized a substantial amount of non-cash compensation cost in
1998. Subsequently, a large number of forfeitures and the re-pricing to
market of those options in 1999 caused a considerable reversal of the
previously recognized non-cash compensation cost. The resulting net income
for the three month periods ended March 31, 2000 and 1999 should not be
construed as profitable operations during those periods.
WE DEPEND ON SATELLITE TRANSMISSION. SATELLITE FAILURE COULD HAVE A
SUBSTANTIAL NEGATIVE EFFECT ON OUR BUSINESS OPERATIONS.
We currently use a single satellite to provide 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. If there is a failure of
a transponder, the satellite operator is contractually obligated to move us
to another transponder. This would create a minimum interruption to
customers, likely less than 24 hours. If the satellite itself completely
fails, we will have to move our services to another satellite. Our
transmissions conform to industry standards so there are several possible
alternative satellites. Our current satellite 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 us approximately $300 per customer. In the event of any
service disruption due to satellite failure, our 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 our GSI(TM) equipment and related satellite Internet service, this
would be equal to $16.50 per day per customer. Nexstream based business
continuity customers might not be impacted but could cost $27.00 per day.
Other Nexstream customers would represent a potential loss of between $27.00
and $155.00 per day depending on the level of service subscribed. We intend
to install a second U.S. Network Operating Center ("NOC") in the first half
of fiscal 2000. This second NOC will be located in Los Angeles, California,
and will utilize a different satellite than the existing NOC. This second
NOC and satellite provides certain redundancies in the event of a failure.
In the event of a satellite failure, we could also be subject to
loss-of-business claims, due to the reliance by business customers on the
satellite Internet services we provide. A sustained disruption in satellite
service could materially impact our ability to continue operations.
13
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eSAT, INC.
WE HAVE A LIMITED OPERATING HISTORY
Any of these occurrences could have a material adverse effect on our
business, financial condition and operating results. Each of our products faces
intense competition from multiple competing vendors. Our principal competitors
include Loral, Inc., Hughes Network Systems and Spacenet. Many of our current
and potential competitors have:
- longer operating histories,
- greater name recognition,
- access to larger customer bases, or
- substantially greater resources than we have.
As a result, our principal competitors may respond more quickly than we
can to new or changing opportunities and technologies. For all of the reasons
stated above, we may be unable to compete successfully against our current and
future competitors.
WE MAY HAVE INSUFFICIENT CAPITAL FOR FUTURE OPERATIONS WHICH WOULD DIMINISH THE
VALUE OF YOUR INVESTMENT.
Based on current proposed plans and assumptions relating to our
operations, we anticipate that current cash reserves, together with projected
cash flow from operations and the sale of additional securities, will be
sufficient to satisfy our contemplated cash requirements through fiscal 2000.
Thereafter, we will require substantial additional financial resources to fund
our operations. The expansion into new product areas will also require
substantial funding. The failure to acquire additional funding when required
will have a material adverse effect on our business prospects. Without the
proper financing of customer contracts by a finance company or additional
equity, we are likely to have difficulty in sustaining on-going operations.
OUR FINANCIAL STATEMENTS CONTAIN A "GOING CONCERN" QUALIFICATION.
The audit reports accompanying our Financial Statements for the years
ended December 31, 1998 and 1999 contain a qualification that certain conditions
indicate that we may 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 2 to the financial statements indicates that substantial operating
losses account for this uncertainty. Many investment bankers and investors view
companies with a "going concern" qualification as less desirable for investment.
Accordingly, we may have a more difficult time raising equity capital or
borrowing capital at all on favorable terms. Our suppliers might be less willing
to extend credit. Our potential customers might be less willing to purchase our
products and services if they believe that we will not be viable enough to
provide service, support, back-up, and follow-on products when needed.
Furthermore, we might be disadvantaged in recruiting employees who might be
concerned about the stability of employment with us. Therefore, the "going
concern" qualification can have severe adverse consequences on us.
14
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eSAT, INC.
WE ARE DEPENDENT ON SUCCESSFUL NEW PRODUCTS AND PRODUCT ENHANCEMENT
INTRODUCTIONS AND MAY SUFFER PRODUCT DELAYS.
Our 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 older, less efficient products.
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, our business, operating results and financial condition could be
materially adversely affected. The process of developing Internet access
products such as ours 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 our business, operating results and financial condition.
WE HAVE NO ASSURANCE OF MARKET ACCEPTANCE OF OUR PRODUCTS AND SERVICES. IF WE
ARE UNABLE TO RAISE MARKET AWARENESS OF OUR PRODUCTS AND SERVICES, WE MAY
EXPERIENCE DECLINING OPERATING RESULTS WHICH WOULD DIMINISH THE VALUE OF YOUR
INVESTMENT.
We are at an early stage of development and our earnings growth depends
primarily upon market acceptance of our products and services. There can be no
assurance that our 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 our potential new
products will be capable of being produced in commercial quantities at
reasonable costs or that they will achieve customer acceptance.
There can be no assurance that our products and services will be successfully
marketed. In addition to our own direct sales force, we are dependent on
value-added resellers and distributors to market our products. There is no
assurance that any distributor or other reseller will be successful in marketing
our products.
Our success is dependent in part on our ability to sell our products and
services 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.
In sales to governmental agencies, nonbusiness factors often enter into the
purchase decision. Such factors 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.
We do not have sufficient experience in marketing our products to determine the
optimum distribution methods. It is unclear whether marketing through
distributors or value-added resellers or mass retailers will result in
acceptable sales levels. Accordingly, as we learn
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eSAT, INC.
more, we may have to revise our sales, distribution, and marketing strategies
and implementation.
WE MIGHT BECOME SUBJECT TO FURTHER GOVERNMENT REGULATION WHICH COULD HARM OUR
PROSPECTS.
Except for a license from the Federal Communications Commission, we are
not currently subject to direct regulation by any government agency in the
United States, other than regulations applicable to businesses generally. There
are currently few laws or regulations directly applicable to access to or
commerce on the Internet. However, 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. Such laws or regulations
could limit the growth of the Internet, which could in turn decrease the demand
for our proposed products and services or increase our cost of doing business.
Any new legislation or regulation or the application of existing laws and
regulations to the Internet in unexpected ways could have an adverse effect on
our business and prospects.
WE MIGHT FACE LIABILITY FOR INFORMATION OBTAINED OR DISTRIBUTED THROUGH THE
PRODUCTS AND SERVICES WE PROVIDE.
Because materials may be downloaded by the Internet services which we
operate or facilitate and may be subsequently distributed to others, there is a
potential that claims will be made against us for defamation, negligence,
copyright or trademark infringement, personal injury or other theories based on
the nature and content of such materials. Such claims have sometimes been
successful against Internet service providers. Our general liability insurance
might not cover potential claims of this type or might not be adequate to
indemnify us for all liability that may be imposed. Any imposition of liability
or legal defense expenses that are not covered by insurance or that are in
excess of insurance coverage could have a material adverse effect on our
business, operating results and financial condition.
LOSS OF KEY MEMBERS OF OUR SENIOR MANAGEMENT COULD ADVERSELY AFFECT OUR BUSINESS
AND PROSPECTS.
Our success will be dependent largely upon the personal efforts of our
Chief Executive Officer, Michael C. Palmer, and our Chief Operating Officer,
Chester L. Noblett, as well as other senior managers. The loss of their services
could have a material adverse effect on our business and prospects. We have no
life insurance on any of our officers. Mr. Palmer's and Mr. Noblett's services
are governed by agreements. Our success is also dependent upon our 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 we 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 us.
16
<PAGE> 17
eSAT, INC.
IF OUR COMMON STOCK IS SUBJECT TO PENNY STOCK RULES, YOU MAY HAVE GREATER
DIFFICULTY SELLING YOUR SHARES.
The Securities Enforcement and Penny Stock Reform Act of 1990 applies to
stock characterized as "penny stocks," and requires additional disclosure
relating to the market for penny stocks in connection with trades in any stock
defined as a penny stock. The Securities and Exchange Commission has adopted
regulations that generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
The exceptions include exchange-listed equity securities and any equity security
issued by an issuer that has
- net tangible assets of at least $2,000,000, if the issuer has
been in continuous operation for at least three years;
- net tangible assets of at least $5,000,000, if the issuer has
been in continuous operation for less than three years; or
- average annual revenue of at least $6,000,000 for the last three
years.
Unless an exception is available, the regulations require the delivery,
prior to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the associated risks.
If our financial condition does not meet the above tests, then trading
in the common stock will be covered by Rules 15g-1 through 15g-6 and 15g-9
promulgated under the Securities Exchange Act. Under those rules, broker-dealers
who recommend such securities to persons other than their established customers
and institutional accredited investors must make a special written suitability
determination for the purchaser and must have received the purchaser's written
agreement to a transaction prior to sale. These regulations would likely limit
the ability of broker-dealers to trade in our common stock and thus would make
it more difficult for purchasers of common stock to sell their securities in the
secondary market. The market liquidity for the common stock could be severely
affected.
17
<PAGE> 18
WE WILL PAY NO DIVIDENDS TO YOU.
We have not paid, and do not expect to pay, any dividends on common stock in
the foreseeable future.
FORWARD-LOOKING STATEMENTS
YOU SHOULD NOT RELY ON OUR FORWARD-LOOKING STATEMENTS.
This prospectus contains forward-looking statements that involve risks
and uncertainties. Discussions containing forward-looking statements may be
found in the material set forth under "Prospectus summary," "Management's
discussion and analysis of financial condition and results of operations,"
and "Business," as well as within this prospectus generally. In addition,
when used in this prospectus, the words "believes," "intends," "plans,"
"anticipates," "expects," and similar expressions are intended to identify
forward-looking statements. Forward-looking statements are subject to a
number of risks and uncertainties. Actual results could differ materially
from those described in the forward-looking statements as a result of the
risk factors set forth and the information provided in this prospectus
generally. We do not intend to update any forward-looking statements.
18
<PAGE> 19
eSAT, INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
The Company did not file any current reports on Form 8-K for the quarterly
period ended March 31, 2000. Subsequent to quarter end, the Company filed
the following document:
(i) A current report on Form 8-K, dated April 13, 2000 reporting that on
April 13, 2000 it acquired all of the outstanding common stock of
PacificNet Technologies, Inc. and InterWireless, Inc., and also that the
Company has sold 75,000 shares of Series D 6% Convertible Preferred
Stock and related warrants to Wentworth, LLC.
19
<PAGE> 20
eSAT, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
eSAT, INC.
Date: May 11, 2000 By: /s/ Mark S. Basile
------------- -------------------------------
Mark S. Basile
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
20
<PAGE> 21
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,053,742
<SECURITIES> 0
<RECEIVABLES> 540,064
<ALLOWANCES> 0
<INVENTORY> 395,182
<CURRENT-ASSETS> 2,385,070
<PP&E> 879,035
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,737,375
<CURRENT-LIABILITIES> 1,709,402
<BONDS> 0
0
10,500
<COMMON> 18,472
<OTHER-SE> 1,936,025
<TOTAL-LIABILITY-AND-EQUITY> 3,737,375
<SALES> 563,310
<TOTAL-REVENUES> 563,310
<CGS> 547,452
<TOTAL-COSTS> 547,452
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,061
<INCOME-PRETAX> 613,230
<INCOME-TAX> 0
<INCOME-CONTINUING> 613,230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 613,230
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
