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As filed with the Securities and Exchange Commission on June 16, 2000
Registration No. 333-95451
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Amendment No. 3 to Form S-1)
ESAT, INC.
(Name of registrant as specified in its charter)
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Nevada 7370 95-0344604
(State or Jurisdiction of (Primary Standard Industrial (IRS Employer
Organization or Incorporation) Classification Code Number) Identification Number)
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10 Universal City Plaza, Suite 1130
Universal City, CA 91608
818-464-2600
(Address and telephone number of principal
executive offices and principal place of business)
Michael C. Palmer, President
eSat, Inc.
10 Universal City Plaza, Suite 1130
Universal City, CA 91608
818-464-2600
(Name, address and telephone number of agent for service)
Copy to:
David R. Decker
Freya L. Christian
Arter & Hadden LLP
725 South Figueroa Street, 34th Floor
Los Angeles, California 90017
Approximate date of commencement of proposed sale to the public: AS SOON AS
PRACTICAL AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Proposed Maximum Proposed Maximum Amount of
Securities to Amount Offering Price Aggregate Registration
be Registered to be Registered Per Share Offering Price Fee
------------------------ ---------------- ---------------- ---------------- ------------
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Common Stock, par value $.001 per
share, Underlying Series C 6%
Convertible Preferred Stock(3).... 2,000,000 $ 2.9531 $ 5,906,200 $ 1,559(1)
--------- ------------ --------------- ------------
Common Stock, par value $.001 per
share, Issuable upon Exercise of
Warrants Issued in Connection with
the Issuance of Series C 6%
Convertible Preferred Stock(3).... 477,754 $ 4.617 $ 2,205,790 $ 582(2)
--------- ------------ -------------- ------------
Common Stock, par value $.001 per
share, Underlying Series D 6%
Convertible Preferred Stock(3).... 3,000,000 $ 2.9531 $ 8,859,300 $ 2,339(2)
--------- ------------ -------------- ------------
Common Stock, par value $.001 per
share, Issuable upon Exercise of
Warrants Issued in Connection with
the Issuance of Series D 6%
Convertible Preferred Stock(3).... 2,566,844 $ 3.9844 $ 10,227,333 $ 2,700(2)
--------- ------------ -------------- ------------
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Common Stock, par value $.001 per
share, issuable upon exercise of
warrants for Selling Shareholder(3)..... 159,286 $ 3.139 $ 499,999 $ 132(2)
--------- ------------ -------------- ------------
Common Stock, par value $.001 per
share, issuable upon exercise of
warrants for Selling Shareholder(3)..... 255,824 $ 2.9317 $ 749,999 $ 198(2)
--------- ------------ -------------- ------------
Common Stock, par value $.001 per
share, for Selling Shareholder.......... 50,000 $ 3.1875 $ 159,375 $ 42(1)
--------- ------------ -------------- ------------
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(1) Fee determined pursuant to Rule 457(c).
(2) Fee determined pursuant to Rule 457(g).
(3) Intended to cover additional shares of common stock which might be
issued pursuant to anti-dilution provisions.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 89a),
may determine.
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ESAT, INC.
CROSS-REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS OF FORM S-1
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Form S-1 Item Number
and Heading Caption in Prospectus
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1 Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus....... Outside Front Cover Page
2 Inside Front and Outside Back Cover Pages of
Prospectus................................... Inside Front and Outside Back Cover Pages
of Prospectus
3 Summary of Information, Risk Factors and
Ratio of Earnings to Fixed Charges........... Prospectus summary; Risk factors
4 Use of Proceeds.............................. Use of proceeds
5 Determination of Offering price.............. Not applicable
6 Dilution..................................... Not applicable
7 Selling Security Holders..................... Selling stockholders
8 Plan of Distribution......................... Plan of distribution
9 Description of Securities to Be Registered... Description of securities
10 Interest of Named Experts and Counsel........ Legal matters; Experts
11 Information with Respect to the Registrant
(a) Description of Business................. Business -- Overview
(b) Description of Property................. Business -- Description of property
(c) Legal Proceedings....................... Business -- Legal proceedings
(d) Market Price of and Dividends on the
Registrant's Common Equity and
Related Stockholder Matters............. Price range of common stock; Dividend
policy
(e) Financial Statements.................... Consolidated financial statements
(f) Selected Financial Data................. Selected consolidated financial data
(g) Supplementary Financial Information..... Not applicable
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Form S-1 Item Number
and Heading Caption in Prospectus
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(h) Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. Management's discussion and analysis of
financial condition and results of
operations
(i) Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.................... Management's discussion and analysis of
financial condition and results of
operations -- Change in accountants
(j) Quantitative and Qualitative
Disclosures about Market Risk........... Not applicable
(k) Directors and Executive Officers........ Management -- Directors and executive
officers
(l) Executive Compensation.................. Management -- Executive compensation
(m) Security Ownership of Certain
Beneficial Owners and Management........ Principal stockholders
(n) Certain Relationships and Related
Transactions............................ Certain transactions
12 Disclosure of Commission Position on Description of securities -- Director and
Indemnification for Securities Act officer liability and indemnification
Liabilities..................................
13 Other Expenses of Issuance and Part II -- Item 13 -- Other Expenses of
Distribution................................. Issuance and Distribution
14 Indemnification of Directors and Officers.... Part II -- Item 14 -- Indemnification of
Directors and Officers
15 Recent Sales of Unregistered Securities...... Part II -- Item 15 -- Recent Sales of
Unregistered Securities
16 Exhibits and Financial Statement Schedules... Part II -- Item 16 -- Exhibits and
Financial Statement Schedules
17 Undertakings................................. Part II -- Item 17 -- Undertakings
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SUBJECT TO COMPLETION, DATED JUNE 16, 2000
Prospectus
8,509,708 Shares
eSAT, INC.
Common Stock
Selling stockholders are offering up to 8,509,708 shares of common
stock. We will not receive any proceeds from the sale of this common stock. No
shares are being sold by the company at this time.
The selling stockholders may sell these shares from time to time in the
over-the-counter market or otherwise.
Our common stock is traded on the OTC Electronic Bulletin Board under
the symbol "ASAT," and on the Deutsche Borse AG Xetra(TM) (Frankfurt, Germany)
under the symbol "ES8." On June __, 2000, the last reported bid price of the
common stock on the OTC Electronic Bulletin Board was $______ per share.
INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED ON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
_______________, 2000
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You may rely only on the information contained in this prospectus. We
have not authorized anyone to provide information different from that contained
in this prospectus. Neither the delivery of this prospectus nor sale of shares
means that information contained in this prospectus is correct after the date of
this prospectus. This prospectus is not an offer to sell or solicitation of an
offer to buy these securities in any circumstances under which the offer or
solicitation is unlawful.
TABLE OF CONTENTS
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Page
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Prospectus summary......................................................................... 3
Risk factors............................................................................... 6
Forward-looking statements................................................................. 14
Use of proceeds............................................................................ 14
Price range of common stock................................................................ 14
Dividend policy............................................................................ 15
Capitalization............................................................................. 15
Selected consolidated financial data....................................................... 16
Management's discussion and analysis of financial condition and results of operations...... 18
Business................................................................................... 21
Management................................................................................. 31
Certain transactions....................................................................... 37
Principal stockholders..................................................................... 39
Selling stockholders....................................................................... 42
Description of securities.................................................................. 44
Shares eligible for future sale............................................................ 50
Plan of distribution....................................................................... 51
Legal matters.............................................................................. 52
Experts ................................................................................... 52
Additional information..................................................................... 52
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Until _______________, 2000 (40 days after the date of this prospectus),
all dealers effecting transactions in the common stock may be required to
deliver a prospectus. This is in addition to the obligations of dealers to
deliver a prospectus when acting as underwriters.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company, the risks of investing in our common stock,
and our financial statements and notes to those statements appearing elsewhere
in this prospectus.
OUR BUSINESS
We were incorporated in the State of Nevada on June 23, 1995 under the
name U.S. Connect 1995, Inc. On October 8, 1998, we became the surviving
corporation in a merger with Technology Guardian, Inc., a California
corporation. As a part of that merger, we changed our name to Technology
Guardian, Inc. We changed our name to eSAT, Inc. on January 26, 1999. In April
2000, we acquired the businesses of PacificNet Technologies, Inc. and
InterWireless, Inc.
Our principal executive offices are located at 10 Universal City Plaza,
Suite 1130, Universal City, California 91608. Our telephone number is
818-464-2600 and our fax number is 818-464-2799. Our Web site address is
www.esatinc.com. Information accessed on or through our Web site does NOT
constitute a part of this prospectus.
Our principal line of business consists of providing products and
services for long haul, or satellite, Internet access and data delivery. With
the recent acquisition of PacificNet and InterWireless, we are able to provide
last mile, or wireless and traditional cable, Internet service to our customers.
When combined with satellite delivery, wireless or traditional cable delivery
permits us to broadcast to a distant satellite reception dish and then
re-broadcast from that dish to customers without satellite reception capability.
Additionally, our i-Xposure desktop product provides customers with a desktop
management product which can be tailored to the needs of each customer. Our
customers are local, national and international businesses, educational
institutions and governmental agencies. In the future, we may expand our
services to the consumer market.
Our long haul, or satellite, Internet access product line is based on
our Nexstream(TM) gateway and our ChannelCasting(TM) services, which provide
existing single workplace computer networks (commonly known as local area
networks or LANs) with Internet access via a satellite based network. A
"gateway" is a specially designated computer which contains software that allows
LAN users to share an Internet access connection.
We commenced sales of the Nexstream product line in December 1999. This
product uses our satellite network for customer communications to and from
Internet web sites. The ChannelCasting(TM) service takes data from a single
source and distributes it to a prescribed user list. It is currently being
marketed although no sales have been completed. This service is designed to
provide the simultaneous broadcast of video and data files to multiple
destinations through use of our existing technology, as well as technology which
is under development. We plan to be a geographically diverse provider of
Internet services by establishing joint venture relationships in several
countries throughout the world.
Our last mile (wireless and conventional cable) Internet access products
and software solutions are delivered through our recently acquired subsidiaries,
PacificNet and InterWireless. PacificNet provides software support and managed
Internet access to individuals and businesses. InterWireless is a wireless
Internet service provider that provides both traditional and broadband wireless
Internet access services. We currently are able to provide wireless Internet
services only in Southern California, but plan to market the capability on a
national and international basis. Through these two subsidiaries, we will focus
on using technology to provide cost-effective, uniform Internet delivery without
geographic limitations.
Through i-Xposure, we are engaged in the development and marketing of a
personal interactive desktop management system which includes a variety of
personal productivity programs, as well as serving as an Internet access portal
when users are on-line.
In addition to our businesses described above, we are in the process of
developing another line of business through our subsidiary, Global Media
Technologies, Inc. which is focusing on the development of satellite-based
products which take advantage of our high-speed, high-quality video and data
delivery capabilities.
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THE OFFERING
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Shares offered.............................. 8,509,708 shares of common stock
Proceeds to us.............................. None. All sales will be for the benefit of
the selling stockholders
Common stock to be outstanding after the
offering.................................... 30,379,266 shares
OTC Electronic Bulletin Board symbol........ ASAT
Deutsche Borse AG Xetra(TM) (Frankfurt, ES8
Germany)
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In addition to 30,379,266 shares of common stock outstanding after the
offering, we may issue ___________ shares of common stock on exercise of other
outstanding warrants, and ___________ shares of common stock on exercise of
outstanding options.
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SUMMARY CONSOLIDATED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
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Unaudited
Year Ended three months ended
December 31, March 31,
-------------------------------------- -----------------------------
1999 1998 1997 2000 1999
RESTATED
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(in thousands except per share data)
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Net revenue........................... $ 423 $ 341 $1,201 $ 563 $ 86
Gross profit.......................... (1,009) (345) 856 16 (201)
Loss from operations.................. (8,926) (2,958) (434) (2,738) (1,543)
Net income (loss)..................... 73,199 (93,481) (454) 613 11,644
Basic earnings (loss) per share ...... 4.02 (5.81) (0.04) 0.03 0.63
Diluted earnings (loss) per share..... 3.08 (5.81) (0.04) 0.03 0.45
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CONSOLIDATED BALANCE SHEET DATA
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Unaudited
December 31, March 31,
1999 2000(1)
------------- -------------
(in thousands)
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Cash and cash equivalents................... $3,459 $1,054
Working capital............................ 2,572 676
Total assets............................... 5,156 3,737
Total stockholders' equity ................. 3,613 1,965
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(1) These amounts do not include the following events, which occurred in April
2000: receipt of net proceeds of $6,985,000 from the sale of 75,000 shares of
Series D 6% Convertible Preferred Stock at $100 per share; the acquisitions of
PacificNet Technologies, Inc. and InterWireless, Inc. for an aggregate of
$4,000,000 in cash plus 2,750,000 shares of common stock; and the conversion of
the Series A 12% Convertible Preferred Stock to common stock.
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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.
Our net income in 1999 and for the three months ended March 31, 2000 is
primarily a result of our method of accounting for stock-based compensation. We
account for stock-based employee compensation arrangements in accordance with
the provisions of APB 25, Accounting for Stock Issued to Employees, and comply
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 (those permitting cashless exercise of
options), 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 we granted in 1998 and the
significant difference between the exercise price of those options and the fair
value of our stock at December 31, 1998, we 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 year ended December 31, 1999 and the three months ended March
31, 2000 should not be construed as profitable operations during that period.
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(TM)
based business continuity customers might not be impacted but could cost $27.00
per day. Other Nexstream(TM) 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.
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WE MIGHT NOT BE SUCCESSFUL IN IMPLEMENTING OUR DOMESTIC AND WORLDWIDE PROPOSED
EXPANSION WHICH WILL RESULT IN OUR BEING A SMALLER AND LESS COMPETITIVE COMPANY.
Over the next two years, we intend to expand our operations domestically
and internationally, and will seek to expand the range of our services and
penetrate new geographic markets.
However, we have no experience in effectuating rapid expansion or in
managing operations which are geographically dispersed. There can be no
assurance that our current management, personnel and other corporate
infrastructure will be adequate to manage our growth. Expansion internationally
will require joint venture partners outside the United States which will provide
capital and personnel to fund the operations internationally. As a company, we
have very limited experience in international joint venture transactions. We
have no joint venture partners at this time. There can be no assurance that we
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 we will not be able to meet our goal
of substantial domestic and international expansion within the next two years.
Failure to complete our intended expansion will result in our being a smaller
and less competitive company
WE HAVE A LIMITED OPERATING HISTORY.
We were incorporated in 1995, but did not commence operations until
1997. Since then, our business has been substantially refocused. Thus, we have a
limited operating history upon which an evaluation of us can be based. Our
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, we 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 market acceptance of new products and services. There can be no assurance
that unanticipated expenses, problems or technical difficulties will not occur
which would result in material delays in market acceptance of our products and
services or that our efforts will result in such market acceptance.
TIMING OF ORDERS FOR AND CONTINUED DEVELOPMENT OF OUR SERVICES AND PRODUCTS WILL
CAUSE OUR QUARTERLY RESULTS TO FLUCTUATE AND CONSEQUENTLY YOU SHOULD NOT RELY ON
THE RESULTS OF ANY PERIOD AS AN INDICATION OF FUTURE PERFORMANCE.
We have experienced material period-to-period fluctuations in revenue
and operating results. We anticipate that these periodic fluctuations in revenue
and operating results will occur in the future. We attribute these fluctuations
to a variety of business conditions that include:
- the volume and timing of orders we receive from quarter to
quarter;
- the introduction and acceptance of our new services and products
and product enhancements by us;
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<PAGE> 12
- purchasing patterns of our customers and distributors; and
- market acceptance of services and products sold by our
distributors.
As a result, we believe that quarterly revenue and operating results are
likely to vary significantly in the future and that quarter-to-quarter
comparisons of our operating results may not be meaningful. You should therefore
not rely on the results of one quarter as an indication of future performance.
OUR INTELLECTUAL PROPERTY MAY BE CHALLENGED.
As is the case with many technology companies, the rapid pace of change
in technology could cause our intellectual property to be challenged. These
challenges could come from stronger companies who believe that the use of our
technology interferes with their use or that they own all of the technology and
related rights. If any of these challenges were successful, our ability to sell
products based on our technology or intellectual property could be severely
impaired.
WE MUST DO BUSINESS IN A DEVELOPING MARKET AND FACE NEW ENTRANTS. FAILURE TO
MEET THE CHALLENGES OF NEW PRODUCTS AND COMPETITORS WILL REDUCE OUR MARKET SHARE
AND THE VALUE OF YOUR INVESTMENT.
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 may not provide opportunities for more than one dominant
supplier of products and services similar to ours. If a single supplier other
than us dominates one or more market segments, our revenue is likely to decline
and we will become a less valuable company.
BECAUSE WE LACK THE NAME RECOGNITION, CUSTOMER BASE AND RESOURCES OF OTHER
COMPANIES PROVIDING INTERNET ACCESS AND OTHER INTERNET RELATED PRODUCTS AND
SERVICES, WE MAY BE UNABLE TO COMPETE SUCCESSFULLY WHICH WOULD REDUCE OUR
REVENUE AND THE VALUE OF YOUR INVESTMENT.
The markets for our products are intensely competitive and are likely to
become even more competitive. Increased competition could result in:
- pricing pressures, resulting in reduced margins;
- decreased volume, resulting in reduced revenue; or
- the failure of our products to achieve or maintain market
acceptance.
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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.
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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
10
<PAGE> 15
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.
11
<PAGE> 16
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.
YOU COULD SUFFER DILUTION OF YOUR INVESTMENT IF CERTAIN WARRANTS ARE EXERCISED,
PREFERRED STOCK IS CONVERTED INTO COMMON STOCK, OR STOCK OPTIONS ARE EXERCISED.
As of June __, 2000, we have a total of 21,869,558 shares of common
stock outstanding. We have issued warrants to purchase 7,541,182 shares of
common stock at a weighted average price of $4.96 per share, as well as options
to purchase 7,319,564 shares of commons stock at a weighted average price of
$3.64 per share. We have issued $5,000,000 of Series C Convertible Preferred
Stock that, based on a minimum conversion price of $2.50 per share, will convert
into 2,000,000 shares of our common stock. We have issued $7,500,000 of Series D
Convertible Preferred Stock that, based on a minimum conversion price of $2.50
per share, will convert into 3,000,000 shares of our common stock. Issuance of
any of these shares will dilute your interest in our company.
12
<PAGE> 17
In November 1998, we entered into a subscription agreement with a
private investor wherein he was to purchase 2,092,000 shares of common stock for
$1.30 per share which we determined was a reasonable price at that time. He was
not able to raise the funds to purchase the stock and we canceled the
subscription agreement. He has now sued to compel us to issue those shares to
him, alleging that we breached the agreement. If his lawsuit is successful, we
will be required to issue up to an additional 2,092,000 shares of common stock
at a price substantially below the current market price, which would dilute the
interest of our other common stockholders.
ISSUANCE OF OUR AUTHORIZED PREFERRED STOCK COULD DISCOURAGE A CHANGE IN CONTROL,
COULD REDUCE THE MARKET PRICE OF OUR COMMON STOCK AND COULD RESULT IN THE
HOLDERS OF PREFERRED STOCK BEING GRANTED VOTING RIGHTS THAT ARE SUPERIOR TO
THOSE OF THE HOLDERS OF COMMON STOCK.
We have issued 125,000 shares of preferred stock. All have voting rights
on all matters decided by shareholders. Each outstanding preferred share has the
right to cast 40 votes (the number of votes that the share would convert into),
or a total of 5,000,000 votes as of this date, on all matters on which
stockholders may vote. We are authorized to issue an additional 9,875,000 shares
of preferred stock without obtaining the consent or approval of our
stockholders. The issuance of preferred stock could have the effect of delaying,
deferring, or preventing a change in control. We may also grant superior voting
rights to the holders of preferred stock. Any issuance of preferred stock could
materially and adversely affect the market price of the common stock and the
voting rights of the holders of common stock. The issuance of preferred stock
may also result in the loss of the voting control of holders of common stock to
the holders of preferred stock.
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.
MANY SHARES WILL BECOME ELIGIBLE FOR FUTURE SALE, WHICH MIGHT ADVERSELY AFFECT
THE MARKET PRICE FOR THE SHARES.
As of June , 2000, there are 8,057,824 shares of our common stock
outstanding which cannot be sold on the public market. Of these shares,
4,535,201 shares are held by directors, officers, or stockholders who have
beneficial ownership of 10% or more of the outstanding shares, including shares
subject to options held by them. 3,522,623 shares are held by other
stockholders. These shares will become eligible for trading at various dates in
2000. In addition, shares of common stock which may be acquired pursuant to
outstanding convertible preferred stock or warrants will be eligible for trading
at various dates after they are acquired. We are 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 our common stock.
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<PAGE> 18
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.
USE OF PROCEEDS
All of the shares of common stock offered by this prospectus are being
offered by the selling stockholders. We received money from the sale of shares
of convertible preferred stock that were converted, or are convertible, into the
shares of common stock offered in this prospectus. We also received, or will
receive, money from the exercise of warrants to purchase common stock which is
offered by this prospectus. This money was, or will be, used for working capital
and general corporate purposes. We will not receive any additional proceeds from
the sale of shares by the selling stockholders. For information about the
selling stockholders, see "Selling stockholders."
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the OTC Electronic Bulletin Board under
the trading symbol "ASAT." The following table sets forth the high and low bid
prices for our common stock since the beginning of the fiscal year 1997. 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
</TABLE>
14
<PAGE> 19
<TABLE>
<S> <C> <C>
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 22.6875 10.50
Second quarter 14.25 7.876
Third quarter 9.3750 4.375
Fourth quarter 6.0625 1.1875
2000 Fiscal year
----------------
First Quarter 7.375 3.0625
Second Quarter through 6/_/00 4.3125 1.75
</TABLE>
On June _, 2000, the last reported trade for our common stock was
$3.0625.
As of June _, 2000, there were 730 holders of record of our common
stock.
DIVIDEND POLICY
We plan to retain all of our earnings, if any, to finance the expansion
of our business and for general corporate purposes. We have not declared or paid
any cash dividends on our common stock. We do not anticipate paying cash
dividends in the foreseeable future except possibly on preferred stock. The
terms of our outstanding preferred stock prohibit the payment of dividends on
our common stock unless all dividends accrued on the preferred stock have been
paid.
CAPITALIZATION
The following table sets forth our capitalization as of December 31,
1999 and our unaudited capitalization as of March 31, 2000:
15
<PAGE> 20
You should read this table together with "Management's discussion and
analysis of financial condition and result of operations," consolidated
financial statements and notes to consolidated financial statements appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000(1)
----------- -----------
<S> <C> <C>
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 shares
(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 18,345 18,742
Additional paid-in capital 25,764,947 22,088,700
Retained deficit (20,899,587) (20,298,024)
----------- -----------
4,894,205 1,819,648
Less: Subscriptions receivable (1,558,510) (558,510)
Minority interest in equity
of subsidiary 277,500 703,859
---------- ----------
Total stockholder's equity $3,613,195 $1,964,997
========== ==========
</TABLE>
(1) These amounts do not include the following events, which occurred in April
2000: receipt of net proceeds of $6,985,000 from the sale of 75,000 shares of
Series D 6% Convertible Preferred Stock at $100 per share; the acquisitions of
PacificNet Technologies, Inc. and InterWireless, Inc. for an aggregate of
$4,000,000 in cash plus 2,750,000 shares of common stock; and the conversion of
the Series A 12% Convertible Preferred Stock to common stock.
The information provided above excludes:
- 7,541,182 shares of common stock issuable upon exercise of
warrants,
- 7,319,564 shares of common stock issuable upon exercise of
outstanding options, and
- 5,000,000 shares issuable on conversion of outstanding preferred
stock.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to and should be read in conjunction with the consolidated financial
statements and notes to consolidated financial statements and the "Management's
discussion and analysis of financial condition and
16
<PAGE> 21
results of operations" and other financial information included elsewhere in
this prospectus. The consolidated statements of operations data for the years
ended December 31, 1997, 1998 and 1999 and the consolidated balance sheet data
at December 31, 1998 and 1999 are derived from and qualified by reference to the
audited consolidated financial statements included elsewhere in this prospectus.
The consolidated statements of operations data for the three months
ended March 31, 1999 and the consolidated balance sheet data at March 31, 2000
have been derived from our unaudited consolidated financial statements but have
been prepared on the same basis as our audited consolidated financial statements
which are included in this prospectus. In our opinion, these unaudited
consolidated financial statements include all adjustments, consisting of
normally recurring adjustments, considered necessary for a fair presentation of
our consolidated financial position and results of operations for that period.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Unaudited
Year Ended three months ended
December 31, March 31,
-------------------------------------- ----------------------------
1998
1999 RESTATED 1997 2000 1999
------------ ----------- ----------- ------------ ------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Net revenue............................. $ 423 $ 341 $1,201 $ 563 $ 86
Gross profit............................ (1,009) (345) 856 16 (201)
Loss from operations.................... (8,926) (2,958) (434) (2,738) (1,543)
Net income (loss)....................... 73,199 (93,481) (454) 613 11,644
Basic earnings (loss) per share......... 4.02 (5.81) (0.04) 0.03 0.63
Diluted earnings (loss) per share....... 3.08 (5.81) (0.04) 0.03 0.45
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
December 31,
---------------------------- Unaudited
1998 March 31,
1999 RESTATED 2000
----------- -------------- -----------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents.................... $3,459 $2,568 $1,054
Working capital............................. 2,572 2,367 676
Total assets................................ 5,156 3,261 3,737
Redeemable preferred stock
Preferred Stock - Series C (aggregate
liquidation preference $4,999,500 in 1999).. 0.5 -- 0.5
Total stockholders' equity................... 3,613 2,722 1,965
</TABLE>
See note 1(m) of notes to consolidated financial statements for a
discussion regarding the computation and presentation of basic and diluted net
loss per share.
17
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO
INCLUDED ELSEWHERE IN THIS REPORT, AS WELL AS "RISK FACTORS."
RESULTS OF OPERATIONS
MARCH 31, 2000 AS COMPARED TO MARCH 31, 1999
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 our i-Xposure subsidiary, and
to a lesser extent, sales of our disaster recovery products and services. The
prior year balance reflects sales of our 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 $3,351,110 and $13,188,277 for the three
months ended March 31, 2000 and 1999, respectively.
1999 AS COMPARED TO 1998
During fiscal years 1998 and 1999, we experienced difficulties selling
our products and collecting our accounts receivable. Our first product offering,
the unidirectional GSI(TM) product line, experienced technical difficulties due
to its reliance on outbound telephone lines and other Internet service providers
for its upstream connection to the Internet. During fiscal 1999, we worked on a
solution to this technical problem with the GSI(TM) product line, as well as the
development and market launch of service with our bi-directional Nexstream(TM)
product that utilizes a satellite connection for both upstream and downstream
connections to the Internet.
Revenues totaled $423,640 and $341,047 for the years ended December 31,
1999 and 1998, respectively. The 1999 revenue reflects primarily fourth quarter
shipments of our Nexstream(TM) product, whereas our first generation satellite
products are represented in the 1998 balance.
For the years ended December 31, 1999 and 1998, cost of sales were
$1,432,717 and $685,570, respectively. Cost of sales includes the cost of
hardware and software shipped to customers, satellite access time purchased from
a third party and inventory write-offs.
For the years ended December 31, 1999 and 1998, operating expenses were
$7,916,819 and $2,613,468, respectively. The increase in operating expenses for
fiscal 1999 is due to higher levels of staffing and compensation, increased
marketing expenditures, increased research and development expenditures and
higher levels of professional fees paid to outside accountants and attorneys.
Other income in 1999 and 1998 reflects primarily a compensation
adjustment recognized under APB 25.
18
<PAGE> 23
1998 as compared to 1997
In fiscal 1998, revenue decreased by $860,000, or 72%, in comparison to
fiscal 1997. This revenue decline is directly attributable to our shift to
high-speed satellite Internet products and services and away from the sale of
networking and computing products and services. In the first quarter of 1998, we
stopped selling networking and computing products and services. In the fourth
quarter of 1998, we stopped selling our initial satellite Internet products and
services altogether, pending the completion of our GSI(TM) products. During
1998, we engaged in capital raising efforts and the development of our GSI(TM)
Internet related products and services along with beta marketing and testing.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have been financed primarily from the sale of preferred
and common stock in 1999 and 1998. At March 31, 2000, we 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. At December 31, 1998, we had cash and cash equivalents of
$2,567,697 and working capital of $2,366,879.
Net cash used in operating activities of $2,500,651 for the three months
ended March 31, 2000 and $6,729,011 and $2,799,628 for the years ended December
31, 1999 and 1998, respectively, was primarily attributable to operating losses
as adjusted for compensation expense recognized under APB 25 and SFAS 123.
Net cash used in investing activities was $265,091 for the three months
ended March 31, 2000 and $806,917 and $293,980 for the years ended December 31,
1999 and 1998, respectively. These expenditures were primarily for the purchase
of fixed assets.
Net cash provided by financing activities of $360,923 for the three
months ended March 31, 2000 and $8,426,792 and $5,673,132, for the years ended
December 31, 1999 and 1998, respectively, resulted primarily from the net
proceeds of the sale of preferred and common stock.
To the extent our revenues increase in the coming twelve months, 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 operation 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 the fourth quarter of 1999, we entered into an agreement with
Vantage Capital, Inc. ("VCI") for the purpose of raising capital. Pursuant to
that agreement, a total of $2,000,000 of Series A 12% Convertible Preferred
Stock was subscribed to VCI, and $5,000,000 of Series B 12% Convertible
Preferred Stock was subscribed to Corporate Financial Enterprises, Inc. ("CFE").
In addition, $5,000,000 of Series C 6% Convertible Preferred Stock was issued to
Wentworth, LLC, a third-party investor. Through December 31, 1999, we had
received a total of $1,100,000 on the Series
19
<PAGE> 24
A Preferred Stock subscription, $1,000,000 on the Series B Preferred Stock
Subscription and the Series C Preferred Stock was fully paid.
Effective December 31, 1999, we entered into an agreement with CFE
which canceled the Series B Preferred Stock and settled a dispute with CFE
regarding payment for certain common stock previously issued to CFE and its
clients. As a part of that settlement, we received an additional $558,510 from
CFE, and we retained the $1,000,000 deposited on the Series B Preferred Stock.
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 Wentworth, LLC 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. An equity line of credit is also available from Wentworth,
LLC. Pursuant to that equity line, when called for by us, Wentworth, LLC has
agreed to purchase up to an additional $12,500,000 of the company's common
stock. The purchase price will be approximately 90% of fair market value on the
date we request the purchase. Wentworth, LLC will be entitled to have the
additional shares registered for resale under the Securities Act. Purchases
must be in tranches of not more than $2,000,000. We have agreed to call for a
minimum of $10,000,000 from Wentworth, LLC on or before July 13, 2001. As a
part of any purchase of common stock by Wentworth, LLC pursuant to the equity
line, it will be issued warrants to purchase a number of shares of our common
stock equal to 15% of the amount raised. Such warrants will have an exercise
price equal to 125% of average closing bid prices for the five days prior to
the closing of purchase. Shares underlying the warrants are entitled to
"piggyback" registration rights.
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 least the next twelve months.
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.
YEAR 2000 COMPLIANCE
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.
CHANGE IN ACCOUNTANTS
We dismissed Lichter and Associates as our independent accountant,
effective November 30, 1999. Lichter and Associates' report on the financial
statements for 1998 and 1997 did not contain an adverse opinion or a disclaimer
of opinion, nor was it qualified or modified, with one exception. The auditor's
report accompanying the financial statements in Amendment No. 1 to Form 10 filed
with the SEC on October 29, 1999 included the following qualification: "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 an adjustment that might result from the outcome of
this
20
<PAGE> 25
uncertainty." The decision to change accountants was approved by the board of
directors, including the audit committee. During the period preceding the
dismissal, there were no disagreements with Lichter and Associates on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure.
BUSINESS
OVERVIEW
We provide a single source for long haul, or satellite, last mile, or
wireless and traditional cable, broadband delivery and turnkey Internet products
and services. We also develop satellite Internet access equipment, software and
services. Through our subsidiary, i-Xposure, we provide a desktop management
system which can be tailored to the specifications of a particular customer. We
provide global businesses, schools, government agencies and healthcare
facilities with an efficient method of Internet access, data delivery and
infrastructure, using the latest developments in satellite, wireless,
traditional cable and integrated desktop management technology.
We plan to be a geographically diverse satellite Internet service
provider through the establishment of joint ventures in various countries. We
expect 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.
From inception, we have incurred significant losses totaling
approximately $20,800,000. Furthermore, we anticipate incurring additional
losses in the foreseeable future as we grow and complete the development of our
products. We operate in a highly competitive market and our success will depend
on our ability to compete in this marketplace. We have no assurance of market
acceptance of our products and we have no assurance that our marketing and
distribution methods will be successful.
OUR STRATEGY
We expect growth in demand for Internet access on a worldwide basis. Our
strategy is based on the development and marketing of our products and services
in six areas.
21
<PAGE> 26
First, we plan to build a worldwide satellite network by installing
three or more network operation centers (NOCs) placed in strategic locations
throughout the world. Each of these NOCs will serve as a means of connecting to
each other, as well as a connection to a different satellite supporting a
specific region. When completed, this worldwide satellite network will allow us
to provide Internet access to a much larger market in countries where there is
little or no telecommunications infrastructure. We have started to implement
this strategy by acquiring PacificNet and InterWireless. These acquisitions
provide us with an NOC capable of managing our global network presence along
with sufficient Internet capacity to service our worldwide network business
strategy and corresponding bandwidth requirements. In conjunction with our
present NOC in Raleigh, North Carolina, these acquisitions provide the security
of redundant operation centers. The PacificNet facility has the capability to
reach Pacific Rim and Asia customers while our East Coast facility will service
the United States and Europe.
Second, we plan to market, on a worldwide basis, our long haul, last mile
and desktop management products and services to rural and urban markets which
currently cannot receive high-speed Internet and network connectivity due to
limited telecommunications infrastructure.
Third, we plan to market our long haul (satellite), last mile (wireless
and traditional cable connections) and desktop management products and services
as a single source vendor to national and multi-national businesses interested
in a uniform platform for connectivity and Internet access.
Fourth, we plan to utilize our subsidiaries to identify new uses and
markets based on the company's core technology to support the company business
objectives.
Fifth, through i-Xposure, we plan to strengthen our personal interactive
desktop, or Pid, technology into a full-scale customer specific desktop
management product designed to take advantage of our long haul and last mile
products and services.
Sixth, we plan to market our products and services to the business
continuity market worldwide. Our products and services can provide an effective
means of back-up to any business which relies on Internet access or remote
Internet connections for mission critical applications.
Our international strategy is to form joint ventures with strategically
positioned partners in Asia, Europe, Latin America, the Middle East and Africa.
At this time, we are in negotiation with a number of these partners, but have
signed no definitive agreements.
HISTORICAL SUMMARY OF THE COMPANY
We were incorporated on June 23, 1995, under Nevada laws, 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, we made a public
offering of our common stock from which we derived gross proceeds of
approximately $100,000. Prior to October 1998, we had not commenced operations
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and were seeking to establish a new business. On October 8, 1998, we became the
surviving company of a merger with Technology Guardian, Inc., a California
corporation ("TGI"). All the issued and outstanding shares of TGI were exchanged
for shares of our common stock. In connection with the merger, we changed our
name to Technology Guardian, Inc., and succeeded to the business of TGI which
was providing computer network installation services and the related sale of
personal computers and telecommunications equipment necessary for the
configuration of local area networks, and in research and development of the
products we currently offer. We changed our name to "eSAT, Inc." on January 26,
1999.
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
first quarter of 1998, we terminated our sales of network computer related
products and concentrated entirely on the completion of our satellite Internet
access products and services. In the second quarter of 1998, we started beta
sales and installation of our initial (first generation) satellite Internet
access products. Beta sales involve the sales of products and services which
have been developed in a laboratory setting but have not been tested in actual
use. Beta installation means the first installations in a commercial setting,
often at a discount or at no cost in order for us to obtain additional
information for improving and completing the products and services. Through the
end of 1998, we beta tested our first generation satellite Internet product and
services. Beta testing on the first generation of products was terminated in
December 1998, such testing having been completed to our satisfaction.
In the fourth quarter of 1998, we 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 them was completed to our satisfaction in January 1999. They
were incorporated into our products known as the GSI(TM), and a number of them
have since been upgraded.
Finally, in the fourth quarter of 1998, we completed installation of our
equipment at our network operations center ("NOC") in Durham, North Carolina.
The NOC houses our computer equipment and software, and functions as a junction
point for all the Internet related data traffic from our customers and acts as
the uplink to the satellites. We contract with third parties for segments of
satellite time that we then resell to our customers. During the second quarter
of 1999, we launched our ChannelCasting(TM) technology followed by the initial
beta testing of the bi-directional Nexstream product in the third quarter of
1999.
On April 13, 2000, we acquired all of the outstanding common stock of
PacificNet, a provider of software support and managed Internet access to
individuals and businesses, in a merger transaction. At the same time, we also
purchased all of the outstanding common stock of PacificNet's sister company,
InterWireless, a wireless Internet service provider that provides both
traditional and broadband wireless Internet access. We continue to operate the
businesses of PacificNet and InterWireless and have moved our headquarters to
their offices in Universal City, California. They continue to operate as
separate subsidiaries.
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PRODUCTS AND SERVICES
Our products and services fall into four general categories: long haul,
or satellite, delivery of Internet content; last mile, or wireless and
traditional cable, delivery of Internet content; specialized software for other
Internet service providers; and customer-specific desktop management systems.
LONG HAUL DELIVERY. Our long haul, or satellite, delivery is offered, or
will be offered, through our Nexstream(TM) and to-be-released Sibone(TM) product
platforms.
NEXSTREAM(TM). Nexstream(TM) uses specially configured satellite dishes
to permit the user to receive data and transmit data through our satellite
system. The result is a secure, transportable, cost-effective and high-speed
communications system which provides significant benefits for organizations with
offices and facilities in remote geographic areas. The technology is especially
effective where privacy and security are a concern, or where mission-critical
applications dictate having a non-ground based system. Nexstream(TM) may also 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 INTERNET BACKBONE ("Sibone"(TM)). Sibone(TM) is a patent
pending satellite network architecture currently under development. We believe
that Sibone will be our primary long haul delivery platform. The core element of
this network is a proprietary technology known as Virtual On-board Switching
(VOS). VOS involves the introduction of intelligent routing/switching algorithms
to the ground terminal equipment of a given satellite network. Designed for
satellites in geosynchronous earth orbit, VOS adds a new dimension to existing
satellites without requiring any modifications by the satellite operator. The
overall effect is the creation of an advanced communication system, using
readily available satellite capacity, which offers a cost-effective alternative
to expensive "smart" broadband satellites with on-board switching capability.
This product is uniquely suited for customers such as telephone and cable
companies, Internet service providers and competitive local exchange carriers.
CHANNELCASTING(TM). In addition to these core products, we offer our
ChannelCasting(TM) service, which can be provided utilizing any of our product
platforms. ChannelCasting(TM) takes data from a single source and economically
distributes it to a prescribed user list. This is particularly suited for large
data and video files. The data is distributed at the same time to all parties,
or may be staged for scheduled delivery as required by the supplier. Viewing of
the materials can be regulated as to time, and the materials can be left
resident on the recipient's LAN connected resources or personal computer for
reference at a later date.
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LAST MILE DELIVERY. Our subsidiary, InterWireless, is a wireless Internet
service provider which enables Southern California businesses to access the
Internet at speeds many times faster than typical ISDN (or digital line)
connections and without phone company charges. Although InterWireless' wireless
services are currently local to the Southern California market, we plan to
market its technology and knowledge base worldwide.
ISP MANAGED SOLUTIONS. Our PacificNet subsidiary offers a wide range of
services under the product name VISP or Virtual Internet Service Provider. The
VISP product is geared to companies who currently or wish to offer ISP services
without the burden of investing in and maintaining the "back office" portion of
an ISP business. The VISP product is completely customized to meet the
customers' branding requirements and is operated by PacificNet in its network
operations center. Services include user sign-up, billing, authentication,
email, news, technical support and access to more than 1,100 dial-up locations
throughout the world.
CUSTOMER-SPECIFIC DESKTOP MANAGEMENT SYSTEMS. Our i-Xposure subsidiary
has developed a personal interactive desktop manager and organizer (the "Pid").
The Pid includes a variety of personal productivity programs as well as serving
as an Internet access portal when users are online. We currently have agreements
in place that provide us with exclusive rights to content from several premier
providers in film, television, sports and other entertainment categories.
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MARKETING AND SALES
We currently sell our products as a delivery tool for our services to
businesses in a wide variety of vertical markets and customers in: education,
hospitality, government, Fortune 500 companies, law enforcement, manufacturing,
entertainment and Internet service organizations through our own sales staff,
value added resellers and other independent sales organizations. Approximately
50% of our sales are currently from providing network management services to
Internet service providers.
We employ a sales staff of __ people (___ are located in our Fountain
Valley office, ___ are located in our offices in Universal City and one sales
representative is in Texas). They focus 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.
Additionally, we distribute our products through value-added resellers
("VARs") and independent sales organizations. These organizations allow us to
increase our visibility and sales of products and services by entering into
contracts for these organizations to undertake sales activities for a percentage
commission of any sale realized. Approximately half of our sales to date have
originated and been completed using these organizations. Currently, we have
approximately ____________
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VAR and independent sales relationships, no single one of which is material to
our operations. Sales through the VAR channel have been modest, with the
majority of our sales having been realized on a direct sale basis. We have
re-focused on enhancing this distribution channel with traditional wide area
network VARs and systems integrators. The result of this effort has been a
significant increase in both quantity and size of contracts under negotiation.
We intend to enter into relationships with between one hundred to two hundred
VARs within the next twelve months. We expect to realize the majority of North
American revenues through this channel.
We anticipate establishing a relationship with a public relations firm
in the near future to complement our direct marketing and advertising programs,
increase exposure, capture editorial coverage and further develop our brand
awareness. We will continue to market our services through tradeshows, events,
print, the media, and Internet direct marketing.
GOVERNMENT AGENCY MARKET
We are actively marketing our products to the Federal Government. The
contracting and sales cycle with government agencies can often require a year or
more to complete. We have completed an installation with the San Bernardino
County, California, Sheriff's Department and with the U.S. Department of
Forestry in Dubois, Idaho. The performance and reliability of 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.
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 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. We believe we meet all
government guidelines for providing Internet access to schools in the manner
required by the E-RATE program.
THE INTERNATIONAL MARKET
We plan for joint ventures with one or more parties headquartered in
various countries to be our international partners. We expect these joint
ventures to contribute significant revenue in the future. We have identified
major areas of the world capable of receiving transmissions from a
geo-stationary satellite. The planned joint ventures would establish our
satellite service in 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
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venture is expected to be provided by the partner in the headquartered country.
We plan to focus on Asia first so that we can be in a position to provide
products and services to the rapidly growing markets in the Pacific Rim basin
including Hong Kong, mainland China, Taiwan, Australia, New Zealand, Singapore,
Malaysia, Thailand, Philippines, Indonesia and others.
DIVERSIFICATION OF BUSINESS
We are not dependent on any one customer or group of customers. However,
our business plan calls for significant orders from governmental agencies and
large corporations.
BACKLOG OF ORDERS
We currently do not have a backlog of orders.
INTELLECTUAL PROPERTY
We believe that our intellectual property is an important factor in
maintaining our competitive position in our core eSat businesses, as well as the
businesses of PacificNet, InterWireless and i-Xposure. To protect our
proprietary rights, we rely generally on patent, copyright, trademark and trade
secret laws, as well as confidentiality agreements with our employees,
consultants, vendors and corporate business partners. Despite these protections,
a third party could, without authorization, copy or otherwise obtain and use our
products or technology to develop similar technology. Moreover, our agreements
with employees, consultants and others who participate in product and service
development activities may be breached, we may not have adequate remedies for
any breach, and our trade secrets may become known or independently developed by
competitors.
Patents. We currently have filed two pending patent applications. In
addition, we are aggressively pursuing additional patent applications for
devices and processes directly and indirectly related to the initial two
filings. Any patent applications may not be granted, future patents may be
challenged, invalidated or circumvented, and the rights granted under a patent
that may be issued may not provide competitive advantages to us. Many of our
current and potential competitors dedicate substantially greater resources to
protection and enforcement of intellectual property rights, especially patents.
If a blocking patent has been issued or is issued in the future, we would need
either to obtain a license or to design around the patent. We may not be able to
obtain a required license on acceptable terms, if at all, or to design around
the patent.
Trademarks. We have applied for registration of all of our primary
trademarks in the United States, including "eSat," "SatBone," "S-Bone,"
"Sibone," "VOS," "Virtual Onboard Switching," "i-Xposure" and "pid." We intend
to continue to pursue the registration of these and certain of our other
trademarks in the United States and in other countries; however, we cannot be
sure that we can prevent all third party use of our trademarks. We have obtained
the Internet domain name "esatinc.com" but we are aware that an Irish
telecommunications company has the same name ("ESAT") and the Internet domain
name "esat.com." We have not been asked to cease using the name "eSat."
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Copyrights. Software has been developed for eSat, i-Xposure, PacificNet,
and InterWireless that is protected by copyright law. There is no assurance that
the steps we take will be adequate to protect these rights or that we will be
successful in preventing the illegal duplication, distribution or other use of
our software. Our failure to adequately limit the unauthorized redistribution of
our software could result in litigation or liability, which could harm our
business.
The laws of some foreign countries do not protect our proprietary rights
to the same extent as do the laws of the United States, and effective patent,
copyright, trademark and trade secret protection may not be available in these
jurisdictions.
We rely on technology and other proprietary matter that we license from
third parties, including software and images that are integrated with internally
developed software and used in our products and services. Third party licenses
may not continue to be available to us on commercially reasonable terms.
The loss of any of these rights could harm our business.
Third parties may assert infringement claims against us. From time to
time we may be subject to claims in the ordinary course of our business,
including claims of alleged infringement of the trademarks, patents and other
intellectual property rights of third parties by us or our users. Any such
claims, or any resultant litigation, should it occur, could subject us to
significant liability for damages and could result in the invalidation of our
proprietary rights. In addition, even if we were to win any such litigation,
such litigation could be time consuming and expensive to defend, and could
result in the diversion of our time and attention, any of which could materially
and adversely affect our result in limitations on our ability to use such
trademarks, patents and other intellectual property unless we enter into
arrangements with such third parties, which may be unavailable on commercially
reasonable terms.
COMPETITION
We compete in the market for providing Internet access services to the
business, government, school, and nonprofit sectors.
We anticipate competition from Internet service providers (ISPs) which
provide satellite downlink data transmission in the commercial/business,
government and education sectors. Our competitors also include the established
ISPs, which offer a variety of connection features and speeds of access. Some
use telephone lines, some use television cable systems, and others offer
satellite focused services. There are numerous providers of these services and
no one provider dominates the market. Many service providers are affiliated with
telephone or cable television companies which provide capital resources and
customer marketing opportunities unavailable to us. At this time, we believe no
competitor has a dominant position in the worldwide ISP market segment.
We have not established a competitive position in the market place,
since we have only recently commenced the marketing and sales of our products.
As a result, potential customers are unable to evaluate other customers'
experiences in using our products. This lack of track
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record might dissuade some customers from purchasing our products until there is
a greater customer base and a broader evaluation of the quality and
effectiveness of our products and services.
We compete 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. We offer an easy to
use 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. Our pricing of products and services is subject to change in
accordance with market changes and competitive conditions.
The positive factors pertaining to our competitive position include
our pricing, widespread availability, and an easy to use format. The negative
factors pertaining to our competitive position are lack of product awareness and
of brand recognition among potential customers, lack of widespread user-base,
and, in some instances, a lack of customer track record.
RESEARCH AND DEVELOPMENT
We plan to devote significant resources to continued research and
development of various Internet related products and services.
EMPLOYEES
We currently have __ employees. __ employees are located in Fountain
Valley, California, ___ are located at our i-Xposure facility in Irvine,
California, and __ employees are located in Universal City, California. One
sales representative is located in Texas.
DESCRIPTION OF PROPERTY
We do not own any material physical properties. We lease our
headquarters in Universal City California, as well as our other facilities in
Irvine, California and Fountain Valley, California, pursuant to commercial
leases which expire September 30, 2004, October 30, 2001 and September 30, 2003,
respectively. We also lease space in Durham, North Carolina, which houses our
computer equipment related to our uplink to the satellite network. We believe we
have adequate space to conduct our business for the foreseeable future.
LEGAL PROCEEDINGS
The only material legal proceeding involves an action brought in the
United States District Court, Central District of California, on July 23, 1999,
by a private investor who entered into a subscription agreement in November 1998
to purchase 2,092,000 shares of our common stock for $1.30 per share. He did not
raise the funds to honor his subscription and we canceled
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the subscription agreement. The investor has sued to compel us to issue those
shares to him alleging that we breached the agreement. We believe his assertion
is without merit and are defending the case.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and positions of our directors
and executive officers:
<TABLE>
<CAPTION>
Officer Name Age Position Since
------------ --- -------- -----
<S> <C> <C> <C>
Michael C. Palmer 50 CEO, President, Secretary and Director 1999
Chester (Chet) L. Noblett, Jr. 55 Chairman of the Board 1997
Richard Elliot 40 Senior Vice President 2000
David Pennells 43 Senior Vice President 2000
Steven A. Tulk 33 Senior Vice President, Managing Director -
Asia Operations 2000
Michael J. O'Hara 43 Senior Vice President, Managing Director -
South America Operations 2000
Leon Shpilsky 36 Senior Vice President, Managing Director -
Europe Operations 2000
Mark S. Basile 38 Chief Financial Officer 2000
Jeffrey Hecht 48 Vice President of Operations 1998
Keven Ellison 38 Vice President of Marketing 2000
Michael S. Massey 26 Chief Technology Officer 2000
Salvator A. Piraino 72 Director 1997
Gary Pan 53 Director 1998
</TABLE>
The directors are elected to hold office until the next annual meeting
of stockholders and until their respective successors have been elected and
qualified. Officers 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 our
directors and executive officers for at least the past five years.
MICHAEL C. PALMER has been the Chief Executive Officer, President and
Secretary and a director of the company since April 1999. Mr. Palmer has held
the position of Chief Financial Officer from November 1998 to March 1999 and has
been affiliated with the company since December 1997. From 1978 through March
2000, Mr. Palmer was a partner of Parks, Palmer, Turner and Yemenedjian, a firm
of certified public accountants. Mr. Palmer served as a director of Western
Waste Industries (NYSE: WW) from July 1995 to May 1996. He received a B.S.
degree in Business Administration in 1972 and an M.S. degree in Business
Taxation in 1975 from the University of Southern California.
CHESTER (CHET) L. NOBLETT, JR. has been Chairman of the Board since
April 1999 and a Director since June 1997. He was Chief Operating Officer from
June 1997 until December 1999. He served briefly as interim Chief Financial
Officer in January and February 2000. From 1990 to 1996, Mr. Noblett was
employed as the chief executive officer for Tradom International, a
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subsidiary of 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.
RICHARD ELLIOT became Senior Vice President of the company on May 1,
2000. From 1995 to 1999, he was President and co-founder of PacificNet, LLC, the
predecessor of PacificNet Technologies, Inc., which we acquired in April 2000.
Mr. Elliot remains the President of PacificNet Technologies, Inc. In 1998, Mr.
Elliot co-founded, and became President of, InterWireless, Inc., which we also
acquired in April 2000. He remains the President of InterWireless as well.
DAVID PENNELLS became Senior Vice President of the company on May 1,
2000. From 1995 to 1999, he was Vice President and co-founder (along with Mr.
Elliot) of PacificNet, LLC, the predecessor of PacificNet Technologies, Inc. He
remains the Vice President of PacificNet. In 1998, Mr. Pennells co-founded
(along with Mr. Elliot), and became Vice President of, InterWireless, Inc. He
remains in that position.
STEVEN A. TULK was appointed as the company's Senior Vice President,
Managing Director - Asia Operations in January 2000. Mr. Tulk served as chief
information officer of Vivendi Water's consumer and commercial division from
December 1998 to January 2000. From 1994 to 1998, Mr. Tulk operated Tulk
Consulting Inc., a software development and network engineering consulting firm.
From 1992 to 1994 Mr. Tulk was director of management information systems for
Pharmacia's ophthalmic division. Mr. Tulk served as senior technical specialist
for the J. Paul Getty Trust from 1990 to 1992. Mr. Tulk received a B.S. in
Business Administration from the University of California at Riverside in 1990.
MICHAEL J. O'HARA was appointed as the company's Senior Vice President
of Technology Partners from February 2000 to May 2000, when he was appointed to
serve as Senior Vice President, Managing Director - South America Operations.
Mr. O'Hara previously worked for over 15 years at Hughes in various satellite
communications and software divisions, primarily in the new business and system
engineering areas. He most recently was chief system engineer for the Hughes-led
team competing for the next-generation low-orbit U.S. weather system. Prior to
that, Mr. O'Hara served as senior systems engineer on one of the largest data
processing and distribution systems ever deployed. He has also managed numerous
multi-million dollar software development projects and technology assessment
studies. Mr. O'Hara graduated with a B.S. in Physics from the University of
Massachusetts at Lowell in 1978 and earned M.S. degrees in Physics and Computer
Science from the University of Illinois at Urbana-Champaign in 1980 and 1984,
respectively.
LEON SHPILSKY was appointed as the company's Senior Vice President,
Managing Director - Europe Operations in May 2000. From 1987 to May 2000, Mr.
Shpilsky held various positions with the certified public accounting firm of
Parks, Palmer, Turner and Yemenedjian, most recently serving as
principal/director of international practice. From 1984 to 1987, Mr. Shpilsky
was a certified public accountant with KPMG Peat Marwick, LLP, an international
accounting and consulting firm. Mr. Shpilsky received a B.S. in Business
Administration from the University of Southern California in 1984.
MARK S. BASILE was appointed as the company's Chief Financial Officer in
March 2000. From March 1999 to March 2000, Mr. Basile was chief financial
officer of Superior Galleries, Inc., an auction services firm in Beverly Hills,
California. From 1996 through March 1999, Mr. Basile served as director of
management accounting and controller of the Hawaii division of Young's Market
Company. From 1989 to 1996, Mr. Basile was director of internal audit at K2
Inc., a manufacturer of sporting goods and recreational products. Prior to that,
Mr. Basile was a certified public accountant at Ernst & Young LLP, an
international accounting and consulting firm. Mr. Basile received a B.S. in
Accounting from the University of Florida in 1983.
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.
KEVEN ELLISON was appointed as the company's Vice President of
Marketing in April 2000. Mr. Ellison held the position of Director of Marketing
from July 1999 to April 2000. In 1999, Mr. Ellison developed the business plan
and web strategy for Lobbyforme.com, a leading Internet political portal.
From 1991 to 1999, Mr. Ellison was director of marketing for Loronix
Information Systems, a digital surveillance technology firm. In 1998, Mr.
Ellison provided marketing consultation services to Fargo Electronics. Mr.
Ellison provided marketing consultation services to Quicksilver Sportswear in
1990. Mr. Ellison was educated at California State University at Long Beach.
MICHAEL S. MASSEY was appointed as the company's Chief Technology
Officer in March of 2000. Since joining us in February of 1999, Mr. Massey held
the position of Director of Product Development, where he authored two patents
on satellite communication technology. From April 1998 to February 1999, Mr.
Massey was the founder and chief technical officer of Unex.Net, a satellite
communication consulting firm specializing in broadband deployment strategies in
Asia. From April 1997 to March 1998, Mr. Massey held managerial positions at
several Internet service providers, where he specialized in wide area network
(WAN) design for corporate clientele. From July 1993 to September 1996, Mr.
Massey served in the U.S. Navy, including three years in the Navy's Nuclear
Engineering Program. Mr. Massey was inducted into the Mensa Society in 1993, and
graduated cum laude from the Rose-Hulman Institute of Technology in 1995 with a
B.S. in Mechanical Engineering.
SALVATOR 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
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Aircraft Company. Mr. Piraino received a B.E. degree in Engineering from Loyola
University in 1950.
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 received a B.S. degree in Electrical Engineering from National Taiwan
University, an M.S. degree in Electrical Engineering from University of
Waterloo, and his Ph.D. in Management from the University of California at Los
Angeles.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
we paid to our Chief Executive Officer, each of the four most highly compensated
executive officers that earned more than $100,000 during 1999, and two
additional executive officers who would have been included in the four had they
been serving as executive officers in 1999.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-------------------------------------------------- ----------------------------------------
Awards
-------------------------
Other Restricted Securities
Name and Annual Stock Underlying All Other
Principal Position Year Salary Bonus Compensation Awards Options Compensation
-------------------- ---- ---------- ------- ------------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael C. Palmer(1) 1999 $ 455,913 $ $ 87,500 1,625,000
President, Chief Executive 1998 10,780 100,000
Officer and Secretary 1997
Chester L. Noblett, Jr. 1999 178,936(2) 300,000
Chief Operating Officer 1998 114,750 48,750 1,095,802
1997
Mark McMillan(3) 1999 87,500 500,000(4)
1998
1997
James Mack(5) 1999 120,625
1998 18,750 35,000 300,000(6)
1997
</TABLE>
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<PAGE> 38
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
David Coulter*(7) 1999 51,854 50,000 1,500,000
Former President 1998 166,407 56,250 3,535,890(8)
1997
Steven A Tulk 2000 (9) 50,000 350,000
Senior Vice President,
Business Development
Richard Elliot 2000 (10)
Senior Vice President
</TABLE>
* Please see Certain transactions, below, and Note 8(e) to the Financial
Statements regarding the cancellation of Mr. Coulter's options in March,
1999.
(1) In 1999, Mr. Palmer was an employee of Parks Palmer Turner &
Yemenidjian, a firm of certified public accountants and was paid for his
services through that firm through October 1999. Effective November
1999, the company paid VCI $25,000 per month for Mr. Palmer's services
pursuant to a consulting agreement. Mr. Palmer is the sole owner of VCI.
In addition, VCI received warrants to purchase 600,000 shares of common
stock as part of the consulting arrangement. Those warrants are not
exercisable until after December 31, 2000. See "Certain transactions"
for additional information.
(2) Includes back pay of $55,417 earned in 1999 and paid in January 2000.
(3) Mr. McMillan joined us in May 1999, with a base salary of $150,000 per
year. Additionally, he received a $250,000 mortgage loan from the
company. Mr. McMillan left the company in April 2000.
(4) All of these options have been canceled in 2000 pursuant to their terms.
(5) Mr. Mack joined us in September 1998 and subsequently left in February
2000.
(6) 225,000 of these options were subsequently canceled pursuant to
their terms.
(7) Mr. Coulter left the company in May 1999. After leaving the company he
was paid $170,000 in 1999 and $90,000 in 2000. See "Certain
transactions."
(8) All of these options were subsequently canceled in 1999 pursuant to a
settlement agreement as described in "Certain transactions."
(9) Mr. Tulk joined us in January 2000, with a base salary of $150,000.
(10) Mr. Elliot joined us in April 2000, with a base salary of $180,000.
34
<PAGE> 39
The company has entered into an employment agreement with Mr. 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 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. In addition, 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.
We have entered into an employment agreement with Mr. Tulk for a period
of five years, commencing January 1, 2000. Under the terms of this agreement,
Mr. Tulk receives a minimum base salary of $150,000 per year, and is eligible to
earn a performance bonus of up to 100% of his base salary. In addition to
receiving a signing bonus of $50,000, Mr. Tulk is also entitled to reimbursement
of his relocation expenses, as well as his business-related expenses, under the
employment agreement. Further, Mr. Tulk received stock options for 350,000
shares of our stock by the terms of his stock option agreement.
The company has entered into an employment agreement with Richard Elliot
for a period of three years, commencing May 1, 2000. At the end of such term,
the agreement will automatically renew for successive one year terms unless
either party chooses not to renew the contract. By the terms of the agreement,
Mr. Elliot receives a base salary of $180,000 per year, and is eligible
to receive performance-based bonus compensation. Under the agreement, Mr.
Elliot's salary will be reviewed annually (or more frequently) by our Board of
Directors. The employment agreement includes company health insurance coverage
and reimbursement of normal business-related expenses. In addition, Mr. Elliot
is entitled to receive paid vacation and sick time, as well as paid time during
which he may attend professional conferences or seminars. The agreement also
provides an automobile allowance of $1400 per month that includes payment of
associated automobile insurance. Further, Mr. Elliot's employment agreement
allows him to be eligible to receive, together with David Pennells (see below),
an aggregate of 1,000,000 options to purchase shares of our stock for allocation
to a pool of PacificNet and InterWireless employees. 850,000 of these options
have already been allocated to certain employees of those two subsidiaries.
The company has entered into an employment agreement with David Pennells
for a period of three years, commencing May 1, 2000. The agreement will
automatically renew for successive one year periods unless either party chooses
not to renew the contract. Mr. Pennells, by the terms of the agreement, receives
a base salary of $150,000 per year, and is eligible to receive performance-based
bonus compensation. Under the agreement, Mr. Pennells' salary will be reviewed
on an annual basis (or more frequently) by our Board of Directors. The
employment agreement includes company health insurance coverage and
reimbursement of normal business-related expenses. In addition, Mr. Pennells is
entitled to receive paid vacation and sick time, as well as paid time during
which he may attend professional conferences or seminars. The agreement also
provides an automobile allowance of $1400 per month that includes payment of
associated automobile insurance. Further, Mr.
35
<PAGE> 40
Pennells' employment agreement allows him to be eligible to receive, together
with Richard Elliot (see above), an aggregate of 1,000,000 options to purchase
shares of our stock for allocation to a pool of PacificNet and InterWireless
employees. 850,000 of these options have already been allocated to certain
employees of those two subsidiaries.
We have entered into an employment agreement with Leon Shpilsky for a
period of three years, commencing May 8, 2000. The agreement will automatically
renew for successive one year periods, provided neither party chooses not to
renew the contract. Mr. Shpilsky, by the terms of the agreement, receives a base
salary of $125,000 per year, and is eligible to receive performance-based
compensation. Under the agreement, Mr. Shpilsky may also receive a salary
adjustment under certain conditions while he is based in Western Europe. The
employment agreement includes company health insurance coverage and
reimbursement of normal business-related expenses. In addition, Mr. Shpilsky is
entitled to receive paid vacation and sick time, as well as paid time during
which he may attend professional conferences or seminars. The agreement also
provides a monthly automobile expense allowance that includes payment of
automobile insurance and associated expenses. Further, Mr. Shpilsky is entitled
to receive compensation for relocation expenses. The employment agreement also
grants to Mr. Shpilsky 300,000 stock options for shares of our company's common
stock.
OPTION GRANTS IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
Individual
Grants
Percent
of Total
Options Market
Number of Granted to Exercise
Shares Employees of Base Price on Potential Realizable Value at
Underlying in Fiscal Price Date of Expiration Assumed Annual Rates of Stock
Name Options Year ($/Sh) Grant Date Price Appreciation for Option Term
---- ---------- ---------- --------- -------- ---------- ----------------------------------
5%($) 10%($)
---------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael C. Palmer(1) 25,000 .6% $ 4.00 $4.00 2/9/04 $ 27,750 $ 61,000
Michael C. Palmer(1) 1,000,000 23.5 3.00 3.00 10/30/04 830,000 1,800,000
Chester L. Noblett, Jr. 300,000 7.1 3.00 3.00 2/9/04 249,000 540,000
Mark McMillan(2) 500,000 11.8 13.125 5/17/04
David Coulter(2) 1,500,000 35.3 3.00 8/22/03
</TABLE>
(1) Excludes an aggregate of 600,000 warrants granted to VCI in 1999. VCI is
controlled by Mr. Palmer.
(2) Messrs. Coulter and McMillan have left the company.
OPTIONS EXERCISED IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
Number of Shares Dollar Value
Shares Value -------------------------- --------------------------
Acquired Realized Exercisable Unex Exercisable Unex
-------- -------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael C. Palmer - - 725,000 1,000,000 $ 137,500 $ 2,000,000
Chester L. Noblett, Jr. 159,547 $757,848 1,245,802 - 3,301,634 -
Mark McMillan(1) - - - 500,000 - -
James Mack(1) - - 100,000 200,000 200,000 400,000
</TABLE>
(1) Messrs. McMillan and Mack have left the company.
DIRECTOR COMPENSATION
Each non-employee director receives a payment of $500 for each board
meeting attended and an annual option grant to purchase 20,000 shares at market
value. All directors are entitled to reimbursement for expenses of traveling to
and from board meetings, and any other out-of-pocket expenses incurred on behalf
of the company.
Mr. 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 with Technology Guardian, Inc. ("TGI"), Mr. Piraino
was granted 25,000 shares of common stock as compensation for serving on the
board of directors.
36
<PAGE> 41
CERTAIN TRANSACTIONS
In April 1997, in exchange for the issuance of 849,750 shares of TGI
common stock which were converted into company shares in the merger, TGI entered
into a settlement agreement among TGI, Cyber Village Network, Inc. ("CVN") and
Mr. Noblett in which CVN and Mr. Noblett agreed to release TGI from all
potential claims arising from: (i) an Option Agreement, dated August 6, 1997;
and, (ii) an agreement entered into among TGI, David Coulter, as TGI's then
President, CVN and Mr. Noblett as agent for CVN ("Commission Agreement").
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 fee in the
amount of $100,000 for services provided in assisting TGI with obtaining
additional capital.
In May 1998 Mr. Coulter transferred 379,250 shares of his stock to CVN.
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
with U.S. Connect 1995.
The cancellation of the Option Agreement was part of the overall
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 TGI. Due to what Mr.
Coulter perceived to be the increasing potential of TGI, he did not want TGI to
honor TGI's prior commitment to Mr. Noblett. 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 stockholders of the
37
<PAGE> 42
company, all of whom were closely associated with the company. Accordingly,
there were no public stockholders affected in any way by these transactions.
In connection with the merger with U.S. Connect 1995, we 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 stockholders as of August 30, 1998, at an
exercise price of $0.7168 per share, exercisable for five years from date of
grant. In addition, the company assumed the obligations of TGI for options to
purchase 1,910,885 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 years from date of grant. In October 1998 the board of
directors authorized the issuance of additional options to purchase 1,500,000
shares of common stock to Mr. Coulter, and 333,000 shares of common stock to Mr.
Noblett, at an exercise price of $3.00 per share, exercisable for five years
from date of grant subject to the company achieving $30,000,000 in sales in
1999. We did not achieve this level of sales in 1999, and therefore the
additional options issued to Mr. Coulter (1,500,000) and Mr. Noblett (333,000)
lapsed.
On March 22, 1999, Mr. 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. By contract, 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 1,500,000 shares exercisable at $3.00 per share and options
on 1,910,885 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. We 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
us at the rate of $10,000 per month for a total of 36 months, commencing upon
his resignation. We have entered into a general mutual release of claims with
Mr. Coulter. As a result of an alleged breach of the resignation agreement by
Mr. Coulter, we suspended the payment of $10,000 per month to Mr. Coulter. On
February 23, 2000, we entered into a Settlement Agreement and General Release
with Mr. Coulter, pursuant to which Mr. Coulter released all claims for
compensation under the Resignation Agreement of March 22, 1999, and agreed to
transfer certain domain names to us. In return, we agreed to pay Mr. Coulter
$90,000 and to grant him piggy back registration rights with respect to shares
he acquires in the exercise of his stock options.
CFE and VCI (the "Consultant") worked together as equal joint venture
partners pursuant to an exclusive Consulting Agreement entered into between the
Consultant and the company, dated September 15, 1999, which was to terminate no
earlier than September 15, 2002. Mr. Palmer, CEO of the company, is also the
owner and President of the Consultant.
38
<PAGE> 43
Pursuant to the Consulting Agreement, we agreed to issue 2,500,000
shares of Series B 12% Convertible Preferred Stock to CFE for $2.00 per share,
and 1,000,000 shares of Series A 12% Convertible Preferred Stock to VCI for
$2.00 per share.
The Consulting Agreement and the issued and outstanding Series B
Preferred Stock was canceled by mutual agreement of the parties in March 2000.
As part of the settlement, we agreed with CFE to settle a dispute about the
number of common shares issued to CFE and its clients and the amount we received
in payment for those shares. CFE paid us $558,510 and we entered into a mutual
release with CFE for all claims. In addition, CFE agreed to put the shares of
common stock which CFE would receive upon conversion of its warrants into a
voting trust if requested by NASDAQ in order to facilitate a listing on NASDAQ.
Furthermore, all of the outstanding Series A Preferred Stock was converted into
550,000 shares of common stock in April 2000. The warrants issued to the former
holders of Series A Preferred Stock and Series B Preferred Stock remain
outstanding.
PRINCIPAL STOCKHOLDERS
COMMON STOCK
The following table sets forth, as of June __, 2000, the ownership of
the company's common stock by
- each director and named executive officer of the company,
- all named executive officers and directors of the company as a
group, and
- all persons known by the company to beneficially own more than 5%
of the company's common stock.
<TABLE>
<CAPTION>
Amount and Percent
Nature of of Total
Beneficial Shares and
Beneficial Owner Ownership(1) Options
------------------------------------ ------------ --------------
<S> <C> <C>
David B. Coulter(2)
15555 Huntington Village Lane, #239 2,500,000 10.70%
Building 9
Huntington Beach, CA 92647
Chester (Chet) L. Noblett Jr.(3) 2,737,097 11.84%
16520 Harbor Boulevard, Bldg. G
Fountain Valley, California 92708
Salvator Piraino(4) 161,103 *
16520 Harbor Boulevard, Bldg. G
Fountain Valley, California 92708
</TABLE>
39
<PAGE> 44
<TABLE>
<S> <C> <C>
Gary Pan(5) 45,000 *
16520 Harbor Boulevard, Bldg. G
Fountain Valley, California 92708
Jim Mack(6) 62,311 *
16520 Harbor Boulevard, Bldg. G
Fountain Valley, California 92708
Michael C. Palmer(7) 1,370,000 5.96%
10 Universal City Plaza, Suite 1130
Universal City, California 91608
Richard Elliot 2,062,500 9.20%
10 Universal City Plaza, Suite 1130
Universal City, California 91608
Steven A. Tulk 400 *
10 Universal City Plaza, Suite 1130
Universal City, California 91608
Directors and Named Executive Officers 8,938,411 34.58%
as a group
</TABLE>
* Less than one percent.
(1) 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
40
<PAGE> 45
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 1,500,000 shares of the company's common
stock at $3.00 per share for a period of five years from August 22,
1998.
(3) Includes options to purchase (i) 262,802 shares of the company's common
stock at $0.7168 per share for a period of five years from date of grant
(August 8, 1998); (ii) 333,000 shares of the company's common stock at
$3.00 per share for a period of five years from date of grant (October
7, 1998); (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 (________,
1999); and (iv) warrants to purchase 350,000 shares of the company's
common stock at $2.40 per share for a period of five years from date of
grant (June 9, 1998).
(4) Includes options to purchase (i) 16,103 shares of the company's common
stock at $0.7168 per share for a period of five years from date of grant
(August 31, 1998); (ii) 20,000 shares of the company's common stock at
$5.50 per share for a period of five years from date of grant (September
30, 1999); and (iii) 25,000 shares of the company's common stock at
$4.00 per share for a period of five years from date of grant (February
9, 1999).
(5) Includes options to purchase (i) 20,000 shares of the company's common
stock at $17.41 per share for a period of five years from date of grant
(September 30, 1999) and (ii) 25,000 shares of the company's common
stock at $4.00 per share for a period of five years from date of grant
(February 9, 1999).
(6) Includes options to purchase 4,294 shares of the company's common
stock at $0.7168 per share for a period of five years from date of grant
(August 31, 1998).
(7) Includes options to purchase 1,000,000 shares of the company's common
stock at $3.00 per share for a period of five years from date of grant
(November 1, 1999); (ii) 100,000
41
<PAGE> 46
shares of the company's common stock at $9.25 per share for a period of
five years from date of grant (November 28, 1998); and (iii) 25,000
shares of the company's common stock at $4.00 per share for a period of
five years from date of grant (February 9, 1999).
PREFERRED STOCK
The following table sets forth information regarding the beneficial
ownership of our voting preferred stock as of the date of this prospectus:
<TABLE>
<CAPTION>
Name and Address Number of Shares Percent
Class of Beneficial Owner Beneficially Owned of Class
----- ------------------- ------------------ --------
<S> <C> <C> <C>
Series C Wentworth, LLC 50,000 100%
6% Convertible Corporate Center
Preferred Stock(1) West Bay Road
Grand Cayman
Series D Wentworth, LLC 75,000 100%
6% Convertible Preferred Corporate Center
Stock(1) West Bay Road
Grand Cayman
</TABLE>
(1) All of the above preferred stock is convertible into common stock
immediately; provided however, that no conversion may occur if,
after conversion, the holder would be deemed beneficial owner of
more than 4.99% of the company's then outstanding common stock.
See "Description of securities" for details on the conversion
prices.
SELLING STOCKHOLDERS
All of the shares offered by this prospectus are being registered for
sale for the accounts of selling stockholders. As noted in the following table,
the selling stockholders have obtained or will obtain the common stock offered
under this prospectus by converting or exercising certain of our convertible
securities that they now hold or have the right to acquire. These selling
stockholders hold shares of Series C 6% Convertible Preferred Stock ("Series C
Preferred"), Series D 6% Convertible Preferred Stock ("Series D Preferred"),
warrants to purchase
42
<PAGE> 47
common stock that we issued to holders of the Series C Preferred and Series D
Preferred in connection with the issuance of the Series C Preferred and Series D
Preferred, or common stock acquired upon the exercise of certain warrants.
The table below includes, in the total number of shares offered, shares
of common stock that have been issued or are issuable upon conversion of shares
of Series C Preferred and Series D Preferred.
The table below also includes shares of common stock issuable upon
exercise of warrants issued to holders of Series C Preferred and Series D
Preferred, who are selling stockholders, and shares of common stock acquired,
or to be acquired, by a selling stockholder pursuant to exercise of certain
warrants.
We will not receive any portion of the proceeds from the sale of shares
of common stock by the selling stockholders.
Based on the information supplied to us by each selling stockholder, the
following table sets forth certain information regarding the approximate number
of shares of common stock which each selling stockholder owns or has the right
to immediately acquire as of the date hereof, and as adjusted to reflect the
sale by the selling stockholders of the shares of common stock offered by this
prospectus. No selling stockholder has held any office or maintained any
material relationship with us, or any of our predecessors or affiliates, over
the past three years.
<TABLE>
<CAPTION>
Common Shares Common Shares
Beneficially Owned Number of Beneficially Owned
Prior to Offering(1) Common After Offering(1)(2)
------------------------ Shares --------------------
Name and Address Number Percent(3) Offered Number Percent
---------- ---------- --------- ------- ----------
<S> <C> <C> <C> <C> <C>
Wentworth, LLC(4)
Corporate Center
West Bay Road
Grand Cayman 8,044,598(5) 22.97% 8,044,598(5) -0- 0%
---------- ---------- --------- --------- ----------
Grayson & Associates(6)
One Tabor Center
1200 17th Street, 16th Floor
Golden, Colorado 80202 465,110 2.08% 465,110 -0- 0%
</TABLE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated, each
person possesses sole voting and investment power with respect to all of
the shares of common stock owned by such person, subject to community
property laws where applicable. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options and convertible securities held
by that person that are currently exercisable, or become exercisable within
60 days of the date of this prospectus, are deemed outstanding. Such
shares, however, are not deemed outstanding for the purpose of computing
the percentage ownership of any other person. The information as to each
person has been furnished by such person.
(2) Assumes that all shares of common stock offered in this prospectus will be
sold.
43
<PAGE> 48
(3) Based on approximately 30,379,266 shares of common stock issued and
outstanding as of June __, 2000 which assumes that the shares offered
for sale are outstanding.
(4) Navigator Management Ltd., the Manager of Wentworth, LLC, has voting and
investment decision authority over this investment.
(5) In accordance with the underlying warrant agreements, we are required to
register an amount of shares equal to 200% of the shares issuable with
respect to such warrants. The actual number of shares to be offered will
depend on the number of shares acquired by Wentworth, LLC upon
conversion of the Series C Preferred Stock, Series D Preferred Stock and
warrants it holds.
(6) Gerald Grayson, President of Grayson & Associates, is the individual who
has voting and investment decision authority over this investment.
DESCRIPTION OF SECURITIES
The following summary description of our capital stock is not intended
to be complete and is subject to and qualified in its entirety by reference to
our Amended and Restated Articles of Incorporation, copies of which are filed
as exhibits to the registration statement of which this prospectus forms a
part.
GENERAL
We have authorized capital stock consisting of 50,000,000 shares of
common stock, $0.001 par value, of which __________ common shares are issued and
outstanding, and 10,000,000 shares of preferred stock, $0.01 par value, of which
125,000 shares are issued and outstanding. There are _____ holders of record of
our common stock as of the date of this prospectus.
44
<PAGE> 49
As of June __, 2000, we have reserved 7,319,564 shares of common stock
for issuance pursuant to options; 9,063,381 shares for issuance pursuant to
outstanding warrants; and 5,000,000 shares for issuance pursuant to outstanding
convertible securities.
COMMON STOCK
The principal terms of our common stock are set forth below:
- number authorized: 50,000,000*
- number outstanding: 21,869,558 exclusive of shares reflected in
this prospectus as being held for sale by the selling
stockholders
- dividend rate: see "Dividend policy"
- vote per share: one
- no preemptive rights or other rights to subscribe for unissued or
treasury shares or securities convertible into or exercisable or
exchangeable for shares of our common stock
- shares of common stock are duly authorized and validly issued,
fully paid and nonassessable
* At the next annual meeting of shareholders, we plan to request that
shareholders authorize an increase in the authorized common stock to
[100,000,000] shares
PREFERRED STOCK
Our board of directors has the authority to issue up to 10,000,000
shares of preferred stock in one or more series and to fix the powers,
designations, rights, preferences and restrictions thereof, including dividend
rights, conversion rights, voting rights, redemption terms, liquidation
preferences and the number of shares constituting each such series, without any
further vote or action by our stockholders. The issuance of preferred stock in
certain circumstances may delay, deter or prevent a change in control of the
company, may discourage bids for our common stock at a premium over the market
price of the common stock, and may adversely affect the market price of, and the
voting and other rights of the holders of, our common stock. The principal terms
of our preferred stock are set forth below:
Series C 6% Convertible Preferred
- number authorized: 50,000 shares
- number outstanding: 50,000 shares
- dividend rate: 6% payable in either cash or common stock
- per share liquidation preference: $100 (aggregate preference of
$5,000,000)
- vote per share: one vote for each share of common stock into
which the preferred stock could be converted as of the record
date for the vote
- right to appoint directors: none
- when convertible: all shares are convertible as of the date of
this prospectus, provided that not more than 20% of the shares
may be converted in any
45
<PAGE> 50
period of five consecutive trading days. Further, no holder may
convert into common stock if, as a result of such conversion,
that holder would own more than 19.9% of the issued and
outstanding shares of our common stock (we are required to redeem
any excess). In addition, no holder may convert Series C
Preferred Stock if, after such conversion, the holder would be
deemed a beneficial owner of more than 4.99% of the then
outstanding shares of common stock of the company
- conversion price: the lesser of 125% of the closing bid price of
the common stock on December 28, 1999 ($3.4375), or 85% of the
five date average quoted price for the five trading days
immediately preceding the conversion notice date, subject to a
$2.50 floor per share for a 15 month period ending in March 2001
- contains standard anti-dilution provisions to protect against
stock splits and below market stock issuances
- redemption rights: holders have no redemption rights. We may
redeem at our election for cash at a price equal to the greater
of a) an amount sufficient to yield to holders a 17.5% annualized
rate of return or b) the economic benefit a holder would realize
(before taxes and brokerage commissions) from converting the
stock to common stock and selling it
- registration rights: the common stock into which the Series C
Preferred may be converted is required to be registered with the
Securities and Exchange Commission
Series D 6% Convertible Preferred
- number authorized: 75,000 shares
- number outstanding: 75,000 shares
- dividend rate: 6% payable in either cash or common stock
- per share liquidation preference: $100 (aggregate preference of
$7,500,000)
- vote per share: one vote for each share of common stock into
which the preferred stock could be converted as of the record
date for the vote
- right to appoint directors: none
- when convertible: 25,000 shares are convertible 30 days after the
effective date of this prospectus; 25,000 shares are convertible
60 days after the date of this prospectus; and the balance is
convertible 90 days after the date of this prospectus; provided
that not more than 20% of the shares may be converted in any
period of five consecutive trading days. Further, no holder may
convert into common stock if, as a result of such conversion,
that holder would own more than 19.9% of the issued and
outstanding shares of our common stock (we are required to redeem
any excess). In addition, no holder may convert Series D
Preferred Stock if, after such conversion, the holder would be
deemed a beneficial owner of more than 4.99% of the then
outstanding shares of common stock of the company
- conversion price: the lesser of 125% of the closing bid price of
the common stock on April 12, 2000 ($3.1875), or 85% of the
average price for the five trading days
46
<PAGE> 51
prior to the conversion notice date, subject to a $2.50 floor per
share for a 15 month period ending in July 2001
- contains standard anti-dilution provisions to protect against
stock splits and below market stock issuances
- redemption rights: holders have no redemption rights. We may
redeem at our election for cash at a price equal to the greater
of a) an amount sufficient to yield to holders a 17.5% annualized
rate of return or b) the economic benefit a holder would realize
(before taxes and brokerage commissions) from converting the
stock to common stock and selling it
- registration rights: the common stock into which the Series D
Preferred may be converted is required to be registered with the
Securities and Exchange Commission
WARRANTS TO WENTWORTH, LLC PURSUANT TO SERIES C AND SERIES D PREFERRED STOCK
- number of warrants: 1,522,299
- when exercisable: at any time and from time to time; provided,
however, that in no event shall the holder be entitled to
exercise the warrant or shall the company have the obligation to
issue shares upon such exercise of all or any portion of the
warrant to the extent that, after such conversion, the sum of (i)
the number of shares of common stock beneficially owned by the
holder and its affiliates (other than shares of common stock,
which may be deemed beneficially owned through the ownership of
the unconverted portion of the preferred stock or unexercised
portion of the warrants), and (ii) the number of shares of common
stock issuable upon the conversion of the preferred stock or
exercise of the warrants with respect to which the determination
of this proviso is being made, would result in beneficial
ownership by the holder and its affiliates of more than 9.99% of
the
47
<PAGE> 52
outstanding shares of common stock (after taking into account the
shares to be issued to the holder upon such conversion or
exercise)
- exercise price: $4.617 for warrants issued with the Series C
Preferred Stock and $3.9844 for warrants issued with the Series D
Preferred Stock
- contains standard anti-dilution provisions to protect against
stock splits and below market stock issuances
- registration rights: the common stock into which the Series C and
Series D warrants may be converted is required to be registered
with the Securities and Exchange Commission
ANTI-TAKEOVER LAW
Acquisition of controlling interests. A corporation is subject to
Nevada's control share law if it has more than 200 stockholders, at least 100 of
whom are stockholders of record and residents of Nevada, and it does business in
Nevada or through an affiliated corporation.
The law focuses on the acquisition of a "controlling interest" which
means the ownership of outstanding voting shares sufficient, but for the control
share law, to enable the acquiring person to exercise the following proportions
of the voting power of the corporation in the election of directors: (i)
one-fifth or more but less than one-third, (ii) one-third or more but less than
a majority, or (iii) a majority or more. The ability to exercise such voting
power may be direct or indirect, as well as individual or in association with
others.
The effect of the control share law is that the acquiring person, and
those acting in association with it, obtains only such voting rights in the
control shares as are conferred by a resolution of the stockholders of the
corporation, approved at a special or annual meeting of stockholders. The
control share law contemplates that voting rights will be considered only once
by the other stockholders. Thus, there is no authority to strip voting rights
from the control shares of an acquiring person once those rights have been
approved. If the stockholders do not grant voting rights to the control shares
acquired by an acquiring person, those shares do not become permanent non-voting
shares. The acquiring person is free to sell its shares to others. If the buyers
of those shares themselves do not acquire a controlling interest, their shares
do not become governed by the control share law.
If control shares are accorded full voting rights and the acquiring
person has acquired control shares with a majority or more of the voting power,
any stockholder of record, other than an acquiring person, who has not voted in
favor of approval of voting rights is entitled to demand fair value for such
stockholder's shares.
Nevada's control share law may have the effect of discouraging takeovers
of the corporation.
Business combination law. In addition to the above control share law,
Nevada has a business combination law which prohibits certain business
combinations between Nevada corporations and "interested stockholders" for three
years after the "interested stockholder" first
48
<PAGE> 53
becomes an "interested stockholder" unless the corporation's board of directors
approves the combination in advance. For purposes of Nevada law, an "interested
stockholder" is any person who is (i) the beneficial owner, directly or
indirectly, of ten percent or more of the voting power of the outstanding voting
shares of the corporation, or (ii) an affiliate or associate of the corporation
and at any time within the three previous years was the beneficial owner,
directly or indirectly, of ten percent or more of the voting power of the then
outstanding shares of the corporation. The definition of the term "business
combination" is sufficiently broad to cover virtually any kind of transaction
that would allow a potential acquiror to use the corporation's assets to finance
the acquisition or otherwise to benefit its own interests rather than the
interests of the corporation and its other shareholders.
The effect of Nevada's business combination law is to potentially
discourage parties interested in taking control of the company from doing so if
it cannot obtain the approval of our board of directors.
DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION
Pursuant to the company's articles of incorporation, the personal
liability of a director or officer of the company to the company or a
stockholder for monetary damages for breach of a fiduciary duty is limited to
situations in which a director's or officer's acts or omissions involve
intentional misconduct, fraud or knowing violations of law.
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 documents,
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 are necessary to attract and retain qualified persons as directors
and officers.
There is no pending litigation or proceeding involving a director,
officer, employee or other agent of the company as to which indemnification is
being sought, 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.
49
<PAGE> 54
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers or controlling persons, pursuant
to the foregoing provisions, or otherwise, we have been advised that, in the
opinion of the SEC, such indemnification is against public policy as expressed
in the Securities Act, and is, therefore, unenforceable.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this offering, assuming full conversion of our Series
C and Series D Preferred Stock at the current conversion price, we will have
26,869,558 shares of common stock outstanding. Of the outstanding shares of
common stock, 3,522,623 are freely tradable by persons other than executive
officers, directors and ten percent stockholders of the company as that term is
defined under the Securities Act, without restriction or further registration,
and 4,535,201 would be deemed "restricted securities" within the meaning of Rule
144 under the Securities Act. If presently unexercised warrants or options were
exercised to purchase common stock, or presently convertible preferred stock
(other than Series C and Series D Preferred Stock) was converted into common
stock, we would have an additional 14,860,746 shares of "restricted securities"
outstanding for a total of 41,730,304 shares. "Restricted securities" may not be
sold in the absence of registration unless an exemption from registration is
available, including the exemption contained in Rule 144. The presently
outstanding "restricted securities" become eligible for resale under Rule 144 at
various dates commencing on _______________, 2000, and all will be eligible for
resale under Rule 144 by _______________, 200_.
In general, under Rule 144, a stockholder who has beneficially owned
shares of common stock for at least one year is entitled to sell, within any
three-month period, a number of "restricted" shares that does not exceed the
greater of one percent of the then outstanding shares of common stock or the
average weekly trading volume during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to sale limitations, notice
requirements and the availability of current public information about us. Rule
144(k) provides that a stockholder who is not deemed to be an "affiliate" and
who has beneficially owned shares of common stock for at least two years is
entitled to sell those shares at any time under Rule 144(k) without regard to
the limitations described above. In addition to the shares of common stock that
are currently outstanding, a total of 7,319,564 shares of common stock are
reserved for issuance upon exercise of options granted to our directors,
executive officers and employees; 9,063,381 shares are issuable upon exercise of
outstanding warrants; and, at current conversion prices, 5,000,000 shares are
issuable upon conversion of Series C and Series D Preferred Stock.
We are unable to estimate the number of shares that may be sold in the
future by existing holders of shares of our common stock or holders of options
or warrants or convertible securities that are outstanding or the effect, if
any, that sales of shares of common stock by these persons will have on the
market price of the common stock prevailing from time to time. Sales of
50
<PAGE> 55
substantial amounts of common stock by these persons could adversely affect the
then prevailing market prices of the common stock and warrants.
PLAN OF DISTRIBUTION
The shares offered by this prospectus may be sold from time to time by
selling stockholders, who consist of the persons named under "Selling
stockholders" above and those persons' pledgees, donees, transferees or other
successors in interest. The selling stockholders may sell the shares on the OTC
Bulletin Board or otherwise, at market prices or at negotiated prices. They may
sell shares by one or a combination of the following:
- a block trade in which a broker or dealer so engaged will attempt
to sell the shares as agent, but may position and resell a portion of the block
as principal to facilitate the transaction;
- purchases by a broker or dealer as principal and resale by the
broker or dealer for its account pursuant to this prospectus;
- ordinary brokerage transactions and transactions in which a
broker solicits purchasers;
- privately negotiated transactions;
- short sales;
- if such a sale qualifies, in accordance with Rule 144 promulgated
under the Securities Act rather than pursuant to this prospectus; and
- any other method permitted pursuant to applicable law.
In making sales, brokers or dealers engaged by the selling stockholders
may arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from selling stockholders in amounts to be
negotiated prior to the sale. The selling stockholders and any broker-dealers
that participate in the distribution may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act of 1933, and any proceeds or
commissions received by them, and any profits on the resale of shares sold by
broker-dealers, may be deemed to be underwriting discounts and commissions.
If any selling stockholder notifies us that a material arrangement has
been entered into with a broker-dealer for the sale of shares through a block
trade, special offering, exchange distribution or secondary distribution or a
purchase by a broker or dealer, we will file a prospectus supplement, if
required pursuant to Rule 424(c) under the Securities Act of 1933, setting
forth:
51
<PAGE> 56
- the name of each of the participating broker-dealers,
- the number of shares involved,
- the price at which the shares were sold,
- the commissions paid or discounts or concessions allowed to the
broker-dealers, where applicable,
- a statement to the effect that the broker-dealers did not conduct
any investigation to verify the information set out or incorporated by reference
in this prospectus, and
- any other facts material to the transaction.
We are paying the expenses incurred in connection with preparing and
filing this prospectus and the registration statement to which it relates, other
than selling commissions. In addition, in the event the selling stockholders
sell short shares of common stock, this prospectus may be delivered in
connection with such short sales and the shares offered by this prospectus may
be used to cover such short sales. To the extent, if any, that the selling
stockholders may be considered "underwriters" within the meaning of the
Securities Act, the sale of the shares by them shall be covered by this
prospectus.
LEGAL MATTERS
Arter & Hadden LLP, Los Angeles, California, has advised us with respect
to the validity of the shares of common stock offered by this prospectus.
EXPERTS
Carpenter, Kuhen & Sprayberry, independent auditors, have audited the
consolidated financial statements of the company for the year ended December 31,
1999. Lichter and Associates, independent auditors, audited our consolidated
financial statements for the years ended December 31, 1997 and 1998. Their
reports are included in this prospectus. Our consolidated financial statements
are included in this prospectus in reliance on their reports, given their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
The company has filed with the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, a registration statement on Form S-1
under the Securities Act
52
<PAGE> 57
with respect to the securities offered. As permitted by SEC rules, this
prospectus does not contain all of the information set forth in the registration
statement and the exhibits and schedules to the registration statement. For
further information concerning the company and the securities offered, we refer
you to the registration statement and the exhibits and schedules filed as a part
of the registration statement.
Statements contained in this prospectus concerning the contents of any
contract or any other document are not necessarily complete. In each instance
where a copy of that contract or document has been filed as an exhibit to the
registration statement, we refer you to the copy of the contract or document
that has been filed. Each statement is qualified in all respects by reference to
that exhibit. The registration statement, including its exhibits and schedules,
may be inspected without charge at the SEC's Public Reference Room, at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and at the SEC's regional
offices at Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511, and 7 World Trade Center, New York, New York
10048. Copies of all or any part of those documents may be obtained from the
SEC's office after payment of the SEC's prescribed fees. You may call the SEC at
1-800-SEC-0330 for further information on the operation of the SEC's public
reference rooms. The SEC maintains a Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding companies that file electronically with the SEC.
We intend to provide our stockholders with annual reports containing
consolidated financial statements audited by an independent public accounting
firm and will make available to stockholders quarterly reports containing
unaudited consolidated financial data for the first three quarters of each year.
We are subject to the information and reporting requirements of the Securities
Exchange Act of 1934, as amended, and file periodic reports, proxy statements
and other information with the SEC.
53
<PAGE> 58
ESAT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ESAT, INC. FINANCIAL STATEMENTS
Report of Carpenter, Kuhen & Sprayberry, Independent Auditors......................... F-2
Report of Lichter and Associates, Independent Auditors................................ F-3
Consolidated Balance Sheets - December 31, 1999 and 1998 and March 31, 2000 and
1999 (Unaudited).................................................................. F-4
Consolidated Statements of Operations for the years ended December 31, 1999,
1998 and 1997 and the three months ended March 31, 2000 and 1999 (Unaudited)...... F-6
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1999 and 1998 and the three months ended March 31, 2000 (Unaudited)........... F-7
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997 and the three months ended March 31, 2000 and 1999 (Unaudited)...... F-8
Notes to Consolidated Financial Statements for the years ended December 31, 1999,
1998 and 1997 .................................................................... F-9
Notes to Consolidated Financial Statements as of March 31, 2000 and 1999 (Unaudited).. F-29
PACIFICNET, LLC FINANCIAL STATEMENTS
Report of Carpenter, Kuhen & Sprayberry, Independent Auditors......................... F-34
Balance Sheets - December 31, 1999 and 1998 and March 31, 2000 (Unaudited)............ F-35
Statements of Operations and Members' Deficit for the years ended December 31, 1999
and 1998 and the three months ended March 31, 2000 (Unaudited).................... F-37
Statements of Cash Flows for the years ended December 31, 1999 and 1998 and the
three months ended March 31, 2000 (Unaudited)..................................... F-38
Notes to Financial Statements as of December 31, 1999 and 1998........................ F-39
Notes to Financial Statements as of March 31, 2000 (Unaudited)........................ F-47
INTERWIRELESS, INC. FINANCIAL STATEMENTS
Report of Carpenter, Kuhen & Sprayberry, Independent Auditors......................... F-55
Balance Sheets - December 31, 1999 and 1998 and March 31, 2000 (Unaudited)............ F-56
Statements of Operations and Retained Deficit for the period from March 3, 1998
(date of inception) to December 31, 1998 and the year ended December 31, 1999
and the three months ended March 31, 2000 (Unaudited)............................. F-58
Statements of Cash Flows for the period from March 3, 1998 (date of inception) to
December 31, 1998 and the year ended December 31, 1999 and the three months ended
March 31, 2000 (Unaudited)........................................................ F-59
Notes to Financial Statements as of December 31, 1999 and 1998....................... F-60
Notes to Financial Statements as of March 31, 2000 (Unaudited)....................... F-65
PRO FORMA FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of March 31, 2000 (Unaudited)................. F-71
Condensed Consolidated Statement of Operations for the three months ended
March 31, 2000 (Unaudited)........................................................ F-72
Condensed Consolidated Statement of Operations for the year ended December 31, 1999
(Unaudited)....................................................................... F-73
Adjustments........................................................................... F-74
</TABLE>
F-1
<PAGE> 59
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
eSat, Inc.
Fountain Valley, California
We have audited the accompanying consolidated balance sheet of eSat, Inc., and
subsidiaries, as of December 31, 1999, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the year 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 audit.
We conducted our audit 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.
In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of eSat, Inc.
as of December 31, 1999 in conformity with generally accepted accounting
principles.
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
experienced losses from operations since inception, except for the reversal in
1999 of employee stock option compensation expense that was recognized in 1998
in accordance with APB 25, and substantial doubt exists as to its continuation
as a going concern. Continuation is dependent upon the success of future
operations. Management's plans in regard to those matters are described in Note
2. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Certain errors in applying APB 25 resulted in an understatement of previously
reported compensation expense for the year ended December 31, 1998 and was
discovered during the current year. Accordingly, the 1998 financial statements
have been restated and an adjustment has been made to compensation expense and
retained earnings to correct the error.
Carpenter, Kuhen & Sprayberry
Oxnard, California
March 29, 2000
Except Notes 1m and 12, as to which
the date is May 10, 2000.
F-2
<PAGE> 60
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
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 year 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 audit.
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 result 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.
Also, certain errors in applying APB 25 resulted in an understatement of
previously reported compensation expense for the year ended December 31, 1998
and was discovered during the current year. Accordingly the 1998 financial
statements have been restated and an adjustment has been made to compensation
expenses and retained earnings to correct the error.
Lichter and Associates
February 23, 1999, except for Note P, as to which the date is June 14, 1999,
Notes J, K and Q as to which the date is October 22, 1999 and above correction
as to which the date is March 29, 2000 Los Angeles, California
F-3
<PAGE> 61
ESAT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1999 AND 1998
AND MARCH 31, 2000 AND 1999 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1998 2000 1999
CURRENT ASSETS: RESTATED (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash and cash equivalents $3,458,561 $2,567,697 $1,053,742 $2,661,826
Accounts receivable, net 18,669 48,964 540,064 25,095
Inventory, net 135,189 289,260 395,182 203,265
Deposits 420,747 -- 317,385 7,399
Other current assets 23,066 -- 78,697 14,000
---------- ---------- ---------- ----------
Total current assets 4,056,232 2,905,921 2,385,070 2,911,585
---------- ---------- ---------- ----------
PROPERTY AND EQUIPMENT, NET 749,744 293,251 879,035 467,647
---------- ---------- ---------- ----------
OTHER ASSETS:
Note receivable 250,000 15,000 142,139 --
Other assets 100,493 47,215 96,121 76,586
Media licenses, net -- -- 235,010 --
---------- ---------- ---------- ----------
350,493 62,215 473,270 76,586
---------- ---------- ---------- ----------
$5,156,469 $3,261,387 $3,737,375 $3,455,818
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 62
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1998 2000 1999
CURRENT LIABILITIES: RESTATED (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Accounts payable $ 791,467 $ 235,866 $ 1,050,977 $ 101,280
Accrued expenses 161,713 179,692 366,436 93,989
Unearned revenue 78,161 117,070 74,052 101,570
Current portion of obligations
under capital lease 28,401 -- 22,714 19,488
Other current liabilities -- 6,414 -- 8,000
Payroll taxes payable -- -- -- 137,045
Commission payable 160,000 -- -- --
Note payable related party 90,250 -- -- --
Severance pay payable 90,000 -- -- --
Settlement payable 83,866 -- 59,866 --
Current portion of accrued media licenses -- -- 135,357 --
------------ ------------ ------------ ------------
Total current liabilities 1,483,858 539,042 1,709,402 461,372
------------ ------------ ------------ ------------
LONG-TERM LIABILITIES 59,416 -- 62,976 56,072
------------ ------------ ------------ ------------
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 18,345 16,086 18,472 17,579
Additional paid-in capital 25,764,947 96,805,249 22,088,700 86,934,105
Retained deficit (20,899,587) (94,098,990) (20,298,024) (82,454,800)
------------ ------------ ------------ ------------
4,894,205 2,722,345 1,819,648 4,496,884
Less: Subscriptions receivable (1,558,510) -- (558,510) (1,558,510)
Minority interest in equity of subsidiary 277,500 -- 703,859 --
------------ ------------ ------------ ------------
Total stockholders' equity 3,613,195 2,722,345 1,964,997 2,938,374
------------ ------------ ------------ ------------
$ 5,156,469 $ 3,261,387 $ 3,737,375 $ 3,455,818
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 63
ESAT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1999 1998 1997 2000 1999
RESTATED (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
SALES $ 423,640 $ 341,047 $ 1,201,044 $ 563,310 $ 86,352
COST OF SALES 1,432,717 685,570 345,491 547,452 287,436
------------ ------------ ------------ ------------ ------------
Gross margin (1,009,077) (344,523) 855,553 15,858 (201,084)
GENERAL AND ADMINISTRATIVE
EXPENSES 7,916,819 2,613,468 1,289,406 2,753,738 1,342,204
------------ ------------ ------------ ------------ ------------
Loss from operations (8,925,896) (2,957,991) (433,853) (2,737,880) (1,543,288)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Compensation adjustment recognized
under APB 25 81,945,112 (90,754,014) -- 3,315,787 13,149,509
Other income 149,684 -- -- 15,088 14,082
Interest income 57,158 -- -- 10,355 31,159
Gain on sale of assets 675 -- -- -- 675
Minority interest in loss of subsidiary -- -- -- 19,941 --
Interest expense (25,730) (11,371) (19,145) (10,061) (7,148)
------------ ------------ ------------ ------------ ------------
82,126,899 (90,765,385) (19,145) 3,351,110 13,188,277
------------ ------------ ------------ ------------ ------------
Income (loss) before income
taxes and extraordinary
income 73,201,003 (93,723,376) (452,998) 613,230 11,644,989
PROVISION FOR INCOME TAXES 1,600 800 800 -- 800
------------ ------------ ------------ ------------ ------------
Income (loss) before
extraordinary income 73,199,403 (93,724,176) (453,798) 613,230 11,644,189
EXTRAORDINARY INCOME -- 242,990 -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 73,199,403 $(93,481,186) $ (453,798) $ 613,230 $ 11,644,189
============ ============ ============ ============ ============
EARNINGS PER COMMON SHARE:
Income (loss) before extraordinary income $ 4.02 $ (5.83) $ (0.04) $ 0.03 $ 0.63
============ ============ ============ ============ ============
Net income (loss) $ 4.02 $ (5.81) $ (0.04) $ 0.03 $ 0.63
============ ============ ============ ============ ============
EARNINGS PER COMMON SHARE--ASSUMING DILUTION:
Income (loss) before extraordinary item,
as restated $ 3.08 $ (5.83) $ (0.04) $ 0.03 $ 0.45
============ ============ ============ ============ ============
Net income (loss), as restated $ 3.08 $ (5.81) $ (0.04) $ 0.03 $ 0.45
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 64
ESAT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock-Series A Preferred Stock-Series C Common Stock
--------------------------- --------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 -- $ -- -- $ -- 11,407,507 $ 11,408
Net loss -- -- -- -- -- --
Common stock issued in reverse
acquisition -- -- -- -- 1,050,400 1,050
Sale of common stock -- -- -- -- 3,628,029 3,628
Compensation adjustment recognized
under APB 25 -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998, as restated -- -- -- -- 16,085,936 16,086
Net income -- -- -- -- -- --
Compensation adjustment recognized
under APB 25 -- -- -- -- -- --
Sale of common stock -- -- -- -- 3,848,577 3,848
Issuance of common stock for services -- -- -- -- 178,470 179
Sale of preferred stock series A 1,000,000 10,000 -- -- -- --
Sale of preferred stock series C -- -- 50,000 500 -- --
Minority interest in equity of
subsidiary -- -- -- -- -- --
Cancellation of common stock in
settlement -- -- -- -- (1,767,769) (1,768)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 1,000,000 10,000 50,000 500 18,345,214 18,345
Net income -- -- -- -- -- --
Compensation expense recognized
under FAS 123 -- -- -- -- -- --
Compensation adjustment recognized
under APB 25 -- -- -- -- -- --
Issuance of common stock related
to raising capital -- -- -- -- 50,000 50
Cashless exercise of common stock options -- -- -- -- 39,867 40
Cashless exercise of common stock warrants -- -- -- -- 36,509 37
Reversal of payable related to cost
of capital -- -- -- -- -- --
Payment of preferred stock dividend -- -- -- -- -- --
Minority interest in equity of subsidiary -- -- -- -- -- --
Elimination of subscription receivable -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 2000 1,000,000 $ 10,000 50,000 $ 500 18,471,590 $ 18,472
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Additional Minority Total
Paid-In Retained Subscription Interest in Stockholders'
Capital Deficit Receivable Subsidiary Equity
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ 278,643 $ (617,804) $ -- $ -- $ (327,753)
Net loss -- (93,481,186) -- -- (93,481,186)
Common stock issued in reverse
acquisition 103,089 -- -- -- 104,139
Sale of common stock 5,669,503 -- -- -- 5,673,131
Compensation adjustment recognized
under APB 25 90,754,014 -- -- -- 90,754,014
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998, as restated 96,805,249 (94,098,990) -- -- 2,722,345
Net income -- 73,199,403 -- -- 73,199,403
Compensation adjustment recognized
under APB 25 (81,945,112) -- -- -- (81,945,112)
Sale of common stock 3,278,365 -- (558,510) -- 2,723,703
Issuance of common stock for services 1,161,945 -- -- -- 1,162,124
Sale of preferred stock series A 1,990,000 -- (1,000,000) -- 1,000,000
Sale of preferred stock series C 4,474,500 -- -- -- 4,475,000
Minority interest in equity of
subsidiary -- -- -- 277,500 277,500
Cancellation of common stock in
settlement -- -- -- -- (1,768)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 25,764,947 (20,899,587) (1,558,510) 277,500 3,613,195
Net income -- 613,230 -- -- 613,230
Compensation expense recognized
under FAS 123 379,667 -- -- -- 379,667
Compensation adjustment recognized
under APB 25 (3,315,787) -- -- -- (3,315,787)
Issuance of common stock related
to raising capital (50) -- -- -- --
Cashless exercise of common stock options (40) -- -- -- --
Cashless exercise of common stock warrants (37) -- -- -- --
Reversal of payable related to cost
of capital 160,000 -- -- -- 160,000
Payment of preferred stock dividend -- (11,667) -- -- (11,667)
Minority interest in equity of subsidiary -- -- -- 426,359 426,359
Elimination of subscription receivable (900,000) -- 1,000,000 -- 100,000
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2000 $ 22,088,700 $(20,298,024) $ (558,510) $ 703,859 $ 1,964,997
============ ============ ============ ============ ============
</TABLE>
F-7
<PAGE> 65
ESAT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
YEARS
ENDED
DECEMBER 31,
1999 1998 1997
RESTATED
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 73,199,403 $(93,481,186) $ (453,798)
Adjustments to reconcile net income (loss) to net cash used
in operating activities-
Noncash items included in net income (loss):
Depreciation and amortization 251,199 24,659 12,546
Gain on sale of assets (675) -- --
Compensation - stock issued for services 1,162,477 -- --
Compensation adjustment recognized under APB 25 (81,945,112) 90,754,013 --
Minority interest in loss of subsidiary -- -- --
Bad debt expense -- -- --
Net change in operating assets and liabilities 603,697 (97,114) 203,535
------------ ------------ ------------
Net cash used in operating activities (6,729,011) (2,799,628) (237,717)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of fixed assets (585,497) (293,980) (6,539)
Proceeds from sale of fixed assets 13,580 -- --
Increase in notes receivable (235,000) -- --
Purchase of stock -- -- (12,000)
------------ ------------ ------------
Net cash used in investing activities (806,917) (293,980) (18,539)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in notes payable (47,283) -- --
Decrease in capital lease obligations -- -- --
Preferred stock dividend paid -- -- --
Proceeds from issuance of minority interest in subsidiary -- -- --
Proceeds from issuance of preferred stock 5,475,000 -- --
Proceeds from issuance of common stock 2,999,075 5,673,132 253,363
------------ ------------ ------------
Net cash provided by financing activities 8,426,792 5,673,132 253,363
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 890,864 2,579,524 (2,893)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,567,697 (11,827) (8,934)
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,458,561 $ 2,567,697 $ (11,827)
============ ============ ============
</TABLE>
<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 net income (loss) to net cash used
in operating activities-
Noncash items included in net income:
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 loss of 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
------------ ------------
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>
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE> 66
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies of eSat, Inc., is presented to
assist in understanding the Company's financial statements. These
accounting policies conform to generally accepted accounting principles.
eSat, Inc. ("the Company"), was originally incorporated under the laws
of the State of California on February 22, 1996 as Technology Guardian,
Inc. On October, 8, 1998, the Company merged with U.S. Connect 1995,
Inc., and on January 26, 1999, changed its name to eSat, Inc.
a) Nature of Operations
The Company's primary line of business is providing high-speed
satellite Internet access services and products to businesses,
educational institutions, and government agencies, both domestically
and internationally. The Company's satellite network enables it to
provide high-speed data delivery services without geographical
constraints. The Company is also developing a personal interactive
desktop organizer, which includes a variety of personal productivity
programs.
b) Revenue Recognition
The Company reports on the accrual basis for both financial statement
and income tax purposes. Revenue from product sales is recognized as
products are shipped. Revenue from services 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.
c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
d) Cash and Cash Equivalents
The Company considers all investment instruments purchased with a
maturity of three months or less to be cash equivalents.
F-9
<PAGE> 67
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
e) Concentration of Credit Risk
The Company maintains its cash balances in various financial
institutions. The balances are insured by the Federal Deposit
Insurance Corporation up to $100,000. At various times throughout the
year ended December 31, 1999, the Company has maintained balances in
excess of federally insured limits. The Company's uninsured balances
totaled $3,260,611 and $185,239 at December 31, 1999 and 1998,
respectively.
The Company purchases transponder time from one supplier.
f) Accounts Receivable
The allowance for doubtful accounts is established through a
provision for bad debt charged to expense. Receivables are charged
off against the allowance when management believes that the
collectibility of the account is unlikely. Recoveries of amounts
previously charged off are credited to revenues. At December 31, 1999
and 1998, the allowance for doubtful accounts was $26,804 and $0,
respectively.
g) Inventory
Inventory consists of satellite dishes and related equipment and is
stated at the lower of cost or market. Cost is determined using the
weighted average method.
h) Property, Equipment and Depreciation
Property and equipment are recorded at cost. Depreciation of property
and equipment is provided using the straight-line method over the
following estimated useful lives:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
<S> <C>
Machinery and Equipment 3 Years
Furniture 5 Years
Leasehold improvements 3 Years
Office equipment 3 Years
</TABLE>
Expenditures for maintenance and repairs are charged to expense as
incurred.
F-10
<PAGE> 68
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
h) Property, Equipment and Depreciation (Continued)
Property and equipment consist of:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Machinery and equipment $ 434,131 $ 106,281
Office equipment 304,942 86,419
Furniture 113,269 99,173
Leasehold improvement 45,720 24,018
Automobiles -- 19,325
--------- ---------
898,062 335,216
Less - Accumulated depreciation (246,472) (41,965)
--------- ---------
651,590 293,251
Leased property under capital lease, net 98,154 --
--------- ---------
$ 749,744 $ 293,251
========= =========
</TABLE>
i) Principles of Consolidation
The consolidated financial statements include the accounts of eSat,
Inc., and its wholly owned subsidiaries. Significant inter-company
transactions and amounts have been eliminated in consolidation.
j) Research and Development
Research and development costs are charged to operations when
incurred and are included in operating expenses. The amounts charged
to operations for the year ended December 31, 1999 were $500,134. For
the years ended December 31, 1998 and 1997 there were no expenditures
for research and development.
The Company accounts for the creation of its computer software
products in accordance with SFAS 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed.
Accordingly, where technological feasibility has been established but
the software product has not yet been made available for general
release to customers, production costs incurred have been capitalized
in the financial statement. The unamortized portion of the
capitalized costs at December 31, 1999 was $96,451.
F-11
<PAGE> 69
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k) Income Taxes
The Company files a consolidated federal income tax return. The
subsidiaries pay to or receive from eSat, Inc., the parent company,
the amount of federal income taxes they would have paid or received
had the subsidiaries filed separate federal income tax returns.
Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income
taxes. The Company has a deferred tax asset due to net operating loss
carryforwards for income tax purposes and the non-tax deductible
recognition of compensation expense for financial statement purposes.
The deferred tax asset is $2,754,236 and $808,290 at December 31,
1999 and 1998, respectively; however, due to the ongoing nature of
the losses and the potential inability of the Company to ever realize
the benefit, a valuation allowance has been established for 100% of
the deferred tax asset. At December 31, 1999 and 1998, the Company's
available federal net operating loss carry forwards totaled
$12,233,782 and $3,589,974, respectively, and California net
operating loss carry forwards totaled $12,232,752 and $3,590,544,
respectively. The loss carry forwards will expire at various dates
through the year 2019.
l) 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.
F-12
<PAGE> 70
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
l) Stock-Based Compensation (Continued)
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 year ended
December 31, 1999, should not be construed as profitable operations
during that year (See Note 2 for Going Concern disclosure).
m) Net Earnings or Loss Per Share-Restated
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 at December 31, 1999.
Subsequent to the issuance of the financial statements, the weighted
average number of certain options and warrants were found to have
been omitted from the diluted earnings per share calculation. The
correction results in a reduction of reported diluted earnings per
share by $0.35.
<TABLE>
<S> <C>
Income available to common stockholders before adjustments $ 73,199,403
Adjustments --
------------
Income available to common stockholders used in basic EPS $ 73,199,403
============
Weighted average number of common shares used in
basic EPS 18,206,553
Effect of dilutive securities:
Common stock dividend on preferred stock Series A (479)
Stock options 1,762,798
Warrants 1,270,949
Convertible preferred stock Series A 97,691
Convertible preferred stock Series C 11,023
------------
Weighted average number of common shares and dilutive
potential common stock used in dilutive EPS, as
originally reported 21,348,535
Stock options omitted 1,427,566
Warrants omitted 1,017,804
------------
Weighted average number of common shares and dilutive
potential common stock used in dilutive EPS, as restated 23,793,905
============
</TABLE>
The following transactions occurred after December 31, 1999, which,
had they taken place during 1999, would have changed the number of
shares used in the computations of earnings per share: (1) options to
purchase 680,000 common shares were issued to employees; (2) warrants
to purchase 2 million common shares were awarded to non-employees;
and (3) a third party investor agreed to purchase 6 million common
shares and warrants to purchase an additional 6 million shares on
March 16, 2000 (See Note 11).
F-13
<PAGE> 71
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
m) Net Earnings or Loss Per Share (Continued)
Basic net loss per share is based on the weighted average number of
common shares outstanding of 16,085,936 and 11,407,507 for 1998 and
1997, respectively. The basic and diluted earnings per share
calculations are the same for 1998 and 1997 because potential
dilutive securities would have had an antidilutive effect for all
periods presented. Securities that were not included in the 1998 and
1997 earnings per share calculation because they were antidilutive
consist of the convertible preferred stock, warrants and stock
options.
n) Advertising
The Company expenses advertising costs as they are incurred.
Advertising expenses for the years ended December 31, 1999, 1998, and
1997 were $479,387, $175,647, and $125,934, respectively.
(2) 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 March 2000, the
Company entered into a private placement agreement for the sale of
$12,000,000 of common stock. The Company feels that this 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.
(3) NOTE RECEIVABLE - EMPLOYEE
Note receivable - employee at December 31, 1999 consists of a 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.
F-14
<PAGE> 72
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(4) LEASED PROPERTY UNDER CAPITAL LEASE
The Company leases office equipment under capital leases. The economic
substance of these lease agreements is that the Company is financing the
acquisition of the leased assets through the leases and, accordingly,
they are recorded in the Company's assets and liabilities. The following
is an analysis of the leased property under capital lease:
<TABLE>
<CAPTION>
1999 1998
RESTATED
<S> <C> <C>
Office equipment $ 137,081 $ --
Less accumulated depreciation (38,927) --
--------- ---------
$ 98,154 $ --
========= =========
Net minimum lease payments $ 104,653 $ --
Less - amount representing interest (16,836) --
--------- ---------
Present value of net minimum lease payments $ 87,817 $ --
========= =========
</TABLE>
The following is a schedule by years of future minimum lease payments
required under the leases:
<TABLE>
<S> <C>
Years ending December 31, 2000 $ 28,401
2001 32,183
2002 18,674
2003 8,559
--------
$ 87,817
========
</TABLE>
(5) COMMITMENTS AND CONTINGENCIES
a) Non-Cancelable Operating Lease
The Company leases its office facilities under a non-cancelable
operating lease. The lease has a five-year term, which expires
September 30, 2003. At December 31, 1999, base rent under the lease
was $7,332 per month. The lease requires the Company to provide for
common area maintenance expenditures. Base rent and CAM charges are
subject to escalation every year. The Company has the option to renew
the lease for an additional period of five years. Rent expense under
the lease for the years ended December 31, 1999, 1998, and 1997 were
$86,013, $45,500, and $25,900, respectively.
F-15
<PAGE> 73
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(5) COMMITMENTS AND CONTINGENCIES (Continued)
a) Non-Cancelable Operating Lease (Continued)
The following is a schedule by years of future minimum lease payments
required under the lease:
<TABLE>
<S> <C>
Years ending December 31, 2000 $ 88,968
2001 92,577
2002 95,532
2003 73,863
---------
$ 350,940
=========
</TABLE>
b) Pending and Threatened Litigation
On July 23, 1999 a case was filed in which the plaintiff alleges the
Company breached a Subscription Agreement to sell him 2,092,500
shares of Company stock. Plaintiff requested that the case be
dismissed without prejudice, but the Company demanded that the case
be dismissed with prejudice without any compensation to Plaintiff.
This case has been scheduled for trial and the Company believes it
will prevail.
On December 11,1999 a case was filed against the Company and an
Officer by a Plaintiff who had been terminated for poor work
performance. In the original action the Plaintiff named eight causes
of action for unspecified amounts. The Plaintiff subsequently filed
an amended complaint reducing the causes of action to five and naming
the Company only. The Company has denied all allegations.
The Company has received a claim from two individuals that allege
that the Company and a former Officer defrauded them when they
purchased Company stock. They have demanded $160,000 to resolve all
claims. Although a lawsuit has been threatened, one has not been
filed. The Company will deny all allegations.
F-16
<PAGE> 74
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(5) COMMITMENTS AND CONTINGENCIES (Continued)
c) Employment Agreements
The Company has entered into agreements with certain of its officers.
The agreements provide for a minimum annual salary and options to
purchase stock of the Company.
d) Purchase Obligations
In order to assure its supply of satellite transmission time when
needed, the Company has entered into Transponder Lease Agreements
with suppliers with available transponder capacity. The agreements
expire at various dates through November, 2002. The Company may
terminate the agreements only if there is a period of interruption of
service greater than 14 days or in the event the satellite the
agreement pertains to is taken out of service. The Company is
required to make minimum monthly payments as follows, whether or not
it makes use of the time under the agreements:
<TABLE>
<S> <C>
Years ending December 31, 2000 $ 753,960
2001 753,960
2002 72,000
-----------
$ 1,579,920
===========
</TABLE>
In addition, at the Company's option, for additional monthly fees,
the Company may upgrade service if additional capacity is needed. The
Company is responsible for the payment of all taxes, duties, user
fees, and privilege or excise taxes pertaining to the use of the
suppliers' equipment. Fees paid under these agreements totaled
$601,960, $37,230, and $0 for the years ended December 31, 1999,
1998, and 1997, respectively.
(6) NOTE PAYABLE - RELATED PARTY
<TABLE>
<S> <C>
Note payable - Vantage Capital, Inc., due on demand, with interest at
the Applicable Federal Rates, unsecured. Michael Palmer, CEO of eSat,
Inc., is the 100% shareholder of Vantage Capital, Inc. AFR at December
31, 1999 was 5.59%. $ 90,250
========
</TABLE>
F-17
<PAGE> 75
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(7) STOCK PURCHASE AGREEMENT
During the one year period beginning December 29, 1999, the purchasers
of the outstanding Class C Preferred Stock committed to purchase up to
$20,000,000 of Common Stock at a price equal to 90% of the average of
the five lowest closing bid prices for the 10 days prior to each notice
of sale. The agreement requires sales in certain minimum amounts and
requires warrants of 15% with an exercise price of 125% of the purchase
price. The Company must register the shares delivered under this
agreement and the registration must be effective. As of the report date
the shares were not registered.
(8) STOCKHOLDERS' EQUITY
a) Common Stock and Warrants
At December 31, 1999, the Company has 50 million shares authorized
and 18,345,214 issued and outstanding. In addition, the Company had
outstanding at December 31, 1999, 5,039,163 warrants convertible into
common shares at various prices ranging from $0.72 to $14.70, with
expiration dates through December, 2004.
A summary of the warrants outstanding at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE
EXERCISE PRICE RANGE NUMBER CONTRACTUAL LIFE EXERCISE PRICE
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
$0.72 - $1.37 225,000 50 months $ 0.86
$2.40 - $3.14 3,009,286 49 months 2.94
$4.25 - $6.25 1,038,877 58 months 5.02
$8.50 400,000 58 months 8.50
$14.00 - $14.70 366,000 45 months $14.13
</TABLE>
b) Common Stock Reserved
At December 31, 1999, common stock was reserved for the following
reasons:
<TABLE>
<CAPTION>
<S> <C>
Exercise of common stock warrants 5,039,163
Conversion of preferred stock 847,037
Common stock dividends on preferred stock 5,129
Exercise of employee stock options 2,704,873
---------
8,596,202
=========
</TABLE>
F-18
<PAGE> 76
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(8) STOCKHOLDERS' EQUITY (Continued)
c) Preferred Stock
Preferred stock consists of the following:
Series A - $.01 par value, 2 million shares authorized, 1 million
shares issued and outstanding, pays dividends quarterly in the form
of common stock at an annual rate of 12%, cumulative and fully
participating, convertible to common stock at a rate of one share of
preferred stock for $2 of common stock, rounded to the nearest whole
common share. The Company is required to maintain a reserve of common
stock sufficient to effect conversion. Holders of Series A Preferred
Stock are entitled to one vote per share. In addition, the Company
must obtain the consent of the holders of not less than 50% of the
shares of outstanding Series A preferred stock on matters involving
declaration and payment of dividends on common stock, sale or
issuance of capital stock of the Company or options to acquire
capital stock of the Company other than Series A Preferred Stock, or
changes in the general character of the Company's business. All
outstanding shares of Series A preferred stock are held by Vantage
Capital, Inc., a related party.
Series C - $.001 par value, 50,000 shares authorized, issued and
outstanding, pays dividends quarterly in the form of cash or common
stock at an annual rate of 6 percent, cumulative and fully
participating, redeemable and convertible to common stock. The number
of common shares to be issued upon conversion is determined by
multiplying the number of preferred shares to be converted by a
fraction. The numerator of the fraction is the purchase price of the
preferred shares. The denominator of the fraction is the conversion
price, calculated as the lesser of 125 percent of the closing bid
price of the common stock on the trading day immediately preceding
the issue date, or 85 percent of the five day average quoted price
for the five trading days immediately preceding the conversion notice
date.
d) Stock Option Agreements
The Company has granted fixed employee stock-based compensation
options and variable employee stock-based compensation options. The
variable option agreements provide for exercise of options into a
number of shares of Common Stock, which is dependent on the market
value of the stock at the date of exercise. The fixed and variable
option agreements typically have a maximum term of 5 years and are
typically fully vested at the date of grant.
F-19
<PAGE> 77
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(8) STOCKHOLDERS' EQUITY (Continued)
d) Stock Option Agreements (Continued)
The fair value of each option granted is estimated on the grant date
using the Black-Scholes Model. The following assumptions were made in
estimating fair value:
<TABLE>
<CAPTION>
FIXED VARIABLE
OPTIONS OPTIONS
---------- -----------
<S> <C> <C>
Dividend yield 0.00% 0.00%
Risk-free interest rate 6.55% 6.55%
Expected life 2.50 years 2.50 years
Expected volatility 62.32% 62.32%
</TABLE>
Had compensation cost been determined on the basis of fair value
pursuant to FASB Statement No. 123, net income and earnings per share
would have been reduced as follows:
<TABLE>
<S> <C>
Net income:
As reported $ 73,199,403
==============
Pro forma $ (11,953,659)
==============
Basic earnings per share:
As reported $ 4.02
==============
Pro forma $ (0.66)
==============
Diluted earnings per share:
As reported, as restated $ 3.08
==============
Pro forma $ (0.56)
==============
</TABLE>
F-20
<PAGE> 78
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(8) STOCKHOLDERS' EQUITY (Continued)
d) Stock Option Agreements (Continued)
The following is a schedule of the weighted average exercise price
and weighted average fair value in accordance with SFAS 123:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE PRICE FAIR VALUE
-------------- ----------
<S> <C> <C>
Exercise price:
Equals market price $10.25 $0.60
Exceeds market price $3.26 $1.25
Less than market price $6.23 $1.03
</TABLE>
The Company applies APB Opinion 25 in accounting for its fixed and
variable stock compensation plans. Compensation cost charged to
operations in 1999 was $2,522,340 and $(84,467,452) for the fixed and
variable plans, respectively. Compensation cost charged to operations
in 1998 was $0 and $90,754,014 for the fixed and variable plans,
respectively.
Following is a summary of the status of the variable plan during
1999:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVG.
SHARES EXERCISE PRICE
--------- ---------------
<S> <C> <C>
Outstanding at January 1, 1999 6,752,236 $1.98
Granted -- --
Exercised (598,941) 0.95
Forfeited (4,564,422) 1.92
----------
Outstanding at December 31, 1999 1,588,873 2.56
==========
Options exercisable at December 31, 1999 1,588,873 2.56
==========
</TABLE>
F-21
<PAGE> 79
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(8) STOCKHOLDERS' EQUITY (Continued)
d) Stock Option Plan (Continued)
Following is a summary of the status of the variable plan during
1998:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVG.
SHARES EXERCISE PRICE
---------- ---------------
<S> <C> <C>
Outstanding at January 1, 1998 -- $ --
Granted 6,752,236 1.98
Exercised -- --
Forfeited -- --
---------
Outstanding at December 31, 1998 6,752,236 1.98
=========
Options exercisable at December 31, 1998 6,752,236 1.98
=========
</TABLE>
Following is a summary of the status of the fixed plan during 1999:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVG.
SHARES EXERCISE PRICE
--------- ---------------
<S> <C> <C>
Outstanding at January 1, 1999 -- $ --
Granted 1,366,000 7.32
Exercised -- --
Forfeited -- --
---------
Outstanding at December 31, 1999 1,366,000 7.32
=========
Options exercisable at December 31, 1999 1,116,000 8.15
=========
</TABLE>
F-22
<PAGE> 80
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(8) STOCKHOLDERS' EQUITY (Continued)
d) Stock Option Plan (Continued)
Following is a summary of the status of variable options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE
EXERCISE PRICE RANGE NUMBER CONTRACTUAL LIFE EXERCISE PRICE
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
$0.72 580,873 45 months $0.72
$3.00 908,000 45 months $3.00
$9.25 100,000 48 months $9.25
</TABLE>
Following is a summary of the status of fixed options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE
EXERCISE PRICE RANGE NUMBER CONTRACTUAL LIFE EXERCISE PRICE
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
$3.00 - $3.50 335,000 60 months $3.00
$4.00 460,000 55 months $4.00
$5.50 60,000 58 months $5.50
$10.25 11,000 54 months $10.25
$13.13 500,000 53 months $13.13
</TABLE>
e) Common Stock Issuance Settlement
During the years ended December 31, 1998 and 1999, Corporate
Financial Enterprises (CFE) was engaged to complete a private
placement of approximately 2 million shares. This private placement
was to yield proceeds of $1.5 million to the Company. A former
officer of the Company authorized the issuance of over 3.3 million
shares under this agreement. The Company received $1.5 million, but
received no consideration for the excess shares issued.
F-23
<PAGE> 81
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(8) STOCKHOLDERS' EQUITY (Continued)
e) Common Stock Issuance Settlement (Continued)
In settlement of the discrepancy, the Company entered into a Stock
Reconciliation Settlement Agreement with CFE effective December 31,
1999. Under the terms of the agreement the Company received $558,310
in cash as settlement for the unpaid stock, net of unpaid fees owed
CFE. The CFE agreement for future fees will be canceled. Also, the
Company will keep a $1 million deposit made by CFE in anticipation of
purchasing certain preferred shares. CFE waives all rights to receive
any preferred shares. Additionally, approximately 1.8 million shares
owned by the former officer were forfeited and canceled under a
resignation agreement.
(9) BUSINESS COMBINATION
In October, 1998, the Company completed a reverse acquisition with U.S.
Connect 1995, Inc. A total of 11,407,507 common shares were exchanged in
a 1:1 ratio. The transaction was a merger of a private operating company
into a non-operating public shell corporation with nominal assets.
(10) RELATED PARTY TRANSACTIONS
On September 17, 1999, the Company entered into a consulting agreement
(the "Agreement") with Vantage Capital, Inc., which is wholly owned by
Michael Palmer, Chief Executive Officer of eSat, Inc. The 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 Agreement provides for compensation in the form of a
monthly retainer of $5,000 in cash or stock, the issuance of 1.2 million
in warrants exercisable at prices ranging from $4.25 to $8.50, a fee of
10% of the total aggregate consideration paid for any acquisition or
sale by the Company of any business, corporation, or division, a fee
equal to 10% of any private or public placement of debt or equity
securities of the Company, and a share in any fees or commissions
payable by third parties on any transaction contemplated by the
Agreement. In accordance with this agreement, a $160,000 liability was
accrued at December 31, 1999.
During the year ended December 31, 1999, the Company paid $575,526 to
Parks, Palmer, Turner and Yemenidjian, LLP, a public accounting firm in
which Michael Palmer, the Company's current CEO, was previously the
managing partner. The payments were compensation for the services of
Michael Palmer and associates of the firm.
F-24
<PAGE> 82
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(11) STATEMENTS OF CASH FLOWS
The net changes in operating assets and liabilities shown on the
statements of cash flows consist of the following:
<TABLE>
<CAPTION>
RESTATED
1999 1998 1997
<S> <C> <C> <C>
(Increase) Decrease:
Accounts receivable, net $ 30,295 $ 208,022 $(241,405)
Inventory, net 154,071 (92,820) (139,651)
Other current assets (443,813) -- --
Other assets (53,272) (37,688) 52,500
Increase (Decrease):
Accounts payable 385,639 (105,906) 127,989
Accrued expenses (17,979) (32,345) 138,146
Unearned revenue (38,909) 117,070 --
Other liabilities 587,665 (153,447) 265,956
--------- --------- ---------
$ 603,697 $ (97,114) $ 203,535
========= ========= =========
Operating activities reflect:
Interest paid $ 25,730 $ 11,371 $ 19,145
========= ========= =========
Income taxes paid $ 800 $ 800 $ 800
========= ========= =========
</TABLE>
Non-cash financing transactions consisted of subscription receivables
for stock issuance in the amount of $1,558,510, $0, and $0, and
financing of capitalized leases of $135,100, $0, and $0 at December 31,
1999, 1998, and 1997 respectively.
F-25
<PAGE> 83
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
(12) SUBSEQUENT EVENTS
On January 1, 2000, i-Xposure, a subsidiary of eSat, Inc., acquired the
assets of Blackhawk Graphics in exchange for 200,000 i-Xposure shares.
The assets consisted primarily of intellectual property rights and will
be accounted for as a purchase by the subsidiary resulting in
approximately $400,000 of goodwill which will be amortized over seven
years. In addition, the owner of Blackhawk was hired under an employment
agreement that provides for the issuance of 350,000 i-Xposure stock
options after certain milestones are met.
On March 16, 2000, the Company entered into an agreement with a third
party investor to sell 6 million shares of common stock and 6 million
warrants convertible into common stock within 3 years at $3.3125 per
share for a total consideration of $12 million. The proceeds will be
used to retire preferred stock and for acquisitions and general
corporate purposes.
On March 29, 2000, the Company notified the holder of Preferred Stock
Series C of the intent to redeem all 50,000 outstanding shares for
$5,311,824 plus accrued dividends of $60,822.
The Company has signed a letter of intent to acquire InterWireless,
Inc., a wireless Internet service provider, and PacificNet Technologies,
Inc., an Internet service provider.
On April 12, 2000 the Company rescinded its letter of intent to redeem
all outstanding shares of Series C Preferred Stock. The Company issued
Amended and Restated Certificate of Designations for the Series C
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.
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.
F-26
<PAGE> 84
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
Assuming these acquisitions had occurred on January 1, 1999 the
Company's net sales, net income, basic and diluted earnings per share
would have been $3,995,932, $72,726,506, $3.94 and $2.79 respectively
for the year ended December 31, 1999.
The note above regarding the acquisition of Blackhawk Graphics is
incorrect. There were 100,000 shares of eSat, Inc. common stock issued
as a signing bonus of an employment agreement. This was appropriately
accounted for as compensation expense in 1999, the period in which the
employment agreement was signed.
In April 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, Inc.
(13) PRIOR PERIOD ADJUSTMENT
The accompanying financial statements for 1998 have been restated to
correct an error in the application of APB 25, Accounting for Stock
Issued to Employees, made in 1998. The effect of the restatement was to
decrease net income for 1998 by $90,754,014 ($5.64 per share), net of
income tax.
(14) 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
F-27
<PAGE> 85
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
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.
F-28
<PAGE> 86
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
caused a considerable reversal of the previously recognized non-cash
compensation cost. The resulting net income for the year ended
December 31, 1999, should not be construed as profitable operations
during that year (See Note 3 for Going Concern disclosure).
F-29
<PAGE> 87
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 18,614,509
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.
F-30
<PAGE> 88
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 shareholder. A $12.5 million equity line of credit is
available with this same shareholder. The Company feels that this 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.
F-31
<PAGE> 89
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 the year ended December 31, 1999.
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.
F-32
<PAGE> 90
PACIFICNET, LLC
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
TOGETHER WITH INDEPENDENT AUDITORS' REPORT
AND MARCH 31, 2000 (UNAUDITED)
F-33
<PAGE> 91
[CARPENTER KUHEN & SPRAYBERRY LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Members
PacificNet, LLC
Universal City, California
We have audited the accompanying balance sheets of PacificNet, LLC, as of
December 31, 1999 and 1998, and the related statements of operations and
members' deficit, 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 PacificNet, LLC as of December
31, 1999 and 1998 and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
CARPENTER, KUHEN & SPRAYBERRY
Bakersfield, California
April 24, 2000
F-34
<PAGE> 92
PACIFICNET, LLC
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
AND MARCH 31, 2000 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1999 1998 2000
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 43,367 $135,819 $ --
Accounts receivable, net 335,417 71,936 235,125
Due from related party 64,553 16,139 66,053
Other current assets 1,600 8,786 5,966
Due from members -- 2,376 --
-------- -------- --------
Total current assets 444,937 235,056 307,144
PROPERTY AND EQUIPMENT, NET 406,133 460,582 483,872
DEPOSITS 55,937 16,746 64,937
-------- -------- --------
$907,007 $712,384 $855,953
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-35
<PAGE> 93
LIABILITIES AND MEMBERS' DEFICIT
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 2000
1999 1998 (UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Bank Overdraft $ -- $ -- $ 10,780
Accounts payable 252,980 294,944 367,534
Accrued expenses 38,242 34,634 25,455
Other Current Liabilities -- -- 18,886
Deferred revenue 96,101 72,134 166,199
Unearned revenue 228,571 -- 151,883
Contracts payable 76,973 22,710 58,058
Current portion of obligations under capital lease 47,648 23,094 44,751
Current portion of long-term debt 250,347 95,712 229,186
--------- --------- ----------
Total current liabilities 990,862 543,228 1,072,732
--------- --------- ----------
LONG-TERM LIABILITIES:
Obligations under capital lease 70,979 18,160 62,792
Long-term debt -- 250,348 --
--------- --------- ----------
70,979 268,508 62,792
--------- --------- ----------
COMMITMENTS AND CONTINGENCIES -- -- --
--------- --------- ----------
MEMBERS' DEFICIT (154,834) (99,352) (279,571)
--------- --------- ----------
$ 907,007 $ 712,384 $ 855,953
========= ========= ==========
</TABLE>
F-36
<PAGE> 94
PACIFICNET, LLC
STATEMENTS OF OPERATIONS AND MEMBERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEARS ENDED DECEMBER 31, 2000
1999 1998 (UNAUDITED)
<S> <C> <C> <C>
SALES $ 3,244,764 $ 2,133,570 $ 965,106
COST OF SALES 2,371,923 1,970,520 757,587
----------- ----------- ---------
Gross margin 872,841 163,050 207,519
GENERAL AND ADMINISTRATIVE EXPENSES 598,112 328,573 250,193
----------- ----------- ---------
Income (loss) from operations 274,729 (165,523) (42,674)
----------- ----------- ---------
OTHER INCOME (EXPENSE):
Management fee income 18,000 15,000 4,500
Interest income 12 -- --
Loss on sale of property and equipment (123,043) (24,286) --
Interest expense (42,462) (15,638) (10,336)
Other income (expense) (2,000) -- 24,081
----------- ----------- ---------
(149,493) (24,924) 18,245
----------- ----------- ---------
Income (loss) before income taxes 125,236 (190,447) (24,429)
PROVISION FOR INCOME TAXES 3,800 3,800 --
----------- ----------- ---------
Net income (loss) 121,436 (194,247) (24,429)
MEMBERS' EQUITY, (DEFICIT) BEGINNING OF PERIOD (99,352) 173,395 (154,834)
Distributions (176,918) (78,500) (100,308)
----------- ----------- ---------
MEMBERS' DEFICIT, END OF PERIOD $ (154,834) $ (99,352) $(279,571)
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-37
<PAGE> 95
PACIFICNET, LLC
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND
THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31,
DECEMBER 31, 2000
1999 1998 (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 121,436 $(194,247) $ (24,429)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities-
Noncash items included in net income:
Depreciation expense 109,385 129,761 31,725
Loss on disposal of assets 123,043 24,286 --
Loss on worthless stock 2,000 -- --
Net change in operating assets and liabilities (83,304) 163,363 200,989
--------- --------- ---------
Net cash provided by operating activities 272,560 123,163 208,285
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in amount due from related party (48,414) (18,113) (1,500)
Decrease (increase) in amount due from members 2,376 (2,376) --
Payments for purchase of fixed assets (123,529) (82,332) (109,464)
Proceeds from sale of fixed assets 56,700 -- --
Purchase of stock -- (2,000) --
--------- --------- ---------
Net cash used in investing activities (112,867) (104,821) (110,964)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in contracts payable 54,263 22,710 (18,915)
Payments of lease obligations (33,777) (12,044) (11,084)
Issuance of long-term debt -- 269,049 --
Payments of long-term debt (95,713) -- (21,161)
Member distributions (176,918) (78,500) (100,308)
--------- --------- ---------
Net cash (used in) provided by financing
activities (252,145) 201,215 (151,468)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH (92,452) 219,557 (54,147)
CASH (OVERDRAFT), BEGINNING OF PERIOD 135,819 (83,738) 43,367
--------- --------- ---------
CASH (OVERDRAFT), END OF PERIOD $ 43,367 $ 135,819 $ (10,780)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-38
<PAGE> 96
PACIFICNET, LLC
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies of PacificNet, LLC, is presented to
assist in understanding the Company's financial statements. These
accounting policies conform to generally accepted accounting principles.
PacificNet, LLC ("the Company"), was formed as a California limited
liability company on May 3, 1995.
a) Nature of Operations
The Company's primary line of business is providing a wide range of
services under the product name VISP or Virtual Internet Service
Provider. The VISP product is geared to companies who currently or
wish to offer ISP services without the burden of investing in and
maintaining the "back office" portion of an ISP business. The VISP
product is completely customized to meet the customers' branding
requirements and is operated by the Company in its network operations
center. Services include user signup, billing, authentication, email,
news, technical support and access to more than 1,100 dialup
locations throughout the world.
b) Basis of Accounting
The Company reports on the accrual basis for financial statement
purposes and the cash basis for income tax purposes.
c) Revenue Recognition
Revenue from product sales is recognized as products are shipped.
Revenue from services is recognized as the service is provided.
Deferred revenue consists of prepaid internet access fees, prepaid
VISP contract services and deferred start-up fees. Start-up fee
revenue is amortized using the straight-line method over the
estimated life of the contract. A related liability, deferred
revenue, is recorded for the unearned portion of service revenue
received. Deferred revenue was $96,101 and $72,134 at December 31,
1999 and 1998, respectively.
d) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-39
<PAGE> 97
PACIFICNET, LLC
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
(Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
e) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of accounts receivable and
cash. Beginning in 1999 the Company has a VISP service contract with
a nationwide Internet service provider to provide for its program
participants dial-up authentication, Email and billing. The Company
receives a fee per program participant per month on a prorated basis
taking into account deactivations and cancellations of participants.
The service contract has a three-year term ending March 31, 2002 with
an automatic renewal clause and is to continue indefinitely until the
agreement is terminated by either party. This major customer
comprised 60% of accounts receivable at December 31, 1999. The
revenue from this major customer comprised 30% of sales for the year
ended December 31, 1999. For the year ended December 31, 1998 the
Company had two major customers which each comprised 10% and 14% of
accounts receivable, respectively. The Company generally requires no
collateral from its customers.
The Company maintains its cash balances in one financial institution.
The balances are insured by the Federal Deposit Insurance Corporation
up to $100,000. At various times throughout the years ended December
31, 1999 and 1998, the Company has maintained balances in excess of
federally insured limits. The Company's uninsured balances totaled $0
and $35,819 at December 31, 1999 and 1998, respectively.
f) Accounts Receivable
The allowance for doubtful accounts is established through a
provision for bad debt charged to expense. Receivables are charged
off against the allowance when management believes that the
collectibility of the account is unlikely. Recoveries of amounts
previously charged off are credited to revenues. At December 31, 1999
and 1998, the allowance for doubtful accounts was $127,434 and
$45,882, respectively.
g) Property, Equipment and Depreciation
Property and equipment are recorded at cost. Depreciation of property
and equipment is provided using the straight-line method over the
following estimated useful lives:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
<S> <C>
Computer equipment 5 Years
Office equipment and furniture 7 Years
Accounting software 3 Years
</TABLE>
F-40
<PAGE> 98
PACIFICNET, LLC
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
(Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
g) Property, Equipment and Depreciation (Continued)
Expenditures for maintenance and repairs are charged to expense as
incurred.
Property and equipment consists of:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Computer equipment $ 355,934 $ 628,410
Office equipment and furniture 55,147 53,486
Accounting software 14,030 --
--------- ---------
425,111 681,896
Less - Accumulated depreciation (152,875) (267,262)
--------- ---------
272,236 414,634
Leased property under capital lease, net 133,897 45,948
--------- ---------
$ 406,133 $ 460,582
========= =========
</TABLE>
h) Research and Development
Research and development costs are charged to operations when
incurred and are included in operating expenses. The amounts charged
to operations for the years ended December 31, 1999 and 1998 were $0
and $2,580, respectively.
i) Income Tax
The Company is treated as a partnership for federal income tax
purposes. Consequently, federal income taxes are not payable by, or
provided for, the Company. Members are taxed individually on their
shares of the Company's earnings at the federal and state levels. The
Company is subject to an annual California minimum franchise tax of
$800 and the California Limited Liability Company Fee, which is based
on annual gross sales. The Company's net income or loss is allocated
among the members in accordance with the operating agreement of the
Company.
j) Advertising
The Company expenses advertising costs as they are incurred.
Advertising expenses for the years ended December 31, 1999 and 1998
were $6,405 and $5,977, respectively.
F-41
<PAGE> 99
PACIFICNET, LLC
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
(Continued)
(2) LEASED PROPERTY UNDER CAPITAL LEASE
The Company leases computer equipment under capital leases. The economic
substance of these lease agreements is that the Company is financing the
acquisition of the leased assets through the leases and, accordingly,
they are recorded in the Company's assets and liabilities. The following
is an analysis of the leased property under capital leases:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Computer equipment $ 160,209 $ 49,058
Less - Accumulated depreciation (26,312) (3,110)
--------- --------
$ 133,897 $ 45,948
========= ========
Net minimum lease payments $ 141,296 $ 48,195
Less - Amount representing interest (22,669) (6,941)
--------- --------
Present value of net minimum lease payments $ 118,627 $ 41,254
========= ========
</TABLE>
The following is a schedule by years of future minimum lease payments
required under the leases:
<TABLE>
<S> <C>
Years Ending December 31, 2000 $ 61,061
2001 50,350
2002 29,023
2003 862
--------
$141,296
========
</TABLE>
F-42
<PAGE> 100
PACIFICNET, LLC
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
(Continued)
(3) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Note payable to U.S. Bank, secured by
accounts receivable, property and equipment,
monthly principal and interest payments of
$6,433, balloon payment of $229,186 due
April 17, 2000, interest at U.S. Bank
index rate plus 2% $ 242,071 $ 291,950
Note payable to U.S. Bank, secured by
accounts receivable, property and equipment,
monthly principal payments of $4,201,
interest due monthly at the U.S. Bank
index rate plus 1%, due February 1, 2000 8,276 54,110
--------- ---------
250,347 346,060
Less current portion (250,347) (95,712)
--------- ---------
$ -- $ 250,348
========= =========
</TABLE>
F-43
<PAGE> 101
PACIFICNET, LLC
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
(Continued)
(4) COMMITMENTS AND CONTINGENCIES
Non-Cancelable Operating Leases
Beginning in 1999 the Company leases its office facilities under a
non-cancelable operating lease. The lease has a 65 month term, which
expires September 1, 2004. At December 31, 1999, base rent under the
lease was $26,313 per month. Base rent escalates each year. Rent expense
for the year ended December 31, 1999 was $257,034. There is no renewal
option on this lease.
The Company leases computer equipment under non-cancelable operating
leases. The lease terms range from 20 months to 60 months and expire
from October 31, 2000 to May 31, 2004. At December 31, 1999 base rent
under the lease agreements ranged from $400 to $3,643 per month. Rent
expense for the years ended December 31, 1999 and 1998 was $196,336 and
$255,020, respectively. Certain operating leases provide for renewal
options for one year periods at their fair rental value at the time of
renewal. In the normal course of business, operating leases are
generally renewed or replaced by other leases.
The Company leases office equipment under a non-cancelable operating
lease. The lease has a 60 month term, which expires November 30, 2001.
At December 31, 1999 base rent under the lease was $405.94 per month.
Rent expense for the years ended December 31, 1999 and 1998 was $4,871.
There is no renewal option on this lease.
The following is a schedule by years of future minimum lease payments
required under the leases:
<TABLE>
<S> <C>
Years Ending December 31, 2000 $ 504,334
2001 475,931
2002 399,870
2003 363,985
2004 279,762
----------
$2,023,882
==========
</TABLE>
(5) RETIREMENT PLAN
Effective January 31, 1998 the Company sponsors a 401(k) profit sharing
plan that covers all employees who have attained the age of eighteen and
have completed twelve months of service during the eligibility period.
The Company has elected not to make contributions to the plan for the
calendar years ended December 31, 1999 and 1998. Company contributions
are vested according to a schedule. Employee contributions are fully
vested.
F-44
<PAGE> 102
PACIFICNET, LLC
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
(Continued)
(6) RELATED PARTY TRANSACTIONS
Beginning in 1998, the Company receives management fee income of $1,500
per month from Interwireless, Inc., a related party. The Company is
related to Interwireless, Inc. by common ownership and management. Under
the terms of the management agreement the Company provides
Interwireless, Inc. the use of its facilities, equipment and staff.
Total fees received from Interwireless, Inc. for the years ended
December 31, 1999 and 1998 were $18,000 and $15,000, respectively. The
Company has an unsecured amount due from Interwireless, Inc. in the
amount of $64,553 and $16,139 at December 31, 1999 and 1998,
respectively. The Company has guaranteed several lease commitments of
Interwireless, Inc. The amount guaranteed by the Company for the
remaining terms of the leases is $74,013 at December 31, 1999.
(7) STATEMENTS OF CASH FLOWS
The net changes in operating assets and liabilities shown on the
statements of cash flows consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
(Increase) Decrease:
Accounts receivable, net $(263,481) $ (6,921)
Other current assets 5,186 3,539
Deposits (39,191) (2,058)
Increase (Decrease):
Accounts payable (41,964) 114,632
Accrued expenses 3,608 34,634
Deferred revenue 23,967 19,537
Unearned revenue 228,571 --
--------- ---------
$ (83,304) $ 163,363
========= =========
Operating activities reflect:
Interest paid $ 42,462 $ 15,638
========= =========
Income taxes paid $ 3,800 $ 3,800
========= =========
</TABLE>
Non-cash financing transactions consisted of financing of capitalized
leases of $111,150 and $49,058 at December 31, 1999 and 1998,
respectively.
F-45
<PAGE> 103
PACIFICNET, LLC
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
(Continued)
(8) SUBSEQUENT EVENTS
In April 2000, prior to the merger described below, the Company
incorporated. The name of the corporation is PacificNet Technologies,
Inc. The members exchanged their interests for a proportionate share of
PacificNet Technologies, Inc. common stock.
On April 13, 2000 the Company was merged with and into a wholly-owned
subsidiary of eSat, Inc. through the exchange of all the outstanding
shares of the Company's common stock for 2,750,000 shares of common
stock of eSat, Inc. pursuant to an agreement dated April 13, 2000.
On February 1, 2000 and April 17, 2000 the notes payable to U.S. Bank,
became due. As of April 24, 2000, the date of the Independent Auditors'
Report, the Company was negotiating with U.S. Bank to refinance the
remaining amount due of $229,186.
F-46
<PAGE> 104
PACIFICNET, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies of PacificNet, LLC, is presented to
assist in understanding the Company's financial statements. These
accounting policies conform to generally accepted accounting principles.
PacificNet, LLC ("the Company"), was formed as a California limited
liability company on May 3, 1995.
a) Nature of Operations
The Company's primary line of business is providing a wide range of
services under the product name VISP or Virtual Internet Service
Provider. The VISP product is geared to companies who currently or
wish to offer ISP services without the burden of investing in and
maintaining the "back office" portion of an ISP business. The VISP
product is completely customized to meet the customers' branding
requirements and is operated by PacificNet in its network operations
center. Services include user signup, billing, authentication, email,
news, technical support and access to more than 1,100 dialup
locations throughout the world.
b) Basis of Accounting
The Company reports on the accrual basis for financial statement
purposes and the cash basis for income tax purposes.
c) Revenue Recognition
Revenue from product sales is recognized as products are shipped.
Revenue from services is recognized as the service is provided.
Deferred revenue consists of prepaid internet access fees, prepaid
VISP contract services and deferred start-up fees. Start-up fee
revenue is amortized using the straight-line method over the
estimated life of the contract. A related liability, deferred
revenue, is recorded for the unearned portion of service revenue
received. Deferred revenue was $166,199 at March 31, 2000.
d) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-47
<PAGE> 105
PACIFICNET, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 (UNAUDITED)
(Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
e) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of accounts receivable and
cash. Beginning in 1999 the Company has a VISP service contract with
a nationwide Internet service provider to provide for its program
participants dial-up authentication, Email and billing. The Company
receives a fee per program participant per month on a prorated basis
taking into account deactivations and cancellations of participants.
The service contract has a three-year term ending March 31, 2002 with
an automatic renewal clause and is to continue indefinitely until the
agreement is terminated by either party. This major customer
comprised 42% of accounts receivable at March 31, 2000. The revenue
from this major customer comprised 56% of sales for the three months
ended March 31, 2000. The Company generally requires no collateral
from its customers.
The Company maintains its cash balances in one financial institution.
The balances are insured by the Federal Deposit Insurance Corporation
up to $100,000. At various times throughout the three months ended
March 31, 2000, the Company has maintained balances in excess of
federally insured limits.
f) Accounts Receivable
The allowance for doubtful accounts is established through a
provision for bad debt charged to expense. Receivables are charged
off against the allowance when management believes that the
collectibility of the account is unlikely. Recoveries of amounts
previously charged off are credited to revenues. At March 31, 2000,
the allowance for doubtful accounts was $161,576.
g) Property, Equipment and Depreciation
Property and equipment are recorded at cost. Depreciation of property
and equipment is provided using the straight-line method over the
following estimated useful lives:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
<S> <C>
Computer equipment 5 Years
Office equipment and furniture 7 Years
Accounting software 3 Years
Other software 3 Years
</TABLE>
F-48
<PAGE> 106
PACIFICNET, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 (UNAUDITED)
(Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
g) Property, Equipment and Depreciation (Continued)
Expenditures for maintenance and repairs are charged to expense as
incurred.
Property and equipment consists of:
<TABLE>
<S> <C>
Computer equipment $ 459,713
Office equipment and furniture 57,090
Accounting software 14,589
Other software 3,183
---------
534,575
Less - Accumulated depreciation (176,589)
---------
357,986
Leased property under capital lease, net 125,886
---------
$ 483,872
=========
</TABLE>
h) Income Tax
The Company is treated as a partnership for federal income tax
purposes. Consequently, federal income taxes are not payable by, or
provided for, the Company. Members are taxed individually on their
shares of the Company's earnings at the federal and state levels. The
Company is subject to an annual California minimum franchise tax of
$800 and the California Limited Liability Company Fee, which is based
on annual gross sales. The Company's net income or loss is allocated
among the members in accordance with the operating agreement of the
Company.
i) Advertising
The Company expenses advertising costs as they are incurred.
Advertising expenses for the three months ended March 31, 2000 were
$4,119.
F-49
<PAGE> 107
PACIFICNET, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 (UNAUDITED)
(Continued)
(2) LEASED PROPERTY UNDER CAPITAL LEASE
The Company leases computer equipment under capital leases. The economic
substance of these lease agreements is that the Company is financing the
acquisition of the leased assets through the leases and, accordingly,
they are recorded in the Company's assets and liabilities. The following
is an analysis of the leased property under capital leases:
<TABLE>
<S> <C>
Computer equipment $ 160,209
Less - Accumulated depreciation (34,323)
---------
$ 125,886
=========
Net minimum lease payments $ 128,093
Less - Amount representing interest (20,550)
---------
Present value of net minimum lease payments $ 107,543
=========
</TABLE>
The following is a schedule by years of future minimum lease payments
required under the leases:
<TABLE>
<S> <C>
Years Ending March 31, 2001 $ 58,167
2002 46,922
2003 23,004
--------
$ 128,093
=========
</TABLE>
(3) LONG-TERM DEBT
<TABLE>
<S> <C>
Note payable to U.S. Bank, secured by accounts receivable, property
and equipment, monthly principal and interest payments of $6,433,
balloon payment of $229,186 due April 17, 2000, interest at U.S.
Bank index rate plus 2%. $ 229,186
Less current portion (229,186)
---------
$ --
==========
</TABLE>
F-50
<PAGE> 108
PACIFICNET, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 (UNAUDITED)
(Continued)
(4) COMMITMENTS AND CONTINGENCIES
Non-Cancelable Operating Leases
Beginning in 1999 the Company leases its office facilities under a
non-cancelable operating lease. The lease has a 65 month term, which
expires September 1, 2004. At March 31, 2000, base rent under the lease
was $26,313 per month. Base rent escalates each year. Rent expense for
the three months ended March 31, 2000 was $95,749. There is no renewal
option on this lease.
The Company leases computer equipment under non-cancelable operating
leases. The lease terms range from 20 months to 60 months and expire
from October 31, 2000 to May 31, 2004. At March 31, 2000 base rent under
the lease agreements ranged from $400 to $3,643 per month. Rent expense
for the three months ended March 31, 2000 was $79,681. There are no
renewal options for these leases.
The Company leases office equipment under non-cancelable operating
leases. The lease terms range from 60 months to 63 months and expire
from November 31, 2001 to July 31, 2005. At March 31, 2000 base rent
under the lease agreements ranged from $405 to $1,263 per month. Rent
expense for the three months ended March 31, 2000 was $1,218. There are
no renewal options for these leases.
The Company leases transportation equipment under non-cancelable
operating leases. The lease terms are 48 months and expire from February
28, 2004 to March 31, 2004. At March 31, 2000 base rent under the lease
agreements ranged from $796 to $840 per month. Rent expense for the
three months ended March 31, 2000 was $9,667. There are no renewal
options for these leases.
The following is a schedule by years of future minimum lease payments
required under the leases:
<TABLE>
<S> <C>
Years Ending March 31, 2001 $ 576,170
2002 551,285
2003 392,934
2004 365,145
2005 and thereafter 182,626
-----------
$ 2,068,160
===========
</TABLE>
F-51
<PAGE> 109
PACIFICNET, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 (UNAUDITED)
(Continued)
(5) RETIREMENT PLAN
Effective January 31, 1998 the Company sponsors a 401(k) profit sharing
plan that covers all employees who have attained the age of eighteen and
have completed twelve months of service during the eligibility period.
The Company has elected not to make contributions to the plan for the
calendar year ended December 31, 1999. Company contributions to the plan
for the calendar year ending December 31, 2000 are discretionary and
have not yet been determined. Company contributions are vested according
to a schedule. Employee contributions are fully vested.
(6) RELATED PARTY TRANSACTIONS
Beginning in 1998, the Company receives management fee income of $1,500
per month from Interwireless, Inc., a related party. The Company is
related to Interwireless, Inc. by common ownership and management. Under
the terms of the management agreement the Company provides
Interwireless, Inc. the use of its facilities, equipment and staff.
Total fees received from Interwireless, Inc. for the three months ended
March 31, 2000 was $4,500. The Company has an unsecured amount due from
Interwireless, Inc. in the amount of $66,053 at March 31, 2000. The
Company has guaranteed several lease commitments of Interwireless, Inc.
The amount guaranteed by the Company for the remaining terms of the
leases is $67,910.
(7) STATEMENTS OF CASH FLOWS
The net changes in operating assets and liabilities shown on the
statements of cash flows consist of the following:
<TABLE>
<S> <C>
(Increase) Decrease:
Accounts receivable, net $ 100,292
Other current assets (4,366)
Deposits (9,000)
Increase (Decrease):
Accounts payable 114,554
Accrued expenses (12,787)
Deferred revenue 70,098
Unearned revenue (76,688)
Other current liabilities 18,886
---------
$ 200,989
=========
Operating activities reflect:
Interest paid $ 10,336
=========
</TABLE>
F-52
<PAGE> 110
PACIFICNET, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 (UNAUDITED)
(Continued)
(8) SUBSEQUENT EVENTS
In April 2000, prior to the merger described below, the Company
incorporated. The name of the corporation is PacificNet Technologies,
Inc. The members exchanged their interests for a proportionate share of
PacificNet Technologies, Inc. common stock.
On April 13, 2000 the Company was merged with and into a wholly-owned
subsidiary of eSat, Inc. through the exchange of all the outstanding
shares of the Company's common stock for 2,750,000 shares of common
stock of eSat, Inc. pursuant to an agreement dated April 13, 2000.
On April 17, 2000 the Company's long-term debt, a note payable to U.S.
Bank, became due. As of April 28, 2000, the Company was negotiating with
U.S. Bank to refinance the remaining amount due of $229,186.
F-53
<PAGE> 111
INTERWIRELESS, INC.
FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 3, 1998 (DATE OF INCEPTION) TO
DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31, 1999
TOGETHER WITH INDEPENDENT AUDITORS' REPORT
F-54
<PAGE> 112
[CARPENTER KUHEN & SPRAYBERRY LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Interwireless, Inc.
Universal City, California
We have audited the accompanying balance sheets of Interwireless, Inc., (a
California corporation) as of December 31, 1999 and 1998, and the related
statements of operations and retained deficit, and cash flows for the period
from March 3, 1998 (Date of Inception) to December 31, 1998 and the year ended
December 31, 1999. 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 Interwireless, Inc. as of
December 31, 1999 and 1998 and the results of its operations and its cash flows
for the period from March 3 (Date of Inception) to December 31, 1998 and the
year ended December 31, 1999, in conformity with generally accepted accounting
principles.
CARPENTER, KUHEN & SPRAYBERRY
Bakersfield, California
April 24, 2000
F-55
<PAGE> 113
INTERWIRELESS, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
AND MARCH 31, 2000 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1998 2000
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 4,510 $ 5,749 $ 5,502
Accounts receivable, net 20,615 7,178 9,623
Inventory 3,490 8,786 4,859
Deferred income taxes 2,514 -- 2,374
Other current assets -- 1,169 --
--------- -------- --------
Total current assets 31,129 22,882 22,358
--------- -------- --------
PROPERTY AND EQUIPMENT, AT COST:
Computer equipment 92,715 65,759 97,325
Less - Accumulated depreciation (22,781) (6,626) (27,640)
--------- -------- --------
69,934 59,133 69,685
--------- -------- --------
OTHER ASSETS:
Deposits 3,589 2,000 3,589
Other asset 1,866 2,456 1,719
--------- -------- --------
5,455 4,456 5,308
--------- -------- --------
$ 106,518 $ 86,471 $ 97,351
========= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-56
<PAGE> 114
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 2000
1999 1998 (UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 22,705 $ 16,207 $ 18,985
Deferred revenue 18,267 22,977 13,253
Due to shareholders 34,700 34,900 34,700
Due to related party 64,595 16,139 66,235
Other current liabilities 1,058 7,693 278
Income taxes payable -- 800
--------- -------- --------
Total current liabilities 141,325 98,716 133,451
--------- -------- --------
NON-CURRENT DEFERRED INCOME TAXES 1,899 1,557 2,062
--------- -------- --------
COMMITMENTS AND CONTINGENCIES -- -- --
--------- -------- --------
STOCKHOLDERS' DEFICIT:
Common stock - no par value
Authorized - 100,000 shares
Issued and outstanding - 7,500 shares 7,500 7,500 7,500
Retained deficit (44,206) (21,302) (45,662)
--------- -------- --------
Total stockholders' deficit (36,706) (13,802) (38,162)
--------- -------- --------
$ 106,518 $ 86,471 $ 97,351
========= ======== ========
</TABLE>
F-57
<PAGE> 115
INTERWIRELESS, INC.
STATEMENTS OF OPERATIONS AND RETAINED DEFICIT
FOR THE PERIOD FROM MARCH 3, 1998 (DATE OF INCEPTION) TO
DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31, 1999
AND THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
PERIODS ENDED DECEMBER 31, 2000
1999 1998 (UNAUDITED)
<S> <C> <C> <C>
SALES $ 327,528 $ 167,264 $ 77,551
COST OF SALES 307,955 152,983 58,610
--------- --------- --------
Gross margin 19,573 14,281 18,941
GENERAL AND ADMINISTRATIVE EXPENSES 43,849 33,226 19,294
--------- --------- --------
Loss from operations (24,276) (18,945) (353)
--------- --------- --------
INCOME TAX PROVISION (BENEFIT):
Current 800 800 800
Deferred (2,172) 1,557 303
--------- --------- --------
(1,372) 2,357 1,103
--------- --------- --------
Net loss (22,904) (21,302) (1,456)
RETAINED DEFICIT, BEGINNING OF YEAR (21,302) -- (44,206)
--------- --------- --------
RETAINED DEFICIT, END OF YEAR $ (44,206) $ (21,302) $(45,662)
========= ========= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-58
<PAGE> 116
INTERWIRELESS, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM MARCH 3, 1998 (DATE OF INCEPTION) TO
DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31, 1999
AND THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
PERIODS ENDED ENDED
DECEMBER 31, MARCH 31, 2000
1999 1998 (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(22,904) $(21,302) $(1,456)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Noncash items included in net income:
Depreciation expense 16,155 6,626 4,860
Deferred income tax provision (2,172) 1,557 303
Net change in operating assets and liabilities (13,618) 26,088 255
-------- -------- -------
Net cash provided by (used in) operating activities (22,539) 12,969 3,962
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (26,956) (65,759) (4,610)
-------- -------- -------
Net cash used in investing activities (26,956) (65,759) (4,610)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in amount due to shareholders (200) 2,400 --
Increase in amount due to related party 48,456 16,139 1,640
Proceeds from issuance of common stock -- 50,000 --
Redemption of common stock -- (10,000) --
-------- -------- -------
Net cash provided by financing activities 48,256 58,539 1,640
-------- -------- -------
NET INCREASE (DECREASE) IN CASH (1,239) 5,749 992
CASH, BEGINNING OF YEAR 5,749 -- 4,510
-------- -------- -------
CASH, END OF YEAR $ 4,510 $ 5,749 $ 5,502
======== ======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-59
<PAGE> 117
INTERWIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies of Interwireless, Inc., is presented
to assist in understanding the Company's financial statements. These
accounting policies conform to generally accepted accounting principles.
Interwireless, Inc. ("the Company") was originally incorporated under
the laws of the State of California on February 20, 1998 and began
operations on March 3, 1998.
a) Nature of Operations
The Company's primary line of business is providing a wireless
Internet service which enables Southern California businesses to
access the Internet at speeds up to 155 Mbps, many times faster than
typical ISDN connections and without phone company charges. Although
the Company's wireless solutions services are currently local to the
Southern California market, the Company plans to market its
technology and knowledge base worldwide.
b) Basis of Accounting
The Company reports on the accrual basis of accounting for both
financial and income tax purposes.
c) Revenue Recognition
Revenue from product sales is recognized as products are shipped.
Revenue from services is recognized as the service is provided.
Deferred revenue consists of deferred start-up fees. Start-up fee
revenue is amortized using the straight-line method over the
estimated life of the contract. A related liability, deferred
revenue, is recorded for the unearned portion of service revenue
received. The deferred revenue was $18,267 and $22,977 at December
31, 1999 and 1998, respectively.
d) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-60
<PAGE> 118
INTERWIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
e) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of accounts receivable. The
Company had two major customers which comprised 15% and 18%,
respectively, of accounts receivable at December 31, 1999. The
Company had one major customer which comprised 45% of accounts
receivable at December 31, 1998. The Company generally requires no
collateral.
f) Accounts Receivable
The allowance for doubtful accounts is established through a
provision for bad debt charged to expense. Receivables are charged
off against the allowance when management believes that the
collectibility of the account is unlikely. Recoveries of amounts
previously charged off are credited to revenues. At December 31, 1999
and 1998, the allowance for doubtful accounts was $10,545 and $0,
respectively.
g) Inventory
Inventory consists of antennas and related equipment and is stated at
the lower of cost or market. Cost is determined using the specific
identification method.
h) Property, Equipment and Depreciation
Property and equipment are recorded at cost. Expenditures for
maintenance and repairs are charged to expense as incurred.
Depreciation is provided using the straight-line method over the
following estimated useful life:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
<S> <C>
Computer equipment 5 Years
</TABLE>
F-61
<PAGE> 119
INTERWIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
i) Income Taxes
Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income
taxes. The Company has a deferred tax asset due to net operating loss
carryforwards for income tax purposes and from depreciable assets due
to the use of different methods and lives and from different
treatment of the allowance for doubtful accounts for financial
statement and income tax purposes. The deferred tax asset is $2,514
and $0 and the deferred tax liability is $1,899 and $1,557 at
December 31, 1999 and 1998, respectively. A valuation allowance
reducing the deferred tax asset was determined not to be necessary.
At December 31, 1999, the Company's available federal net operating
loss carry forward totaled $24,654, and the California net operating
loss carry forward totaled $23,854. The loss carry forwards will
expire in the year 2019.
(2) COMMITMENTS AND CONTINGENCIES
(a)Non-Cancelable Operating Leases
The Company leases certain premises and equipment under
non-cancelable operating leases. The leases have terms ranging from
three to five years, which expire at various dates through December
2004. The base rents are subject to escalation every year. The
Company has the option to renew the leases for an additional period
of five years. Rent expense under the leases for the years ended
December 31, 1999 and 1998 were $40,411 and $10,494, respectively.
The following is a schedule by years of future minimum lease payments
required under the leases:
<TABLE>
<S> <C>
Years Ending December 31, 2000 $ 40,347
2001 39,418
2002 27,979
2003 13,400
2004 6,086
--------
$127,230
========
</TABLE>
F-62
<PAGE> 120
INTERWIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(Continued)
(2) COMMITMENTS AND CONTINGENCIES (Continued)
(b)Purchase Obligations
In order to assure its supply of broadband frequency when needed, the
Company has entered into License Agreements with suppliers with
available frequency capacity. The agreements expire at various dates
through January 2004. The Company may terminate the agreements only
in the event of damage or destruction to the tower space which
renders it unusable or in-operable. The Company is required to make
minimum monthly payments as follows, whether or not it makes use of
the frequency under the agreements:
<TABLE>
<S> <C>
Years Ending December 31, 2000 $128,763
2001 133,913
2002 139,270
2003 102,352
2004 907
--------
$505,205
========
</TABLE>
In addition, at the Company's option, for additional monthly fees, the
Company may install, maintain, operate and repair an Internet provider
system. Fees paid under the above license agreements totaled $117,486
and $18,953 for the years ended December 31, 1999 and 1998,
respectively.
(3) RELATED PARTY TRANSACTIONS
The Company pays management fees of $1,500 per month to PacificNet, LLC,
a related party. The Company is related to PacificNet, LLC by common
ownership and management. Under the terms of the management agreement,
PacificNet, LLC provides the Company with the use of its facilities,
equipment and staff. Total fees paid to PacificNet, LLC for the years
ended December 31, 1999 and 1998 were $18,000 and $15,000, respectively.
The Company has an unsecured amount due to PacificNet, LLC, a related
party, in the amount of $64,595 and $16,139 at December 31, 1999 and
1998, respectively.
The Company has an unsecured amount due to Richard Elliot, a
shareholder, in the amount of $21,575 at December 31, 1999 and 1998.
The Company has an unsecured amount due to Dave Pennells, a shareholder,
in the amount of $13,125 and $13,325 at December 31, 1999 and 1998,
respectively.
F-63
<PAGE> 121
INTERWIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(Continued)
(4) STATEMENTS OF CASH FLOWS
The net changes in operating assets and liabilities shown on the
statements of cash flows consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
(Increase) Decrease:
Accounts receivable, net $(13,437) $ (7,178)
Inventory 5,296 (8,786)
Other current assets 1,169 (1,169)
Deposits (1,589) (2,000)
Other asset 590 (2,456)
Increase (Decrease):
Accounts payable 6,498 16,207
Deferred revenue (4,710) 22,977
Other current liabilities (6,635) 7,693
Income taxes payable (800) 800
-------- --------
$(13,618) $ 26,088
======== ========
Operating activities reflect:
Income taxes paid $ 1,600 $ --
======== ========
</TABLE>
The Company had non-cash financing transactions relating to the
conversion of equity to amounts due to the shareholders of $32,500 at
December 31, 1998.
(5) SUBSEQUENT EVENT
On April 13, 2000 the Company was merged with and into a wholly-owned
subsidiary of eSat, Inc., through the exchange of all the outstanding
shares of the Company's common stock for $4 million, pursuant to an
agreement dated April 13, 2000.
F-64
<PAGE> 122
INTERWIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies of Interwireless, Inc., is presented
to assist in understanding the Company's financial statements. These
accounting policies conform to generally accepted accounting principles.
Interwireless, Inc. ("the Company") was originally incorporated under
the laws of the State of California on February 20, 1998 and began
operations on March 3, 1998.
a) Nature of Operations
The Company's primary line of business is providing a wireless
Internet service which enables Southern California businesses to
access the Internet at speeds up to 155 Mbps, many times faster than
typical ISDN connections and without phone company charges. Although
InterWireless's wireless solutions services are currently local to
the Southern California market, the Company plans to market its
technology and knowledge base worldwide.
b) Basis of Accounting
The Company reports on the accrual basis of accounting for both
financial and income tax purposes.
c) Revenue Recognition
Revenue from product sales is recognized as products are shipped.
Revenue from services is recognized as the service is provided.
Deferred revenue consists of deferred start-up fees. Start-up fee
revenue is amortized using the straight-line method over the
estimated life of the contract. A related liability, deferred
revenue, is recorded for the unearned portion of service revenue
received. The deferred revenue at March 31, 2000 was $13,253.
d) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-65
<PAGE> 123
INTERWIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 (UNAUDITED)
(Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
e) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of accounts receivable. The
Company had one major customer which comprised 33% of accounts
receivable at March 31, 2000. The revenue from this major customer
comprised 13% of sales for the three months ended March 31, 2000. The
Company generally requires no collateral.
f) Accounts Receivable
The allowance for doubtful accounts is established through a
provision for bad debt charged to expense. Receivables are charged
off against the allowance when management believes that the
collectibility of the account is unlikely. Recoveries of amounts
previously charged off are credited to revenues. At March 31, 2000,
the allowance for doubtful accounts was $9,957.
g) Inventory
Inventory consists of antennas and related equipment and is stated at
the lower of cost or market. Cost is determined using the specific
identification method.
h) Property, Equipment and Depreciation
Property and equipment are recorded at cost. Expenditures for
maintenance and repairs are charged to expense as incurred.
Depreciation is provided using the straight-line method over the
following estimated useful life:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
<S> <C>
Computer equipment 5 Years
</TABLE>
F-66
<PAGE> 124
INTERWIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 (UNAUDITED)
(Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
i) Income Taxes
Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income
taxes. The Company has a deferred tax asset due to net operating loss
carryforwards for income tax purposes and from depreciable assets due
to the use of different methods and lives and from different
treatment of the allowance for doubtful accounts for financial
statement and income tax purposes. The deferred tax asset is $2,374
and the deferred tax liability is $2,062 at March 31, 2000. A
valuation allowance reducing the deferred tax asset was determined
not to be necessary. At March 31, 2000, the Company's available
federal net operating loss carry forward totaled $24,654 and the
California net operating loss carry forward totaled $23,854. The loss
carry forwards will expire in the year 2019.
(2) COMMITMENTS AND CONTINGENCIES
(a)Non-Cancelable Operating Leases
The Company leases certain premises and equipment under
non-cancelable operating leases. The leases have terms ranging from
three to five years, which expire at various dates through December
2004. The base rents are subject to escalation every year. The
Company has the option to renew the leases for an additional period
of five years. Rent expense under the leases for the three months
ended March 31, 2000 was $10,139.
The following is a schedule by years of future minimum lease payments
required under the leases:
<TABLE>
<S> <C>
Years Ending March 31, 2001 $ 40,452
2002 37,980
2003 24,463
2004 9,685
2005 4,565
--------
$117,145
========
</TABLE>
F-67
<PAGE> 125
INTERWIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 (UNAUDITED)
(Continued)
(2) COMMITMENTS AND CONTINGENCIES (Continued)
(b)Purchase Obligations
In order to assure its supply of broadband frequency when needed, the
Company has entered into License Agreements with suppliers with
available frequency capacity. The agreements expire at various dates
through January 2004. The Company may terminate the agreements only
in the event of damage or destruction to the tower space which
renders it unusable or in-operable. The Company is required to make
minimum monthly payments as follows, whether or not it makes use of
the frequency under the agreements:
<TABLE>
<S> <C>
Years Ending March 31, 2001 $130,052
2002 135,257
2003 140,793
2004 67,651
--------
$473,753
========
</TABLE>
In addition, at the Company's option, for additional monthly fees, the
Company may install, maintain, operate and repair an Internet provider
system. Fees paid under the above license agreements totaled $30,756 for
the three months ended March 31, 2000.
(3) RELATED PARTY TRANSACTIONS
The Company pays management fees of $1,500 per month to PacificNet, LLC,
a related party. The Company is related to PacificNet, LLC by common
ownership and management. Under the terms of the management agreement,
PacificNet, LLC provides the Company with the use of its facilities,
equipment and staff. Total fees paid to PacificNet, LLC for the three
months ended March 31, 2000 was $4,500.
The Company has an unsecured amount due to PacificNet, LLC, a related
party, in the amount of $66,235 at March 31, 2000.
The Company has an unsecured amount due to Richard Elliot, a
shareholder, in the amount of $21,575 at March 31, 2000.
The Company has an unsecured amount due to Dave Pennells, a shareholder,
in the amount of $13,125 at March 31, 2000.
F-68
<PAGE> 126
INTERWIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 (UNAUDITED)
(Continued)
(4) STATEMENTS OF CASH FLOWS
The net changes in operating assets and liabilities shown on the
statements of cash flows consist of the following:
<TABLE>
<S> <C>
(Increase) Decrease:
Accounts receivable, net $ 10,991
Inventory (1,369)
Other asset 147
Increase (Decrease):
Accounts payable (3,720)
Deferred revenue (5,014)
Other current liabilities (780)
--------
$ 255
========
</TABLE>
(5) SUBSEQUENT EVENT
On April 13, 2000 the Company was merged with and into a wholly-owned
subsidiary of eSat, Inc. through the exchange of all the outstanding
shares of the Company's common stock for $4 million, pursuant to an
agreement dated April 13, 2000.
F-69
<PAGE> 127
eSAT, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On April 13, 2000, eSat, Inc. and subsidiaries (the "Company") acquired 100% of
the stock of InterWireless, Inc. ("InterWireless") and PacificNet Technologies,
Inc. ("PacificNet"). The acquisition of InterWireless was accounted for as a
purchase, with assets acquired and liabilities assumed recorded at fair value.
Operating results of InterWireless will be included in the Company's
consolidated financial statements, effective April 13, 2000.
The acquisition of PacificNet occurred through a stock-for-stock exchange and
was accounted for as a pooling-of-interests. The Company issued 2,750,000 shares
of common stock in exchange for all of the outstanding common stock of
PacificNet.
The unaudited pro forma condensed consolidated balance sheet as of March 31,
2000, the unaudited pro forma condensed consolidated statement of operations for
the three months ended March 31, 2000, and the unaudited pro forma condensed
consolidated statement of income for the year ended December 31, 1999, are based
upon the historical consolidated financial statements of the Company included
elsewhere herein and the financial statements of InterWireless and PacificNet
included elsewhere herein. The unaudited pro forma consolidated condensed
statements of income have been prepared after giving effect to pro forma
adjustments described in the notes thereto as if the acquisitions occurred on
January 1 of the respective periods, and the unaudited pro forma condensed
consolidated balance sheet has been prepared as if the acquisitions occurred on
March 31, 2000.
The unaudited pro forma condensed consolidated statements of income and balance
sheet do not purport to represent what the results of operations of the Company
would actually have been if the events described in the notes thereto had in
fact occurred at the beginning of such period, or to project the results of
operations of the Company for any future date or period.
The unaudited pro forma condensed consolidated statements of income and balance
sheet should be read in conjunction with the Company's financial statements,
including the notes thereto, the financial statements of InterWireless, and the
financial statements of PacificNet.
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<PAGE> 128
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of March 31, 2000 (Unaudited)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------
eSat, Inc.
and InterWireless, PacificNet Pro Forma
subsidiaries Inc. Technologies, Inc. Adjustments Pro Forma
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,053,742 $ 5,502 $ -- $ 2,985,000 (c)
(66,667)(g) $ 3,977,577
Accounts receivable, net 540,064 9,623 235,125 784,812
Inventory 395,182 4,859 -- 400,041
Other current assets 396,082 2,374 72,019 (66,235)(f) 404,240
------------------------------------------------ ------------
Total current assets 2,385,070 22,358 307,144 5,566,670
------------------------------------------------ ------------
PROPERTY AND EQUIPMENT, NET 879,035 69,685 483,872 1,432,592
------------------------------------------------ ------------
OTHER ASSETS:
Goodwill -- -- -- 3,857,143 (b) 3,857,143
Other assets 473,270 5,308 64,937 543,515
------------------------------------------------ ------------
473,270 5,308 64,937 4,400,658
------------------------------------------------ ------------
$3,737,375 $ 97,351 $ 855,953 $ 11,399,920
================================================ ============
CURRENT LIABILITIES:
Accounts payable $1,050,977 $ 18,985 $ 367,534 $ 1,437,496
Unearned revenue 74,052 -- 151,883 225,935
Current portion of long-term debt 135,357 -- 229,186 364,543
Other current liabilities 449,016 278 157,930 607,224
Deferred revenue -- 13,253 166,199 179,452
Note payable - stockholders -- 34,700 -- 34,700
Note payable - related party -- 66,235 -- (66,235)(f) --
-------------------------------------------------- ------------
Total current liabilities 1,709,402 133,451 1,072,732 2,849,350
-------------------------------------------------- ------------
LONG-TERM LIABILITIES 62,976 2,062 62,792 127,830
-------------------------------------------------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock 10,500 -- -- 75 (a) 10,575
Common stock 18,472 7,500 -- 2,750 (d)
46 (g) 28,768
Additional paid-in capital 22,088,700 -- -- 6,984,925 (a)
79,380 (g)
(2,750)(d) 29,150,255
Retained deficit (20,298,024) (45,662) (279,571) (142,857)(b)
(146,093)(g) (20,912,207)
-------------------------------------------------- ------------
1,819,648 (38,162) (279,571) 8,277,391
Less: Subscriptions receivable (558,510) -- -- (558,510)
Minority interest in equity
of subsidiary 703,859 -- -- 703,859
-------------------------------------------------- ------------
Total stockholders' equity 1,964,997 (38,162) (279,571) 8,422,740
-------------------------------------------------- ------------
$3,737,375 $ 97,351 $ 855,953 $ 11,399,920
================================================== ============
</TABLE>
F-71
<PAGE> 129
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2000 (Unaudited)
<TABLE>
<CAPTION>
HISTORICAL
eSat, Inc. and PacificNet Pro Forma
subsidiaries InterWireless, Inc. Technologies, Inc. Adjustments Pro Forma
<S> <C> <C> <C> <C> <C>
SALES $ 563,310 $ 77,551 $ 965,106 $ 1,605,967
COST OF SALES 547,452 58,610 757,587 1,363,649
--------------------------------------------------- -----------
Gross margin 15,858 18,941 207,519 242,318
GENERAL AND ADMINISTRATIVE EXPENSES 2,753,738 19,294 250,193 146,093(g) 3,169,318
--------------------------------------------------- -----------
Loss from operations (2,737,880) (353) (42,674) (2,927,000)
--------------------------------------------------- -----------
OTHER INCOME
Compensation adjustment recognized
under APB 25 3,315,787 -- -- 3,315,787
Amortization of intangibles -- -- -- (142,857)(b) (142,857)
Other income 35,323 -- 18,245 53,568
--------------------------------------------------- -----------
3,351,110 -- 18,245 3,226,498
--------------------------------------------------- -----------
Income (loss) before income taxes 613,230 (353) (24,429) 299,498
PROVISION FOR INCOME TAXES -- 1,103 -- 1,103
--------------------------------------------------- -----------
Net income (loss) $ 613,230 $ (1,456) $ (24,429) $ 298,395
=================================================== ===========
EARNINGS PER COMMON SHARE:
Net income (loss) $ 0.03 $ 0.01 (e)
============ ===========
Assuming dilution $ 0.03 $ 0.01 (e)
============ ===========
</TABLE>
F-72
<PAGE> 130
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
HISTORICAL
PacificNet
eSat, Inc. InterWireless, Technologies, Pro Forma
and subsidiaries Inc. Inc. Adjustments Pro Forma
<S> <C> <C> <C> <C> <C>
SALES $ 423,640 $ 327,528 $ 3,244,764 $ 3,995,932
COST OF SALES 1,432,717 307,955 2,371,923 4,112,595
--------------------------------------------------- -----------
Gross margin (1,009,077) 19,573 872,841 (116,663)
GENERAL AND ADMINISTRATIVE EXPENSES 7,916,819 43,849 598,112 146,093 (g) 8,704,873
--------------------------------------------------- -----------
Loss from operations (8,925,896) (24,276) 274,729 (8,821,536)
--------------------------------------------------- -----------
OTHER INCOME (EXPENSE)
Compensation adjustment recognized
under APB 25 81,945,112 -- -- 81,945,112
Amortization of intangibles -- -- -- (571,429)(b) (571,429)
Other income (expense) 149,684 -- (2,000) 147,684
Management fee income -- -- 18,000 18,000
Interest income 57,158 -- 12 57,170
Gain (loss) on sale of assets 675 -- (123,043) (122,368)
Interest expense (25,730) -- (42,462) (68,192)
--------------------------------------------------- -----------
82,126,899 -- (149,493) 81,405,977
--------------------------------------------------- -----------
Income (loss) before income taxes 73,201,003 (24,276) 125,236 72,584,441
PROVISION FOR INCOME TAXES 1,600 (1,372) 3,800 4,028
--------------------------------------------------- -----------
Net income (loss) $73,199,403 $ (22,904) $ 121,436 $72,580,413
=================================================== ===========
EARNINGS PER COMMON SHARE:
Net income $ 4.02 $ 3.46 (e)
=========== ===========
Assuming dilution $ 3.08 $ 2.54 (e)
=========== ===========
</TABLE>
F-73
<PAGE> 131
(1) PRO FORMA ADJUSTMENTS
(a) To record issuance of Series D Preferred Stock at $100 per share, 75,000
shares, less a fee of $515,000. The proceeds were used to purchase
InterWireless.
(b) To record goodwill of $4,000,000 from the purchase of InterWireless,
which is calculated as the purchase price less the fair value of the net
assets of InterWireless. The goodwill is recorded net of accumulated
amortization of $142,857 for the three month period ended March 31,
2000. Goodwill is estimated to have a useful life of 7 years.
(c) To record proceeds from sale of Series D Preferred Stock in excess of
those used to purchase InterWireless.
(d) To record issuance of 2,750,000 common shares at a par value of $.001
for the pooling with PacificNet.
(e) Diluted earnings per share includes 2,011,047 shares from conversion of
Series D Preferred Stock issued in connection with the purchase of
InterWireless. The calculation is made pursuant to the Series D
Preferred Stock Certificate of Designation, assuming conversion at
January 1, 1999, in accordance with the "if converted" method. In
addition, the weighted average shares used in the calculation of basic
and diluted pro forma earnings per share includes 2,750,000 shares of
the Company's common stock that were issued on April 13, 2000, in
connection with the acquisition of PacificNet.
(f) To eliminate intercompany accounts for consolidation purposes.
(g) To record payment of finder's fee associated with the acquisitions of
InterWireless and PacificNet. The total finder's fee, which consisted of
$66,667 in cash and 45,833 shares of the Company's common stock, was
allocated between expense and capital on a ratio pro rata to the
purchase prices of the two acquisitions.
F-74
<PAGE> 132
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
<TABLE>
<CAPTION>
Description Amount
<S> <C>
Registration Fee $ 7,552 (1)
----------------
NASD Filing Fee N/A
Legal Fees and Expenses (including Blue Sky) *
Accounting Fees and Expenses *
Transfer Agent Fees and Expenses *
Printing Expenses *
Miscellaneous *
----------------
$ *(2)
</TABLE>
(1) $13,550.72 was paid with the original filing.
(2) While all shares registered for sale are being sold by selling
shareholders, all expenses of issuance and distribution are being
paid by registrant per contractual agreements.
* To be included by amendment.
Item 14. Indemnification of Directors and Officers
Pursuant to the company's articles of incorporation, the personal
liability of a director or officer of the company to the company or a
shareholder for monetary damages for breach of a fiduciary duty is limited to
situations in which a director's or officer's acts or omissions involve
intentional misconduct, fraud or knowing violations of law.
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 documents,
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 are necessary to attract and retain qualified persons as directors
and officers.
There is no pending litigation or proceeding involving a director,
officer, employee or other agent of the company as to which indemnification is
being sought, and the
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<PAGE> 133
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 15. Recent Sales of Unregistered Securities
Technology Guardian, Inc., a California corporation, which was merged
into the company, entered into an Agreement with Pacific Capital Group Ltd.
("Pacific Capital"), to sell shares pursuant to the terms of a Confidential
Offering Memorandum dated July 2, 1998 ("Pacific Capital Offering"). Pacific
Capital arranged the sale of 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 1,910,885 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 1,500,000
shares of common stock to Mr. Coulter, and 333,000 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.
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 9,146,381 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 2,092,633 shares of common stock
under Regulation S according to its agreement with Corporate Financial
Enterprises, Inc. ("CFE") at $0.7168 per share. These shares were issued to
investors in Europe.
On October 28, 1998, the company commenced a private placement for
2,004,000 shares of common stock under Rule 506, at $2.40 per share (the
"October '98 Offering"). The company completed this offering in January 1999,
with gross proceeds of $4,809,600. Tradeway Securities Group, Inc. acted as
placement agent and received commissions of $480,000, plus a
II-2
<PAGE> 134
$144,000 nonaccountable expense allowance and warrants to purchase 500,000
shares of common stock at $2.64 per share exercisable through January, 2004.
Pursuant to the October 1998 Offering, we have agreed to issue Loyalty
Options to acquire up to 500,000 shares of our common stock to be granted to
those shareholders who retain ownership of the shares purchased in the October
1998 Offering, for two years from the date of purchase (the Loyalty period). The
options will be issued on the basis of one option for each 25 shares purchased.
The options are exercisable at an exercise price of $4.80 per share for a period
of three years from the date of issue. No Loyalty Options have been issued at
this time.
In January, 1999, David B. Coulter transferred warrants to purchase
650,000 shares at $0.7168 per share to CFE, which then exercised the option. The
shares were exercised using cashless exercise which resulted in 339,093 shares
issued pursuant to Section 4(2) of the Securities Act of 1933, as amended.
In the period of November, 1998, through July 22, 1999, five holders of
warrants exercised their warrants in a cashless exercise with respect to 61,312
shares of common stock. These warrant holders included Tim Shelburn as to 8,033
shares, Chuck Wolf as to 7,949 shares, Tom Jandt as to 10,350 shares, Andrew
Glashow as to 6,143 shares, and Lawrence C. Early as to 28,837 shares. These
shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as
amended. Mr. Early is a former CFO of the company.
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, we 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, we issued 205,000 shares under Regulation S to 16
investors residing in Asia.
On January 4, 1999, we 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, we issued 1,000 shares to Mr.
David Gallie at a discount to the market. We issued these 1,000 shares 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, we 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 CFE, pursuant to an agreement executed
by David B. Coulter, a former CEO of the company, and CFE 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.
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<PAGE> 135
Pursuant to the Consulting Agreement, we agreed to issue 2,500,000
shares of Series B 12% Convertible Preferred Stock to CFE for $2.00 per share,
and 1,000,000 shares of Series A 12% Convertible Preferred Stock to VCI for
$2.00 per share.
The Consulting Agreement and the issued and outstanding Series B
Preferred Stock was canceled by mutual agreement of the parties in March 2000.
As part of the settlement, we agreed with CFE to settle a dispute about the
number of common shares issued to CFE and its clients and the amount we received
in payment for those shares. CFE paid us $558,510 and we entered into a mutual
release with CFE for all claims. In addition, CFE agreed to put the shares of
common stock which CFE would receive upon conversion of its warrants into a
voting trust if requested by NASDAQ in order to facilitate a listing on NASDAQ.
Furthermore, all of the outstanding Series A Preferred Stock was
converted into 550,000 shares of common stock in April 2000. The warrants issued
to the former holders of Series A Preferred Stock and Series B Preferred Stock
remain outstanding.
In October 1999, we 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.
In December 1999, we issued 50,000 shares of Series C 6% Convertible
Preferred Stock to Wentworth, LLC for a total of $5,000,000. The Preferred Stock
has a liquidation preference of $100 per share, bears cumulative dividends at 6%
per annum payable in cash or common stock, and is convertible into common stock
at a minimum of $2.50 per share. The shares were issued to an accredited
investor pursuant to Section 4(2) of the Securities Act of 1933, as amended.
In April 2000, we issued 75,000 shares of Series D 6% Convertible
Preferred Stock to Wentworth, LLC for a total of $7,500,000. The Preferred Stock
has a liquidation preference of $100 per share, bears cumulative dividends at 6%
per annum payable in cash or common stock, and is convertible into common stock
at the lesser of $4.30 or 85% of the average closing price for the five trading
days immediately prior to the conversion. The shares were issued to accredited
investors pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
2.1 Agreement and Plan of Merger between Technology Guardian, Inc.
and U.S. Connect 1995, Inc., dated September 15, 1998, filed
September 15, 1998 with the Nevada Secretary of State(1)
</TABLE>
II-4
<PAGE> 136
<TABLE>
<S> <C>
2.2 Articles of Merger of Technology Guardian, Inc. and Technology
Guardian, Inc. (formerly U.S. Connect 1995, Inc.), filed October
8, 1998 with the Nevada Secretary of State(1)
2.3 Agreement and Plan of Merger and Reorganization by and among
Registrant, PN Acquisition Co. and PacificNet Technologies, Inc.,
dated as of April 13, 2000(4)
3.1 Certificate of Amended and Restated Articles of Incorporation of
Technology Guardian, Inc., filed September 28, 1995 with the
Nevada Secretary of State(1)
3.2 Certificate of Amendment to Articles of Incorporation of
Technology Guardian, Inc., filed February 4, 1999 with the Nevada
Secretary of State(1)
3.3 Bylaws of U.S. Connect 1995, Inc.(1)
3.4 Certificate of Designations of Series A 12% Convertible Preferred
Stock of Registrant, filed January 26, 2000 with the Nevada
Secretary of State(6)
3.5 Certificate of Designations of Series B 12% Convertible Preferred
Stock of Registrant, filed January 26, 2000 with the Nevada
Secretary of State(6)
3.6 Certificate of Designations of Series C 6% Convertible Preferred
Stock of Registrant, filed December 29, 1999 with the Nevada
Secretary of State(6)
3.7 Certificate of Designations of Series D 6% Convertible Preferred
Stock of Registrant, filed April 19, 2000 with the Nevada
Secretary of State(4)
3.8 Amended and Restated Certificate of Designations of Series C 6%
Convertible Preferred Stock of Registrant(4)
5 Arter & Hadden LLP Opinion re legality(6)
10.1 Stock Option Agreement between Registrant and William Sarpalius,
dated September 1, 1999(1)
10.2 Stock Option Agreements between Registrant and Lori Walker, dated
September 1, 1999(1)
10.3 Stock Option Agreements between Registrant and Carol Sarpalius,
dated September 1, 1999(1)
10.4 Employment Agreement between Registrant and Chester Noblett, Jr.,
dated June 15, 1998(1)
10.5 Stock Option Agreement between Registrant and Chet Noblett, dated
September 15, 1999(1)
10.6 Warrant Agreement between Registrant and Corporate Financial
Enterprises, Inc., dated as of September 17, 1999(6)
</TABLE>
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<PAGE> 137
<TABLE>
<S> <C>
10.7 Warrant Agreement between Registrant and Vantage Capital, Inc.,
dated as of September 17, 1999(6)
10.8 Common Stock Purchase Warrant by and between Registrant and
Wentworth, LLC, dated as of December 29, 1999(6)
10.9 Registration Rights Agreement by and among Registrant, Vantage
Capital, Inc., Corporate Financial Enterprises, Inc., and
American Equities, LLC, dated as of November 22, 1999(6)
10.10 Stock Purchase Agreement by and among Registrant and Vantage
Capital, Inc., dated as of November 22, 1999(6)
10.11 Stock Purchase Agreement by and among Registrant, Corporate
Financial Enterprises, Inc. and American Equities, LLC, dated as
of November 22, 1999(6)
10.12 Securities Purchase Agreement by and between Registrant and
Wentworth, LLC, dated December 29, 1999(6)
10.13 Registration Rights Agreement by and between Registrant and
Wentworth, LLC, dated December 29, 1999(6)
10.14 Side Letter Agreement, dated December 29, 1999, between
Registrant and Wentworth, LLC(6)
10.15 Resignation Agreement between Registrant and David Coulter, dated
March 22, 1999(3)
10.16 Master Services Agreement between Registrant and Exodus
Communications, Inc., dated December 30, 1999(6)
10.17 Letter Agreement between Registrant and Parks, Palmer, Turner and
Yemenidjian, LLP for the services of Michael Palmer, dated
November 10, 1998(6)
10.18 Settlement Agreement and Mutual Release by and between Cyber
Village Network, Inc., Chet Noblett, and Technology Guardian,
Inc. and David Coulter, dated October 17, 1997(6)
10.19 Consulting Agreement between Registrant and Vantage Capital,
Inc., dated September 17, 1999(2)
10.20 Loan Out Agreement between Registrant and Vantage Capital Corp.
for the services of Michael Palmer, dated November 1, 1999(6)
</TABLE>
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<PAGE> 138
<TABLE>
<S> <C>
10.21 Employment Agreement between Global Media Technology, Inc. and
Barry B. Sandrew, dated October 7, 1999(6)
10.22 Co-Employment Agreement between Registrant and Employers Resource
Management Company, Inc., for the services of executive officers,
dated September 29, 1998(6)
10.23 Consulting Agreement between Registrant and Herbeck Consulting
Group, Inc., dated December 6, 1999(6)
10.24 Stock Purchase Agreement by and among Registrant, InterWireless,
Inc. and the shareholders of InterWireless, Inc., dated April 13,
2000(4)
10.25 Securities Purchase Agreement by and between Registrant and
Wentworth, LLC, dated April 13, 2000(4)
10.26 Registration Rights Agreement by and between Registrant and
Wentworth, LLC, dated April 13, 2000(4)
10.27 Employment Agreement between Registrant and Steve Tulk, dated
March 15, 2000(7)
10.28 Stock Option Agreement between Registrant and Mark Basile, dated
March 15, 2000(7)
10.29 Stock Option Agreement between Registrant and Steven A. Tulk,
dated January 1, 2000(7)
10.30 Stock Reconciliation Settlement Agreement between Registrant and
Corporate Financial Enterprises, Inc., dated March 28, 2000(5)
10.31 Registrant's 1997 Stock Option and Stock Bonus Plan(7)
10.32 Employment Agreement between Registrant and Richard Elliot, dated
April 13, 2000(7)
</TABLE>
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<PAGE> 139
<TABLE>
<S> <C>
10.33 Employment Agreement between Registrant and David Pennells, dated
April 13, 2000 (7)
10.34 Settlement Agreement and General Release by and between Registrant
and David Coulter, dated February 23, 2000(8)
10.35 Employment Agreement between Registrant and Leon Shpilsky, dated
May 11, 2000(8)
10.36 Common Stock Purchase Warrant by and between Registrant and
Wentworth, LLC, dated as of April 30, 2000(8)
10.37 Amendment to Side Letter Agreement between Registrant and
Wentworth, LLC (Exhibit 10.14), dated April 13, 2000
21 List of Subsidiaries(7)
23.1 Consent of Independent Auditors(6)
23.2 Consent of Counsel (See Exhibit 5)(6)
23.3 Consent of Lichter and Associates, Independent Auditors
23.4 Consent of Carpenter Kuhen & Sprayberry, Independent Auditors
24 Power of Attorney(7)
27 Financial Data Schedule(5)
99 Federal Communications Commission Radio Station Authorization,
dated August 25, 1999(6)
</TABLE>
(1) Filed as part of Registrant's Form 10 dated March 16, 1999, and
incorporated herein by reference.
(2) Filed as part of Registrant's Form 10 dated November 1, 1999, and
incorporated herein by reference.
(3) Filed as a part of Registrant's Form 10 dated May 11, 1999, and
incorporated herein by reference.
(4) Filed as part of Registrant's Form 8-K dated April 19, 2000, and
incorporated herein by reference.
(5) Filed as part of Registrant's Form 10-K dated March 31, 2000, and
incorporated herein by reference.
(6) Filed as part of Registrant's Form SB-2 (File No. 333-95451) dated
January 26, 2000, and incorporated herein by reference.
(7) Filed as part of Registrant's Form S-1 dated May 5, 2000, and
incorporated herein by reference.
(8) Filed as part of Registrant's Form S-1, dated May 24, 2000, and
incorporated herein by reference.
Item 17. Undertakings
(a) Rule 415 Offering. Registrant hereby undertakes:
(1) To file, during any period in which it offers securities or
sales are being made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective
II-8
<PAGE> 140
amendment thereof) which, individually or together, represent a fundamental
change in the information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) (ss.230.424(b) of this chapter) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement.
(2) That, for determining liability under the Securities Act,
each post-effective amendment shall be deemed to be a new registration statement
of the securities offered herein, and the offering of the securities at that
time shall be deemed to be the initial bona fide offering.
(3) To file a post-effective amendment to remove from
registration any of the securities being registered that remain unsold at the
end of the offering.
(h) Request for acceleration of effective date. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 (the
"Act") may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of competent
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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<PAGE> 141
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Universal City, State
of California, on June 16, 2000.
ESAT, INC.
By /s/ Michael C. Palmer
------------------------------
Michael C. Palmer,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael C. Palmer Chief Executive Officer, June 16, 2000
----------------------------------- President, Secretary and Director
Michael C. Palmer
Chester L. Noblett, Jr.* Chairman of the Board and June 16, 2000
----------------------------------- Assistant Secretary
Chester L. Noblett, Jr.
/s/ Mark S. Basile Chief Financial Officer and June 16, 2000
----------------------------------- Principal Accounting Officer
Mark S. Basile
Gary Pan* Director June 16, 2000
-----------------------------------
Gary Pan
Salvator A. Piraino* Director June 16, 2000
-----------------------------------
Salvator A. Piraino
*By: /s/ Michael C. Palmer
------------------------------
Michael C. Palmer,
Attorney-in-Fact
</TABLE>
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<PAGE> 142
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
2.2 Articles of Merger of Technology Guardian, Inc. and Technology
Guardian, Inc. (formerly U.S. Connect 1995, Inc.), filed October
8, 1998 with the Nevada Secretary of State(1)
2.3 Agreement and Plan of Merger and Reorganization by and among
Registrant, PN Acquisition Co. and PacificNet Technologies, Inc.,
dated as of April 13, 2000(4)
3.1 Certificate of Amended and Restated Articles of Incorporation of
Technology Guardian, Inc., filed September 28, 1995 with the
Nevada Secretary of State(1)
3.2 Certificate of Amendment to Articles of Incorporation of
Technology Guardian, Inc., filed February 4, 1999 with the Nevada
Secretary of State(1)
3.3 Bylaws of U.S. Connect 1995, Inc.(1)
3.4 Certificate of Designations of Series A 12% Convertible Preferred
Stock of Registrant, filed January 26, 2000 with the Nevada
Secretary of State(6)
3.5 Certificate of Designations of Series B 12% Convertible Preferred
Stock of Registrant, filed January 26, 2000 with the Nevada
Secretary of State(6)
3.6 Certificate of Designations of Series C 6% Convertible Preferred
Stock of Registrant, filed December 29, 1999 with the Nevada
Secretary of State(6)
3.7 Certificate of Designations of Series D 6% Convertible Preferred
Stock of Registrant, filed April 19, 2000 with the Nevada
Secretary of State(4)
3.8 Amended and Restated Certificate of Designations of Series C 6%
Convertible Preferred Stock of Registrant(4)
5 Arter & Hadden LLP Opinion re legality(6)
10.1 Stock Option Agreement between Registrant and William Sarpalius,
dated September 1, 1999(1)
10.2 Stock Option Agreements between Registrant and Lori Walker, dated
September 1, 1999(1)
10.3 Stock Option Agreements between Registrant and Carol Sarpalius,
dated September 1, 1999(1)
10.4 Employment Agreement between Registrant and Chester Noblett, Jr.,
dated June 15, 1998(1)
10.5 Stock Option Agreement between Registrant and Chet Noblett, dated
September 15, 1999(1)
10.6 Warrant Agreement between Registrant and Corporate Financial
Enterprises, Inc., dated as of September 17, 1999(6)
</TABLE>
II-11
<PAGE> 143
<TABLE>
<S> <C>
10.7 Warrant Agreement between Registrant and Vantage Capital, Inc.,
dated as of September 17, 1999(6)
10.8 Common Stock Purchase Warrant by and between Registrant and
Wentworth, LLC, dated as of December 29, 1999(6)
10.9 Registration Rights Agreement by and among Registrant, Vantage
Capital, Inc., Corporate Financial Enterprises, Inc., and
American Equities, LLC, dated as of November 22, 1999(6)
10.10 Stock Purchase Agreement by and among Registrant and Vantage
Capital, Inc., dated as of November 22, 1999(6)
10.11 Stock Purchase Agreement by and among Registrant, Corporate
Financial Enterprises, Inc. and American Equities, LLC, dated as
of November 22, 1999(6)
10.12 Securities Purchase Agreement by and between Registrant and
Wentworth, LLC, dated December 29, 1999(6)
10.13 Registration Rights Agreement by and between Registrant and
Wentworth, LLC, dated December 29, 1999(6)
10.14 Side Letter Agreement, dated December 29, 1999, between
Registrant and Wentworth, LLC(6)
10.15 Resignation Agreement between Registrant and David Coulter, dated
March 22, 1999(3)
10.16 Master Services Agreement between Registrant and Exodus
Communications, Inc., dated December 30, 1999(6)
10.17 Letter Agreement between Registrant and Parks, Palmer, Turner and
Yemenidjian, LLP for the services of Michael Palmer, dated
November 10, 1998(6)
10.18 Settlement Agreement and Mutual Release by and between Cyber
Village Network, Inc., Chet Noblett, and Technology Guardian,
Inc. and David Coulter, dated October 17, 1997(6)
10.19 Consulting Agreement between Registrant and Vantage Capital,
Inc., dated September 17, 1999(2)
10.20 Loan Out Agreement between Registrant and Vantage Capital Corp.
for the services of Michael Palmer, dated November 1, 1999(6)
</TABLE>
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<PAGE> 144
<TABLE>
<S> <C>
10.21 Employment Agreement between Global Media Technology, Inc. and
Barry B. Sandrew, dated October 7, 1999(6)
10.22 Co-Employment Agreement between Registrant and Employers Resource
Management Company, Inc., for the services of executive officers,
dated September 29, 1998(6)
10.23 Consulting Agreement between Registrant and Herbeck Consulting
Group, Inc., dated December 6, 1999(6)
10.24 Stock Purchase Agreement by and among Registrant, InterWireless,
Inc. and the shareholders of InterWireless, Inc., dated April 13,
2000(4)
10.25 Securities Purchase Agreement by and between Registrant and
Wentworth, LLC, dated April 13, 2000(4)
10.26 Registration Rights Agreement by and between Registrant and
Wentworth, LLC, dated April 13, 2000(4)
10.27 Employment Agreement between Registrant and Steve Tulk, dated
March 15, 2000(7)
10.28 Stock Option Agreement between Registrant and Mark Basile, dated
March 15, 2000(7)
10.29 Stock Option Agreement between Registrant and Steven A. Tulk,
dated January 1, 2000(7)
10.30 Stock Reconciliation Settlement Agreement between Registrant and
Corporate Financial Enterprises, Inc., dated March 28, 2000(5)
10.31 Registrant's 1997 Stock Option and Stock Bonus Plan(7)
10.32 Employment Agreement between Registrant and Richard Elliot, dated
April 13, 2000(7)
</TABLE>
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<PAGE> 145
<TABLE>
<S> <C>
10.33 Employment Agreement between Registrant and David Pennells, dated
April 13, 2000(7)
10.34 Settlement Agreement and General Release by and between
Registrant and David Coulter, dated February 23, 2000(8)
10.35 Employment Agreement between Registrant and Leon Shpilsky, dated
May 11, 2000(8)
10.36 Common Stock Purchase Warrant by and between Registrant and
Wentworth, LLC, dated as of April 30, 2000(8)
10.37 Amendment to Side Letter Agreement between Registrant and
Wentworth, LLC (Exhibit 10.14), dated April 13, 2000
21 List of Subsidiaries(7)
23.1 Consent of Independent Auditors(6)
23.2 Consent of Counsel (See Exhibit 5)(6)
23.3 Consent of Lichter and Associates, Independent Auditors
23.4 Consent of Carpenter Kuhen & Sprayberry, Independent Auditors
24 Power of Attorney(7)
27 Financial Data Schedule(5)
99 Federal Communications Commission Radio Station Authorization,
dated August 25, 1999(6)
</TABLE>
(1) Filed as part of Registrant's Form 10 dated March 16, 1999, and
incorporated herein by reference.
(2) Filed as part of Registrant's Form 10 dated November 1, 1999, and
incorporated herein by reference.
(3) Filed as a part of Registrant's Form 10 dated May 11, 1999, and
incorporated herein by reference.
(4) Filed as part of Registrant's Form 8-K dated April 19, 2000, and
incorporated herein by reference.
(5) Filed as part of Registrant's Form 10-K dated March 31, 2000, and
incorporated herein by reference.
(6) Filed as part of Registrant's Form SB-2 (File No. 333-95451) dated
January 26, 2000, and incorporated herein by reference.
(7) Filed as part of Registrant's Form S-1 dated May 5, 2000 and
incorporated herein by reference.
(8) Filed as part of Registrant's Form S-1, dated May 24, 2000, and
incorporated herein by reference.
II-14
