<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File Number 000-26039
eSAT, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 95-0344604
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 UNIVERSAL CITY PLAZA, SUITE 1130, UNIVERSAL CITY, CA 91608
--------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(818) 464-2670
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
PAR VALUE $.001 23,429,433
----------------------- ----------------------------------
(Class of Common Stock) (Outstanding at November 9, 2000)
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<PAGE> 2
eSAT, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999 3
Unaudited Consolidated Statements of Operations for the
three and nine months ended September 30, 2000 and 1999 4
Unaudited Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 10
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES 19
ITEM 5. OTHER INFORMATION 19
SIGNATURE 20
</TABLE>
2
<PAGE> 3
eSAT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
CURRENT ASSETS: (UNAUDITED)
<S> <C> <C>
Cash and cash equivalents $ 103,815 $3,412,205
Accounts receivable, net 729,449 471,899
Inventory, net 218,005 135,189
Other current assets 14,904 17,866
Deposits 273,359 420,747
Notes receivable-related party -- 64,553
---------- ----------
Total current assets 1,339,532 4,522,459
---------- ----------
PROPERTY AND EQUIPMENT, NET 3,357,770 1,051,936
---------- ----------
OTHER ASSETS:
Note receivable -- 250,000
Notes receivable-related party 832,120 --
Goodwill, net 3,855,632 --
Deposits 80,336 132,523
Other assets 10,805 23,907
---------- ----------
Total other assets 4,778,893 406,430
---------- ----------
$9,476,195 $5,980,825
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
CURRENT LIABILITIES: (UNAUDITED)
<S> <C> <C>
Accounts payable-trade $ 1,812,185 $ 837,065
Accounts payable-other 1,210,800 --
Accrued expenses 241,873 199,955
Unearned revenue 151,883 306,732
Deferred revenue 286,105 73,646
Other current liabilities 345,000 --
Current portion of obligations
under capital lease 44,516 76,049
Contracts payable 22,948 76,973
Net assets held for disposal 2,435,870 284,419
Note payable stockholder 34,700 --
Severance pay payable -- 90,000
Commission payable -- 160,000
Current portion of long-term debt -- 250,346
Settlement payable -- 83,866
Note payable related party -- 90,250
------------ ------------
Total current liabilities 6,585,880 2,529,301
------------ ------------
LONG-TERM LIABILITIES
Obligations under capital lease 53,950 130,395
Deferred revenue -- 22,455
------------ ------------
Total long-term liabilities 53,950 152,850
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock - Series C -
cumulative, fully participating
convertible, $0.001 par value
Authorized - 50,000 shares Issued
and outstanding - 50,000 shares 50 50
Preferred stock - Series A,
cumulative, fully participating,
convertible, $0.001 par value
Authorized - 50,000 shares
Issued and outstanding - 50,000 shares -- 10,000
Preferred stock - Series D,
cumulative, fully participating,
convertible, $0.001 par value
Authorized - 75,000 shares
Issued and outstanding - 72,100 shares 72 --
Preferred stock - Series E,
cumulative, fully participating,
convertible, $0.001 par value
Authorized - 30,000 shares
Issued and outstanding - 30,000 shares 30 --
Common stock - $0.001 par value
Authorized - 100,000,000 shares
Issued and outstanding - 22,134,065 shares 22,134 18,345
Additional paid-in capital 27,932,899 25,765,397
Members' deficit -- (37,021)
Retained deficit (25,118,820) (20,899,587)
------------ ------------
2,836,365 4,857,184
Less: Subscriptions receivable -- (1,558,510)
------------ ------------
Total stockholders' equity 2,836,365 3,298,674
------------ ------------
$ 9,476,195 $ 5,980,825
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
eSAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
SALES $ 1,439,185 $ 879,593 $ 3,806,481 $ 2,703,760
COST OF SALES 1,618,468 892,133 4,240,657 2,817,811
------------ ------------ ------------ ------------
Gross margin (179,283) (12,540) (434,176) (114,051)
GENERAL AND ADMINISTRATIVE EXPENSES 2,660,680 2,151,665 8,921,641 5,936,208
------------ ------------ ------------ ------------
Loss from operations (2,839,963) (2,164,205) (9,355,817) (6,050,259)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Compensation adjustment recognized
under APB 25 575,007 13,633,701 7,505,679 81,510,130
Gain (loss) on sale of assets -- -- 25,000 (130,569)
Interest income 2,703 3,050 30,966 55,396
Other income (1,946) 147,060 (1,651) 171,660
Interest expense (5,825) (10,274) (36,847) (35,078)
Worthless stock -- -- -- (2,000)
------------ ------------ ------------ ------------
569,939 13,773,537 7,523,147 81,569,539
------------ ------------ ------------ ------------
Income (loss) before income taxes
and discontinued operations (2,270,024) 11,609,332 (1,832,670) 75,519,280
PROVISION FOR INCOME TAXES -- -- -- 5,400
------------ ------------ ------------ ------------
Income (loss) before
discontinued operations (2,270,024) 11,609,332 (1,832,670) 75,513,880
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from operations of discontinued subsidiary
(less applicable income taxes of $-0-) -- (107,677) (1,184,404) (107,677)
Loss on disposal of discontinued subsidiary
including provision of $967,050 for
operating losses during the phase one period
(less applicable losses of $-0-) -- -- (967,050) --
------------ ------------ ------------ ------------
-- -- (2,151,454) (107,677)
------------ ------------ ------------ ------------
Net income (loss) $ (2,270,024) $ 11,501,655 $ (3,984,124) $ 75,406,203
============ ============ ============ ============
EARNINGS PER COMMON SHARE
Income (loss) before discontinued operations $ (0.10) $ 0.57 $ (0.09) $ 3.60
============ ============ ============ ============
Discontinued operations $ -- $ (0.01) $ (0.10) $ --
============ ============ ============ ============
Net income (loss) $ (0.10) $ 0.56 $ (0.19) $ 3.60
============ ============ ============ ============
EARNINGS PER COMMON SHARE -- ASSUMING DILUTION
Income (loss) before discontinued operations $ (0.10) $ 0.47 $ (0.09) $ 2.82
============ ============ ============ ============
Discontinued operations $ -- $ (0.01) $ (0.10) $ --
============ ============ ============ ============
Net income (loss) $ (0.10) $ 0.46 $ (0.19) $ 2.82
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
eSAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,984,124) $ 75,406,203
Adjustments to reconcile net loss to net cash used
in operating activities:
Noncash items included in net income:
Depreciation and amortization 719,170 235,596
(Gain) loss on sale of assets (25,000) 130,569
Loss on disposal of worthless stock -- 2,000
Allowance for doubtful notes receivable 16,745 --
Employee relocation expenses offset by note receivable reduction 192,500 --
Compensation - stock issued for services 18,750 434,607
Compensation - stock options issued for services 919,249 --
Compensation adjustment recognized under APB 25 (7,505,679) (81,510,130)
Net change in operating assets and liabilities 1,073,982 1,162,069
----------- ------------
Net cash used in operating activities (8,584,407) (4,139,086)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of fixed assets (1,442,394) (560,840)
Payments received on subscription receivable 558,510 --
Proceeds from sale of fixed assets -- 28,280
Assets held for disposition, including accrued losses 2,151,984 --
Receipt of payments on note receivable related party 64,553 --
Increase in notes receivable-related party (832,119) (263,500)
Purchase of Interwireless (4,152,219) --
Receipt of payment on note receivable 25,000 --
----------- ------------
Net cash used in investing activities (3,626,685) (796,060)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in contracts payable -- 24,354
Payments on note payable related party (66,235) --
Payments on contracts payable (54,025) 17,860
Payments on capital lease obligations (48,966) (43,555)
Member distributions (111,423) (105,226)
Principal payments on long-term debt (250,347) (70,460)
Preferred stock dividend paid (86,667) --
Proceeds from issuance of preferred stock 9,520,365 --
Proceeds from issuance of common stock -- 2,471,411
---------- ------------
Net cash provided by financing activities 8,902,702 2,294,384
---------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,308,390) 2,640,762
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,412,205 2,703,516
---------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 103,815 $ 62,754
========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
ESAT, INC. AND SUBSIDIARIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements of eSat, Inc. (the "Company") and subsidiaries
include all adjustments (consisting only of normal recurring
adjustments) considered necessary to present fairly its financial
position as of September 30, 2000 and 1999, and the results of
operations, for the three months and nine months ended September 30,
2000 and 1999 and cash flows for the nine months ended September 2000
and 1999. The results of operations for the three months and nine months
ended September 30, 2000 and 1999, are not necessarily indicative of the
results to be expected for the full year or for any future period.
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant inter-company transactions
and balances have been eliminated in consolidation. The consolidated
financial statements and notes included herein should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements
in accordance with the provisions of APB 25, Accounting for Stock Issued
to Employees, and complies with the disclosure provisions of SFAS 123,
Accounting for Stock-Based Compensation. Under APB 25, compensation cost
is recognized on fixed plans over the vesting period based on the
difference, if any, on the date of grant between the fair value of the
Company's stock and the amount an employee must pay to acquire the
stock. For variable plans, APB 25 requires recognition of compensation
cost over the vesting period based on the difference, if any, on the
period-end date between the fair value of the Company's stock and the
amount an employee must pay to acquire the stock. Forfeitures of
variable plan options result in a reversal of previously recognized
compensation cost.
Due to the large number of variable plan options granted by the Company
in 1998 and the significant difference between the exercise price of
those options and the fair value of the Company's stock at December 31,
1998, the Company recognized a substantial amount of non-cash
compensation cost in 1998. Subsequently, a large number of forfeitures
and the re-pricing to market of those options in 1999 and 2000 caused a
considerable reversal of the previously recognized non-cash compensation
cost. The resulting net income from operations for the periods ended
September 30, 1999, and other income amounts for the periods ended
September 30, 2000 should not be construed as profitable operations
during those periods (See Note 3 for Going Concern disclosure).
6
<PAGE> 7
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 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>
THREE MONTHS ENDED SEPTEMBER 30,
1999
<S> <C>
Income available to common stockholders before
adjustments $11,501,655
Preferred stock dividend --
-----------
Income available to common stockholders used
in basic EPS $11,501,655
===========
Weighted average number of common
shares used in basic EPS 20,441,952
Effect of dilutive securities:
Stock options 2,284,742
Warrants 2,162,727
-----------
Weighted average number of common shares and
dilutive potential common stock used in
dilutive EPS 24,889,421
===========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999
<S> <C>
Income available to common stockholders before
adjustments $75,406,203
Preferred stock dividend --
-----------
Income available to common stockholders used
in basic EPS $75,406,203
===========
Weighted average number of common
shares used in basic EPS 20,951,151
Effect of dilutive securities:
Stock options 3,666,880
Warrants 2,101,485
----------
Weighted average number of common share
and dilutive potential common stock use in
dilutive EPS 26,719,516
==========
</TABLE>
7
N
<PAGE> 8
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b) Net Earning or Loss Per Share (Continued)
For the nine months and three months ended September 30, 2000 the
calculation of earnings per share amounts are the same because
potential dilutive securities would have had an antidilutive effect.
The securities that would have had an antidilutive effect include
stock options, warrants and convertible preferred stock. The weighted
average number of common shares used in the calculation of basic
earnings per share for the three months and nine months ended
September 30, 2000 were 21,766,181 and 21,528,155 respectively.
(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 on the Company's ability to meet its
financing requirements, and the success of its future operations.
At September 30, 2000, the Company did not have sufficient cash and
cash equivalents to funds its operations through December 31, 2000. On
October 6, 2000 the Company raised an additional $2,000,000 from
Wentworth, LLC (the "New Money") pursuant to a modification of the
Private Equity Credit Agreement ("PECA") between the Company and
Wentworth LLC, dated August 9, 2000. Together with cash on hand, cash
equivalents and the New Money, the Company still does not have
sufficient cash or cash equivalents to fund its operations through
December 31, 2000. The Company's ability to meet its operating and
business expansion requirements for the duration of 2000 is highly
dependent upon i) the Company's compliance with the conditions precedent
to additional financing under the PECA, including without limitation the
requirement of no material adverse change to the business or financial
condition of the Company, and ii) Wentworth LLC's performance under the
PECA.
(4) DISCONTINUED OPERATIONS
On June 30, 2000 the Company adopted a formal plan to dispose of its
majority owned subsidiary, i-Xposure, Inc., which is no longer part of
the Company's strategic long-term growth objectives. The subsidiary is
reported as a discontinued operation and its net assets and results of
operations are reported separately in the unaudited consolidated
financial statements. The disposal of the subsidiary is expected to be
completed prior to December 31, 2000.
8
<PAGE> 9
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
(4) DISCONTINUED OPERATIONS (Continued)
The estimated loss on disposal of the discontinued operations of
$967,050 (net of income tax benefit of $-0-) represents the Company's
share of the provision of $1,050,000 for expected losses during the
phase out period from July 1, 2000 to December 31, 2000. The Company's
weighted average ownership percentage was 92.1 percent during the three
months and six months ended June 30, 2000.
Assets and liabilities of i-Xposure, Inc. to be disposed of consisted of
the following at September 30, 2000:
<TABLE>
<S> <C>
Accounts receivable $ 10,109
Other current assets 31,208
Property and equipment 233,699
-----------
Total assets 275,016
Bank overdraft 69,804
Accounts payable 211,580
Loans payable 250,000
Loans Payable-stockbroker 30,000
Loan payable-related party 832,120
Losses and expenses accrued 592,897
Minority interest in equity 724,485
-----------
Net assets to be
disposed of $(2,435,870)
===========
</TABLE>
Assets are shown at their expected net realizable value and liabilities
are shown at their face amounts.
Operating results of i-Xposure, Inc. for the nine months ended September
30, 2000 are shown separately in the accompanying income statement.
i-Xposure, Inc. commenced operations in the third quarter of 1999. The
Net sales of i-Xposure, Inc. were $578 and $528,993 for the three months
and nine months ended September 30, 2000 respectively. The Net loss of
i-Xposure, Inc. was $496,097 and $1,782,118 for the three and nine
months ended September 30, 2000 respectfully. These amounts are not
included in net sales or net loss in the accompanying income statements.
(5) BUSINESS ACQUISITIONS
On April 13, 2000 the Company acquired InterWireless, Inc. in a business
combination accounted for as a purchase. The purchase price of
$4,197,881 exceeded the fair value of the net assets by $4,152,219,
which will be amortized as goodwill using the straight-line method over
7 years. The results of operations of InterWireless, Inc. have been
included with the result 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 account for as
a pooling of interests.
Historical financial information presented has been restated to include
PacificNet Technologies, Inc.
(6) 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.
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 proceed
were partially used to finance the acquisition of Interwireless, Inc.
In August, 2000 the Company issued 30,000 shares of 6% Series E
preferred stock. This stock has a par value of $0.001, and is fully
participating and convertible into shares of common stock.
During the third quarter, 2,900 shares of 6% Series D preferred stock
was converted into 335,181 shares of common stock.
9
<PAGE> 10
eSAT, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales from continuing operations for the three months ended September 30, 2000
increased to $1,439,185 from $879,593 in the prior year period. For the nine
month period ended September 30, 2000, revenues increased to $3,806,481 from
$2,703,760 for the same period in the prior year. The 2000 revenue increased
primarily due to an increase in the subscriber base and ancillary services
revenue at the PacificNet subsidiary, and to a lesser extent, increases in
sales of the Company's disaster recovery products and services.
Cost of sales for the third quarter 2000 totaled $1,618,468 as compared to
$892,133 in 1999. For the nine months ended September 30, 2000, cost of sales
increased to $4,240,657 from $2,817,811 in the prior year due primarily to
technical staffing increases at the Company's network operations center,
increases in related hardware supplies and maintenance, start up cost incurred
in developing the Company's fixed wireless network and an increase in satellite
access fees.
General and administrative expenses increased from $2,151,665 for the quarter
ended September 30, 1999 to $2,660,680 in the current year period. For the nine
month period ended September 30, 2000, general and administrative expenses
totaled $8,921,641 as compared to $5,936,208 in the prior year period. The
increase in 2000 reflects the cost of business continuity marketing and
corporate investor relations programs, staffing increased in the areas of
business and technical development and legal and accounting fees associated
with the Company becoming a full SEC reporting company in late 1999.
Other income totaled $569,939 and $7,523,147, respectively, for the three and
nine month periods ended September 30, 2000, as compared to $13,773,537 and
$81,569,539, respectively for the three and nine month periods ended September
30, 1999. Other income primarily represents a compensation adjustment
recognized under APB 25.
For the nine month period ended September 30, 2000, the loss from the
operations and disposal of the discontinued subsidiary total $1,184,404 and
$967,070, respectively. These losses were recorded during the second quarter
2000 and represent costs associated with the Company's plan to divest of its
majority-owned subsidiary, i-xposure, Inc. No additional provision was recorded
during the quarter ended September 30, 2000.
10
<PAGE> 11
eSAT, INC.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have historically been financed from the sale
of preferred and common stock. At September 30, 2000, the Company had cash and
cash equivalents on hand of $103,815 and working capital of ($5,246,348) as
compared to cash and cash equivalents of $3,412,205 and working capital of
($1,993,158) at December 31, 1999.
Net cash used in operating activities of $8,584,407 and $4,139,086 for
the nine months ended September 30, 2000 and 1999, respectively, is attributable
primarily to operating losses as adjusted for compensation expense recognized
under APB 25 and FAS 123.
Net cash used in investing activities totaled $3,626,685 and $796,060
for the nine months ended September 30, 2000 and 1999, respectively. Net cash
used in 2000 represents primarily the purchase of Interwireless and fixed
assets, as offset by the recognition of the disposal of the Company's investment
in the i-Xposure, Inc. subsidiary.
Net cash provided by financing activities totaled $8,902,702 for the
nine months ended September 30, 2000 as compared to $2,294,384 for the same
period in 1999. The balances in both periods primarily represent the sale of
preferred and common stock.
In April 2000, all of the outstanding Series A preferred stock was
converted into 550,000 shares of common stock.
In April 2000, the Company entered into an agreement with the holder
of the Series C preferred stock for the purpose of raising additional capital.
Pursuant to that agreement, a total of $7,500,000 of Series D 6% convertible
preferred stock was sold. In addition to the shares purchased, the agreement
calls for the issuance of warrants to purchase 1,283,422 shares of common stock
at an initial exercise price of $3.9844 per share.
In August, 2000 a total of $3,000,000 of Series E 6% convertible
preferred stock was sold. In addition to the shares sold, the agreement calls
for the issuance of warrants to purchase 666,075 shares of common stock at an
exercise price of $1.5225 per share. The Company also modified the terms of its
equity line of credit with Wentworth, LLC including the establishment of a
$7,000,000 credit limit on the facility under a Private Equity Credit Agreement
("PECA".)
In October, 2000, the Company received $2,000,000 under a
modification to the PECA. In accordance with the agreement, shares of the
Company's common stock are issuable to Wentworth, LLC upon receipt of their
call notice. A call notice on this financing has not been received by the
Company to date. The PECA also calls for the issuance of warrants to purchase
shares of an amount equal to 15% (25% under the October modification) of the
shares issued from each put or call notice at a price of 125% of the market
price with respect to each funding under the PECA including the $2,000,000
financing.
Under the terms of the PECA, the Company is committed to use
$3,000,000 of the $5,000,000 currently unused portion of the credit line by
August 2001.
At September 30, 2000, the Company did not have sufficient cash and
cash equivalents to fund its operations through December 31, 2000. On October
6, 2000 the Company raised an additional $2,000,000 from Wentworth, LLC (the
"New Money") pursuant to a modification of the PECA between the Company and
Wentworth LLC, dated August 9, 2000. Together with cash on hand, cash
equivalents and the New Money, the Company still does not have sufficient cash
or cash equivalents to fund its operations through December 31, 2000. The
Company's ability to meet its operating and business expansion requirements for
the duration of 2000 is highly dependent upon i) the Company's compliance with
the conditions precedent to additional financing under the PECA, including
without limitation the requirement of no material adverse change to the
business or financial condition of the Company, and ii) Wentworth LLC's
performance under the PECA.
<PAGE> 12
eSAT, INC.
IMPACT OF YEAR 2000
We experienced no interruptions in our operations when the calendar year
changed to the year 2000. We believe that our products and services, and
products which we purchase from third party vendors, are designed to operate
continuously regardless of date changes.
12
<PAGE> 13
eSAT, INC.
RISK FACTORS
WE HAVE REPORTED LOSSES FROM OPERATIONS FOR OUR LAST THREE YEARS AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2000, AND, IF WE DO NOT BECOME PROFITABLE,
OUR BUSINESS WILL BE ADVERSELY AFFECTED AND THE VALUE OF YOUR INVESTMENT
WILL DECLINE.
For the nine months ended September 30, 2000, we incurred a loss from
continuing operations of $9,355,817, 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 anticipation of future growth of our
operations; (ii) expenses related to marketing; and (iii) lack of product
sales. In addition, we incurred significant research and development costs
associated with new products. There can be no assurance that we will be able
to generate sufficient revenues to operate profitably in the future or to
pay our debts as they become due. The company is dependent upon successful
completion of future capital infusions to continue operations. See
"Management's Discussion and Analysis of Financial Condition."
The Company's net income in 1999 is primarily a result of its method of
accounting for stock-based compensation. The Company accounts for
stock-based employee compensation arrangements in accordance with the
provisions of APB 25, Accounting for Stock Issued to Employees, and Complies
with the disclosure provisions of SFAS 123, Accounting for Stock-Based
Compensation. Under APB 25, compensation cost is recognized on fixed plans
over the vesting period based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount an
employee must pay to acquire the stock. For variable plans, APB 25 requires
recognition of compensation cost over the vesting period based on the
difference, if any, on the period-end date between the fair value of the
Company's stock and the amount an employee must pay to acquire the stock.
Forfeitures of variable plan options result in a reversal of previously
recognized compensation cost.
Due to the large number of variable plan options granted by the Company in
1998 and the significant difference between the exercise price of those
options and the fair value of the Company's stock at December 31, 1998, the
Company recognized a substantial amount of non-cash compensation cost in
1998. Subsequently, a large number of forfeitures and the re-pricing to
market of those options in 1999 caused a considerable reversal of the
previously recognized non-cash compensation cost. The resulting net income
for the three and nine month periods ended September 30, 1999 should not be
construed as profitable operations during those periods.
WE DEPEND ON SATELLITE TRANSMISSION. SATELLITE FAILURE COULD HAVE A
SUBSTANTIAL NEGATIVE EFFECT ON OUR BUSINESS OPERATIONS.
We currently use a single satellite to provide satellite Internet services.
There is risk associated with this dependence. There are two types of
possible failures to the satellite: a failure of the individual transponder
that is used and a failure of the entire satellite. If there is a failure of
a transponder, the satellite operator is contractually obligated to move us
to another transponder. This would create a minimum interruption to
customers, likely less than 24 hours. If the satellite itself completely
fails, we will have to move our services to another satellite. Our
transmissions conform to industry standards so there are several possible
alternative satellites. Our current satellite provider engages in quarterly
reviews of available like-satellite space and is ready to contract for that
space if needed. If the entire satellite were to fail, a one to five day
outage of services might occur depending on the availability of other
satellites. Additionally, a repointing of the receiving dishes on the ground
would likely be required. The repointing of the receiving dishes on the
ground would cost us approximately $300 per customer. In the event of any
service disruption due to satellite failure, our customers would be credited
for the dollar value of the amount of time they are without the satellite
Internet service. Based on a standard contract paying $495 per month for the
use of our GSI(TM) equipment and related satellite Internet service, this
would be equal to $16.50 per day per customer. Nexstream based business
continuity customers might not be impacted but could cost $27.00 per day.
Other Nexstream customers would represent a potential loss of between $27.00
and $155.00 per day depending on the level of service subscribed. We intend
to install a second U.S. Network Operating Center ("NOC") in the first half
of fiscal 2000. This second NOC will be located in Los Angeles, California,
and will utilize a different satellite than the existing NOC. This second
NOC and satellite provides certain redundancies in the event of a failure.
In the event of a satellite failure, we could also be subject to
loss-of-business claims, due to the reliance by business customers on the
satellite Internet services we provide. A sustained disruption in satellite
service could materially impact our ability to continue operations.
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eSAT, INC.
WE HAVE A LIMITED OPERATING HISTORY
Any of these occurrences could have a material adverse effect on our
business, financial condition and operating results. Each of our products faces
intense competition from multiple competing vendors. Our principal competitors
include Loral, Inc., Hughes Network Systems and Spacenet. Many of our current
and potential competitors have:
- longer operating histories,
- greater name recognition,
- access to larger customer bases, or
- substantially greater resources than we have.
As a result, our principal competitors may respond more quickly than we
can to new or changing opportunities and technologies. For all of the reasons
stated above, we may be unable to compete successfully against our current and
future competitors.
WE MAY HAVE INSUFFICIENT CAPITAL FOR FUTURE OPERATIONS WHICH WOULD DIMINISH THE
VALUE OF YOUR INVESTMENT.
Based on current proposed plans and assumptions relating to our
operations, we anticipate that current cash reserves, together with projected
cash flow from operations and the sale of additional securities, will be
sufficient to satisfy our contemplated cash requirements through fiscal 2000.
Thereafter, we will require substantial additional financial resources to fund
our operations. The expansion into new product areas will also require
substantial funding. The failure to acquire additional funding when required
will have a material adverse effect on our business prospects. Without the
proper financing of customer contracts by a finance company or additional
equity, we are likely to have difficulty in sustaining on-going operations.
OUR FINANCIAL STATEMENTS CONTAIN A "GOING CONCERN" QUALIFICATION.
The audit reports accompanying our Financial Statements for the years
ended December 31, 1998 and 1999 contain a qualification that certain conditions
indicate that we may not be able to continue as a going concern. The financial
statements do not contain any adjustments that might be necessary in such a
case. Note 2 to the financial statements indicates that substantial operating
losses account for this uncertainty. Many investment bankers and investors view
companies with a "going concern" qualification as less desirable for investment.
Accordingly, we may have a more difficult time raising equity capital or
borrowing capital at all on favorable terms. Our suppliers might be less willing
to extend credit. Our potential customers might be less willing to purchase our
products and services if they believe that we will not be viable enough to
provide service, support, back-up, and follow-on products when needed.
Furthermore, we might be disadvantaged in recruiting employees who might be
concerned about the stability of employment with us. Therefore, the "going
concern" qualification can have severe adverse consequences on us.
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<PAGE> 15
eSAT, INC.
WE ARE DEPENDENT ON SUCCESSFUL NEW PRODUCTS AND PRODUCT ENHANCEMENT
INTRODUCTIONS AND MAY SUFFER PRODUCT DELAYS.
Our success in the Internet access business depends on, among other things, the
timely introduction of successful new products or enhancements of existing
products to replace declining revenues from older, less efficient products.
Consumer preferences for software products are difficult to predict, and few
consumer software products achieve sustained market acceptance. If revenues from
new products or enhancements do not replace declining revenues from existing
products, our business, operating results and financial condition could be
materially adversely affected. The process of developing Internet access
products such as ours is extremely complex and is expected to become more
complex. A significant delay in the introduction of one or more new products or
enhancements could have a material adverse effect on the ultimate success of
such products and on our business, operating results and financial condition.
WE HAVE NO ASSURANCE OF MARKET ACCEPTANCE OF OUR PRODUCTS AND SERVICES. IF WE
ARE UNABLE TO RAISE MARKET AWARENESS OF OUR PRODUCTS AND SERVICES, WE MAY
EXPERIENCE DECLINING OPERATING RESULTS WHICH WOULD DIMINISH THE VALUE OF YOUR
INVESTMENT.
We are at an early stage of development and our earnings growth depends
primarily upon market acceptance of our products and services. There can be no
assurance that our product development efforts will progress further with
respect to any potential new products or that they will be successfully
completed. In addition, there can be no assurance that our potential new
products will be capable of being produced in commercial quantities at
reasonable costs or that they will achieve customer acceptance.
There can be no assurance that our products and services will be successfully
marketed. In addition to our own direct sales force, we are dependent on
value-added resellers and distributors to market our products. There is no
assurance that any distributor or other reseller will be successful in marketing
our products.
Our success is dependent in part on our ability to sell our products and
services to governmental agencies, including public school districts, and large
business organizations. Selling to governmental agencies and larger companies
generally requires a long sales process, with multiple layers of review and
approval.
In sales to governmental agencies, nonbusiness factors often enter into the
purchase decision. Such factors include the residence and origin of the supplier
of the products, the nature of the supplier and the distributor, the ethnic and
gender characteristics of personnel and owners of the company selling or
distributing the products, political and other contacts, and other peculiar
factors. Accordingly, the success of selling to these potential customers is
uncertain.
We do not have sufficient experience in marketing our products to determine the
optimum distribution methods. It is unclear whether marketing through
distributors or value-added resellers or mass retailers will result in
acceptable sales levels. Accordingly, as we learn
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eSAT, INC.
more, we may have to revise our sales, distribution, and marketing strategies
and implementation.
WE MIGHT BECOME SUBJECT TO FURTHER GOVERNMENT REGULATION WHICH COULD HARM OUR
PROSPECTS.
Except for a license from the Federal Communications Commission, we are
not currently subject to direct regulation by any government agency in the
United States, other than regulations applicable to businesses generally. There
are currently few laws or regulations directly applicable to access to or
commerce on the Internet. However, due to the increasing popularity and use of
the Internet, it is possible that laws and regulations may be adopted with
respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. Such laws or regulations
could limit the growth of the Internet, which could in turn decrease the demand
for our proposed products and services or increase our cost of doing business.
Any new legislation or regulation or the application of existing laws and
regulations to the Internet in unexpected ways could have an adverse effect on
our business and prospects.
WE MIGHT FACE LIABILITY FOR INFORMATION OBTAINED OR DISTRIBUTED THROUGH THE
PRODUCTS AND SERVICES WE PROVIDE.
Because materials may be downloaded by the Internet services which we
operate or facilitate and may be subsequently distributed to others, there is a
potential that claims will be made against us for defamation, negligence,
copyright or trademark infringement, personal injury or other theories based on
the nature and content of such materials. Such claims have sometimes been
successful against Internet service providers. Our general liability insurance
might not cover potential claims of this type or might not be adequate to
indemnify us for all liability that may be imposed. Any imposition of liability
or legal defense expenses that are not covered by insurance or that are in
excess of insurance coverage could have a material adverse effect on our
business, operating results and financial condition.
LOSS OF KEY MEMBERS OF OUR SENIOR MANAGEMENT COULD ADVERSELY AFFECT OUR BUSINESS
AND PROSPECTS.
Our success will be dependent largely upon the personal efforts of our
Chairman and Chief Executive 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. Noblett's and certain senior manager 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.
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<PAGE> 17
eSAT, INC.
IF OUR COMMON STOCK IS SUBJECT TO PENNY STOCK RULES, YOU MAY HAVE GREATER
DIFFICULTY SELLING YOUR SHARES.
The Securities Enforcement and Penny Stock Reform Act of 1990 applies to
stock characterized as "penny stocks," and requires additional disclosure
relating to the market for penny stocks in connection with trades in any stock
defined as a penny stock. The Securities and Exchange Commission has adopted
regulations that generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
The exceptions include exchange-listed equity securities and any equity security
issued by an issuer that has
- net tangible assets of at least $2,000,000, if the issuer has
been in continuous operation for at least three years;
- net tangible assets of at least $5,000,000, if the issuer has
been in continuous operation for less than three years; or
- average annual revenue of at least $6,000,000 for the last three
years.
Unless an exception is available, the regulations require the delivery,
prior to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the associated risks.
If our financial condition does not meet the above tests, then trading
in the common stock will be covered by Rules 15g-1 through 15g-6 and 15g-9
promulgated under the Securities Exchange Act. Under those rules, broker-dealers
who recommend such securities to persons other than their established customers
and institutional accredited investors must make a special written suitability
determination for the purchaser and must have received the purchaser's written
agreement to a transaction prior to sale. These regulations would likely limit
the ability of broker-dealers to trade in our common stock and thus would make
it more difficult for purchasers of common stock to sell their securities in the
secondary market. The market liquidity for the common stock could be severely
affected.
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<PAGE> 18
WE WILL PAY NO DIVIDENDS TO YOU.
We have not paid, and do not expect to pay, any dividends on common stock in
the foreseeable future.
FORWARD-LOOKING STATEMENTS
YOU SHOULD NOT RELY ON OUR FORWARD-LOOKING STATEMENTS.
This prospectus contains forward-looking statements that involve risks
and uncertainties. Discussions containing forward-looking statements may be
found in the material set forth under "Prospectus summary," "Management's
discussion and analysis of financial condition and results of operations,"
and "Business," as well as within this prospectus generally. In addition,
when used in this prospectus, the words "believes," "intends," "plans,"
"anticipates," "expects," and similar expressions are intended to identify
forward-looking statements. Forward-looking statements are subject to a
number of risks and uncertainties. Actual results could differ materially
from those described in the forward-looking statements as a result of the
risk factors set forth and the information provided in this prospectus
generally. We do not intend to update any forward-looking statements.
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eSAT, INC.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) Recent sales of unregistered securities
In October 2000, the Company issued a $2,000,000 put notice to Wentworth,
LLC, under its private equity credit line. Shares of the Company's common
stock are issuable under this drawdown upon receipt of a call notice from
Wentworth, LLC. The conversion price used in the calculation of the shares
issuable at the date of the call notice is 85% of the average closing price
for the five trading days immediately prior to the date of the call.
Wentworth, LLC is an accredited investor pursuant to Section 4 (2) and
Regulation S of the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(c) At the Annual Meeting of the Stockholders of eSat, Inc. held on
September 15, 2000, the following actions were taken:
(1) All of the Company's director positions were subject to
election. Results were as follows:
Michael C. Palmer - 17,269,625 votes for, none against and
195,855 votes abstained;
Chester L. Noblett - 17,263,625 votes for, none against and
195,855 votes abstained;
Ed Raymund - 17,273,125 votes for, none against and 195,855
votes abstained;
Esther Rodriguez - 17,208,125 votes for, none against and
195,855 votes abstained;
James Fuchs - 17,271,125 votes for, none against and
195,855 votes abstained;
Sal Piraino - 17,207,755 votes for, none against and
195,855 votes abstained;
(2) The Company's articles of incorporation were amended to
increase the number of common shares authorized from
50,000,000 to 100,000,000 with 16,355,352 votes for,
1,018,474 against and 32,198 abstained.
(3) The number of shares reserved for issuance under the
Company's 1997 Stock Option and Stock Bonus Plan was
increased to 7,580,000 with 5,790,221 votes for, 1,105,847
against and 30,778 abstained.
(4) The Company's 2000 Stock Option Plan was adopted with
3,000,000 shares of common stock reserved for issuance under
the plan with 5,810,108 votes for, 1,070,658 against and
38,030 abstained.
(5) The selection of the firm of Sprayberry, Barnes, Marietta &
Luttrell formerly known as Carpenter, Kuhen & Sprayberry as
the Company's independent auditors for 2000 was ratified
with 17,143,584 votes for, 205,332 against and 40,518
abstained.
ITEM 5. OTHER INFORMATION
(a) On June 30, 2000 the Company adopted a formal plan to dispose of its
majority owned subsidiary, i-xposure, Inc., which is no longer part of
the Company's strategic long-term growth objectives. The subsidiary is
reported as a discontinued operation and its net assets and results of
operations are reported separately in the unaudited consolidated
financial statements. In October 2000, the Company entered into an
agreement with a private investor to sell a majority of its interest in
the i-xposure, Inc. subsidiary. The Company received a promissory note
from i-xposure, Inc. in the amount of $700,000, payable quarterly from
the net profits of the business for a period of five years. The
agreement requires the Company to guarantee i-xposure, Inc. revenue of
up to $130,000 in each of the months October through December, 2000.
Additionally, the Company has guaranteed up to $150,000 plus interest of
bridge loan financing provided to i-xposure, Inc. from the investor.
(b) In September 2000, Esther Rodriguez resigned from the Company's Board of
Directors. In October 2000, Michael C. Palmer resigned from the
Company's Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Amended Series C 6% Convertible Preferred Stock Certificate of
Designations
3.2 Amended Series D 6% Convertible Preferred Stock Certificate of
Designations
4.1 Same as Exhibit 3.1
4.2 Same as Exhibit 3.2
10.1 Modification Agreement between Wentworth, LLC and the Company
dated October 6, 2000
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
(i) A report on Form 8-K was filed on September 21, 2000 announcing
that Michael C. Palmer is no longer serving as President, Chief
Executive Officer and Secretary of the Company. Chester L. Noblett will
serve as acting Chief Executive Officer, Mark S. Basile was appointed as
the Company's Secretary and David Pennells was appointed to the Board of
Directors to fill a vacancy.
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eSAT, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
eSAT, INC.
Date: November 14, 2000 By: /s/ Mark S. Basile
----------------- -------------------------------
Mark S. Basile
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Amended Series C 6% Convertible Preferred Stock Certificate of
Designations
3.2 Amended Series D 6% Convertible Preferred Stock Certificate of
Designations
4.1 Same as Exhibit 3.1
4.2 Same as Exhibit 3.2
10.1 Modification Agreement between Wentworth, LLC and the Company dated
October 6, 2000
27.1 Financial Data Schedule
</TABLE>
