<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 June 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) 464-2600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
PAR VALUE $.001 21,882,021
----------------------- ----------------------------------
(Class of Common Stock) (Outstanding at August 10, 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 June 30, 2000
and December 31, 1999 3
Unaudited Consolidated Statements of Operations for the
three and six months ended June 30, 2000 and 1999 4
Unaudited Consolidated Statements of Cash Flows for the
six months ended June 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>
JUNE 30, DECEMBER 31,
2000 1999
CURRENT ASSETS: (UNAUDITED)
<S> <C> <C>
Cash and cash equivalents $ 667,375 $3,412,205
Accounts receivable, net 616,589 471,899
Inventory, net 349,943 135,189
Other current assets 14,821 17,866
Deposits 273,279 420,747
Notes receivable-related party 2,563 64,553
---------- ----------
Total current assets 1,924,570 4,522,459
---------- ----------
PROPERTY AND EQUIPMENT, NET 1,951,511 1,051,936
---------- ----------
OTHER ASSETS:
Note receivable 110,812 250,000
Notes receivable-related party 646,512 --
Goodwill, net 4,003,925 --
Deposits 80,336 132,523
Other assets 15,170 23,907
---------- ----------
Total other assets 4,856,755 406,430
---------- ----------
$8,732,836 $5,980,825
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
CURRENT LIABILITIES: (UNAUDITED)
<S> <C> <C>
Accounts payable-trade $ 1,912,431 $ 837,065
Accounts payable-other 428,516 --
Accrued expenses 63,218 199,955
Unearned revenue 151,883 306,732
Deferred revenue 211,562 73,646
Other current liabilities 191,429 --
Current portion of obligations
under capital lease 66,672 76,049
Contracts payable 37,418 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 5,533,699 2,529,301
------------ ------------
LONG-TERM LIABILITIES
Obligations under capital lease 69,580 130,395
Deferred revenue 94,050 22,455
------------ ------------
Total long-term liabilities 163,630 152,850
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock - Series C -
cumulative, fully participating
convertible, $0.01 par value
Authorized - 50,000 shares Issued
and outstanding - 50,000 shares 500 500
Preferred stock - Series A,
cumulative, fully participating,
convertible, $0.01 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 - 75,000 shares 75 --
Common stock - $0.001 par value
Authorized - 50,000,000 shares
Issued and outstanding - 21,721,453
shares 21,721 18,345
Additional paid-in capital 25,862,006 25,764,947
Members' deficit -- (37,021)
Retained deficit (22,848,795) (20,899,587)
------------ ------------
3,035,507 4,857,184
Less: Subscriptions receivable -- (1,558,510)
------------ ------------
Total stockholders' equity 3,035,507 3,298,674
------------ ------------
$ 8,732,836 $ 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 INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
SALES 1,341,499 $ 1,080,652 $ 2,396,203 $ 1,824,167
COST OF SALES 1,510,861 1,119,201 2,461,642 1,925,678
------------ ------------ ------------ ------------
Gross margin (169,362) (38,549) (65,439) (101,511)
GENERAL AND ADMINISTRATIVE EXPENSES 3,804,514 2,340,378 6,458,138 3,784,543
------------ ------------ ------------ ------------
Loss from operations (3,973,876) (2,378,927) (6,523,577) (3,886,054)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Compensation adjustment recognized
under APB 25 3,614,885 53,731,496 6,930,672 67,876,429
Gain (loss) on sale of assets 25,000 (4,629) 25,000 (130,569)
Interest income 10,355 21,187 28,279 52,346
Other income 7,569 6,018 8,004 24,600
Interest expense (10,625) (7,956) (31,021) (24,804)
Worthless stock -- (2,000) -- (2,000)
------------ ------------ ------------ ------------
3,647,184 53,744,116 6,960,934 67,796,002
------------ ------------ ------------ ------------
Income (loss) before income taxes
and discontinued operations (326,692) 51,365,189 437,357 63,909,948
PROVISION FOR INCOME TAXES -- 4,600 -- 5,400
------------ ------------ ------------ ------------
Income (loss) before
discontinued operations (326,692) 51,360,589 437,357 63,904,548
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS
Loss from operations of discontinued subsidiary
(less applicable income taxes of $-0-) (1,004,142) -- (1,184,404) --
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) -- (967,050) --
------------ ------------ ------------ ------------
(1,971,192) -- (2,151,454) --
Net income (loss) $ (2,297,884) $ 51,360,589 $ (1,714,097) $ 63,904,548
============ ============ ============ ============
EARNINGS PER COMMON SHARE
Income (loss) before discontinued operations $ (0.02) $ 2.44 $ 0.02 $ 3.01
============ ============ ============ ============
Discontinued operations $ (0.09) $ -- $ (0.10) $ --
============ ============ ============ ============
Net income (loss) $ (0.11) $ 2.44 $ (0.08) $ 3.01
============ ============ ============ ============
EARNINGS PER COMMON SHARE -- ASSUMING DILUTION
Income (loss) before discontinued operations $ (0.02) $ 1.97 $ 0.02 $ 2.33
============ ============ ============ ============
Discontinued operations $ (0.09) $ -- $ (0.10) $ --
============ ============ ============ ============
Net income (loss) $ (0.11) $ 1.97 $ (0.08) $ 2.33
============ ============ ============ ============
</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>
SIX MONTHS ENDED
JUNE 30,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,714,097) $ 63,904,550
Adjustments to reconcile net loss to net cash used
in operating activities:
Noncash items included in net income:
Depreciation and amortization 386,017 139,596
(Gain) loss on sale of assets (25,000) 130,569
Loss on sale of worthless stock -- 2,000
Allowance for doubtful notes receivable 178,932 --
Employee relocation expenses offset by note receivable reduction 117,000 --
Compensation - stock issued for services -- 107,500
Compensation - stock options issued for services 919,249 --
Compensation adjustment recognized under APB 25 (6,930,672) (67,876,429)
Net change in operating assets and liabilities 860,184 524,370
----------- ------------
Net cash used in operating activities (6,208,387) (3,067,844)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of fixed assets (676,158) (331,686)
Payments received on subscription receivable 558,510 --
Proceeds from sale of fixed assets -- 28,280
Assets held for disposition, including accrued losses 2,150,915 --
Receipt of payments on note receivable related party 61,990 --
Increase in notes receivable-related party (829,012) (241,624)
Purchase of Interwireless (4,108,553) --
----------- ------------
Net cash used in investing activities (2,842,308) (545,030)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in contracts payable -- 30,277
Payments on note payable related party (66,235) --
Payments on contracts payable (39,555) --
Payments on capital lease obligations (33,133) (12,110)
Member distributions (111,423) (65,226)
Principal payments on long-term debt (250,347) (61,397)
Preferred stock dividend paid (86,667) --
Proceeds from issuance of preferred stock 6,893,225 --
Proceeds from issuance of common stock -- 1,721,411
---------- ------------
Net cash provided by financing activities 6,305,865 1,612,955
---------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,744,830) (1,999,919)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,412,205 2,703,516
---------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 667,375 $ 703,597
========== = ==========
</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 JUNE 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 June 30, 2000 and 1999, and the results of operations,
and cash flows for the three months and six months ended June 30, 2000
and 1999. The results of operations for the three months and six months
ended June 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 period ended June 30, 2000 and 1999, 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 JUNE 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 JUNE 30,
2000 1999
<S> <C> <C>
Income available to common stockholders before
adjustments $ (2,297,884) $51,360,589
Preferred stock dividend (75,000) --
------------ -----------
Income available to common stockholders used
in basic EPS $ (2,372,884) $51,360,589
============ ===========
Weighted average number of common
shares used in basic EPS 21,641,352 21,060,874
Effect of dilutive securities:
Stock options 334,628 2,904,948
Warrants 283,127 2,153,558
Convertible preferred stock Series A 71,837 --
Convertible preferred stock Series C 2,000,000 --
Convertible preferred stock Series D 2,571,428 --
------------ -----------
Weighted average number of common shares and
dilutive potential common stock used in
dilutive EPS 26,902,372 26,119,380
============ ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
<S> <C> <C>
Income available to common stockholders before
adjustments $ (1,714,097) $63,904,548
Preferred stock dividend (86,667) --
------------ -----------
Income available to common stockholders used
in basic EPS $ (1,800,764) $63,904,548
============ ===========
Weighted average number of common
shares used in basic EPS 21,368,030 21,209,970
Effect of dilutive securities:
Stock options 334,628 4,308,795
Warrants 283,127 1,891,364
Convertible preferred stock Series A 287,347 --
</TABLE>
7
<PAGE> 8
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2000 AND 1999 (UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b) Net Earning or Loss Per Share (Continued)
<TABLE>
<CAPTION>
<S> <C> <C>
Convertible preferred stock Series C 2,000,000 --
Convertible preferred stock Series D 1,285,714 --
---------- ----------
Weighted average number of common share
and dilutive potential common stock use in
dilutive EPS 25,558,846 27,410,129
========== ==========
</TABLE>
For the six months and three months ended June 30, 2000 the
calculation of certain 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 are
presented above.
(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.
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. The Company feels
certain financing arrangements coupled with product and services market
introductions will provide sufficient cash to meet its operating and
business expansion requirements in 2000.
(4) DISCONTINUED OPERATIONS
On June 30, 2000 the Company adopted a formal plan to dispose of its
majority owned subsidiary, iXposure, 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. During the six months ended June
30, 2000 iXposure completed a private placement of its common stock and
is contemplating another private placement before December 31, 2000.
8
<PAGE> 9
ESAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 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 iXposure, Inc. to be disposed of consisted of
the following at June 30, 2000:
<TABLE>
<S> <C>
Cash $ 82,191
Accounts Receivable 118,950
Other current assets 31,208
Property and equipment 218,646
-----------
Total assets 450,995
Accounts payable 189,926
Loans payable 250,000
Loan payable-related party 646,512
Losses and expenses accrued 1,050,000
Minority interest in equity 750,427
-----------
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 iXposure, Inc. for the three months and six months
ended June 30, 2000 are shown separately in the accompanying income
statement. iXposure had no operations during the first six months of
1999. Net sales of iXposure were $16,193 and $529,571 for the three
months and six months ended June 30, 2000 respectively. These amounts
are not included in net sales 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) 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 June 30, 2000 a valuation allowance of $178,932 was
placed on the note receivable.
(7) 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.
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 June 30,
2000 increased to $1,341,499 from $1,080,652 in the prior year period. For the
six month period ended June 30, 2000, revenues increased to $2,396,203 from
$1,824,167 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, as well as an increase in sales of the
Company's disaster recovery products and services.
Cost of sales for the second quarter 2000 totaled $1,510,861 as
compared to $1,119,201 in 1999. For the six months ended June 30, 2000, cost of
sales increased to $2,461,642 from $1,925,678 in the prior year period. The
increase in 2000 is related to an increase in satellite access fees, data
center equipment lease expenses and increases in technical staffing.
General and administrative expenses increased from $2,340,378 for the
quarter ended June 30, 1999 to $3,804,514 in the current year period. For the
six month period ended June 30, 2000, general and administrative expenses
totaled $6,458,138 as compared to $3,784,543 in the prior year period. The
increase in 2000 reflect the cost of business continuity marketing and
corporate investor relations programs, staffing increases 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 $3,647,184 and $6,960,934, respectively, for the
three and six month periods ended June 30, 2000, as compared to $53,744,116 and
$67,796,002, respectively, for the three and six month periods ended June 30,
1999. Other income primarily represents a compensation adjustment recognized
under APB 25.
The loss from the operations and disposal of the discontinued
subsidiary total $1,004,142 and $967,050, respectively, for the three months
ended June 30, 2000. For the six month period ended June 30, 2000, the loss
from the operations and disposal of the discontinued subsidiary total
$1,184,404 and $967,050, respectively. These losses reflect costs associated
with the Company's plan to divest of its majority-owned subsidiary, i-Xposure,
Inc. The disposal of the subsidiary is expected to be completed by December 31,
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 June 30, 2000, the Company had cash and cash
equivalents on hand of $667,375 and working capital of ($3,609,129), as compared
to cash and cash equivalents of $3,412,205 and working capital of $1,993,158 at
December 31, 1999. The deficit working capital at June 30, 2000 includes
($2,435,870) relating to the net assets of the discontinued subsidiary.
Net cash used in operating activities of $6,208,387 and $3,067,844 for
the six months ended June 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 $2,842,308 and $545,030
for the six months ended June 30, 2000 and 1999, respectively. Net cash used in
2000 represents primarily the purchase of Interwireless as offset by the
recognition of the disposal of the Company's investment in the i-Xposure
subsidiary.
Net cash provided by financing activities totaled $6,305,865 for the
six months ended June 30, 2000 as compared to $1,612,955 in 1999. The 2000 and
1999 balances primarily reflect the sale of preferred and common stock,
respectively.
To the extent that the Company's revenues increase in the remainder of
the fiscal year, we anticipate significant increases in operating expenses,
working capital and capital expenditures. The cost to purchase additional fixed
assets, primarily satellite and microwave transmission and receiving equipment,
and to finance working capital requirements is approximately $25,000,000.
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. A total of $7,000,000 is available
under this facility.
We believe that the receipt of the net proceeds from the preferred stock
described above plus cash generated internally from sales and externally from
other financing arrangements will be sufficient to satisfy our future operating,
working capital and other cash requirements for at the remainder of the fiscal
year. We believe that we have sufficient internal and external resources to fund
current operations, develop new or enhanced products and/or services, and to
respond to competitive pressures and acquire complementary products, businesses
or technologies.
11
<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
SIX MONTHS ENDED JUNE 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 six months ended June 30, 2000, we incurred a loss from continuing
operations of $6,960,934, including all research and development costs. For
the fiscal year ended December 31, 1999, we incurred a loss from operations
of $8,925,896 as compared to a loss from operations of $2,957,991 for the
fiscal year ended December 31, 1998. The losses were primarily due to: (i)
employee compensation, which increased because of additional sales and
operations staff hired in 1998 in anticipation of future growth of our
operations; (ii) expenses related to marketing; and (iii) lack of product
sales. In addition, we incurred significant research and development costs
associated with new products. There can be no assurance that we will be able
to generate sufficient revenues to operate profitably in the future or to
pay our debts as they become due. The company is dependent upon successful
completion of future capital infusions to continue operations. See
"Management's Discussion and Analysis of Financial Condition."
The Company's net income in 1999 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 six month periods ended June 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.
14
<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
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.
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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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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 August 2000, the Company issued 30,000 shares of Series E 6% convertible
preferred stock to Wentworth, LLC for a total of $3,000,000. 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 the lesser of $1.5225 or 85% of the
average closing pice 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 5. OTHER INFORMATION
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. During the six months ended June 30, 2000 i-xposure, Inc. completed a
private placement of its common stock and is contemplating another private
placement before December 31, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Series E 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 August 9, 2000
10.2 Private Equity Credit Agreement by and between Esat, Inc. and
Wentworth, LLC dated August 9, 2000
10.3 Wentworth, LLC Registration Rights Agreement dated August 9,
2000
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
(i) A report on Form 8-K was filed on April 19, 2000 relating to the
acquisition of PacificNet Technologies, Inc. and Interwireless, Inc.
Financial statements for the businesses acquired and pro forma financial
information was filed on May 24, 2000 with Amendment no. 2 to the
Company's Registration Statement on Form S-1 file no. 333-95451.
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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: August 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 Series E 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
August 9, 2000
10.2 Private Equity Credit Agreement by and between Esat, Inc. and
Wentworth, LLC dated August 9, 2000
10.3 Wentworth, LLC Registration Rights Agreement dated August 9, 2000
27.1 Financial Data Schedule
</TABLE>
