CONFORMED COPY
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC. 20549
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the twelve month period ending December 31, 1997
Commission file number: 0-28348
DBS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1124675
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
100 SHORELINE HWY., SUITE 190 A, MILL VALLEY CA 94941
(Address of principal executive offices) (Zip Code)
(415) 380-8055
(Registrant's telephone number, including area code)
FORMER ADDRESS: 495 MILLER AVENUE, MILL VALLEY CA 94941
(Former name, former address and former fiscal year, if changed since last
report)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
As of March 31, 1998 the aggregate market value for the 4,245,147 shares
of the common stock, par value $.0004 per share, held by non-affiliates was
approximately $11,143,511.
The number of shares outstanding of registrant's only class of common
stock, as of March 31, 1998 was 5,910,236 shares of its common stock, par value
$.0004 per share.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's definitive Proxy Statement for the Company's
Annual Meeting of Stockholders to be held on May 12, 1998 are incorporated by
reference into Part III.
Exhibit Index is located at Page 13
<PAGE>
PART I
ITEM 1. BUSINESS
A. GENERAL
DBS Industries, Inc. ("DBSI" or the "Company") is designing and
developing an automated meter reading ("AMR") service utilizing low earth orbit
("LEO") satellites. LEO satellites orbit the earth at regular intervals and,
with the Company's technology, are capable of collecting data from energy
meters in many hard-to-access locations and at a substantial reduction in the
costs of manually retrieving such information. The Company is developing the
hardware and software to accomplish these tasks as well as the potential for
additional data collection applications such as the monitoring of vending
machines. The AMR business is primarily conducted by the Company through its
wholly-owned subsidiary Global Energy Metering Service, Inc. ("GEMS") and its
20% investment in E-Sat, Inc., a Colorado corporation ("E-Sat"). Further
reference to the Company will also include its subsidiary, GEMS, unless stated
otherwise.
The Company's primary strategy is the development of the AMR business,
targeting public utilities in the United States. The Company may also promote
AMR and build additional value through various direct and indirect equity
investments in communication technologies.
A1. OWNERSHIP IN E-SAT AND LEO SATELLITE INDUSTRY BACKGROUND
The technology of using LEO satellites to gather data has been in
existence for over 20 years and has been used extensively in weather satellite
applications worldwide. The commercial use of LEO satellites is in its infancy
worldwide. Competition will be likely driven by the ability of each license
holder to build and launch their LEO satellites and by the data services they
propose to provide.
E-Sat was incorporated in 1994 and is currently owned 20% by the Company
and 80% by EchoStar Communications Corporation ("EchoStar"). In November 1994,
E-Sat filed an application with the Federal Communications Commission ("FCC")
for a license to develop a commercial LEO satellite system for data
transmission.
In April, 1998 the Federal Communications Commission ("FCC") formally
approved E-Sat's application for a LEO satellite license. E-Sat was one of
five applicants requesting approval for essentially the same frequency band but
proposing a different use. The applicants mutually agreed upon a spectrum
sharing plan (the "Joint Proposal") which, essentially, requires the applicants
to share an uplink and downlink frequency band with other satellite systems and
terrestrial users of the band and to coordinate their operations with the other
users. In October 1997, the FCC released a report and order which concluded
that with use of appropriate transmission techniques, proper system
coordination, the time-sharing of frequencies and the adoption of the Joint
Proposal, there was sufficient spectrum to license all five applicants.
Thereafter, E-Sat filed an amendment conforming its application to the rules
and policies adopted by the FCC report and order which, ultimately, resulted in
the FCC's approval of E-Sat's application. The total capital requirements for
E-Sat's proposed data transmission system, including the anticipated six
satellites and other start up costs, are estimated to exceed $60 million. In
1997, the Company funded E-Sat expenses of $385,671, which represents greater
than 20% of E-Sat's total expenses for the year and includes advances made on
behalf of EchoStar. The Company's percentage of ownership in E-Sat may be
subject to dilution if it cannot meet future funding requirements and no
assurances can be given that the Company will have sufficient resources to meet
the financial requirements of E-Sat to maintain a leased interest in E-Sat's
satellite capacity.
B. GLOBAL ENERGY METERING SERVICES, INC.
GEMS was incorporated in December 1994 to provide the service
applications of the commercial LEO satellite technology developed through its
predecessor company JPS Systems, Inc.("JPS"). In 1995, JPS was formally
consolidated with GEMS and dissolved as a corporate entity. During the two
years prior to consolidation, JPS developed the basic technology of reading
data remotely by LEO satellites and conducted a proof of concept trial for
Pacific Gas & Electric Co. ("PG&E") in California. This trial was completed in
April 1995 and led to the development of a plan for GEMS to provide AMR
solutions for hard-to-access meters owned by public utilities. This plan is
intended to provide suppliers and consumers of the utility and petroleum
industries worldwide remote data collection capabilities utilizing LEO
satellite technology.
<PAGE>
In 1996, GEMS received a purchase order for LEO transmitters from ABB
Power T&D Company, Inc. ("ABB") for its development of electric meters
utilizing the Company's LEO satellite AMR technology. The Company also had an
agreement with North American CLS, Inc. ("NACLS"), which provided a limited
amount of LEO satellite capacity for trials of the Company's AMR applications
with the Argos System, a satellite location and data collection system operated
and controlled by the Centre National d' Etudes Spatiales (France) and the
National Oceanic and Atmospheric Administration ("NOAA"). The Company's
agreement for use of the Argos System expired on December 31, 1997 and certain
governmental agencies have proposed limits on future commercial use of the
Argos System. The expiration of the NACLS agreement and the proposed future
limits have caused GEMS and ABB to suspend the purchase order. No assurances
can be given that the purchase order will be reinstated or whether the terms of
any future purchase order will be acceptable to the Company.
B1. GEMS TECHNOLOGY BACKGROUND
LEO satellites are particularly suited for AMR, especially in hard-to-
access and rural applications. Many AMR applications require data only
transmission at pre-scheduled intervals and the capacity requirements for AMR
applications are relatively small compared to the requirements for the
transmission of voice or video. LEO satellites require less power to operate
than the larger geostationary satellites, such as DBS, translating into lower
capital costs and smaller radios that can be integrated in the actual meter. A
LEO satellite system is also generally less expensive to place into service
than a DBS satellite system.
GEMS has shown the viability of its technology and its proposed service
through the JPS/PG&E proof of concept trial completed in April 1995 and with a
series of pilot demonstrations conducted in conjunction with ABB, in which
prototype satellite radios and electric meters were installed at 31 electric
utilities in the Continental United States and 1 utility in South America.
Typical trial demonstrations lasted for a 30 day period, and the demonstrations
were completed in late 1996.
B2. GEMS' MARKET AND COMPETITION
GEMS has focused on electric and gas utilities in the United States,
targeting their high-cost-to-read metering segment. Since meter data has
historically been retrieved by utility personnel, logistical issues such as 1)
significant travel time to a meter site, 2) rugged terrain, 3) physical risk,
4) restricted sites, 5) environmental issues, and 6) mis-reads requiring
additional site visits can contribute to higher costs for utilities.
A number of competitors are currently developing proposals to implement
AMR at electric and natural gas utilities throughout the United States. Other
proposed AMR technology solutions include terrestrial wireless radio
technologies such as Specialized Mobile Radio, Cellular and Multiple Address
Service licenses, unlicenced radios operating under Part 15 of the FCC
Regulations, and hard wired technologies such as telephone, fiber optics, cable
and power line carriers. While terrestrial wireless technology may be cost
effective in the densely populated urban areas, it may not be cost effective to
automate rural and hard-to-access areas; and it is in these niche market
locations that GEMS intends to compete effectively by utilizing LEO satellite
technology.
C. OWNERSHIP IN SEIMAC LIMITED
In November 1995, the Company purchased a 20% equity ownership interest
in Seimac Limited ("Seimac"), a privately-held Canadian satellite radio design
and manufacturing company, in exchange for 165,519 shares of the Company's
common stock. Since 1994, GEMS has been working closely with Seimac to develop
a satellite radio which is intended to be integrated into ABB's Alpha
Stars<trademark> automated electric utility meter. Founded in 1975 in Nova
Scotia, Canada, Seimac specializes in the development of remote data collection
devices used primarily by global ocean research and military organizations for
use in harsh, rugged environments. The Company has worked extensively with
Seimac to develop a transmitter that will fit inside an electric meter and
periodically transmit its data to a LEO satellite
D. EMPLOYEES
The Company and its subsidiary currently employ 9 people full-time.
<PAGE>
E. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT
With the exception of historical facts stated herein, the matters
discussed in this report are "forward looking" statements that involve risks
and uncertainties that could cause actual results to differ materially from
projected results. Such "forward looking" statements include, but are not
necessarily limited to, statements regarding anticipated levels of future
revenue and earning from the operations of the Company, and its wholly owned
subsidiary GEMS (collectively the "Company"), projected costs and expenditures
relating to the Company's interest in and development of its automated meter
reading ("AMR") business including funding requirements, the availability of
future debt and equity capital on commercially reasonable terms, and consulting
costs in connection with FCC licenses and permits. Factors that could cause
actual results to differ materially, include, in addition to other factors
identified in this report, requirements for additional capital for the proposed
AMR service, the availability of capital on commercially acceptable terms, the
completion of a commercially viable AMR service, the dependence and uncertainty
of utility companies to utilize such an AMR service, the reliance on third
parties for the advancement of the design, manufacturing and marketing of the
service, the fulfillment of contract obligations by suppliers and other third
parties, the availability of qualified personnel and equipment, delays in the
receipt of or failure to receive necessary governmental approvals, permits and
licenses or renewals thereof, risks and uncertainties relating to general
economic and political conditions, both domestically and internationally,
changes in the law and regulations governing the Company's activities in the
AMR technology, results of the Company's financing efforts and marketing
conditions, and other risk factors related to the Company's AMR business.
Readers of this report are cautioned not to put undue reliance on "forward
looking" statements which are, by their nature, uncertain as reliable
indicators of future performance. The Company disclaims any intent or
obligation to publicly update these "forward looking" statements, whether as a
result of new information, future events, or otherwise.
ITEM 2. PROPERTIES
On March 1, 1997, the Company and GEMS entered into a three year lease
for approximately 2,300 square feet for their principal offices at 100
Shoreline Highway, Suite 190-A, Mill Valley, California, which expires in March
2000. The current monthly rent is approximately $5,900.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
To the Company's knowledge, trading in its Common Stock commenced in the
over-the-counter market in January 1993. The table which follows sets forth
the high and low bid quotations for its Common Stock during each of the last
eight fiscal quarters, as reported by the National Quotation Bureau, Inc. As
of the period ended September 30, 1996, High/Low bids were no longer available
to the Company. All stock prices marked with * reflect the closing bid price
as of the date shown.
<PAGE>
Common
QUARTER ENDED HIGH BID LOW BID
March 31, 1996 6.00 5.75
June 30, 1996 4.00 3.75
September 30, 1996 2.38* N/A
December 31, 1996 2.00* N/A
March 31, 1997 1.625* N/A
June 30, 1997 1.125* N/A
September 30, 1997 .968* N/A
December 31, 1997 .531* N/A
These quotations reflect inter-dealer prices, without retail markup,
mark-down or commission, and may not represent actual transactions. All per
share prices have been adjusted to reflect the Company's 40-to-1 reverse stock
split effected in February, 1996.
As of March 31, 1998, the Company had approximately 502 stockholders of
record. This number does not include stockholders who hold the Company's
securities in street name.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
In April, 1998 the FCC approved E-Sat's application for a LEO satellite
license. E-Sat is owned 20% by the Company and 80% by EchoStar. E-Sat was one
of five applicants requesting approval for essentially the same frequency band
but proposing a different use. The applicants mutually agreed upon a spectrum
sharing plan (the "Joint Proposal") which, essentially, requires the applicants
to share an uplink and downlink frequency band with other satellite systems and
terrestrial users of the band and to coordinate their operations with the other
users of the bands. In October 1997, the FCC released a report and order which
concluded that with use of appropriate transmission techniques, proper system
coordination, time-sharing of frequencies and the adoption of the Joint
Proposal, there was sufficient spectrum to license the five applicants.
Thereafter, E-Sat filed an amendment conforming its application to the rules
and policies adopted by the FCC report and order which, ultimately, resulted in
the FCC approval of E-Sat's application
LIQUIDITY AND CAPITAL RESOURCES
The Company has been in the development stage since its inception and has
not recognized any significant revenues or capital resources other than the
receipt, of (i) a minimal amount of inside capitalization funds at its
inception, (ii) net proceeds in the amount of $166,175 from its public
offering, (iii) gross proceeds of $70,000 from a sale of debentures, (iv)
subscriptions representing gross proceeds of $2,024,588 in connection with five
private placements of common stock, (v) gross proceeds of $342,750 from bridge
loans made by the Company's president and two shareholders, (vi) gross proceeds
of $1,056,500 from the sale of the Company's interest in the stock of a company
holding a DBS license, (vii) gross proceeds of $4,747,501 from the sale of a
seven convertible debentures,(viii) $100,000 from the issuance of a note and
(ix) gross proceeds of approximately $3.5 million settlement for the Company's
interest in Continental Satellite Corp.
Stockholders' equity at December 31, 1997 was $872,039 compared to
stockholders' deficit of $2,273,169 at December 31, 1996. This increase is
attributed primarily to a net gain of approximately $3.9 million for the
EchoStar shares received by the Company on January 8, (as reported in the
statement of operations for the quarter ended March 31, 1997) and subsequently
divested (for approximately $4.4 million) as part of an August 29, 1997
agreement to repay all debentures with EchoStar. During the year ended December
31, 1997 the Company incurred approximately $200,000 of monthly operating costs
which acted to reduce stockholders' equity further. Current operating costs
have been reduced significantly with the repayment of the Company's Debentures
as well as the settlement of the Loral Litigation. (See the Company's 10-QSB
dated September 30, 1997.) Operating expenses for fiscal 1998 are expected to
average $100,000 per month, which will continually act to reduce stockholders'
equity in the absence of the sale of additional equity.
<PAGE>
The consolidated balance sheet as of December 31, 1997 reflects $383,054
of cash and cash equivalents compared to $402,588 as of December 31, 1996. The
Company has insufficient cash to meet its needs in the near term and further
resources will be needed to continue ongoing development of GEMS' automated
meter reading ("AMR") business and the Company's operating activities. The
Company anticipates monthly expenses of approximately $100,000 to continue for
the balance of 1998. This includes approximately $75,000 per month for
operating, legal and consulting expenses, and $25,000 per month for GEMS' and
E-SAT research & development. Cash resources presently available to the Company
are insufficient to continue operations at their projected level through the
end of 1998 and additional capital will be necessary to continue operations at
their current level or to expand operations during 1998. No assurances can be
given that additional capital financing will be available when required or it
if will be on terms favorable to the Company. The Company does not expect its
automated meter reading operations to produce any significant revenue in 1998
or become profitable until 2001, due in part to delays in the approval of the
Company's application for a LEO satellite license, at the earliest, and no
assurance can be given as to this estimate. Beginning in July 1996, the
Company began to receive milestone payments under the terms of a $1.2 million
purchase order for 10,000 satellite radio units. Under this agreement, the
Company was eligible to receive up to $500,000 towards development costs upon
meeting the milestone requirements of the contract. The Company met the first
four milestones of the contract and has received $400,000 in cash. Currently,
the Company and ABB have suspended their development under this agreement due
to the expiration of the Company's agreement for use of the Argos system on
December 31, 1997, and the proposed limit placed on future commercial use of
the Argos system. Therefore, such milestone payments could be subject to
refund, in whole or in part. Unless and until the Company is able to raise
additional capital or become profitable through its subsidiary's automated
meter reading operations, the Company's liquidity and capital resources will
continue to be depleted. Historically, the Company has funded its operations
and obligations through the private placement of equity securities and
convertible debentures. The Company may continue to fund its commitments
through these financing methods. However, no assurances can be given that the
Company will be able to raise the necessary capital to meet its commitments.
In the event the Company is unable to raise the necessary capital, its business
objectives will be adversely affected.
Total assets at December 31, 1997 were $1,785,543 compared to $4,629,177
at December 31, 1996. This change in assets is primarily attributed to
elimination of the Company's interest in Continental Satellite Corporation
based on the settlement with Loral, as well as the return of 270,414 shares of
EchoStar Class A Common Stock as part of an agreement to redeem all of the
Company's debentures held by EchoStar. The largest components of total assets
at December 31, 1997 represent investments in and advances to affiliated
companies of $1,248,649 and cash of $383,054. This compares to December 31
,1996 when the largest components of total assets were Other Assets of
$2,292,409 (Continental Satellite Corporation)and Investments in and advances
to affiliated companies of $1,496,524. Advances to affiliated companies
decreased due to the elimination of the Company's interest in DBSC valued at
approximately $539,080 after a merger between EchoStar and DBSC in January
1997. (see the Company's 10-QSB dated March 31, 1997) and the Company's
contributions and advances to E-Sat in the amount of $385,671, of which
approximately $77,000 represented the Company's equity portion of E-Sat losses.
Net cash used in operating activities was $2,972,153 during 1997 compared
to net cash used of $1,639,464 during 1996 and net cash used of $7,786,293 since
inception. There was net cash provided by investing activities of $3,883,565
during the year ended December 31, 1997, compared to net cash used by investing
activities of $2,596,694 for the year ended December 31, 1996, and net cash
provided by investing activities of $1,357,717 since inception. Net cash used
by financing activities was $930,944 for the year ended December 31, 1997
compared to net cash provided by financing activities of $4,635,002 for the year
ended December 31, 1996, and $6,811,630 since inception. The net cash used
by financing activities during 1997 resulted from the cash repayment of
debentures totaling $1,043,501, offset by a loan to the Company.
RESULTS OF OPERATIONS
The Company remains in the development stage and did not generate any
significant revenues or net interest earnings during 1997 compared to $11,420
in 1996. Revenues from inception were $161,420.
The Company's net profit for the year ended December 31, 1997 was
$3,068,917, compared to a net loss of $3,752,583 for the year ended December
31, and a net loss of $3,839,129 since inception. The net profit for the year
ended December 31, 1997 was due to the net gain on the sale of marketable
equity securities and the Company's equitable interest in a DBS licensee of
approximately $5.2 million offset by a $1.7 million loss from operations, and
$308,094 net interest expense for the year ended December 31, 1997. Loss from
operations was $1,682,277 for the year ended December 31, 1997, compared to a
loss of $3,323,765 for the year ended December 31, 1996. Total loss from
operations from inception was $8,598,719. General and administrative costs
("G&A") were $1,472,162 for year ended December 31, 1997, compared to
<PAGE>
$2,245,588 for the year ended December 31, 1996. Total G&A from inception
through December 31, 1997 was $6,462,988. Research and development costs
associated with GEMS was $210,115 for the year ended December 31, 1997 compared
to $1,078,747 for the year ended December 31, 1996, and $2,216,950 since
inception.
The Company's accumulated deficit at December 31, 1997 was $3,839,129
compared to $6,908,046 at December 31, 1996. This decrease was due to a onetime
gain on the sale of marketable equity securities and the Company's equitable
interest in a DBS licensee of approximately $5.2 million and offset by the loss
from operations and interest expense of approximately $3 million. The
accumulated deficit will continue to increase unless and until the Company
generates revenues from the operations of GEMS in such amounts so as to cover
the Company's expenses. Revenues substantial enough to make the Company
profitable are not expected to be generated until 1999, and no assurances can
be given as to that estimate. The Company has been devoting a substantial
amount of its financial and personnel resources toward developing the Company's
AMR business.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The response to this item is being submitted as a separate section of
this report beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The present directors and executive officers of the Company, their ages,
positions held in the Company, and duration as such, are as follows:
NAME POSITION AGE PERIOD
Fred W. Thompson Chairman of the Board, President, 55 December 1992 -
Chief Executive Officer and present
Chief Financial Officer November 1993 -
present
Michael T. Schieber Director 58 December 1992 -
Secretary present
E.A. James Peretti Director, President and 55 February 1996 -
Chief Executive Officer, GEMS present
H. Tate Holt Director 46 February 1996 -
present
Jerome W. Carlson Director 61 May 1997 - present
The Company has adopted staggered terms for its Board of Directors. Messrs.
Schieber and Holt will serve until the 1998 annual meeting of stockholders or
until their successors have been elected, Messrs. Thompson and Peretti will
serve until the 1999 annual meeting of stockholders or until their successors
have been elected, Mr. Carlson will serve until the 2000 annual meeting of
stockholders or until his successor has been elected.
<PAGE>
CERTAIN SIGNIFICANT EMPLOYEES
While the following person does not serve as a director or executive
officer of the Company, he does serve as an executive officer or director of
the Company's subsidiary and is considered to be a significant employee of that
subsidiary.
Randall L. Smith Executive vice-president, Chief 43 January 1996 - present
Engineer,
Director of GEMS
President and Director of GEMS July 1995 - January 1996
President of JPS July 1993 - June 1995
BUSINESS EXPERIENCE
The following is a brief account of the education and business experience
during at least the past five years of each director, executive officer, and
key employee, indicating the principal occupation and employment during that
period, and the name and principal business of the organization in which such
occupation and employment were carried out.
BIOGRAPHICAL INFORMATION
FRED W. THOMPSON, serves as CHAIRMAN OF THE BOARD, PRESIDENT, AND CEO of
the Company. He has over thirty years experience in the telecommunications
industry. From 1983 to 1986, Mr. Thompson managed Inter Exchange Consultants,
Inc., a company he founded, providing management, design and engineering
services for initial cellular telephone operations in New York City, San
Francisco, Los Angeles and other major cities in the U.S. From 1986 to 1990,
Mr. Thompson devoted his time to consulting on various telecommunication
matters as an independent contractor. His career of over 20 years with AT&T
included various management positions in the Long Lines Department, Western
Electric Company, Bell Labs and with several operating telephone companies.
Mr. Thompson received a BS degree in Electrical Engineering from California
Polytechnic.
MICHAEL T. SCHIEBER, DIRECTOR, has served as a Director of the Company
since December 1992. From 1987 to December 1992, Mr. Schieber was the Managing
Partner of Amador Telecommunications and since 1990 has been a partner in
Columbia Communications, both investors in nation-wide paging licenses. Mr.
Schieber also holds minority interests in two Illinois cellular telephone
licenses. He retired from the Department of Fisheries with the State of
Washington in May 1993 where he had served as a civil engineer since 1984. He
is also a retired Air Force Major and Command Pilot. Mr. Schieber received an
MA degree in International Relations and Government from the University of
Notre Dame, a BS in Engineering from the Air Force Academy, and a BA in
Business from The Evergreen State College.
E.A. JAMES PERETTI, DIRECTOR appointed in February 1996, and President
and Chief Executive Officer of Global Energy Metering Service, Inc., a wholly
owned subsidiary of DBSI. Previously, Mr. Peretti served as President of
Westinghouse Electric Supply Company (WESCO), a business unit of Westinghouse
Electric Corp. He also served as a Vice President and officer of Westinghouse
Electric Corp. During his 30 year tenure with WESCO, Mr. Peretti also held
positions as Vice President and General Manager of its Pacific Division. Mr.
Peretti holds a BS degree from Purdue University in Electrical Engineering and
a MBA from the University of Hawaii.
H. TATE HOLT, DIRECTOR appointed in February 1996, is currently President
of Holt & Associates, a growth management consulting firm, and has held that
position since July 1990. Previously, from 1987 to 1990, Mr. Holt was a Senior
Vice President at Automatic Data Processing, Inc. in Roseland, New Jersey and
Santa Clara, California. Mr. Holt has over twenty years of experience in
various senior sales, marketing and general management positions with IBM,
Triad Systems, and ADP. He has participated in major restructuring and
strategic planning in these and other companies. Since 1990, Holt & Associates
has assisted its clients in developing and achieving aggressive growth targets,
both domestically as well as internationally. Mr. Holt is also an active
director of several private and publicly traded companies including Onsite
Energy and has been nominated to serve on the Board of Directors of Holiday RV
Superstores. Mr. Holt holds an AB from Indiana University.
<PAGE>
JEROME W. CARLSON, DIRECTOR appointed in May 1997, is currently President
of Raljer, Inc., management consulting firm, and has held that position since
January 1995. Previously, from 1984 to 1995, Mr. Carlson was the Chief
Financial Officer, Vice President of Finance and Corporate Secretary for Triad
Systems Corporation in Livermore, California. Mr. Carlson has over twenty
years experience in both finance and general management positions with Hewlett
Packard. Since 1995 he has assisted a number of businesses in developing and
achieving certain strategic and tactical goals in their industries. Mr.
Carlson is also an active director and advisor in several private companies.
He holds a B.S. degree from the University of California at Davis and an M.B.A.
from the Stanford Graduate School of Business.
RANDALL L. SMITH, EXECUTIVE VICE PRESIDENT AND CHIEF ENGINEER OF GLOBAL
ENERGY METERING SERVICE, INC. joined the Company in July 1993 as President of
JPS Systems, Inc. Mr. Smith has been a key person in the development of the
Automated Meter Reading Technology being adopted by the Company. During his
previous 14 years at PG&E, his experience included managemet of energy, gas and
electric automation, automatic meter reading and time use control, real-time
pricing, tamper detection, and distribution generation dispatch. Mr.
Smith is a licensed professional engineer in California and received a BS
degree in Electrical Engineering from Michigan Technological University.
FAMILY RELATIONSHIPS
There are no family relationships between any director, executive officer
or key employee.
ITEM 10. EXECUTIVE COMPENSATION
(A) CASH COMPENSATION
The following table provides certain summary information for the year
ended December 31, 1997, concerning compensation in excess of $100,000 paid or
accrued by the Company and its subsidiary to or on behalf of the Company's
executives and/or employees.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
OTHER SECURITIES
NAME AND ANNUAL UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION {(1)} OPTIONS{(2)}
Fred W. Thompson 1997 $180,000{(3)} $6,705 185,000
Chief Executive Officer 1996 $180,000{(4)} $4,245 319,375{(5)}
1995{(6)} $ 30,000 $2,577 4,500
1995 $ 72,000 $6,521 0
E.A. James Peretti
CEO GEMS 1997 $155,000 $3,732 150,000
1996 $155,000 $ 971 375,000
Randall Smith
Executive VP GEMS 1997 $125,000 $2,385 75,000
1996 $125,000 $2,216 131,875{(5)}
</TABLE>
(1) Consists entirely of payment of insurance premiums.
<PAGE>
(2) Common stock of DBS Industries, Inc.
(3) $80,000 paid in cash, $100,000 deferred pursuant to his employment
agreement.
(4) $72,000 paid in cash, $108,000 deferred pursuant to his employment
agreement.
(5) Includes 6,875 shares granted in April 1996 with vesting commencing as of
December 31, 1995.
(6) For the transition period from August 1, 1995 to December 31, 1995.
Mr. Thompson entered into an employment agreement with the Company on
April 18, 1996 effective January 1, 1996. His annual salary under the agreement
is $180,000, and includes non-qualified stock options to purchase 312,500 shares
of the Company's common stock. Pursuant to the agreement, the Company paid
$80,000 of Mr. Thompson's salary and the remaining portion has been deferred
until certain financing requirements of the Company have been achieved. The
Company has maintained a key person insurance policy on Mr. Thompson's life in
the face amount of $2,000,000, and is the sole beneficiary of such policy. The
Company also entered into employment contracts with E.A. James Peretti, CEO of
GEMS, and Randall Smith, Executive VP of GEMS and Chief Engineer. Mr.
Peretti's agreement includes an annual salary of $155,000 and non-qualified
stock options to purchase 375,000 shares of common stock. Mr. Smith's
agreement includes an annual salary of $125,000 and non-qualified stock options
to purchase 125,000 shares of common stock.
(B) COMPENSATION PURSUANT TO STOCK OPTION PLAN
The Company has established a 1996 Stock Option Plan (the "Plan") to serve
as a vehicle to attract and retain the services of key employees and to help
such key employees realize a direct proprietary interest in the Company. The
Plan provides for the grant of non-statutory and incentive stock options.
The exercise price of any incentive stock option granted under the Plan may not
be less than 100% of the fair market value of the common stock of the Company
on the date of grant. The fair market value for which an option may be granted
incentive stock options in any calendar year may not exceed $100,000. Shares
subject to options under the Plan may be purchased for cash. Unless otherwise
provided by the Board, an option granted under the Plan is exercisable for a
term of ten years (or for a shorter period up to ten years). The Plan is
administered by the Board of Directors and its Compensation Committee, which
has discretion to determine optionees, the number of shares to be covered by
each option, the exercise schedule, and other terms of the options. The Plan
may be amended, suspended, or terminated by the Board, but no such action may
impair rights under a previously granted option. Each option is exercisable,
only so long as the optionee remainsemployed by the Company. No option is
transferable by the optionee other than by will or the laws of descent and
distribution.
During fiscal 1997 there was a substantial decrease in the market price of
the Company's Common Stock due, in part, to regulatory delays including a delay
in the approval of E-Sat's LEO satellite license application. As a result, the
Compensation Committee repriced stock options in February and December of 1997.
The repricing was done in an effort to retain the Company's quality employees
and directors who had lost a significant portion of their financial interest in
the Company because their options were "out of the money." In February 1997,
the Company completed the first stock option repricing program for the
Company's directors and employees in which stock options for 1,119,646 shares
of Common Stock, originally issued with exercise prices ranging from $1.60 to
$6.00 per share, were reissued with an exercise price of $1.375 per share, which
approximated the fair market value on the date of repricing. In December 1997,
the Company completed a second stock option repricing program for the Company's
employees (including employee directors) in which stock options for
approximately 1,135,726 shares of Common Stock, with an exercise price of
$1.375, were reissued with exercise prices ranging from $0.531 to $0.584 per
share, which approximated the fair market value on the date of repricing.
The Company maintained the original vesting schedules.
The Company intends to file one or more registration statements on Form
S-8 under the Securities Act to register shares of common stock subject to stock
options that will permit the resale of such shares, subject to vesting
restrictions with the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The General Corporation Law of the State of Delaware permits
indemnification of directors, officers, and employees of corporations under
certain conditions subject to certain limitations. Article XII of the Company's
certificate of incorporation states that the Company may provide indemnification
ofits agents, including its officers and directors, for breach of duty to the
Company to the maximum extent permitted by the General Corporation Law.
Article VI of the Bylaws provide that the Company shall, to the maximum extent
and in the manner permitted in the Corporations Laws, indemnify each of its
<PAGE>
agents, including its Officers and Directors, against expenses, judgments,
fines, settlements, and other amounts actually and reasonably incurred in
connection with any proceeding arising by reason of the fact any such person is
or was an agent of the Company.
OPTION GRANTS IN THE YEAR ENDED DECEMBER 31, 1996
Individual Grants
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees or Base
Granted in Fiscal Price Expiration
NAME 1997 YEAR ($/SH) DATE
Fred W. Thompson 185,000 25% $0.584 12/31/02
President, CEO
E.A. James Peretti 150,000 20% $0.531 12/31/07
CEO GEMS
Randall Smith 75,000 10% $0.531 12/31/07
Exec. VP GEMS
FISCAL YEAR-END OPTION VALUE *
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARS at FY End (#) Options/SARS at FY End ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
Options at December 31, 1997 Options at December 31, 1997
Fred W. Thompson 169,971 / 347,029 $82,969 / $82,969
President, CEO
E.A. James Peretti 225,000 / 300,000 $119,475 / $159,300
CEO GEMS
Randall Smith 105,074/ 133,676 $55,795 / $70,982
Exec. VP GEMS
* Includes options which were repriced in February and December 1997. (See Item
10(b).)
COMPENSATION OF DIRECTORS
The Company reimburses directors for expenses incurred in connection with
attending Board meetings but does not pay director's fees or other compensation
for services rendered as a director. In lieu of fees the Company grants to
each director options to purchase 37,500 shares of Common Stock for each year
of service successfully completed, under a non-qualified stock option plan as
approved by a shareholder vote in 1996.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) & (B) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 31, 1998, the persons listed in the table set forth below were
known by the Company to own or control beneficially more than five percent of
the Company's outstanding Common Stock, par value $.0004 per share. The table
also sets forth the total number of shares of these securities owned by each
director, director nominee and officer of the Company and of all directors,
director nominees and officers as a group as of March 31, 1998, and all options
and warrants exercisable through May 30, 1998.
NAME AND ADDRESS OF BENEFICIALLY AND PERCENT
TITLE OF CLASS BENEFICIAL OWNER RECORD OWNED* OF CLASS
Common Stock Fred W. Thompson 848,471 (1) 14.3%
109 William Avenue
Larkspur, CA 94939
Common Stock Michael T. Schieber 316,489 (2) 5.4%
5520 Beverly Drive NE
Olympia, WA 98506
Common Stock E.A. James Peretti 300,000 (3) 5.1%
8613 Paradise Lagoon Drive
Lucerne, CA 95458
Common Stock H. Tate Holt 125,129 (4) 2.1%
240 Wilson Way
Larkspur, CA 94939
Common Stock Jerome W. Carlson 75,000 (5) 1.3%
95 Mt. Vernon Lane
Atherton, CA 94027
Common Stock Officers, Directors and 1,665,089 28.2%
Nominees as a Group
(5 persons)
* Includes options which were repriced in February and December 1997. (See Item
10(b).)
(1) Includes (i) 599,558 held in Thompson 1996 Revocable Trust and (ii) options
to purchase 234,375 shares at $0.531 expiring January 1, 2006, and 4,375,
3,750, 3,663 and 2,750 common shares exercisable at $0.584 per share and
expiring February 8, 1999, February 8, 1999, February 15, 2000, and December
31, 2000 respectively.
(2) Includes (i) 193,125 shares held jointly with spouse, Arlene Schieber, (ii)
6,505 held solely by Mr. Schieber, (iii) 3,075 held solely by Ms. Schieber,
of which shares Mr. Schieber disclaims beneficial ownership, and (iv)
options to purchase 6,250, 13,750, 6,250, 12,534 and 37,500 common shares
all exercisable at $1.4375 per share which expire on November 22, 2003,
February 15, 2005, December 31, 2005, February 15, 2006 and April 30, 2006,
respectively, and 37,500 common shares exercisable at $1.00 which expire May
13, 2007.
(3) Options to purchase 300,000 common shares exercisable at $0.531 per share,
which expire January 1, 2006.
<PAGE>
(4) Includes (i) 4,821 held solely by Mr. Holt, and (ii) options to purchase
7,808 and 75,000 common shares all exercisable at $1.4375 per share which
expire December 31, 2006 and April 30, 2006, respectively, and 37,500 common
shares exercisable at $1.00 per share which expire May 13, 2007.
(5) Options to purchase common shares exercisable at $1.00 per share, which
expire May 13, 2007.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1996 and 1997, the Company has not been a party to any transaction,
proposed transaction, or series of transactions in which the amount involved
exceeds $60,000, and in which, to the knowledge of the Company, any director or
executive officer, nominee, five percent beneficial security holder, or any
member of the immediate family of the foregoing persons have, or will have a
direct or indirect material interest.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following Financial Statements pertaining to the Company are filed as
part of this report:
Report of Independent Accountants F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity (Deficit) F-4 to F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 to F-22
(A) EXHIBITS
The following Exhibits are filed with this report:
NAME OF EXHIBIT
* (2.1) Plan and Agreement of Reorganization, dated September 30, 1992,
entered into with DBS Network, Inc. and certain of its Shareholders
which was previously filed in, and is hereby incorporated by
reference to, the Company's Current Report on Form 8-K, date of
report, December 2, 1992.
* (3.0) Certificate of Incorporation, which was previously filed in, and is
hereby incorporated by reference to, the Company's Registration
Statement on Form S-18, No. 33-31868-D, effective May 11, 1990.
* (3.1) Bylaws, which was previously filed in, and is hereby incorporated
by reference to, the Company's Registration Statement on Form
S-18, No. 33-31868-D, effective May 11, 1990.
* (3.2) Restated Certificate of Incorporation, as adopted on August 8,
1996.
* (4.1) Form of Unit Warrant Agreement, which was previously filed in, and
is hereby incorporated by reference to, the Company's Registration
Statement on Form S-18, No. 33-31868-D, effective May 11, 1990.
<PAGE>
* (4.2) Specimen Stock Certificate.
* (10.2) Employment Agreement between Fred W. Thompson and DBS Network,
Inc., dated September 1, 1992.
* (10.3) Employment Agreement between Randall L. Smith and JPS Systems,
Inc., dated July 1, 1993.
* (10.4) Employment Agreement between Ellen D. Coll and DBS Industries,
Inc., dated March 1, 1993.
* (10.5) Stockholder Line of Credit and Investment Agreement between DBSN
and Direct Broadcasting Satellite Corporation, dated January 24,
1993.
* (10.5A) Promissory Note January 29, 1993 executed by Direct Broadcast
Satellite Corporation issued pursuant to Stockholder Line of
Credit and Investment Agreement.
* (10.5B) Promissory Note April 19, 1993 executed by Direct Broadcast
Satellite Corporation issued pursuant to Stockholder Line of
Credit and Investment Agreement.
* (10.5C) Promissory Note August 1, 1993 executed by Direct Broadcast
Satellite Corporation issued pursuant to Stockholder Line of
Credit and Investment Agreement.
* (10.6) 1993 Incentive Stock Option Plan for DBS Industries, Inc.
* (10.7) 1993 Non-Qualified Stock Option Plan for Non-Employee Directors
of DBS Industries, Inc.
* (10.8) 1993 Non-Qualified Stock Option Plan for Consultants of DBS
Industries, Inc.
* (10.9) Commercial Lease and Sublease and Consent pertaining to Mill
Valley, California office space.
* (10.12) Satellite Construction Contract, dated as of March 12, 1990,
between Direct Broadcast Satellite Corporation and Martin
Marietta as successor to General Electric Company, Astro-Space
Division.
* (10.13) Contract Modification No. 1, dated as of March 30, 1992, to
Exhibit 10.12.
* (10.14) Contract Modification No. 2, dated as of November 12, 1992, to
Exhibits 10.12 and 10.13.
* (10.15) Contract Modification No. 3, dated as of April 2, 1993, to
Exhibits 10.12, 10.13 and 10.14.
* (10.16) Contract Modification No. 4, dated as of June 10, 1993, to
Exhibits 10.12, 10.13, 10.14 and 10.15.
* (10.17) Contract Modification No. 5, dated as of July 30, 1993, to
exhibits 10.12, 10.13, 10.14, 10.15 and 10.16.
* (10.18) DSAT Sale Agreement incorporated by reference to the Company's
Current Report on Form 8-K dated July 21, 1994.
* (10.19) AXION Sale Agreement incorporated by reference to the Company's
Current Report on Form 8-K dated May 16, 1994.
* (10.20) AXION Royalty Agreement incorporated by reference to the
Company's Current Report on Form 8-K dated May 16, 1994.
* (10.21) Burlingame Bank Line of Credit Agreement comprised of Business
Loan Agreement and Promissory Note, both dated September 6, 1994.
* (10.22) Burlingame Bank Line of Credit Change in Terms Agreement.
<PAGE>
* (10.23) Stock Purchase Agreement between Intraspace Corporation and DBS
Industries, Inc. incorporated by reference to the Company's
Current Report on Form 8-K dated 2/01/96.
* (10.24) DBS Industries, Inc. $3,000,000, Three Year Convertible Debenture
Series B due January 12, 1999 incorporated by reference to the
Company's Current Report on Form 8-K dated 2/01/96.
* (10.25) Memorandum of Understanding between ABB Power T&D Company, Inc.
and Global Energy Metering Service, Inc. dated February 9, 1996.
* (10.26) Stock purchase Agreement between Seimac Limited and DBS
Industries, Inc., comprised of Common Stock Exchange Agreement
and Shareholders Agreement both dated December 13, 1995.
* (10.27) DBS Industries, Inc. $1,000,000, Three Year Convertible
Debenture, Series A due July 1, 1998.
* (10.28) NACLS Contract No. 95/2475 and Schedule A dated 12/01/95.
* (10.29) Letter dated November 8, 1996 to Donald H. Gips, Chief,
International Bureau, Federal Communications Commission, from
William L. Fishman, Corporate Counsel to Direct Broadcasting
Satellite Corporation.
* (10.30) DBS Industries, Inc. $640,000 Three Year Convertible Debenture,
Series C, due December 31, 1999.
* (10.31) Employment Agreement between Fred W. Thompson and the Company,
dated April 18, 1996.
* (10.32) Employment Agreement between Randall L. Smith and GEMS (the
Company's subsidiary), dated March 1, 1996.
* (10.33) Employment Agreement between E.A. James Peretti and GEMS (the
Company's subsidiary) dated April 18, 1996.
* (10.34) 1996 Stock Option Plan.
(21.1) List of Subsidiaries of DBS Industries, Inc.
*Previously filed in, and incorporated by reference to, Form 10-K for Fiscal
Years July 31, 1993 July 31, 1994, July 31, 1995, and December 31, 1995 and
December 31, 1996 or Form 8-K where indicated.
REPORTS ON FORM 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-KSB to be signed on its behalf by the undersigned, duly authorized.
Date: April 14, 1998 DBS INDUSTRIES, INC.
By: FRED W. THOMPSON
Fred W. Thompson, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, which include the
Principal Executive Officer, the Principal Financial Officer and a majority of
the Board of Directors on behalf of the Registrant and in the capacities and on
the dates indicated.
NAME TITLE DATE
FRED W. THOMPSON
Fred W. Thompson President, Director, April 14,1998
Principal Executive Officer
E.A. JAMES PERETTI
E.A. James Peretti Director April 14,1998
MICHAEL T. SCHIEBER
Michael T. Schieber Director, Secretary April 14, 1998
JEROME W. CARLSON Director April 14, 1998
Jerome W. Carlson
H. TATE HOLT Director April 14, 1998
H. Tate Holt
Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant
to Section 12 of the Act.
<PAGE>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
<PAGEF-1>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
DBS Industries, Inc.:
We have audited the accompanying consolidated balance sheets of DBS
Industries, Inc. and subsidiary (a development stage company) as of December
31, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the years then ended and
for the period from April 25, 1990 (date of inception) to December 31, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of DBS Industries,
Inc. and subsidiary as of December 31, 1997 and 1996 and the consolidated
results of their operations and their cash flows for the years then ended,
and for the period from April 25, 1990 (date of inception) to December 31,
1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company has incurred losses and negative cash flows
from operating activities since inception and will require additional
financing. These factors raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans as to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
San Francisco, California
March 13, 1998, except for the second
paragraph of Note 13 as to which the
date is April 1, 1998
<PAGEF-2>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
DECEMBER 31,
ASSETS 1997 1996
Current assets:
Cash and cash equivalents $ 383,054 $ 402,588
Restricted cash - 300,000
Prepaid and other current assets 119,265 68,944
---------- ----------
Total current assets 502,319 771,532
__________ __________
Furniture and equipment 73,277 73,277
Less accumulated depreciation 47,828 34,406
__________ __________
25,449 38,871
---------- ----------
Other assets:
Investments in and advances to affiliated companies 1,248,649 1,496,524
Goodwill, net of accumulated amortization of $81,864
and $61,149 at December 31, 1997 and 1996,
respectively 9,126 29,841
Other assets - 2,292,409
__________ __________
1,257,775 3,818,774
__________ __________
Total assets $1,785,543 $4,629,177
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Convertible debentures $ - $4,640,000
Line of credit - 295,000
Accounts payable 152,485 960,277
Accrued liabilities 145,019 499,070
Deferred compensation payable to officer 216,000 108,000
Deferred revenues 400,000 400,000
__________ __________
Total current liabilities 913,504 6,902,347
---------- ----------
Commitments (Note 6).
Stockholders' equity (deficit):
Preferred stock, $.0004 par value; 5,000,000 shares
authorized; none issued and outstanding - -
Common stock, $.0004 par value; 20,000,000 shares
authorized; 5,882,928 and 5,827,509 shares
issued and outstanding at December 31, 1997 and 2,373 2,351
1996, respectively
Capital in excess of par value 4,681,295 4,605,026
Warrants 112,500 112,500
Deficit accumulated during the development stage (3,839,129) (6,908,046)
Less cost of common stock held in treasury (51,562
shares as of December 31, 1997 and 1996) (85,000) (85,000)
___________ ___________
Total stockholders' equity (deficit) 872,039 (2,273,169)
___________ ___________
Total liabilities and stockholders' $1,785,543 $4,629,177
equity (deficit)
=========== ===========
</TABLE>
<PAGEF-3>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
April 25, 1990
(Inception) to
December 31, December 31, December 31,
1997 1996 1997
Revenue - $ 11,420 $ 161,420
------------ ----------- -----------
Costs and operating expenses:
Cost of revenue - 10,850 127,580
Selling, general and $1,472,162 2,245,588 6,462,988
administrative
Research and development 210,115 1,078,747 2,169,571
---------- ---------- -----------
1,682,277 3,335,185 8,760,139
---------- ---------- -----------
Loss from operations (1,682,277) (3,323,765) (8,598,719)
---------- ---------- -----------
Other income (expenses):
Interest, net (308,094) (395,298) (741,880)
Equity in loss of investments, net (80,975) (31,920) (412,777)
Gain on sale of investments 5,221,063 - 6,057,541
Other, net - - (56,634)
---------- -----------
4,831,994 (427,218) 4,846,250
---------- ----------- -----------
Income (loss) before provision
for income taxes and minority
interests 3,149,717 (3,750,983) (3,752,469)
Provision for income taxes 80,800 1,600 95,235
---------- -----------
Income (loss) before minority 3,068,917 (3,752,583) (3,847,704)
interests
Minority interests in losses of
consolidated subsidiaries - - 8,575
---------- ----------- -----------
Net income (loss) $3,068,917 $(3,752,583) $(3,839,129)
========== =========== ===========
Basic income (loss) per share $0.5234 $(0.6484)
=========== ===========
Diluted income (loss) per share $0.4922 $(0.6484)
=========== ===========
Basic - shares used in per share 5,863,261 5,787,185
computations =========== ===========
Diluted - shares used in per share 6,235,144 5,787,185
computations =========== ===========
</TABLE>
<PAGEF-4>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM DECEMBER 31, 1990 TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
DEFICIT TOTAL
ACCUMULATED STOCK-
COMMON STOCK CAPITAL DURING THE HOLDERS'
PAR EXCESS OF TREASURY DEVELOPMENT EQUITY
SHARES VALUE PAR VALUE WARRANT STOCK STAGE (DEFICIT)
Balance at December 31, 1990 of DBSN as
restated pursuant to the merger on
December 2, 1992 301,000 $ 120 $ 46,375 - - $(219,990) $(173,495)
Issuance of common stock for professional
services at $.01 to $2.14 per share 520,000 208 47,542 47,750
Issuance of common stock for cash at $.01
to $1.00 per share 244,500 98 124,507 - - - 124,605
Stock issue costs for the twelve months
ended December 31, 1991 - - (15,774) - - - (15,774)
Net loss for the twelve months ended
December 31, 1991 - - - - - (115,339) (115,339)
--------- ---- -------- ----- ------ --------- ---------
Balance at December 31, 1991 1,065,500 426 202,650 - - (335,329) (132,253)
Issuance of common stock for cash at $.01
to $1.00 per share 1,317,290 527 538,998 - - - 539,525
Issuance of common stock for professional
services at $.01 to $.10 per share 214,240 86 12,338 12,424
Issuance of common stock in payment of
stockholder loans: June 1992 at $.01
per share 230,000 92 2,208 - - - 2,300
Net loss for the seven months ended July 31,
1992 - - - - - (90,750) (90,750)
--------- ----- ------- ----- ------ --------- --------
Balance at July 31, 1992 2,827,030 1,131 756,194 - - (426,079) 331,246
Shares of Fi-Tek IV, Inc. from August 3,
1989, (inception) through December 2,
1992 817,540 327 155,450 - - - 155,777
Issuance of common stock for cash at $.01
to $3.20 per share 1,313,926 527 998,088 - - - 998,615
Issuance of common stock for interest at
$5.00 per share 10,000 4 4,996 - - - 5,000
Issuance of common stock for JPS common
stock on September 11, 1992 at $.80
per share 61,447 24 49,134 - - - 49,158
Issuance of common stock for professional
services on September 11, 1992 at $.10
per share 6,679 3 665 - - - 668
CONTINUED;
</TABLE>
<PAGEF-5>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT), CONTINUED
FOR THE PERIOD FROM DECEMBER 31, 1990 TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
DEFICIT TOTAL
ACCUMULATED STOCK-
COMMON STOCK CAPITAL IN DURING THE HOLDERS'
PAR EXCESS OF TREASURY DEVELOPMENT EQUITY
SHARES VALUE PAR VALUE WARRANTS STOCK STAGE (DEFICIT)
Issuance of common stock in exchange
for DBSC common stock on October 9,
1992 at $2.00 per share 6,375 $ 2 $ 12,748 - - - $ 12,750
Redemption of 97,450 common stock
warrants on October 2, 1992 at
$8.00 per share - - (19,490) - - - (19,490)
Issuance of common stock on December 2,
1992 at closing of acquisition of
DBSN as a finder's fee at $.0004
per share 25,000 10 - - - - 10
Issuance of common stock for Axion
common stock during March 1993 at
$1.60 per share 50,000 20 79,980 - - - 80,000
Issuance of common stock for DBSC
common stock on July 2, 1993 at
$1.60 per share 133,307 53 213,238 - - - 213,291
Stock issue costs for the period
from August 1, 1992 through
July 31, 1993 - - (6,374) - - - (6,374)
Net loss for the twelve months
ended July 31, 1993 - - - - - $(755,040) (755,040)
--------- ----- --------- ------ ------ ---------- ---------
Balance at July 31, 1993 5,251,303 2,101 2,244,529 - - (1,181,119) 1,065,611
Issuance of common stock for
1993 through April 1994) 102,257 41 411,943 - - - 411,984
Stock issued in exchange for 46% of
JPS stock on November 3, 1993 3,379 1 10,137 - - - 10,138
Stock issued for professional services:
January 28, 1994, at $3.60 per share 5,331 2 19,188 - - - 19,190
July 29, 1994, at $2.00 per share 3,833 2 7,663 - - - 7,665
Stock issued due to exercise of
warrants, at $2.00 per share
(March and April 1994) 2,500 1 4,999 - - - 5,000
Stock issued for interest on July 31,
1994, at $2.00 per share 1,000 - 2,000 - - - 2,000
Purchase of shares of common stock
on January 28, 1994, at $3,20 per
share (1,563) - - - $ (5,000) - (5,000)
Reacquisition of common stock pursuant
to sale of investment in Axion in
May 1994, at $1.60 per share (50,000) - - - (80,000) - (80,000)
Net loss for the twelve months ended
July 31, 1994 - - - - - (26,909) (26,909)
--------- ------ --------- ------- --------- ---------- ----------
Balance at July 31, 1994 5,318,039 $2,148 2,700,559 (85,000) (1,208,028) 1,409,679
</TABLE>
<PAGEF-6>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT), CONTINUED
FOR THE PERIOD FROM DECEMBER 31, 1990 TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
DEFICIT TOTAL
ACCUMULATED STOCK-
COMMON STOCK CAPITAL IN DURING THE HOLDERS'
PAR EXCESS OF TREASURY DEVELOPMENT EQUITY
SHARES VALUE PAR VALUE WARRANTS STOCK STAGE (DEFICIT)
Stock issued for services:
November 30, 1994, at $1.88
per share 10,000 $ 4 $ 18,796 - - - $ 18,800
May 15, 1995, at $2.00 per share 10,724 4 21,443 - - - 21,447
July 15, 1995, at $1.60 per share 11,373 5 18,192 - - - 18,197
Net loss for the twelve months ended
July 31, 1995 - - - - - $(1,284,558) $(1,284,558)
--------- ----- --------- ----- -------- ------------
Balance at July 31, 1995 5,350,136 2,161 2,758,990 $(85,000) (2,492,586) 183,565
Issuance of common stock for 1% JPS
common stock on September 21,
1995 at $1.20 per share 9,450 4 11,336 - - - 11,340
Issuance of common stock for 20%
Seimac Limited common stock on
December 13, 1995 at $4.00 per
share 165,519 66 662,010 - - - 662,076
Issuance of common stock for
professional services at
$5.60 per share 2,934 1 16,427 - - - 16,428
Net loss for the five months ended (662,877) (662,877)
December 31, 1995 - - - - -
Balance at December 31, 1995 5,528,039 2,232 3,448,763 - -85000 (3,155,463) ( 210,532)
Warrants issued on January 13, 1996, to
purchase 75,000 shares of common
stock for services rendered at an
exercise price of $7.30 per share
- - - $ 112,500 - - 112,500
Issuance of common stock for cash:
January 15, 1996, at $4.00 per
share, less noncash
issuance cost of $63,900 200,000 80 736,020 - - - 736,100
February 15, 1996, at $5.20
per share, less noncash
issuance cost of $19,999 38,462 15 179,988 - - - 180,003
Stock issued for services:
January 1 - June 30, 1996, at 22,743 9 85,277 - - - 85,286
$3.75 per share
August 15, 1996, at $4.80 per 6,018 2 28,884 - - - 28,886
share
September 21, 1996, at $5.60
per share 4,821 2 26,996 - - - 26,998
July 1 - December 31, 1996, at 7,605 3 15,207 - - - 15,210
$2.00 per share
Placement fee associated with
January 15 and February 15,
1996, issuances settled through
issuance of common stock 19,821 8 83,891 - - - 83,899
Net loss for the twelve months ended
December 31, 1996 - - - - - (3,752,583) (3,752,583)
--------- ----- --------- ------- -------- ----------- -----------
Balance at December 31, 1996 5,827,509 2,351 4,605,026 112,500 (85,000) (6,908,046) (2,273,169)
Stock issued for services:
January 31, 1997 at $1.69 per share 5,088 2 8,586 - - - 8,588
February 14, 1997 at $1.75 per
share 4,701 2 8,225 - - - 8,227
February 28, 1997 at $2.00 per
share 7,918 3 15,834 - - - 15,837
March 31, 1997 at $1.63 per share 302 - 491 - - - 491
April 10, 1997 at $2.00 per share 7,500 3 14,997 - - - 15,000
April 30, 1997 at $1.50 per share 332 - 498 - - - 498
June 30, 1997 at $1.13 per share 14,578 6 16,394 - - - 16,400
July 9, 1997 at $0.75 per share 15,000 6 11,244 - - - 11,250
Net income for the twelve months ended
December 31, 1997 - - - - - 3,068,917 3,068,917
--------- ------ ---------- -------- --------- ---------- ---------
5,882,928 $2,373 $4,681,295 $112,500 $(85,000) $(3,839,129) $ 872,039
========= ====== ========== ======== ========= ============ =========
</TABLE>
<PAGEF-7>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
APRIL 28,
1990
(INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997
Reconciliation of net income (loss) to net cash
used in operating activities:
Net income (loss) $ 3,068,917 $ (3,752,583) $ (3,839,129)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 126,989 124,086 358,128
Minority interest's share of net loss - - (8,575)
Noncash charges 76,293 268,878 510,546
Equity in loss of investees, net 80,875 31,920 429,829
Gain on sale of investments (5,221,063) - (6,057,541)
Common stock issued as payment for
interest - - 7,000
Decrease (increase) in accounts
receivable and other assets (50,000) 49,416 (115,299)
Increase (decrease) in accounts payable
and accrued liabilities (1,053,843) 1,238,819 528,748
Increase in deferred revenues - 400,000 400,000
----------- ----------- ------------
Net cash used in operating activities (2,972,153) (1,639,464) (7,786,293)
Cash flows from investing activities:
Proceeds from sale of investment - - 900,000
Proceeds from Loral settlement 3,573,677 - 3,573,677
Purchase of fixed assets - (20,499) (105,524)
Organization costs - - (28,526)
Advances to officer - - (31,187)
Purchase of interest in Continental - (2,292,409) (2,292,409)
Advances to affiliates - (56,757) (213,160)
Investments in affiliates 309,888 (227,029) (588,274)
Net assets of purchased subsidiaries - - (147,500)
Cash transferred from Fi-Tek IV, Inc.
pursuant to the merger and reorganization - - 156,648
Purchase of patents and other - - (18,251)
Proceeds from repayment of advances to
affiliate - - 152,500
Cash of divested subsidiary - - (277)
Restricted cash on line of credit 300,000 - 300,000
--------- ------------ ----------
Net cash provided by (used in)
investing activities 4,183,565 (2,596,694) 1,657,717
--------- ------------ ----------
Cash flows from financing activities:
Proceeds from (payment on) line of credit (295,000) (5,000) (300,000)
Issuance of debentures 107,501 3,640,000 4,817,501
Issuance of common stock - 1,000,002 3,153,516
Redemption of common stock warrants - - (19,490)
Stock issue costs - - (57,235)
Proceeds from stockholders' loans 149,750 - 442,750
Payment of debentures (1,043,445) - (1,168,445)
Payment of stockholders' loans (149,750) - (351,967)
Purchase of shares - - (5,000)
----------- ----------- -----------
Net cash provided by (used in) financing
activities (1,230,944) 4,635,002 6,511,630
----------- ----------- -----------
Net increase (decrease) in cash (19,534) 398,844 383,054
Cash and cash equivalents, beginning of period 402,588 3,743 -
---------- ----------- -----------
Cash and cash equivalents, end of period $ 383,054 $ 402,588 $ 383,054
=========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 11,456 $ 40,695 $ 57,651
=========== ========== ===========
Income taxes $ 1,600 $ 3,200 $ 15,955
=========== ========== ==========
Supplemental Disclosures of Noncash Investing and Financing
Activities (Note 11).
</TABLE>
<PAGEF-8>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
These consolidated financial statements include the accounts of DBS Industries,
Inc. (the Company), and its wholly owned subsidiary, Global Energy
Metering Service, Inc. ("GEMS"). Intercompany transactions and balances
have been eliminated in consolidation.
The Company was organized as a Delaware corporation on August 3, 1989. Since
inception the Company has been in thedevelopment stage. The Company's
financial statements have been prepared assuming the Company will continue as a
going concern. Since inception, the Company has devoted substantially all
of its efforts to developing its business. The Company has therefore
incurred substantial losses and negative cash flows from operating
activities as reflected in these financial statements. Accordingly, the
Company has relied primarily upon obtaining equity capital and debt
financing to support its operations.
The Company does not expect revenue to exceed costs and expenses in 1998 and,
accordingly, will continue to incur losses and negative cash flows from
operating activities. To address financing needs, the Company is
pursuing various financing alternatives. These circumstances
raise substantial doubt about the Company's ability to continue as a
going concern. These financial statements do not reflect any
adjustments that might result from the outcome of this uncertainty.
On January 13, 1996, the Company's Board of Directors approved a one-for-
forty reverse stock split of the Company's common stock. The reverse
stock split was consummated in February 1996. All shares and per share amounts
have been restated to retroactively reflect the reverse stock split.
In 1996, in connection with the reverse stock split, the Company amended its
Articles of Incorporation to decrease its authorized shares of common stock
and preferred stock to 100,000,000 and 5,000,000 shares, respectively.
Additionally, the par values of the common and preferred stock were
increased from $.00001 to $.0004 per share. These changes have also been
retroactively reflected in these financial statements. In May 1997, the
Company amended its Articles of Incorporation to decrease its
authorized shares of common stock to 20,000,000.
The Company changed its fiscal year-end from July 31 to December 31, effective
January 1, 1996.
On September 11, 1992, the Company's subsidiary, DBSN (dissolved in May
1995), acquired 51% of the voting shares in JPS Systems, Inc. (JPS)
pursuant to a Stock Exchange Agreement in exchange for shares of DBSN's common
stock which equated to 61,447 shares of the Company's common stock (the fiscal
1993 transaction). In November 1993, the Company acquired, from its
president, additional shares of JPS common stock representing 46% of the
issued and outstanding stock of JPS, pursuant to a stock exchange agreement in
exchange for 3,379 shares of the Company's common stock (the fiscal 1994
transaction). In January 1994, DBSN transferred its 51% interest in JPS to the
<PAGEF-9>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION, continued:
Company. In January 1995, JPS repurchased shares of its common stock
representing 2% of the issued and outstanding common stock of JPS.
In May 1995, JPS was dissolved, and all of its assets and liabilities
were transferred to a newly created wholly-owned subsidiary of the Company,
GEMS. In November 1995, the Company repurchased shares of the common
stock of JPS representing the remaining 1% of the issued and outstanding common
stock of its dissolved subsidiary in exchange for 9,450 shares of common stock
of the Company. GEMS is a Delaware corporation in the development stage whose
primary activity is the development of satellite and radio systems for use in
automating the control and distribution of gas and electric power by utility
companies.
The Company's investments in E-SAT Corporation and Seimac Limited, in which
the Company has ownership interests of 20% each, are accounted for using the
equity method. The Company's investment in Echostar Communication Inc.
(Echostar) and interest in Continental Satellite Corporation were disposed of
during 1997 (see Notes 3 and 5).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Hereafter, unless otherwise specified, all references to the "Company" include,
DBS Industries, Inc. and its wholly- owned subsidiary.
USE OF ESTIMATES:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH EQUIVALENTS:
The Company considers all money market instruments and other highly
liquid investments with original maturities of three months or less
to be cash equivalents.
DEPRECIATION AND AMORTIZATION:
Furniture and equipment are depreciated over the estimated
useful lives of the assets ranging from five to seven years using the
straight-line method of depreciation. When assets are
disposed of, the related cost and accumulated depreciation are removed
from the books and the resulting gain or loss is recognized in the
year of disposal.
<PAGEF-10>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
GOODWILL:
Goodwill is amortized using the straight-line method over five
years. Amortization expense charged to operations for the years ended
December 31, 1997 and 1996 was $20,715 and $9,606, respectively.
INCOME TAXES:
Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES
(SFAS No. 109). Under SFAS No. 109, deferred income tax liabilities and
assets are determined based on the difference between the financial
reporting amounts and tax bases of assets and liabilities that will
result in taxable or deductible amounts in the future such amounts
are based on enacted tax laws and rates in effect for the years in
which the differences are expected to affect taxable income, net
operating loss and tax credit carryforwards. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amounts expected to be realized. Income tax expense is the tax
payable for the period and the change during the period in deferred
tax assets and liabilities.
NET EARNINGS (LOSS) PER SHARE:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS
PER SHARE, which establishes standards for computing and
presenting earnings (loss) per share. Under the new standards,
basic earnings per share is computed based on the weighted average number
of common shares outstanding and excludes any potential dilution;
diluted earnings per share reflects potential dilution from the exercise
or conversion of securities into common stock. SFAS No. 128 is
effective for financial statements issued for periods ending after
December 15, 1997 and earlier adoption is not permitted. The
financial statements presented have been prepared in accordance in SFAS
No. 128 and earnings per share data for all prior periods presented have
been restated to conform with current year presentation. Options
to purchase 1,144,036 shares of common stock with exercise prices
ranging from $1.60 to $6.00 were outstanding as of December 31, 1996
and were excluded from the loss per share calculation for the year ended
December 31, 1996 as they have the effect of decreasing loss per share.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In March 1997, Statement of Financial Accounting Standards No.
129, DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE, was issued and
has been implemented by the Company for the year ended December 31,
1997. In June 1997, Statement of Financial Accounting Standards No.
130, REPORTING COMPREHENSIVE INCOME and Statement of Financial
Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION were issued and are effective for
the year ending December 31, 1998.
<PAGEF-11>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS, continued:
The Company has not determined the impact of the implementation of
these pronouncements.
RECLASSIFICATIONS:
Certain prior period balances have been reclassified to conform to the
current year's presentation. Such reclassifications had no impact on
net loss or stockholders' (deficit) equity as previously reported.
3. INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES:
Following is a summary of the Company's significant investment activities:
DIRECT BROADCASTING SATELLITE CORPORATION (DBSC):
DBSC is one of nine permittees of the Federal Communications
Commission (FCC) for Direct Broadcast Satellite (DBS) services.
As of December 31, 1996, the Company owned approximately 25% of the
common stock of DBSC. The Company accounted for its investment using
the equity method. The Company's net equity investment in DBSC as of
December 31, 1996 was $539,080.
On December 21, 1995, DBSC and Echostar agreed to a merger, subject
to government approval. Under the terms of the merger agreement, (1)
both parties agreed to merge DBSC into a wholly owned subsidiary of
Echostar, and (2) DBSC shareholders would be entitled to receive at
their option, $7.99 in cash or .67417 shares of Echostar common
stock for each of the 973,148 DBSC shares not already owned by
Echostar. At December 31, 1996, the Company owned 401,107 shares of the
common stock of DBSC. The requisite government approvals were obtained
and the merger consummated on January 8, 1997. On January 23,
1997, the Company elected to exchange all of its 401,107 DBSC
shares for 270,414 shares of Echostar common stock which was
valued at $25.00 per share as of January 8, 1997, the effective date
of the merger. In connection with this transaction, the Company
recorded a gain of approximately $6,200,000 in its first quarter of
1997.
On August 29, 1997, the Company transferred the 270,414 shares back to
Echostar in exchange for the retirement of certain debentures (Note
5) and recognized a loss on such transfer of approximately $2.3
million.
<PAGEF-12>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES, continued:
DIRECT BROADCASTING SATELLITE CORPORATION (DBSC), continued:
Following is a summary of DBSC's financial position as of December
31, 1996:
DECEMBER 31,
1996
(UNAUDITED)
Current assets $ 20,046
Other assets 52,373,192
-------------
Total assets $ 52,393,238
=============
Current liabilities $ 186,748
Long-term debt 50,887,763
Stockholders' equity 1,318,727
-------------
Total liabilities and stockholders'
equity $ 52,393,238
=============
DBSC's losses for the year ended December 31, 1996 (unaudited) amounted to
$310,172.
The Company's equity in losses of DBSC was $76,922 for the year ended
December 31, 1996 and was recorded in December 1996 when financial information
became available.
E-SAT CORPORATION (E-SAT):
In October 1994, the Company and Echostar formed E-SAT for the
purpose of filing with the FCC for a license to operate a low earth orbit
satellite system. E-SAT filed with the FCC on November 16, 1994. The
Company holds a 20% interest in E-SAT. The Company's total investments
in and advances to E-SAT were $127,265 as of December 31,
1997 and 1996. The investment is accounted for using the equity method.
The Company's equity in losses of E-SAT for the years ended December 31,
1997 and 1996 were $66,469 and $385, respectively. The equity in losses
for the years ended December 31, 1997 and 1996 were recorded in December
1997 and 1996 when financial information became available. As of December
31, 1997, the Company had a receivable of $632,865 from Echostar which
represents the excess of advances to date to E-SAT in excess of its
proportionate 20% share of its investee's financing requirements.
SEIMAC LIMITED:
On November 30, 1995, the Company acquired 232,829 shares representing 20% of
the voting shares of common stock of Seimac Limited, a Canadian
company, pursuant to a stock purchase and exchange agreement in
exchange for 165,519 shares of common stock of the Company, valued at
$662,010. The Company's investment of $662,010 was $464,255 in excess of the
Company's proportionate share of the net book value of Seimac
<PAGEF-13>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES, continued:
SEIMAC LIMITED, continued:
as of November 30, 1995. This excess is being amortized over a period of
five years. The amortization of this excess book value amounted
to $92,851 for the years ended December 31, 1997 and 1996. This investment
is accounted for using the equity method.
For the years ended December 31, 1997 and 1996, the Company has
recorded its proportionate share of Seimac Limited's net (loss) income of
$(14,506) and $45,387, respectively. The Company's investment in
Seimac Limited as of December 31, 1997 and 1996 was $510,689 and $618,046,
respectively.
Following is a summary of Seimac's unaudited financial position as of
December 31, 1997 and 1996 and its unaudited results of
operations for the years ended December 31, 1997 and 1996:
DECEMBER 31, DECEMBER 31,
1997 1996
(UNAUDITED)
Current assets $ 1,037,165 $ 1,201,477
Other assets 974,888 1,352,364
-------------- --------------
Total assets $ 2,012,053 $ 2,553,841
============== ==============
Current liabilities $ 329,887 $ 469,421
Long-term debt 733,973 597,407
Shareholders' equity 948,194 1,487,013
-------------- --------------
$ 2,012,053 $ 2,553,841
============== ==============
Net sales $ 1,569,043 $ 1,607,128
============== ==============
Net income (loss) $ (72,527) $ 226,935
============== ==============
CONTINENTAL SATELLITE CORPORATION (CONTINENTAL):
On January 12, 1996, the Company entered into a stock purchase agreement
with a third party (the Seller) to acquire 72,030 shares of common
stock of Continental in exchange for approximately $2,300,000
in cash. A $50,000 advance was paid to the seller in December 1995.
Continental has received one of the nine DBS licenses awarded by the
FCC.
In connection with this agreement, the Company issued a three-year,
Series B convertible debenture (Note 6) to Echostar on January 12,
1996 for proceeds of $3,000,000.
<PAGEF-14>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES, continued:
CONTINENTAL SATELLITE CORPORATION (CONTINENTAL), continued:
On January 22, 1996, Loral Aerospace Holdings, Inc., a Continental common
shareholder (the plaintiff), filed a complaint in the Superior Court
of the State of California against Continental and its shareholders
alleging that the common shares purchased by the Company were
improperly issued and, therefore, should be voided. On May 16, 1996, the
Court ruled that the Continental shares were invalidly issued. However,
the Court also ruled that the Company was not without equitable remedy and
allowed the Company to commence an action against Loral.
On April 21, 1997, the Superior Court of Santa Clara County awarded the
Company damages of approximately $4.1 million, plus 50 percent annual
interest. On August 17, 1997, the Company and Loral formally completed
an agreement wherein the Company received a cash payment of approximately
$3.5 million from Loral in exchange for dismissals of appeals by both
parties.
The agreement provides that the Company return the Continental stock
the Company acquired, that the Company acknowledge that all Continental
stock held by the Company owned is invalid, and that the Company has
no objection to the cancellation of that stock by Continental. The
parties to the agreement released one another from all present or future
claims connected with the allegations related to the action which give
rise to the agreement.
The excess of the settlement payment over the Company's carrying value for
its interest in Continental of $1.2 million was recorded as a gain on sale
of investment for the year ended December 31, 1997.
4. LINE OF CREDIT:
The Company maintained a $300,000 line of credit with a bank. The line was
collateralized by a $300,000 certificate of deposit. As of
December 31, 1996, the Company had outstanding borrowings of $295,000
under this line of credit. As of December 31, 1997, $295,000 had been repaid
and the credit facility was discontinued.
5. CONVERTIBLE DEBENTURES:
On July 1, 1995, the Company issued Convertible Debenture 1995 Series A to
the majority shareholder of E-SAT, Echostar, and received $1,000,000 in
proceeds pursuant to this issuance in August 1995. Interest on the debt
accrued, and was payable, quarterly at prime plus 2% for a period of three
years. As collateral for the loan, Echostar held a security interest in
125,000 shares of DBSC common stock and 2,000 shares of E-SAT common
stock held by the Company.
<PAGEF-15>
5. CONVERTIBLE DEBENTURES, continued:
On January 12, 1996, the Company issued a three-year Series B Convertible
Debenture to Echostar for proceeds of $3,000,000. Interest terms were
similar to those of the Series A Convertible Debenture discussed above.
As collateral for the loan, Echostar has a security interest in
72,030 shares of common stock of Continental and 200,000 shares of common
stock of DBSC held by the Company.
On December 5, 1996, the Company issued a three-year Series C Convertible
Debenture to Echostar for proceeds of $640,000. Interest terms were
similar to those of the Series A Convertible Debentures discussed
above. As collateral for the loan, Echostar held a security interest in the
remaining 76,107 shares of common stock of DBSC held by the Company.
As of December 31, 1996, the Company classified all borrowings under the above
convertible debentures as current liabilities due to the Company's default in
connection with the required quarterly payment of accrued interest.
The interest payable to Echostar under the aforementioned debentures
amounted to $405,794 as of December 31, 1996.
On August 29, 1997, the Company completed an agreement with Echostar to
retire three convertible debentures, Series A, Series B, and Series C,
issued to Echostar with accrued interest of $722,811 and certain legal
fees and other expenses related to the transaction. In exchange
for Echostar's retirement of the debt, the Company transferred back to
Echostar 270,414 shares of Echostar Class A common stock and made a cash
payment of approximately $936,000 from the proceeds of its settlement with
Loral (Note 3). The value of the Echostar shares was determined based on a per
share price of $16.57 which represented the closing bid price on
August 27, 1997, the date the parties initially agreed to the terms of the
transaction.
6. COMMITMENTS:
OPERATING LEASES:
The Company and its wholly-owned subsidiary, GEMS, lease their facilities under
noncancelable operating leases which run concurrently and expire in March
2000. Minimum future rental payments under the leases, are as
follows:
YEAR ENDING
DECEMBER 31,
1998 $ 68,130
1999 68,130
2000 11,355
-------------
$ 147,615
=============
<PAGEF-16>
6. COMMITMENTS, continued:
Total rent expense was $66,592 and $74,808 for the years ended
December 31, 1997 and 1996, respectively.
7. STOCKHOLDERS' EQUITY:
COMMON STOCK:
The Company's Certificate of Incorporation, as amended in May 1997,
authorizes the issuance of 20,000,000 shares of common stock with a par
value of $.0004 per share. Each record holder of common stock is
entitled to one vote for each share held on all matters properly
submitted to the stockholders for their vote. Cumulative voting
for the election of directors is not permitted by the Certificate of
Incorporation.
PREFERRED STOCK:
The Company's Certificate ofIncorporation, as amended in May 1997, authorizes
the issuance of 5,000,000 shares of preferred stock with par value of
$.0004 per share. The Board of Directors of the Company is
authorized to issue preferred stock from time to time in series and is further
authorized to establish such series, to fix and determine the variations in the
relative rights and preferences as between the series, and to allow for the
conversion of preferred stock into common stock. No preferred stock has been
issued by the Company as of December 31, 1997.
NONEMPLOYEE STOCK WARRANTS:
On January 13, 1996, the Company issued warrants for the purchase of 75,000
shares of the Company's common stock at an exercise price of $7.30. On
December 31, 1997, the Company replaced these with new warrants at an exercise
price of $1.44. These warrants were issued for services rendered and are
exercisable through January 2006. As of December 31, 1997 none of these
warrants have been exercised.
On July 9, 1997, the Company issued warrants for the purchase of 200,000
shares of the Company's common stock at an exercise price of $0.50 per share.
These warrants were issued in connection with a $100,000 short-term loan made
by a stockholder of the Company. As of December 31, 1997, the loan had
been repaid.
None of the non-employee stock warrants were exercised as of December 31, 1997.
<PAGEF-17>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCKHOLDERS' EQUITY, continued:
EMPLOYEE STOCK OPTIONS AND WARRANTS:
On February 15, 1996, the Company adopted the 1996 Stock Option Plan
(the 1996 Plan) to consolidate its three existing plans. Provisions
of the 1996 Plan are substantially similar to those of the earlier
plans. The overall purpose of the 1996 plan is to advance the
long-term interest of the Company by motivating its employees, directors and
consultants with the opportunity to obtain an equity interest in the
Company and to attract and retain such persons upon whose judgments
the success of the Company largely depends.
Eligible employees, directors, and consultants can receive options to purchase
shares of the Company's common stock at a price generally not less than 100%
and 85% of the fair market value of the common stock on the date
of the grant of incentive stock options and nonstatutory stock options,
respectively. The 1996 Plan allows for the issuance of a maximum of
1,650,000 shares of the Company's common stock. This number of shares
of common stock has been reserved for issuance under the 1996 Plan.
The options granted under the 1996 Plan are exercisable over a maximum
term of ten years from the date of grant and generally vest over (i) one year
in the case of directors and consultants, and (ii) up to a five-year period
in the case of employees. Shares sold under the 1996 Plan are subject to
various restrictions as to resale.
Information with respect to activity under these plans as consolidated in
the 1996 Plan is set forth below:
<TABLE>
<CAPTION>
Outstanding Options and Warrants
<S> <C> <C> <C> <C> <C>
Weighted
Average
Number of Price Per Aggregate Exercise
SHARES SHARE PRICE PRICE
Balance, January 1, 1996 16,281 $0.40-$6.00 $ 52,476 $3.40
Options granted 1,017,535 $4.75-$5.60 5,241,115 5.15
Options exercised - - - -
Options terminated - - - -
--------- ----------
Balance, December 31, 1996 1,180,116 $0.40-$6.00 5,793,591 4.91
Options granted 1,373,843 $0.53-$1.44 980,835 0.71
Options exercised - - - -
Options terminated (1,135,726) $0.40-$6.00 (5,502,778) 4.83
---------- -----------
Balance, December 31, 1997 1,418,233 $0.40-$5.60 $ 1,271,648 0.90
========== ============
</TABLE>
<PAGEF-18>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCKHOLDERS' EQUITY, continued:
EMPLOYEE STOCK OPTIONS AND WARRANTS, continued:
The following table summarizes information with respect to stock options and
warrants outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options and Warrants
Options and Warrants Outstanding Exercisable
<S> <C> <C> <C> <C> <C> <C>
Weighted Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
EXERCISE AT Contractual Exercise AT Exercise
PRICE 12/31/97 Life (YEARS) PRICE 12/31/97 PRICE
$0.53- 1,342,949 8.19 $0.73 879,887 $0.79
$1.44
$1.60- 36,875 6.55 $2.39 36,875 2.39
$2.80
$3.00- 38,409 8.06 $5.23 38,409 5.23
$5.60
--------- -------
1,418,233 955,171
========= =======
</TABLE>
The following information concerning the Company's stock option plans is
provided in accordance with Statement of Financial Accounting Standards
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS No. 123). The
Company accounts for such plans in accordance with APB No. 25 and
related interpretations.
The weighted average fair value of the options and warrants granted or
modified for the years ended December 31, 1997 and 1996, was $0.90
and $4.62, respectively. The fair value of each stock option is
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
1997 1996
Risk free interest rate 5.70% 6.11%
Expected life 8.2 years 5.5 years
Volatility 80% 104%
Dividend yield - -
<PAGEF-19>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCKHOLDERS' EQUITY, continued:
EMPLOYEE STOCK OPTIONS AND WARRANTS, continued:
The following pro forma net income (loss) information has been prepared
following the provision of SFAS No. 123:
DECEMBER 31, DECEMBER 31,
1997 1996
Net income (loss) As Reported $3,068,917 $(3,752,583)
Pro forma $3,036,571 $(5,916,026)
Net income (loss) As Reported $0.5234 $(0.6484)
per share Pro forma $0.5211 $(1.0223)
In February 1997, the Company completed a stock option repricing program in
which 1,119,646 stock options, originally issued with exercise prices ranging
from $1.60 to $6.00 per share, were reissued with an exercise price of $1.44
per share, which approximated fair market value.
In December 1997, the Company completed a second voluntary stock option
repricing program in which approximately 1,135,726 stock options, originally
issued with an exercise price of $1.44 per share were reissued with exercise
prices ranging from $0.53 to $0.58 per share. These repriced options are
generally exercisable over four years and the Company has maintained the
vesting schedule from the original grants.
8. RELATED PARTY TRANSACTIONS:
In August 1995, the Company entered into consulting agreements with two
directors of the Company. The Company incurred approximately $29,000
in consulting expenses in connection with these agreements during the year
ended December 31, 1996. In January 1997, the Company began to defer payment
of a portion of all future compensation of the Company's president. The
deferred compensation balances were $216,000 and $108,000 as of December 31,
1997 and 1996, respectively.
On April 28, 1997, the Company's president provided a bridge loan to
the Company for $47,750 representing collateral funds pledged to Pacific
Bank for the Company's bank overdraft. As of December 31, 1997, both the
bank overdraft and the bridge loan have been repaid.
<PAGEF-20>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RELATED PARTY TRANSACTIONS, continued:
During 1997, the Company borrowed $100,000 under a loan agreement with a
stockholder. Borrowings under the agreement were unsecured and bore interest
at 8% per annum. All borrowings and accrued interest were repaid as of December
31, 1997.
Refer to Notes 3 and 6 (DBSC and E-SAT) for disclosures regarding related
party transactions with EchoStar.
9. INCOME TAXES:
The provision for income taxes for all periods presented relates to current
minimum taxes.
The estimated tax effect of significant temporary differences and carryforwards
that gave rise to deferred income tax assets as of December 31, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FEDERAL STATE FEDERAL STATE
Deferred tax liability - - - -
Deferred tax assets:
Net operating loss carryforwards 706,000 108,000 1,700,000 165,000
Research and development credit 95,000 - 79,000 35,000
carryforwards
Excess of tax over book basis of
investments, and other deferred 12,000 2,000 300,000 55,000
compensation
------- ------- ---------- -------
Net deferred tax assets 813,000 110,000 2,079,000 255,000
Valuation allowance (813,000) (110,000) (2,079,000) (255,000)
-------- -------- ---------- --------
Net deferred tax - - - -
======== ======== ========== ========
Due to the uncertainty of realization, a valuation allowance has been provided
to offset the net deferred tax assets. The (decrease) increase in the valuation
allowance was approximately $(1,411,000) and $1,402,000 during the years ended
December 31, 1997 and 1996, respectively. The provision for income taxes differs
from the amount which would arise by applying the combined statutory income tax
rate of approximately 40% due to changes in the deferred tax valuation
allowance.
As of December 31, 1997, the Company has net operating loss carryforwards of
approximately $2,078,000 and $1,758,000 for federal income tax purposes and
California state franchise tax purposes, respectively. The Company has also
research and development credit carryforwards of $95,000 and $0 for federal
income tax purposes and California state franchise tax purposes, respectively.
Such carryforwards expire in varying amounts between 1998 and 2012.
<PAGEF-21>
9. INCOME TAXES, continued:
As a result of changes enacted by the 1986 Tax Reform Act, utilization of net
operating loss and tax credit carryforwards may be limited due to equity
transactions occurring on or after May 6, 1986.
10. CONCENTRATION OF CREDIT RISK:
The Company periodically maintains cash balances at banks in excess of the
Federal Deposit Insurance Corporation insurance limit of $100,000.
Sales to one customer represented all Company sales in the year ended
December 31, 1996.
11. SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1996, the following noncash activities
occurred:
The Company issued 41,187 of its shares of common stock to certain
individuals in consideration for services rendered. These shares were
valued at $156,380.
The Company issued warrants to certain individuals in consideration for
services rendered. These warrants were valued at $112,500.
The Company issued 19,821 shares of common stock to certain
individuals for services rendered in connection with the
placement of the January and February 1996 sales of the
Company's common stock. These services were valued at $83,899
and were offset against the proceeds.
The Company issued 55,419 of its shares of common stock to certain individuals
in consideration for services rendered. These shares were valued at $76,293.
On January 23, 1997, the Company elected to exchange all of its 401,107 DBSC
shares for 270,414 shares of Echostar common stock which were valued at
approximately $539,000 and $6,760,000, respectively.
On August 29, 1997, the Company settled all principal and accrued interest
balances outstanding under its convertible debentures (Note 6), in exchange
for 270,414 shares of Echostar common stock and a cash payment of approximately
$936,000.
12. SUBSEQUENT EVENTS:
In January 1998, the Company created Newstar Limited, a wholly owned subsidiary
organized under the Laws of the Republic of Bermuda.
In April 1998, the Federal Communications Commission approved E-SAT's
application for a Low Earth Orbit Satellite license.
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-KSB
FOR THE PERIOD ENDED DECEMBER 31, 1997 FOR DBS INDUSTRIES, INC. AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 383,054
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 502,319
<PP&E> 73,277
<DEPRECIATION> 47,828
<TOTAL-ASSETS> 1,785,543
<CURRENT-LIABILITIES> 913,504
<BONDS> 0
0
0
<COMMON> 2,373
<OTHER-SE> 872,039
<TOTAL-LIABILITY-AND-EQUITY> 1,785,543
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,682,277
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 308,094
<INCOME-PRETAX> 3,149,717
<INCOME-TAX> 80,800
<INCOME-CONTINUING> 4,831,994
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,068,917
<EPS-PRIMARY> 0.5234
<EPS-DILUTED> 0.4922
</TABLE>
