As filed with the Commission on September 16, 1998 File No. 333-_____
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
DBS INDUSTRIES, INC.
(Name of small business issuer in its charter)
Delaware 7389 84-1124675
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
100 Shoreline Highway, Suite 190A, Mill Valley, California 94941; 415-380-8055
(Address and telephone number of principal executive offices)
100 Shoreline Highway, Suite 190A, Mill Valley, California 94941; 415-380-8055
(Address of principal place of business or intended principal place of business)
Fred W. Thompson, President and CEO
DBS Industries, Inc.
100 Shoreline Highway, Suite 190A
Mill Valley, California 94941
415-380-8055
(Name, address and telephone number of agent for service)
Copy to:
Daniel B. Eng, Esq.
Bartel Eng Linn & Schroder
300 Capitol Mall, Suite 1100
Sacramento, California 95814
Telephone: 916-442-0400
Approximate date of proposed sale to the public: As soon as practicable after
the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following blocks and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>i
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
====================================================================================================
Proposed Proposed
maximum maximum Amount of
Title of each class of Amount to be offering price aggregate registration
securities to be registered registered per share offering price fee
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock to be offered by
Selling Stockholders 3,088,435 $2.84(1) $8,771,155 $2,587
Common Stock for resale by holders of
Warrants assuming the exercise of such
Warrants 4,648,580 $2.84(2) $13,201,967 $3,895
Warrants to be offered by Selling
Warrantholders 1,250,000 (3) (3) (3)
Total 8,987,015 $21,973,122 $6,482
====================================================================================================
</TABLE>
(1) Fee calculated in accordance with Rule 457(c) of the Securities Act of
1933, as amended ("Securities Act"). Estimated for the sole purpose of
calculating the registration fee and based upon the average quotation of
the high and low price per share of the Company's Common Stock on
September 10, 1998, as reported on the NASD OTC Bulletin Board.
(2) Assumes that the holder of the warrant has exercised such warrant.
Maximum offering price per share is based upon the average quotation of
the high and low price per share of the Company's Common Stock on
September 10, 1998, as reported on the NASD OTC Bulletin Board.
(3) The Warrants may be exercisable to purchase shares of Common Stock. The
number of shares of Common Stock that may be acquired upon the exercise
of the Warrants is included in the calculation of the number of shares
of Common Stock to be registered in note (2) above. No fee is required
pursuant to Rule 457(g).
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>ii
DBS INDUSTRIES, INC.
CROSS-REFERENCE SHEET
Pursuant to Item 501 of Regulation S-B
<TABLE>
<CAPTION>
Registration Statement
Item Number and Caption Prospectus Caption
<S> <C> <C>
1. Front of Registration Statement and Outside Front
Cover Page of Prospectus.................................... Outside Front Cover
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................................. Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors........................ Prospectus Summary; Risk Factors
4. Use of Proceeds............................................. Use of Proceeds
5. Determination of Offering Price............................. Plan of Distribution; Selling Stockholders and
Warrantholders
6. Dilution.................................................... Not Applicable
7. Selling Security Holders.................................... Selling Stockholders and Warrantholders
8. Plan of Distribution........................................ Plan of Distribution; Selling Stockholders and
Warrantholders
9. Legal Proceedings........................................... Legal Proceedings
10. Directors, Executive Officers, Promoters and Management; Principal Stockholders; Certain
Control Persons............................................. Relationships and Related Transactions
11. Security Ownership of Certain Beneficial Owners
and Management.............................................. Principal Stockholders
12. Description of Securities................................... Description of Securities
13. Interest of Named Experts and Counsel....................... Experts; Legal Matters
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities...............Management
15. Organization Within Last Five Years......................... Business
16. Description of Business..................................... Prospectus Summary; Business
17. Management's Discussion and Management's Discussion and Analysis of Financial
Analysis or Plan of Operation............................... Condition and Results of Operations
18. Description of Property..................................... Business
19. Certain Relationships and Related Transactions...............Certain Relationships and Related Transactions
20. Market for Common Equity and Related
Stockholder Matters......................................... Price Range of Common Stock
21. Executive Compensation...................................... Executive Compensation
22. Financial Statements........................................ Consolidated Financial Statements
23. Change In and Disagreements With Accountants
or Accounting and Financial Disclosure...................... Not Applicable
</TABLE>
<PAGE>iii
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
iii
<PAGE>1
PROSPECTUS Subject to Completion
September 16, 1998
DBS INDUSTRIES, INC.
COMMON STOCK
WARRANTS TO PURCHASE COMMON STOCK
----------------
Certain stockholders of DBS Industries, Inc. ("DBSI" or the "Company")
("Selling Stockholders") are hereby offering up to 7,387,015 shares of Common
Stock in connection with (i) the resale of shares of Common Stock held by the
Selling Stockholders, and (ii) the resale of shares of Common Stock held by the
Selling Stockholders assuming the exercise of certain outstanding Warrants. In
addition, the Company is registering Warrants held by certain warrantholders
("Selling Warrantholders") to purchase up to 1,250,000 shares of Common Stock.
See "The Offering," "Selling Stockholders and Warrantholders."
The Company's Common Stock is traded in the over-the-counter market and
quoted on the OTC Bulletin Board under the symbol "DBSS." On ________, 1998, the
average of the high and low quotation for one share of Common Stock of the
Company was $______, as reported on the OTC Bulletin Board.
The Company will not receive any proceeds from the resale of shares of Common
Stock by the Selling Stockholders or the resale of Warrants by the Selling
Warrantholders. Expenses of the offering will be paid by the Company. The
Warrants are not quoted or traded on any exchange or quotation system.
--------------------------------
AN INVESTMENT IN THE COMMON STOCK OR WARRANTS INVOLVES SIGNIFICANT RISKS. SEE
"RISK FACTORS" COMMENCING ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK OR WARRANTS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------------------
The date of this Prospectus is September 16, 1998.
<PAGE>2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PROSPECTUS SUMMARY...........................................................................3
RISK FACTORS.................................................................................5
THE OFFERING................................................................................13
USE OF PROCEEDS.............................................................................13
PRICE RANGE OF COMMON STOCK.................................................................14
DIVIDEND POLICY.............................................................................14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............................................15
BUSINESS....................................................................................19
MANAGEMENT..................................................................................27
PRINCIPAL STOCKHOLDERS......................................................................35
PLAN OF DISTRIBUTION........................................................................36
SELLING STOCKHOLDERS AND WARRANTHOLDERS.....................................................37
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................40
DESCRIPTION OF CAPITAL STOCK................................................................40
CERTIFICATE OF INCORPORATION................................................................41
LEGAL PROCEEDINGS...........................................................................42
LEGAL MATTERS...............................................................................42
EXPERTS ....................................................................................42
AVAILABLE INFORMATION.......................................................................42
</TABLE>
<PAGE>3
PROSPECTUS SUMMARY
This Prospectus contains forward looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in those forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The following summary is qualified in its entirety by the more
detailed information and the Company's Consolidated Financial Statements and
notes thereto, appearing elsewhere in this Prospectus. Except as otherwise
specifically noted herein, all references to "DBSI" or the "Company" refer to
DBS Industries, Inc., a Delaware corporation, and its subsidiaries, Global
Energy Metering Service, Inc. ("GEMS"), Newstar Limited ("Newstar") and its 20%
interest in E-SAT, Corporation ("E-SAT").
The Company
DBS Industries, Inc. ("DBSI" or the "Company"), through its 20% interest
in E-SAT, proposes to construct, launch, and operate a system (the "E-SAT
System") utilizing six non-voice, non-geostationary mobile ("Little LEO")
satellites to provide a two-way, low-cost data messaging services worldwide.
E-SAT intends to launch Little LEO satellites to orbit the earth at an altitude
of approximately 550 miles, and with the Company's technology, are capable of
collecting and transmitting data at regular intervals from fixed devices in
hard-to-access locations and at a cost substantially less than manually
retrieving the information. The Company intends to initially provide data
messaging services for the energy industry including the gas and electric
utility and water industry, and other data messaging services for the vending
machine and environmental monitoring industries, worldwide. Prior to E-SAT
receiving its license to develop, construct and operate the E-SAT System, the
Company, through its subsidiary GEMS, was (i) developing hardware and software
for data collection and transmission; (ii) conducting proof-of-concept
demonstrations with several utility companies to determine the effectiveness and
accuracy of Little LEO satellites to collect and transmit data from fixed
devices such as meters; and (iii) evaluating rocket and satellite vendors in
anticipation of the license.
On March 31, 1998, the Federal Communications Commission ("FCC")
approved E-SAT's application for a Little LEO satellite license. Under the
license, E-SAT is authorized to launch and operate six Little LEO satellites to
provide a two-way, low-cost messaging service in the U.S. in the 148-148.905 MHz
frequency band for service and feeder uplinks, and the 137.0725-137.9725 MHz
frequency band for service and feeder downlinks utilizing code division multiple
access ("CDMA") direct sequence spread spectrum ("CDMA/DSSS") technology.
Pursuant to E-SAT's license, unless extended by the FCC for good cause,
E-SAT must commence construction of the first two satellites by March 1999,
complete construction by March 2002 and launch by September 2002. The remaining
four satellites must commence construction by March 2001, complete construction
by March 2004 and launch by March 2004. E-SAT intends to utilize six Little LEO
satellites located approximately 550 miles above earth in near polar orbits of a
99 degree inclination angle. The E-SAT System will initially consist of a
constellation of three satellites in a single orbit. Later, an additional set of
three satellites shall be launched. The latter three satellites shall be placed
in a second near polar orbit from the initial three satellites. The E-SAT System
will provide coverage of the world and will enable each satellite to see a given
spot on the earth several times during a twenty-four hour period.
The Company believes that its two-way, low cost data messaging services
will reduce costs for customers by providing a more efficient retrieval of data
because the E-SAT System (i) has a proposed lower infrastructure cost and (ii)
transmits data using CDMA/DSSS technology which provides greater capacity than
channelized systems and allows transmissions within the background noise in the
radio frequency environment. See "Business." In addition, the E-SAT System will
provide a means of safely
<PAGE>4
transmitting data which is superior to other methods currently available. The
Company's goal is to lead the low-cost, data messaging service market using
Little LEO satellites to enable businesses to economically gather data from
fixed devices located in remote and hard-to-access locations.
E-SAT is owned 20% by the Company and 80% by EchoStar Communications
Corp ("EchoStar"). The Company has devoted a substantial amount of time and
money developing a two-way, low cost data messaging services utilizing Little
LEO satellites. The Company and EchoStar have held numerous discussions whereby
the Company would acquire a majority interest in E-SAT. No assurance, however,
can be given that the Company will be able to acquire a majority interest in
E-SAT, or if acquired, that it will be on favorable terms to the Company.
Further, any proposed acquisition of a majority interest in E-SAT by the Company
will be subject to FCC approval. See "Risk Factors - Minority Ownership in
E-SAT, Inc."
The Company is located at 100 Shoreline Highway, Suite 190 A, Mill
Valley, California, and its phone number is 415-380-8055.
Summary Of Risk Factors
An investment in the Company's Common Stock and Warrants involves
certain risks which should be carefully considered and evaluated, including but
not limited to, the Company's minority interest in E-SAT, the Company being a
development stage company, the need for additional capital, and the
technological risks in developing a data messaging service using Little LEO
satellites. For a discussion of considerations relevant to an investment in the
Common Stock and Warrants, see "Risk Factors."
The Offering
The Selling Stockholders are registering for resale shares of Common
Stock held by such stockholders and the resale of shares of Common Stock
assuming the exercise of outstanding Warrants. In addition, the Selling
Warrantholders are registering for resale Warrants to acquire up to 1,250,000
shares of Common Stock. The Selling Stockholders and the Selling Warrantholders
acquired their shares or Warrants in private placements. The Company will
receive no proceeds from the sale of Common Stock by the Selling Stockholders or
from the sale of Warrants by the Selling Warrantholders.
Summary Consolidated Financial Data
The unaudited summary consolidated financial data presented below should
be read in conjunction with the more detailed financial statements of the
Company and notes thereto which are included elsewhere in this Prospectus along
with the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
For the year For the year
For the six For the six ended ended April 25, 1990
months ended months ended December 31, December 31, (Inception) to
June 30, 1998 June 30, 1997 1997 1996 June 30, 1998
<S> <C> <C> <C> <C> <C>
Revenue $ - $ - $ - $ 11,420 $ 161,420
Loss from operations 993,793 880,314 1,682,277 3,323,765 (9,592,512)
Net Income (Loss) (1,317,597) 5,042,972 3,068,917 (3,752,583) (5,156,726)
Income (Loss) per Share(1) (0.22) .86 .52 (.65) -
Working Capital (1,087,438) 7,222,798 (411,185) (6,130,815) -
Total Assets 1,079,141 7,889,353 1,785,543 4,629,177 -
Shareholders' Equity
(Deficit) $ (211,285) $ 280,080 $ 872,039 $ (2,273,169) $ -
</TABLE>
(1) Adjusted to reflect a 40 for one reverse stock split effected in February
1996.
<PAGE>5
RISK FACTORS
In addition to the other information presented in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the shares of Common Stock offered hereby.
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, ("Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended, ("Exchange
Act"). The Company's actual results may differ materially from the results
discussed in the forward-looking statements and involve risks and uncertainties.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors" and "Management's Discussion and Analysis,"
and elsewhere in this Prospectus.
Minority Ownership in E-SAT, Inc.
E-SAT has been granted a license to construct, launch and operate six
Little LEO satellites to provide two-way, low-cost data messaging services in
the U.S. E-SAT is owned 20% by the Company and 80% by EchoStar Communications
Corp. ("EchoStar"). In E-SAT's application to the FCC for a license to operate
the E-SAT System, EchoStar represented that it has the financial ability to meet
the estimated cost of construction, launch and first year operation of the first
two satellites of the E-SAT System. Although the Company has only a 20% interest
in E-SAT, the Company has spent a substantial amount of time and money
evaluating satellite and rocket manufacturers, performing proof-of-concept
demonstrations with utility companies, and developing hardware and software for
data collection and transmission in anticipation of E-SAT receiving its license.
The Company and EchoStar have held discussions whereby the Company would acquire
a majority interest in E-SAT. No assurance, however, can be given that the
Company will be able to acquire a majority interest in E-SAT, and in the event
that the Company is unable to acquire a majority interest, the Company will
remain a 20% owner. Further, any proposed acquisition of a majority interest in
E-SAT will be subject to FCC approval. 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 its current interest in
E-SAT. In the event that the Company is unable to obtain a majority interest in
E-SAT, and the E-SAT System is not built, or not built in a timely manner, such
circumstances will have a material adverse effect on the Company.
Development Stage Company
The Company is a development stage company with no commercial services
or operations and, therefore, does not currently generate any revenues. Although
the Company previously held interests in companies that have been granted by the
FCC licenses to construct and launch direct broadcast satellites, for the past
four years the Company has primarily focused on technology development, pursuing
regulatory approval for the E-SAT System, E-SAT System design and development,
contract discussions with satellite and launch vehicle contractors, strategic
planning regarding market rights and securing adequate financing for working
capital and capital expenditures. The completion of the E-SAT System design and
the construction and launch of the satellites will require significant
expenditures. These expenditures, combined with the Company's operating
expenses, will result in continued operating losses until the E-SAT System is
deployed and sufficient revenue-generating services are developed.
The Company's ability to provide commercial service in, initially, the
U.S., and, subject to regulatory approval, on a worldwide basis and to generate
positive operating cash flow will depend on its ability to, among other things:
(i) successfully construct and deploy the E-SAT System in a timely manner; (ii)
develop U.S. and international marketing arrangements permitting distribution of
the data messaging services inside and outside the U.S.; and (iii) construct the
necessary ground infrastructure inside and
<PAGE>6
outside the U.S. Given the Company's limited operating history, there can be no
assurance that it will be able to develop a sufficiently large customer base to
be profitable.
Lack of Revenues and Limited Operations
The Company and its subsidiaries have earned no substantial revenues
since their formation and have limited operating activity. In light of the
substantial costs involved to develop the E-SAT System and market its data
messaging services, the Company does not anticipate substantial revenues or to
be profitable in the near future. No assurance can be given that the Company
will ever achieve profitability. For the six months ended June 30, 1998, and the
years ended December 31, 1997 and 1996, the Company has incurred net (losses) or
income of $(1,317,597), $3,068,917, and $(3,752,583), respectively. During the
year ended December 31, 1997, the Company had a net income due to sales of
indirect interests in direct broadcast satellite licenses.
The Company does not expect any revenues during 1998, and it expects to
incur substantial and increasing operating losses and negative net cash flows
until the E-SAT System is developed, constructed, and operated in a profitable
manner.
Need for Future Capital
The Company currently estimates that it will require approximately $115
million in capital expenditures and development and operating costs through the
full deployment of the E-SAT System for the first five years. Given the risks in
an undertaking of this nature, there can be no assurance that actual cash
requirements will not exceed the Company's estimates. In particular, additional
capital will be required in the event that (i) the Company incurs unexpected
costs in completing the system design or encounters any unexpected technical or
regulatory difficulties, (ii) the Company incurs delay and additional expense as
the result of a launch or satellite failure, (iii) the Company is unable to
enter into marketing agreements with third parties, or (iv) the Company incurs
any significant unanticipated expenses. The Company has little control over any
of these events, and the occurrence of any of the above listed delays or
unanticipated costs could adversely affect the Company's ability to meet its
business plan.
There can be no assurance that capital will be available to the Company
for its purposes on terms acceptable to the Company, if at all, or on a timely
basis. A substantial shortfall in funding will delay or prevent the completion
of the design, construction, deployment or commencement of commercial operations
of the E-SAT System. If the Company is unable to obtain additional financing,
the Company's current plans will be adversely affected and its operations will
have to be curtailed, which will have a material adverse effect on the Company's
future success.
Technological Risks and Risks of Technological Change
The design and construction of the E-SAT System are exposed to risks
associated with a space-based communications system. Although the Company
believes that the E-SAT System is properly designed, its design contains certain
technology that has not been applied in a commercial application. The Company
intends to engage contractors who are experienced in the satellite and
communications industry; however, the Company has no experience in developing,
constructing, and operating a data communications system. The failure of the
E-SAT System to function as designed, or the failure of system components to
function with other components or to specification could result in delays,
unanticipated costs, and loss of system performance, thereby rendering the E-SAT
System unable to perform at the quality and capacity levels required for
success.
<PAGE>7
In addition, future advances in the telecommunications industry could
lead to new technologies, products or services competitive with the products or
services to be provided by the Company. Such technological advances could also
lower the costs of other products or services that may compete with the
Company's products or services, otherwise resulting in pricing pressures on the
Company's products and services, and may adversely affect the Company's results
of operations.
Unscheduled Delays
Delays and associated increases in costs in the construction, launch and
implementation of the E-SAT System could result from a variety of causes,
including: (i) delays encountered in the construction, integration and testing
of the E-SAT System; (ii) launch delays or failures; (iii) delays caused by
design reviews in the event of a launch vehicle failure or a loss of satellites
or other events beyond the control of E-SAT; (iv) further modification of the
design of all or a portion of the E-SAT System in the event of, among other
things, technical difficulties or changes in regulatory requirements; (v) the
failure of E-SAT to enter into, at the times or on the terms expected by the
Company, agreements with space craft manufacturers and other technology provides
and with marketing providers; and (vi) the failure to develop or acquire
effective applications for use with the E-SAT System. There can be no assurance
that the E-SAT satellites or the E-SAT data messaging services will be available
on a timely basis, or at all, or that implementation of the E-SAT System will
occur. A significant delay in the completion of the E-SAT System could erode the
competitive position of the Company and could have a material adverse effect on
the Company's financial condition and results of operations.
Launch Risks
Satellite launches are subject to considerable risks, including the
possible failure of the launch vehicle, which may result in the loss or damage
to the satellite or its deployment into an incorrect or unusable orbit. The
failure of any launch vehicle selected by the Company could result in a delay in
the planned launch schedule. There can be no assurance that any of the Company's
satellite launches will be successful. The Company believes such risks are
insurable.
The demand for launch services for Little LEO satellites is expected to
increase as recently licensed or proposed geostationary and non-geostationary
satellite systems are built and deployed. While the Company believes there is an
adequate supply of launch vehicles of the class required by proposed by Little
LEOs, there can be no assurance that launch services will be available in the
required quantities or on economic terms acceptable to the Company. Any
additional expense associated with launch services or the inability to contract
for services on a timely basis will adversely affect the Company's business
operations. The Company has entered into a launch reservation agreement with
Eurockot Launch Services GmbH ("Eurockot"), a joint venture between Daimler-Benz
Aerospace AG and Khrunichev State Research and Production Space Service, whereby
Eurockot has reserved a launch opportunity on the launch vehicle Rockot at the
launch site Plesetzk, Russia during a specific period. It is anticipated that
any launch must be approved by a governmental agency of the Russian Federation.
No assurance can be given that the Company and Eurockot will enter into a Launch
Services Agreement to provide for the for a launch vehicle for E-SAT's Little
LEO satellites or that such launch will be approved by the Russian Federation.
Potential Satellite Malfunction
A number of factors will affect the useful lives of the E-SAT's Little
LEO satellites, including the quality of construction, the expected gradual
environmental degradation of solar panels, the amount of fuel on board and the
durability of component parts. Random failure of satellite components could
result in damage to or loss of a satellite. In rare cases, satellites could also
be damaged or destroyed by electrostatic storms, high levels of radiation or
collisions with other objects in space. Any premature loss
<PAGE>8
of satellite performance or capacity could have a material adverse effect on the
efficiency of the overall system and the operations of the E-SAT System.
Limited Insurance
The Company expects to obtain launch insurance for each of its satellite
launches. This insurance would, in the event of a launch failure, provide funds
for the construction of a replacement satellite and for replacement launch
services. No assurance can be given that in the event of a launch failure, that
any insurance proceeds will be sufficient to cover the costs of the launch and
satellite. Further, the Company will attempt to negotiate with the rocket
manufacturer to pay for another launch in the event that the first launch is a
failure. Notwithstanding any insurance the Company may procure, in the event
there is a covered loss, prior to the next event that would be subject to any
such policy, the Company will need to satisfy the insurance underwriters that
the technological or other problems associated with the covered loss have been
addressed. In addition, the Company may obtain on-orbit insurance, which would
provide for replacement of failed satellites after the placement of satellites
into commercial service. The launch and on-orbit insurance marketplace is
volatile and there can be no assurance that launch or on-orbit insurance, or
both, will be available to the Company, or if available, will be available on
terms acceptable to the Company. The Company will continue to evaluate the
insurance marketplace to determine the level of risk the Company is willing and
able to absorb internally versus the amount of risk to be transferred to third
parties.
Regulatory Risks
United States License. As a U.S. licensee and a proposed provider of data
messaging services in the U.S., the E-SAT System is and will continue to be
subject to U.S. regulation. E-SAT's business may be significantly affected by
regulatory changes in the U.S. resulting from judicial decisions and/or adoption
of treaties, laws, regulations or policies, or by changes in the interpretation
or application of existing treaties, laws, regulations or policies.
In order to maintain the validity of its FCC license, E-SAT must comply
at all times with the terms of such FCC license, unless specifically waived or
modified by the FCC. These terms include, among other things, system
construction milestones. In order to comply with the milestone requirements of
the FCC license, the E-SAT must commence construction of the first two
satellites by March 1999 and the remaining four satellites by March 2001.
Although E-SAT has every expectation of meeting the milestone requirements,
there can be no assurance that these or any other requirements and conditions of
the FCC license can be met by E-SAT. The terms of the FCC license also require
that construction, launch and operation of the E-SAT System be accomplished in
accordance with the technical specifications set forth in E-SAT's FCC
application, as amended, and consistent with the FCC's rules, unless
specifically waived. During the process of constructing the E-SAT System, there
may be certain modifications to the design set forth in E-SAT's FCC application
that may necessitate regulatory approval. There can be no assurance that such
modifications will be approved by the FCC.
The FCC license will be effective for ten years from the date on which
E-SAT certifies to the FCC that its initial satellite has been successfully
placed into orbit and that the operations of that satellite conform to the terms
and conditions of the FCC license. While the Company expects it will apply to
renew the FCC License beyond the initial 10-year license term, and expects the
FCC will grant such renewal, there can be no assurance that, if applied for,
such a renewal of license would be granted.
In addition, E-SAT's remote terminal units ("RTU") to be integrated with
the fixed devices must be type accepted (Part 15) by the FCC. E-SAT intends to
seek approval of the RTUs under a separate application with the FCC.
<PAGE>9
Foreign Licenses. Pursuant to its license from the FCC, E-SAT is
authorized to provide data messaging services in the U.S. In addition to the FCC
license, E-SAT will be required to seek certain "landing rights" in each country
in which its RTUs will be located. There can be no assurance that the required
regulatory authorizations will be obtained in any country in which the Company
proposes to offer its services, or that such authorizations will be obtained in
a timely manner or in the form necessary to implement the Company's proposed
operations. In the event the Company is not successful in obtaining a foreign
license in a particular country, E-SAT will be unable to offer its services in
such country. Depending on the number of proposed RTU's to be operating in such
country, the unavailability to offer E-SAT's data messaging services to such
country may materially adversely affect the Company's business plan
International Telecommunications Union Coordination. All communications
satellite systems must be technically coordinated with other satellite systems,
and in some cases, with terrestrial communication systems. The purpose of this
coordination is to ensure, to the maximum extent feasible, that communication
systems will be able to operate without unacceptable radiofrequency interference
from other communication systems. This process, called satellite coordination,
takes place under the auspices of the International Telecommunication Union
(ITU) and is essentially a first come, first served process. That is, earlier
filings generally establish some priority over later-filed systems although the
ITU encourages administrations to cooperate to enable as many satellite systems
as possible to be implemented. The process is initiated by the filing of
technical information about each system by the government of the country in
which the system is seeking a space segment license. For E-SAT, that country is
the United States of America. Through the filing of this information, other
counties have the opportunity to identify whether they seek to coordinate their
systems with the newly filed system. During coordination, some systems may be
required to revise their operating parameters or geographical coverage. In
E-SAT's case, two filings cover its system. One filing was originally made at
the request of another U.S. system which had certain transmission parameters
similar to E-SAT's. The other filing included the specific characteristics of
E-SAT, along with those of the other applicants in the FCC's second round Little
LEO licensing proceeding. The first filing has progressed in the ITU process
through successful coordination with a number of countries. When coordination is
successfully completed with all countries that requested coordination, the
system is "notified" to the ITU and is placed in the Master Register of
satellite systems. The FCC has advised E-SAT that it may use the earlier filing,
if it chooses, or may use the later filing. If E-SAT chooses to use the first
filing, it must place into service at least one satellite by January 1, 2000.
E-SAT is working with the FCC to complete the necessary coordination as well as
to update both the older and the newer ITU filings that the filing of modified
characteristics. While it is not anticipated that the filing of modified
characteristics will result in additional technical coordination beyond those
already completed or requested, there can be no assurance that the system will
successfully complete the international coordination process. However, most
countries seek to accommodate satellite systems of other countries and
historically, virtually all coordination are ultimately successful. The United
States permits its licensed systems to be implemented even when the coordination
process has not been completed.
Utility Industry Acceptance
The Company's success is largely dependent on whether utility companies
will contract for E-SAT's data messaging services utilizing the E-SAT System.
Although E-SAT has other proposed uses of its data messaging services, utility
companies, such as gas, electrical, water and other utility companies, remain
the current focus of the Company's marketing and development efforts. The
Company has demonstrated the ability of Little LEO satellites to read data from
meters in proof of concept trials with utility companies. However, no assurance
can be given that unforeseen problems will not develop with respect to the
Company's technology, or services, or that the Company will be successful in
completing the development and commercial implementation of automatic meter
reading by use of the E-SAT System.
<PAGE>10
The Company must complete a number of technical developments and continue to
expand and upgrade its capabilities on a full commercial basis prior to
implementing automatic meter reading services. Utility companies typically go
through numerous steps before making final decisions. These steps, which can
take up to several years to complete, may include the formation of committees to
evaluate the Company's proposal, the review of various technical aspects,
performance and cost evaluations, regulatory reviews and the request for quotes
and proposals from other vendors.
Further, the data messaging service such as automatic meter reading is a
relatively new and constantly evolving business. It is difficult to predict the
future growth of the market or the potential size of the market. Utility
companies are testing products from a number of entities developing various
communication technologies. The use of E-SAT satellites is but one possible
solution for hard-to-access meter sites. No assurances can be given that the
Company will be successful in achieving the adoption of the E-SAT System or to
what extent utilities will employ it. In the event the utility companies do not
adopt the Company's technology, or do so less rapidly than expected, the
Company's future results, including its ability to achieve profitability, will
be materially and adversely affected.
The development of low-cost RTUs to collect and transmit data from fixed
devices such as meters will be important in the development of a broad utility
market for E-SAT's data messaging services. RTUs must be manufactured and be
operated at a low cost in order to make E-SAT's data messaging services
attractive to utility companies. It is expected that the cost of RTUs will
decline as the volume of units produced increases. The Company believes that
because RTUs will be transmitting data in short burst of information packets
utilizing CDMA/DSSS technology, it can develop a low cost RTU which requires
less power to operate and will be attractive to utility and other companies that
may be interested in E-SAT's data messaging services. However, there can be no
assurance that RTUs can be developed at a cost that will attract the utility
company subscriber base necessary for the Company to achieve profitability.
Reliance on United States and International Distributors to Market Services
The Company intends to rely on third parties with existing distribution
channels targeted toward specific markets to sell E-SAT data messaging services
to subscribers in the United States and throughout the world. Such relationships
may take the form of a joint venture or by distribution license. The Company has
contributed significant time and resources in developing these potential
relationships and believes additional corporate opportunities may develop from
such business alliances. The ability and willingness of third parties to market
the Company's data messaging services will depend upon many factors, including
the technical capabilities of the E-SAT System, the wholesale price of the
service, the third party's ability to realize a margin on the service, the cost
of the RTU, and the competitive environment. There can be no assurance that the
Company will be successful in identifying value added resellers ("VARs") for all
of its target markets, or that those VARs that are willing to resell the service
will be successful in their sales efforts.
The Company intends to enter into international distribution license
agreements for countries other than the U.S. Each international distributor will
be responsible for obtaining all regulatory approvals in the local country and
marketing the services directly to subscribers or through sublicenses. There is
no assurance the Company will be successful in identifying international
distributors in each country in which the Company intends to operate, or that
the international distributors will be successful in obtaining regulatory
authorizations to offer E-SAT's data messaging services. Failure to do so may
preclude the Company from operating in those markets.
<PAGE>11
Reliance on Vendors and Consultants
The Company has relied on and will continue to rely on vendors and
consultants that are not employees of the Company or its affiliates to complete
the design, construct and implement the E-SAT System, to market its data
messaging services and for representation on regulatory issues. The Company has
no long-term contractual relationship with these vendors and consultants. While
the Company believes that vendors and consultants will continue to provide the
expertise necessary to complete the design and construction of the E-SAT System,
there can be no assurance that such vendors and consultants will be available in
the future, and if available, will be available on terms favorable to the
Company.
In addition, the Company relies and will continue to rely on outside
parties to manufacture technological equipment for its E-SAT System such as
meters, transmitters, antennas, and other Little LEO satellite based devices. No
assurances can be given that these manufacturers will be able to meet the
Company's needs in a satisfactory and timely manner or that the Company will be
able to obtain additional manufacturers when and if necessary. A significant
price increase, a quality control problem, an interruption in supply or other
difficulties with third party manufacturers could have a material adverse effect
on the Company's plan of business. Further, the failure of third parties to
deliver the requisite products, components, necessary parts or equipment on
schedule, or the failure of third parties to perform at expected levels, could
delay the Company's deployment of the E-SAT System. Any such delay or increased
costs could have a material adverse effect on the Company's business.
Development of Business and Management Growth; Key Personnel
The Company is in its development state has not yet commenced commercial
service. The Company expects to experience significant and rapid growth in the
scope and complexity of its business as it proceeds with the development of its
system. Currently, the Company does not have sufficient staff to manage
operations, control the operations of its satellites, handle sales and marketing
efforts or perform finance and accounting functions. See "Risk Factors -
Reliance on Vendors and Consultants." The Company will be required to hire a
broad range of additional personnel before it begins commercial operations.
Growth, including the creation of management infrastructure and staffing, is
likely to place a strain on the Company's management and operational resources.
The failure to develop and implement effective systems or to hire and train
sufficient personnel for the performance of all of the functions necessary to
effectively service and manage its subscriber base and business, or the failure
to manage growth effectively, would have a material adverse effect on the
Company.
The Company's performance is substantially dependent on the performance
of its executive officers and key personnel. The Company is dependent on its
ability to retain and motivate high-quality personnel. The loss of any of the
Company's key personnel, particularly Fred W. Thompson, could have a material
adverse effect on the Company's business, financial condition, and operating
results. The Company has "key person" life insurance policies on Mr. Thompson in
the amount of $2,000,000.
Competition
The Company will encounter competition from other Little LEO satellite
systems, as well as from an increasingly competitive terrestrial-based
communications industry. The market for collection and transmission of data from
fixed devices such as meters and the potential market for other applications of
data messaging services have led to substantial and increasing competition. Many
of the Company's present and potential future competitors using Little LEO
satellites have begun to address collecting and transmitting data from the fixed
devices such as the utility industry and vending machine industry and have
substantially greater financial, marketing, technical and manufacturing
resources and name recognition and experience than the Company. The Company's
competitors may be able to respond more quickly to new
<PAGE>12
or emerging advancements in the industry and to devote greater resources to the
development, promotion and sale of their products and services. While the
Company believes that its technology is competitive and that the E-SAT System
has been designed to provide a data transmission service at a cost lower than
its competitors, no assurances can be given that such competitors, in the
future, will not succeed in developing better or more cost effective data
transmission system.
In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties that could increase their ability to reach utility customers or
subscribers of data messaging services. Further, if the Company achieves
significant success it could increase the number of competitors in the market.
Such existing and future competition could affect the Company's ability to form
and maintain agreements with utilities and other customers. No assurances can be
given that the Company will be able to compete successfully against current and
future competitors, and any failure to do so would have a material adverse
effect on the Company's business.
Further, terrestrial-based wireless communication systems are providing
data messaging services to the utility industry. Terrestrial systems can offer
these services in urban and remote areas. However, due to the high cost of
establishing the infrastructure to support a terrestrial-based system, the
Company does not believe that a terrestrial-based system will be as cost
effective as the Company in providing a two-way, low cost data messaging service
in hard to access areas.
Penny Stock Regulations
The Securities and Exchange Commission (the "Commission") has adopted
regulations which generally define "penny stock" to be any equity security that
has a market price (as defined) less than $5.00 per share or an exercise price
of less than $5.00 per share, subject to certain exceptions. The Company's
securities may be covered by the penny stock rules, which impose additional
sales practice requirements on broker-dealers who sell to persons other than
established customers and accredited investors (generally, institutions with
assets in excess of $5,000,000 or individuals with net worth in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their
spouse). For transactions covered by this rule, the broker-dealers must make a
special suitability determination for the purchase and receive the purchaser's
written agreement of the transaction prior to the sale. Consequently, the rule
may affect the ability of broker-dealers to sell the Company's securities and
also affect the ability of purchasers to sell their shares in the secondary
market.
Certain Anti-Takeover Provisions
The Company's Certificate of Incorporation contains a fair price
provision that requires a certain threshold approval by the Company's board of
directors in the event of a merger, sale of assets or other type of business
combination. In addition, the Company's board consists of staggered three year
terms, and the board of directors is authorized to issue preferred stock the
terms of which may be determined by the board of directors. These provisions may
have the effect of deterring a change in control of the Company. See
"Certificate of Incorporation."
No Dividends
The Company has not declared or paid any dividends on its Common Stock
since its inception, and does not anticipate paying any such dividends for the
foreseeable future.
<PAGE>13
THE OFFERING
The Selling Stockholders are offering for resale up to 3,038,435 shares
of Common Stock and up to 4,648,580 shares of Common Stock assuming the exercise
of Warrants. Further, the Selling Warrantholders are offering for resale
Warrants to purchase up to 1,250,000 shares of Common Stock.
The shares of Common Stock and Warrants were issued in connection with a
private placement of three million Units to accredited investors at $2.00 per
Unit. Each Unit consists of one share of Common Stock and a Warrant to purchase
one share of Common Stock at $3.00 per share. No assurance can be given that any
of the Selling Warrantholders will exercise their Warrants.
The shares of Common Stock offered for resale and the shares of Common
Stock to be issued upon the exercise of the Warrants, and Warrants held by the
Selling Warrantholders, may be sold in a secondary offering by the holders
thereof pursuant to this Prospectus. The Company will not receive any proceeds
from the resale of the Common Shares by the Selling Shareholders or the Warrants
by the Selling Warrantholders.
Pursuant to the terms of the private placement, the Company is
contractually required to register the shares of Common Stock which are part of
the Units and the shares of Common Stock to be issued upon the exercise of the
Warrants. Further under the terms of a purchase agreement with Astoria Capital
Partners, L.P. ("Astoria Capital") and Microcap Partners, L.P. ("Microcap"), the
Company is required to register by December 4, 1998, shares of Common Stock and
Warrants and the shares of Common Stock to be issued upon of the exercise of the
Warrants together with any securities of the Company issued with respect to the
Common Stock, Warrants or shares of Common Stock to be issued upon the exercise
of the Warrants (collectively, "Registrable Securities"). In the event the
registration statement registering the Registrable Securities is not declared
effective by the Commission by December 4, 1998, the Company is required to
refund to Astoria Capital and Microcap, in the aggregate, an amount equal to the
product of $2.5 million and 3% for each 30 days (pro-rata as to a period of less
than 30 days) the registration statement is not declared effective, subject to
certain exceptions, or the effectiveness of such registration statement or
related prospectus is suspended because such prospectus includes an untrue
statement of material fact or omits to state a material fact required to be
stated.
USE OF PROCEEDS
The Company will not receive any proceeds from the resale of the shares
of Common Stock by the Selling Shareholders or Warrants by the Selling
Warrantholders. The Company is registering the shares of Common Stock, Warrants,
and shares of Common Stock upon the exercise of the Warrants for resale pursuant
to contractual terms under a private placement.
<PAGE>14
PRICE RANGE OF COMMON STOCK
The following table sets forth the high and low bids quoted for the
Company's Common Stock during each quarter for the past two fiscal year ends and
until the quarter ended June 30, 1998, as quoted on the OTC Bulletin Board. The
Company's trading symbol is "DBSS." Subject to meeting The Nasdaq Stock Market,
Inc. requirements, the Company intends to apply to list its Common Stock on The
Nasdaq SmallCap Market.
Common Stock
Quarter Ended High Low
June 30, 1998 2.88 1.50
March 31, 1998 2.32 .50
December 31, 1997 1.38 .38
September 30, 1997 1.00 .53
June 30, 1997 1.94 .75
March 31, 1997 1.94 1.50
December 31, 1996 3.25 1.50
September 30, 1996 3.88 2.00
June 30, 1996 6.63 3.75
March 31, 1996 7.50 4.40
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 September 11, 1998, the Company had 8,762,841 shares of Common
Stock outstanding and 478 stockholders of record. This number does not include
stockholders who hold the Company's securities in street name.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends since its
inception. The Company currently intends to retain future earnings, if any, for
use in the operation and expansion of the business. The Company does not intend
to pay any cash dividends in the foreseeable future.
<PAGE>15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company, through its 20% interest in E-SAT, proposes to construct,
launch, and operate a two-way low-cost data messaging system (the "E-SAT
System") utilizing six low-earth orbit ("Little LEO") satellites. E-SAT's Little
LEO satellites will orbit the earth at altitudes of approximately 550 miles, and
with the Company's technology, are capable of collecting and transmitting data
at regular intervals from fixed devices such as meters in hard-to-access
locations and at a cost substantially less than manually retrieving and
transmitting the data. The Company intends to initially provide automated meter
reading services collecting and providing data from energy-related meters such
as electrical, natural gas, water or propane, but may provide other data
collection services in the areas of vending machines and environmental meters.
Results of Operations
Three and Six Months Ended June 30, 1998 Compared to June 30, 1997
Revenues
The Company remains in the development stage and did not generate any
revenues or net interest income in either the three or six months ended June 30,
1998 or June 30, 1997.
Cost and Operating Expenses
Cost and operating expenses for the three months ended June 30, 1998,
were $626,247 as compared to $410,702 for the three months ended June 30, 1997.
During the three months ended June 30, 1998, cost and operating expenses
increased primarily in research and development because the Company has devoted
substantial amounts of its financial and personnel resources on developing its
automatic meter reading business. Cost and operating expenses for the six months
ended June 30, 1998, were $993,793 as compared to $880,314 for the six months
ended June 30, 1997. General and administrative expenses for the six months
ended June 30, 1998, decreased from the same period during the prior year due to
reduced legal fees. During the six months ended June 30, 1997, the Company was
involved in litigation over an interest in a direct broadcast satellite license
and incurred substantial legal fees. This ligation was settled during 1997. The
decrease in general and administrative expenses for the six months ended June
30, 1998, was offset by an increase in research and development due to the
development of its automatic meter reading service.
Other Income (Expense)
Other expense for the three months ended June 30, 1998, was $280,943 as
compared to $152,852 for the three months ended June 30, 1997. During the three
months ended June 30, 1998, the Company earned interest income of $3,872
compared to interest expense of $136,735 for the three months ended June 30,
1997. During 1997, the Company had debentures outstanding upon which it paid
interest. The debentures were paid off during the third quarter of 1997. This
decrease in interest expense was offset by the loss of $228,943 incurred by the
Company upon the sale of its interest in Seimac and loss of $56,492 attributed
to its 20% interest in E-SAT. Other expense for the six months ended June 30,
1998, was $319,539 as compared to other income of $ 5,923,286 for the six months
ended June 30, 1997. During the six months ended June 30, 1997, the Company
incurred net interest expense of $264,750 due
<PAGE>16
to debentures outstanding and recognized a gain of $6,221,270 on the sale of
marketable securities. No similar net interest expense or gain occurred during
the six months ended June 30, 1998.
Net Loss and Income
The Company's net loss for the three month period ended June 30,1998,
was $911,455 compared to $563,554 for the three month period ended June 30,
1997. Net loss for the six months ended June 30, 1998 was $1,317,597 compared to
a net profit of $5,042,972 for the six month period ended June 30, 1997. During
the six month period ended June 30, 1997, the Company's net income was due
primarily to a one-time gain on marketable equity securities of approximately
$6.2 million offset by operating and interest expenses.
Year Ended December 31, 1997 Compared to December 31, 1996
Revenues
The Company remains in the development stage and did not generate any
significant revenues or net interest income during 1997 compared to $11,420 in
1996. The $11,420 earned during 1996 was attributed to radio equipment sold by
GEMS.
Cost and Operating Expenses
Cost and operating expenses for 1997 were $1,682,277 as compared to
$3,335,185 for 1996. During 1997, cost and operating expenses decreased
primarily in research and development due to the Company's limited access to
capital during 1997. Selling, general and administrative expenses for 1997
decreased to $1,472,162 from $2,245,588 during 1996. During 1996, the Company
was involved in litigation over an equitable interest in a direct broadcast
satellite license and incurred substantial legal fees. This litigation was
settled in August 1997. Research and development expenses were $210,115 for 1997
as compared to $1,078,747 during 1996. Research and development expenses during
1996 were primarily related to GEMS conducting its satellite proof of concept
trial to utility companies and developing hardware and software in preparation
of E-SAT receiving its FCC license.
Other Income (Expense)
Other income for the year ended December 31, 1997, was $4,831,994 as
compared to other loss of $427,218 for the year ended December 31, 1996. During
1997, the Company had net interest expense of $308,094 compared to net interest
expense of $395,298 for the year ended December 31, 1996. During 1997, the
Company had debentures outstanding to EchoStar on which it accrued interest
expense. The decrease in interest expense was offset by the net equity in loss
in investees of $80,975. During 1997, the Company had a net gain on the sale of
investments of $5,221,063. The majority of the gain was attributed to
transactions involving EchoStar. In January 1997, the Company received shares of
EchoStar Common Stock in exchange for the Company's interest in Direct
Broadcasting Satellite Corporation recognizing a gain of approximately $6.2
million. This gain was offset by a loss of approximately $2.2 million in
connection with the retirement of debentures due to EchoStar in exchange for
EchoStar Common Stock that EchoStar held as collateral against the debentures.
In addition, during 1997, the Company recognized a gain of approximately $1.2
million upon the settlement of its litigation with Loral Aerospace Holdings,
Inc. ("Loral") regarding the Company's equitable interest in Continental
Satellite Corporation. No similar gains occurred during 1996.
<PAGE>17
Net Loss and Income
The Company's net income for the year ended December 31, 1997, was
$3,068,917 compared to a net loss of $3,752,583 for year ended December 31,
1996. During the year ended December 31, 1997, the Company's net income was due
primarily to gains on the sale of EchoStar Common Stock and from the settlement
of litigation involving Company's equitable interest in Continental Satellite.
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. The Company
anticipates monthly expenses to average approximately $170,000 to $200,000 per
month for the remaining calendar year which includes $125,000 per month for
operating, legal and consulting expenses, and $45,000 to $75,000 per month for
GEMS & E-SAT research & development. However, expenses will continue to increase
with the demands of developing the E-SAT license and business applications.
Accordingly, cash resources presently available to the Company at June 30, 1998,
are not sufficient to continue operations at their projected level, and
additional capital will be necessary to expand operations or continue current
operations. Traditionally, the Company has relied on equity and debt financings
to finance its operations. This financing was supplemented from the sale of the
Company's interest in entities that hold direct broadcast satellite licenses.
The Company no longer has any interest in direct broadcast satellite licensees.
Currently, the Company is offering to accredited investors in a private
placement up to 3 million units for $6 million in the aggregate with each unit
consisting of one share of Common Stock and one warrant to purchase one share of
Common Stock at $3.00 per share. As of June 30, 1998, the Company had sold
102,000 units for gross proceeds of $204,000. As of September 11, 1998, the
Company has received approximately an additional $5.5 million from the sale of
units subsequent to June 30, 1998. The Company believes that it has sufficient
working capital for the next twelve months.
The Company had cash and cash equivalents of $24,568 and $383,054 as of
June 30, 1998 and December 31, 1997, respectively. The Company had negative
working capital of $1,087,439 as of June 30, 1998, as compared to negative
working capital of $411,185 as of December 31, 1997. Until the Company is able
to develop, construct and operate its E-SAT System and derive revenues
therefrom, the Company will continue to use cash for its operations and
development of the E-SAT System.
Net cash used in operating activities was $377,507 for the six months
ended June 30, 1998, as compared to $608,832 for the six months ended June 30,
1997. Net cash used in operating activities during the six months ended June 30,
1998, decreased from the same period during the prior year due to the decrease
in accounts payable. Net cash used in operating activities was $2,972,153 for
the year ended December 31, 1997, compared to $1,639,464 for the year ended
December 31, 1996. Net cash used during the year 1997 increased due to the
payment of accounts payable which accrued during 1996.
Net cash used in investing activities for the six month period ended
June 30, 1998, was $4,908. This net cash used represents the difference between
the proceeds from the divestiture of Seimac of $199,940 less the Company's net
investment in E-SAT of $204,848. Net cash provided by investing activities was
$4,183,565 for the year 1997 compared to net cash used in investing activities
of $2,596,694 during 1996. During 1997, the Company received proceeds of
$3,573,677 in connection with a settlement of a lawsuit with Loral. Cash used
during 1996 included the purchase of an equitable interest in Continental in the
amount of $2,292,409 and advances to E-SAT in an amount of approximately
$225,000.
Net cash provided by financing activities for the six month period ended
June 30, 1998, was $97,929 compared to $207,659 for the six months ended June
30, 1997. Net cash provided by financing activities during the six months ended
June 30, 1998, consisted entirely of the issuance of Common Stock
<PAGE>18
and net cash provided by financing activities during the six months ended June
30, 1997, consisted primarily of the issuance of Common Stock and debentures.
Net cash used in financing activities was $1,230,994 during 1997 compared to net
cash provided by financing activities of $4,635,002 during 1996. During 1997,
the Company repaid debentures in the amount of $1,043,445 and stockholder's
loans of $149,750. During 1996, the Company received $3,640,000 from the
issuance of debentures and $1,000,002 from the issuance of Common Stock.
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 Power T&D Company, Inc. ("ABB") have
suspended their development under this agreement due to the expiration of the
Company's agreement for the 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.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's, or its suppliers' and customers' computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities. In the Company's assessment, because the Company and its
subsidiaries information systems are primarily comprised of recently purchased
personal computers and software, the Company does not believe that the Year 2000
Issue will materially affect its operations.
In addition, in developing the E-SAT System, the Company will be relying
on vendors to, among other things, manufacture the Little LEO satellites, launch
the Little LEO satellites, manufacture the RTU and build the E-SAT
infrastructure including the ground station. The Company has not yet entered
into contracts with any vendors to develop the E-SAT System, and, therefore, no
assessment has been made as to their Year 2000 compliance. As part of the
contract negotiations, the Company will request and determine the vendor's Year
2000 readiness. In the event that it is determined that a key vendor will not be
Year 2000 compliant, this may have an adverse effect on the Company's business
plans.
<PAGE>19
BUSINESS
The Company
DBS Industries, Inc., through its 20% interest in E-SAT, proposes to
construct, launch, and operate a two-way, low-cost data messaging system
utilizing six Little LEO satellites. E-SAT intends to launch six Little LEO
satellites to orbit the earth at altitudes of approximately 550 miles, and with
the Company's technology, are capable of collecting and transmitting data at
regular intervals from fixed devices such as meters in hard-to-access locations
at a cost substantially less than manually retrieving the information. The
Company intends to provide data messaging services initially for the energy
industry including the gas and electrical utility and water industry, and other
data messaging services for the vending machines and environmental monitoring
industries, worldwide.
The Company believes that its two-way, low cost data messaging services
will reduce costs for customers by providing a more efficient procedure to
collect and transmit data. The E-SAT System has been specifically designed to
collect data from fixed devices and will provide a means of safely transmitting
data which is superior to and less costly than methods currently available.
Little LEO satellites are particularly suited for the collection and
transmission of data from fixed devices such as meters, especially located in
hard-to-access and rural areas. Many automatic meter reading applications
require data transmission only at pre-scheduled intervals. This will allow
Little LEO satellites to retrieve the data from RTUs, store such data, and
forward the data at specified periods to the earth station to be processed,
validated and delivered to the customer.
Further, the capacity requirements for data collection and transmission
from fixed devices are relatively small compared to the requirements for the
transmission of voice or video. Little LEO satellites require less power to
operate than the larger geostationary satellites, such as direct broadcast
satellites, translating into lower capital costs and smaller radios that can be
integrated in the actual meter. A Little LEO satellite system is also generally
less expensive to place into service than a direct broadcast satellite system.
In addition, by collecting and transmitting data using CDMA/DSSS technology,
this will allow the Company's RTUs to transmit data and operate with relatively
less power, thereby reducing the cost of RTU.
The Company will initially focus its data collection and transmission
services to electric and gas utilities in the U.S., targeting their
high-cost-to-read metering segment. Since meter data has historically been
retrieved by utility personnel, logistical issues such as (i) significant travel
time to a meter site; (ii) rugged terrain; (iii) physical risk; (iv) restricted
sites; (v) environmental issues; and (vi) mis-reads requiring additional site
visits can contribute to higher costs for utilities. The Company's goal is to
lead the low-cost, data messaging service market using Little LEO satellites to
enable businesses to economically gather data from fixed devices located in
remote and hard-to-access locations.
Historically, the Company began by purchasing interests in direct
broadcast satellite licensees. The Company had an interest in Direct Broadcast
Satellite Corporation which was subsequently acquired by EchoStar. In addition,
the Company had an equitable interest in Continental Satellite Corporation.
During 1997, the Company sold its last indirect interest in direct broadcast
satellites licensees and settled litigation involving its equitable interest in
a direct broadcast satellite licensee. The proceeds from the sale of, and
settlement of litigation involving, indirect interests in direct broadcast
satellites licenses, in addition to debt and equity financing, have assisted the
Company in financing its operations.
In August 1998, the Company and Matra Marconi Space France s.a.("MMS")
entered into a non-binding memorandum of understanding. Under the memorandum of
understanding, the Company will
<PAGE>20
engage and appoint MMS as prime contractor for the design, construction,
delivery and launch support services of six Little LEO satellites. Further, the
Company and MMS will consider entering into a manufacturing agreement to
manufacture two million RTUs. The entering into various agreements with MMS will
be subject to a number of conditions including satisfactory due diligence,
approval of both the Company's and MMS's board of directors, compliance with all
regulatory requirements and entering into a definitive agreement.
In August 1998, the Company and SAIT Radio Holland SA ("SAIT") entered
into a non-binding letter of intent to explore an arrangement dealing with E-SAT
or Newstar Little LEO satellite system. Under the letter of intent, SAIT shall
be engaged by the Company as the main contractor for the engineering,
development and provision of hardware and software for E-SAT's earth station.
Further, the Company and SAIT intend to enter into an agreement to market rights
of E-SAT or Newstar and for SAIT to obtain an ownership interest in the Company.
The entering into definitive agreements with SAIT is subject to a number of
conditions including each party conducting due diligence and approval by the
Company's and SAIT's board of directors.
Ownership in E-SAT and Little LEO Satellite Industry Background
The technology of using Little LEO satellites to gather data has been in
existence for over 40 years and has been used extensively in weather satellite
applications worldwide. The commercial use of Little LEO satellites is in its
development stage. Competition will be likely driven by the ability of each
license holder to build and launch their Little 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. In November 1994, E-SAT filed an application with the FCC
for a license to develop a commercial Little LEO satellite system for data
collection and transmission. E-SAT was one of five applicants requesting
approval for essentially the same frequency band but proposing a different use.
The five applicants mutually agreed upon a spectrum sharing plan (the "Joint
Proposal") which requires the applicants to share an uplink and downlink
frequency band with other satellite systems. 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. On March 31, 1998, the
FCC approved E-SAT's application for a Little LEO satellite license.
E-SAT is owned 20% by the Company and 80% by EchoStar. The Company has
had conversations with EchoStar to restructure E-SAT in an attempt by the
Company to acquire a majority interest in E-SAT. One structure under
consideration is that the Company's wholly-owned subsidiary Newstar will
purchase a portion or all of E-SAT's transmission capacity. Newstar would then
resell the transmission capacity through joint ventures with other partners. In
conjunction with the proposed structure, the Company would acquire a majority
interest in E-SAT. No assurance can be given that the Company will be able to
purchase a majority interest in E-SAT. Further, any proposed acquisition of a
majority interest in E-SAT will be subject to FCC approval. In the event that
the Company cannot acquire a majority interest in E-SAT, the Company will
continue to have a minority interest in E-SAT. The Company's percentage of
ownership in E-SAT may be subject to dilution if the Company cannot meet future
funding requirements. No assurance can be given that the Company will have
sufficient resources to meet the financial requirements of E-SAT to maintain its
current equity interest in E-SAT.
<PAGE>21
Further, in the event that the Company is unable to acquire a majority
interest in E-SAT and E-SAT is not built or incurs substantial delays in its
construction, this will have an adverse effect on the Company.
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 be approximately $115 million. For the six months ended June 30,
1998 and for the year ended December 31, 1997, the Company funded E-SAT expenses
of $467,034 and $385,671, respectively, which represents greater than 20% of
E-SAT's total expenses for the year and includes advances made on behalf of
EchoStar.
Prior to E-SAT receiving its license to develop, and construct and
operate the E-SAT System, the Company was developing hardware and software for
data collection and transmission, conducting proof-of-concept demonstrations
with utility companies to determine the effectiveness and accuracy of Little LEO
satellites to collect and transmit data from fixed devices, and evaluating
rocket and satellite vendors in anticipation of the E-SAT license.
The E-SAT System
The E-SAT System will consist of six Little LEO satellites, a telemetry,
tracking and control center, which may either be dedicated or leased, a network
control center ("earth station") and numerous RTUs. The E-SAT System has been
designed to provide low cost messaging services worldwide. The E-SAT System has
been designed to meet the projected data messaging requirements for industrial
customers. The E-SAT System is optimized for the projected service markets and
will enable the provision of low-cost and reliable service for those markets.
The primary service of collection and transmission of data from fixed
devices such as meters located in remote locations is accomplished by periodic
readings of utility company meters over a wide geographical region by E-SAT's
satellites. An RTU integrated with the utility meter electronically transmits
the relevant data in digital form to E-SAT's satellite which stores the
collected data to be forwarded to the earth station. A network control center
provides overall operational control of the space segment, and is interfaced
with the earth station for the satellites to facilitate, among other things, the
use of the orbital data from network operations. Based on the current design,
E-SAT estimates that its satellites will operate for a period of five years.
Although metropolitan and urban or suburban areas can benefit from the E-SAT
System, the E-SAT System will be especially advantageous in providing meter
reading functions in remote, rural and low population density areas, eliminating
the costly need of routine visits by utility personnel.
It is anticipated that each meter will be integrated with a RTU. The RTU
will then transmit certain information in a scheduled format sequence. Under
E-SAT's store and forward mode, the uplink data from the RTU is stored in a
memory device aboard the satellite for subsequent downlink transmission when the
satellite passes over the earth station. The store and forward method is
suitable when the earth station is located in high latitude which will minimize
interference in the radio frequency environment. The E-SAT System has been
designed for the collection and transmission of data from fixed devices,
therefore the store and forward method of gathering and transmitting data is
efficient and cost effective. Because the E-SAT will be transmitting non-voice
data in short information packets and will not be transmitting data that
requires real-time or near real-time communications, E-SAT's infrastructure is
simpler and less costly than those Little LEO systems offering real-time data
information services. The E-SAT System consists of up to six Little LEO
satellites and one primary earth station to be built in Norway. The E-SAT System
will validate, format, and deliver the data electronically to the customer.
The E-SAT System will also provide for emergency back up systems.
<PAGE>22
CDMA/DSSS Technology
The E-SAT System will utilize CDMA/DSSS transmission techniques to
enable the E-SAT System to make best use of the limited spectrum available as
well as to achieve high functionality in the noisy environment created by the
numerous radio systems in the frequency banks of operation. The growth of
electrical and electronic equipment has induced an explosion of electromagnetic
interference into the environment. In every industrial environment, the user
requires a fast and safe transfer of data. This constraint is very hard to
achieve with the usual radio solution because saturation of the available
frequency bands. The Company believes that CDMA/DSSS transmission technology
answers this constraint. While narrowband solutions opt for a single carrier
frequency, CDMA/DSSS spread the data over a wide band in order to minimize the
impact of noise and disturbance on the data to being transmitted. Further, under
most conventional transmissions, energy concentration is maximized for a given
message. As a result, greater power is required to complete transmission of
data. Under the CDMA/DSSS transmission technique to be employed by the Company,
the data signal is spread over the entire frequency band. This technique will
minimize the impact of noise and disturbance on the data being transmitted.
CDMA/DSSS converts data bits into a stream of code bits that look like noise.
The receiver on the Little LEO satellite combines the incoming code stream with
a replica of the RTU code and thus regenerates the original data stream.
Background noise in the radio frequency environment is not recognized as data by
the receiver, and is rejected.
The entire population of the RTUs is assumed to be suitably divided in a
number of groups, different groups accessing the satellite at a predetermined
schedule, in the CDMA/DSSS mode for the duration allocated to the group. This
schedule shall be controlled from the network's operation center so that each
satellite can receive new instructions as it passes over the earth station.
For the service downlink, the CDMA/DSSS signal is transmitted by the
Little LEO satellite in a broadcast mode and is received by one or more of the
RTUs. The service downlink CDMA/DSSS signal shall also update precise timing
data to each RTU to allow each meter to properly perform functions.
The total time of visibility of the satellite over the coverage region
is appropriately divided among the various groups, and the number of the time
slots allocated for each group is determined by the number of users in each
group. The CDMA/DSSS parameters are designed to provide effective and accurate
retrieval of the meter data reading even in the presence of potentially large
interference due to external sources such as thermal noise, as well as
interference presented by other users in the frequency bands. E-SAT is the only
commercial Little LEO operator to implement CDMA/DSSS in its communications
protocol.
Remote Terminal Units (RTUs). The CDMA/DSSS pattern of reading and data
retrieval is repeated periodically using the available passes of E-SAT's
satellites. E-SAT's various group of RTUs are activated to transmit in their
designated time slots during the visible periods of the passages of the
satellites over the service coverage area. The activation of the uplink data
transmission shall commence when the RTU integrated with the fixed device shall
be prompted by the satellite and given a precise time in which it shall be
required to transmit (uplink) the data to the satellite.
The utility meter providing the data reading, integrated with RTU, is
designed to generate the data in the prescribed electronic format. Through the
VHF antenna and transmitter, the data is transmitted from the RTU to the
satellite on a scheduled basis as called by the satellite as it passes overhead.
The Company has had preliminary discussion with SAIT to manufacture the RTUs.
However, no assurance can be given that the Company and SAIT will enter into an
agreement to manufacture the RTUs. In addition, the RTUs must be manufactured at
a price that is attractive to have utility companies purchase the Company's
messaging services.
<PAGE>23
Earth Station. The earth station shall perform both telemetry, tracking
and control and feeder link functions. The data collected at the earth station
can be distributed through many standard means including over microwave links,
land lines, or the Internet to the data processing center. Because data will be
stored on the satellite to be forwarded to the earth station when the Little LEO
satellite passes over, E-SAT will require only one primary earth station with
one emergency backup. Tentatively, it is anticipated that the earth station will
be located in Norway since each E-SAT satellite will pass over that area
fourteen times during a twenty-four hour period. Because E-SAT system can
operate its system with one primary earth station, this will reduce the cost of
its services. The Company, of course, will have contingency plans in the event
of a shut down at the earth station.
Satellite Constellation
The initial satellite system will consist of three satellites in
circular, near polar single orbit at a 99 degree inclination angle. The three
satellites will be launched on a single Eurockot launch vehicle. E-SAT has
entered into a launch reservation agreement with Eurockot. Under the terms of
the launch reservation agreement, Eurockot reserved for E-SAT a launch
opportunity on a launch vehicle at the Plesetzk, Russia launch site for two
dedicated, triple satellite launches. No assurance can be given that E-SAT shall
enter into a launch service agreement with Eurockot, or if entered into, that it
will be for the requested launch period.
E-SAT satellite orbit altitude will be approximately 550 miles in a near
polar orbit at a 99 degree inclination angle. At this altitude, there will be
fourteen revolutions per day. After the initial three satellites are deployed
and become operational, and the market is established, an additional three
satellites will be deployed in a second near plane within FCC guidelines. The
Little LEO satellites will be almost constantly illuminated, thereby
significantly reducing the need for batteries. Batteries will be required only
for power load leveling, occasional brief eclipse periods and contingencies.
It is anticipated that the satellites will be designed by MMS. The
Company and MMS have recently entered into a non-binding memorandum of
understanding regarding the engagement of MMS as the prime contractor for the
design, construction, delivery at launch site and launch support service of six
Little LEO satellites. The proposed contract will also include earth station
equipment and launch services via Eurokot for two launches with launch
insurance, development of operation software and data processing for ground
support. Further, the proposed contract calls for manufacturing contract for two
million RTUs. In connection with entering into these agreements, MMS intends to
make an investment in the Company. The entering into various contracts between
the Company and MMS is subject to numerous conditions including, but not limited
to, due diligence, board approval and entering into definitive agreements.
Potential Markets
The Company goal is to provide low cost data messaging satellite
services worldwide. The Company believes that its two-way, low cost data
messaging services will reduce costs for customers by providing a more efficient
retrieval of data because the E-SAT System (i) has a lower infrastructure cost
and (ii) transmits data using CDMA/DSSS technology which provides greater
capacity than channelized systems and allows transmissions within the background
noise in the radio frequency environment. The Company should be able to offer
its data messaging services at cost lower than manual retrieval systems or other
Little LEO satellite operators who may have much greater capital cost
structures.
The Company's customer base will be comprised of investor owned
utilities, rural electric membership co-operatives, municipalities and other
publicly owned utilities, electric holding companies, meter data management
agents, meter manufacturers, local public works agencies and others which have
<PAGE>24
dispersed operations and may require aggregate billing services. It is the rural
and hard-to-access meter segment that the Company will initially market its
services. The Company will develop communication products to integrate into
metering equipment and will provide an associated automatic reading data service
to include remote data collection, validation, formatting and electronic
delivery to the customer.
Utility Meters. The utilities industry is faced with increasing
competition, strict regulation of power generation facilities, and an increasing
cost of operations. The Company believes that the E-SAT System will provide a
cost effective two-way communication path to hard-to-access gas and electric
meters. There are over 150 million electric meters in the U.S. and the 103rd
edition of the Directory of Electric Power Producers lists 198 investor-owned
electric utilities, 1,818 electric municipalities, 922 rural co-operatives and
numerous holding, governmental and public works, agencies. Three principal
objectives used by utilities when evaluating automatic meter reading services
include proficiency to reduce meter reading expense, ability to address
hard-to-read locations, and contribution to improving customer service. The
Company believes that its data messaging services will address these needs.
Natural Gas Wells. The natural gas industry is regulated by the United
State Department of Transportation. Many utilities have had to divest its
pipeline and wellhead assets. There are 111 investor owned natural gas companies
operating throughout the U.S. Penwill Publications It is estimated that more
than 285,000 well heads exit throughout the U.S. There is over 300,000 miles of
interstate pipeline connected to a 1.2 million-mile natural gas gathering and
distribution network serving over 160 million gas service meters throughout the
United States. Collecting data from these fixed locations is another service
E-SAT can provide.
Environmental and Agriculture. Environmental monitoring is becoming
increasingly important as foreign, U.S. federal, state, and local governments
are closely monitoring air, water, and waste disposal sites. Industry, faced
with an increased public awareness of pollution problems, must monitor the
quality of its waste disposal efforts through readings of air quality and water
quality, temperature, and flow from multiple points. In addition, the Company
believes that existing irrigation systems for agricultural and land management
applications will benefit significantly from E-SAT monitoring and remote control
services.
Vending Machines. The E-SAT System is also designed to be able to
provide remote communications to stand-alone equipment, such as vending
machines. This remote communications capability is expected to increase the
efficiency of the personnel servicing the sites, and has the potential to
increase sales for those companies. As of 1995, in the U.S. there were
approximately 3.4 million vending machines owned and operated by independent
vending machine companies (Vending Time Census of Industry Issue 1995).
Competition
Competition in the communications industry is characterized by rapid
change with new technologies and entrants vying for a currently increasing
customer base. Industry participants are forming alliances and integrating
networks to provide a broad range of services to the marketplace. The
communications capabilities provided by the Little LEO industry will create a
low-cost source of global mobile data services. In addition to E-SAT, there are
three other commercial Little LEO satellite operators (Orbcomm, LeoOne, and
Final Analysis). A fourth Little LEO operator is Volunteers In Technical
Assistance ("VITA"), a non-profit organization.
The Company's competitors are all attempting to serve multiple markets
such as cargo and vehicle mobile asset tracking, monitoring and remote control,
emergency services and transaction processing. By choosing to address markets
requiring near real time inter-connectivity, E-SAT's competitors (excluding
<PAGE>25
VITA, a non-profit organization) will launch a constellation of between 26 to 48
Little LEO satellites and will have many earth stations located throughout the
U.S. and the world. These Little LEO systems are much more costly and complex as
compared to the E-SAT System. The RTUs designed for other Little LEO operators
are more expensive and require more power to operate than E-SAT's RTUs. The
Company believes that a lower uplink power requirement for an E-SAT RTU will
give E-SAT a cost competitive advantage when targeting fixed device
applications.
A number of competitors are currently developing proposals to implement
automatic meter reading ("AMR") services at electric and natural gas utilities
throughout the U.S. 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 the Company intends to compete effectively by utilizing
Little LEO satellite technology.
Global Energy Metering Services, Inc.
GEMS was incorporated in December 1994 to provide the service
applications of commercial Little 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 collecting and
transmitting data remotely by Little LEO satellites and conducted a proof of
concept trial for Pacific Gas & Electric Co. ("PG&E") in California. Data from
several natural gas wellheads meters was collected and transmitted by Little LEO
satellites. This trial was completed in April 1995 and led to the development of
a plan for GEMS to provide automatic meter reading solutions for hard-to-access
meters owned by public utilities as well as collection and transmission of data
from other fixed devices. This plan is intended to provide suppliers and
consumers of the utility and petroleum industries worldwide with remote data
collection and transmission capabilities utilizing Little LEO satellite
technology. Subsequently, a series of proof of concept demonstrations conducted
in conjunction with ABB, in which prototype satellite radios (RTUs) and electric
meters were installed at 34 electric utilities in the continental U.S. and two
international utility companies in South America and Canada. Typical trial
demonstrations lasted for a 30 day period, and the demonstrations were completed
in late 1997.
The Company also had an agreement with North American CLS, Inc.
("NACLS"), which provided a limited amount of Little LEO satellite capacity for
trials of the Company's automatic meter reading 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"). In 1996, GEMS received a purchase order for
Little LEO transmitters that could be used on the Argos System as part of its
overall development of a satellite transmitter integrated under the cover of an
electronic utility meter from ABB. The Company's agreement for use of the Argos
System expired on December 31, 1997, and NOAA has established new criteria which
limits future commercial use of the Argos System which, effectively, prohibits
the Company from using the Argos System. The expiration of the NACLS agreement
and the proposed future limits have caused GEMS and ABB to suspend the purchase
order. Although the Company and ABB intend to pursue the use of the Company's
technology for use in ABB's meters, 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.
<PAGE>26
FCC Regulations
All commercial non-voice, non-geostationary mobile-satellite service
"NVNG-MSS" or "Little LEO" such as E-SAT's satellites in the U.S. are subject to
the regulatory authority of the FCC. Little LEO operators must obtain
authorization form the FCC to launch and operate their satellites and to provide
permitted services in assigned spectrum segments.
On March 31, 1998, the FCC approved E-SAT's application for a Little LEO
satellite license. Under the license, E-SAT is authorized to launch and operate
six Little LEO satellites to provide a two-way, low-cost messaging service in
the U.S. in the 148-148.905 MHz for service and feeder uplinks, and the
137.0725-137.9725 MHz frequency band for service and feeder downlinks. For its
uplink, E-SAT is licensed to utilize 500 kHz of contiguous spectrum in the
148-148.855 MHz band that is not shared with the other U.S. licensees, LEO One,
Final Analysis and ORBCOMM. However, some of this spectrum may be required to be
operated co-frequency with the French S-80 system, based on prior coordination
between the U.S. and France. E-SAT is licensed to utilize 148-855-148.905 MHz
for feeder uplinks. E-SAT will operate in the other 355 kHz of the 148-148.905
MHz band on a co-frequency basis with Leo One, Final Analysis and ORBCOMM. In
the downlink direction, E-SAT will operate in the band 137.0725-137.9275 MHz
co-frequency with NOAA satellites, ORBCOMM and Final Analysis. E-SAT is
obligated to coordinate with the other U.S. Little LEO licensees and NOAA,
coordinate internationally and engage in consultations as required by Article 14
of the INTELSAT Agreement and Article 8 of the Inmarsat Convention.
Pursuant to E-SAT's license, unless extended by the FCC for good cause,
E-SAT must commence construction of the first two satellites by March 1999,
complete construction by March 2002 and launch by September 2002. The remaining
four satellites must commence construction by March 2001, complete construction
by March 2004 and launch by March 2004.
International Regulations
The E-SAT System operates in frequencies that are allocated on an
international basis under the authority of the ITU. The U.S., on behalf of
various Little LEO service providers, pursued international allocations of
additional frequencies for the use of Little LEOs. In addition to cooperation
through the FCC, E-SAT will be required to engage in international coordination
with respect to other satellite systems under the auspices of the ITU. Further,
E-SAT must receive operational authority called "landing rights" from each of
the foreign countries in which it proposes to provide services. It will be the
responsibility of the international distributor or licensee of each country to
obtain such authority. In the event E-SAT is unable to obtain authority to offer
its service in a particular country or region, this may have a material adverse
affect on the Company's business plans and operations.
Employees
As of August 31, 1998, the Company has nine full-time employees. The
Company considers its relationship with its employees to be good.
Property
The Company and GEMS have leased 3,287 square feet at a monthly rate of
$8,574, for their principal offices at 100 Shoreline Highway, Suite 190A, Mill
Valley, California, on a three year lease which expires on March 1, 2000.
<PAGE>27
MANAGEMENT
Directors, Executive Officers and Key Employees 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:
<TABLE>
<CAPTION>
Name Position Age Period
<S> <C> <C> <C>
Fred W. Thompson Chairman of the Board, President, 55 December 1992 - present
Chief Executive Officer, and
Chief Financial Officer November 1993 - present
Michael T. Schieber Director 58 December 1992 - present
E. A. James Peretti Director, Chief Operating Officer 55 February 1996 - present
H. Tate Holt Director 46 February 1996 - present
Jerome W. Carlson Director 61 May 1997 - present
Gregory T. Leger Executive Vice President 43 March 1998 - present
Engineering
Fred R. Skillman, Jr. Vice President, Business 37 August 1995 - present
Development
</TABLE>
The Company adopted staggered terms for its Board of Directors at its
1996 Annual Stockholders Meeting. Messrs. Thompson and Peretti will serve until
the 1999 annual meeting of stockholders or until their successors have been
elected and Mr. Carlson will serve until the 2000 annual meeting of stockholders
or until his successor has been elected, and Messrs. Schieber and Holt will
serve until the 2001 annual meeting of stockholders or until their successors
have been elected. The Board of Directors do not have a standard arrangement for
compensation, but have previously, and will continue to receive, stock options
as compensation.
Section 145 of the General Corporation Law of Delaware provides for the
indemnification of officers and directors under certain circumstances against
expenses incurred successfully defending against a claim and authorizes Delaware
corporations to indemnify their officers and directors under certain
circumstances against expenses and liabilities incurred in legal proceedings
involving such persons because of their being or having been an officer or
director. The articles of incorporation and the bylaws of the Company provide
for indemnification of its officers and directors to the full extent authorized
by law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or
<PAGE>28
otherwise, the Company has been advised that in the opinion of the Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
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.
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, has served as Chief Operating Officer
since August 1998, and was appointed in February 1996, as 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 AremisSoft Corporation. Mr.
Holt holds an AB from Indiana University.
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
<PAGE>29
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.
Gregory T. Leger, Executive Vice President Engineering, joined the
Company in March 1998. Mr. Leger is responsible for the design and construction
of the E-SAT System. Mr. Leger has over nine years' experience in engineering
systems, management, business planning, marketing and proposal preparation with
strong analytical and negotiating skills. Most recently and for the past five
years, Mr. Leger was employed by Seimac Limited, as its Product Development
Manager, where he combined business development activities with technical and
project leadership to provide customers with solutions encompassing electronics
data telemetry, software and packaging. Mr. Leger received his BS degree in
Physics at Dalhousie University, Canada, his MS degree in Oceanography at
Dalhousie University, and a degree in Master Space Systems Engineering at
Technical University of Delft, Netherlands.
Fred R. Skillman, Jr., Vice President Business Operations, joined the
Company in August 1995. Mr. Skillman also manages the marketing and the sales
activities for the Company. Mr. Skillman has been working in the utility
industry for 13 years, with extensive utility operating experience, contract
administration, product development, project management and direct line
supervision. Prior to joining the Company, Mr. Skillman worked for Pacific Gas &
Electric ("PG&E") for eleven years. During his tenure at PG&E, Mr. Skillman was
an electrical engineer for the initial AMR system installed for PG&E in Marin
County, California. Mr. Skillman holds a BS degree in Electrical Engineering
from California Polytechnical State University, and an MBA degree from the
University of San Francisco.
Committees of the Board
The Board has an audit committee consisting of Messrs. Schieber and
Peretti, a nominating committee consisting of Messrs. Holt, Carlson and
Thompson, and a compensation committee consisting of Messrs. Holt, Schieber and
Carlson.
The primary functions of the audit committee is to review the scope and
results of audits by the Company's independent auditors, the Company's internal
accounting controls, non-audit services performed by the independent accountants
and the cost of accounting services.
The nominating committee assists in the process of officer and director
nominations.
The compensation committee administers the Company's various stock
option plans and approves compensation, remuneration and incentive arrangements
for officers of the Company.
Executive Compensation
The following table provides certain summary information concerning
compensation of the Company's Chief Executive Officer and each employee of the
Company or its subsidiaries who earns in excess of $100,000 for the year ended
December 31, 1997.
<PAGE>30
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Long-Term
Compensation
---------------------------------------------------- ----------------------
Securities
Name and Other Annual Underlying
Principal Position Year Salary Bonus Compensation(1) Options
- -------------------------------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
Fred W. Thompson 1997 $ 180,000(2) $ 6,705 185,000
Chief Executive Officer 1996 $ 180,000(3) $ 4,245 319,375
1995(4) $ 30,000 $ 2,577 4,500
E.A. James Peretti 1997 $ 155,000 $ 3,732 150,000
Chief Operating Officer 1996 $ 155,000 $ 971 375,000
Randall Smith 1997 $ 125,000 $ 2,385 75,000
Former Executive VP 1996 $ 125,000 $ 2,216 131,875(4)
GEMS
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Consists entirely of payment of insurance premiums.
(2) $80,000 paid in cash, $100,000 deferred pursuant to his employment
agreement. (3) $72,000 paid in cash, $108,000 deferred pursuant to his
employment agreement. (4) 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. Mr. Peretti's agreement includes an annual salary of $155,000 and
non-qualified stock options to purchase 375,000 shares of Common Stock.
Stock Option Plans
The Company has established the 1998 Stock Option Plan (the "1998 Plan")
which was approved by the shareholders in May 1998 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 1998 Plan provides for
the grant of up to 500,000 non-statutory and incentive stock options. Under the
1998 Plan, officers, directors, consultants and employees of the Company will be
eligible for participation. The exercise price of any incentive stock option
granted under the 1998 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 optionee may be granted incentive stock options in any calendar
year may not exceed $100,000. Shares subject to options under the 1998 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 1998 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 1998 Plan may be amended, suspended, or terminated by
the Board, but no such action may impair rights under a previously granted
option. Each
<PAGE>31
option is exercisable only so long as the optionee remains employed by the
Company. No option is transferable by the optionee other than by will or the
laws of descent and distribution.
The Company has established a 1996 Stock Option Plan (the "1996 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 1996 Plan provides for the grant of up to 1,650,000 non-statutory and
incentive stock options of which 1,620,528 are outstanding as of August 31,
1998. Under the 1996 Plan, officers, directors, consultants and employees of the
Company are eligible for participation. The exercise price of any incentive
stock option granted under the 1996 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 optionee may be granted incentive stock options in any
calendar year may not exceed $100,000. Shares subject to options under the 1996
Plan may be purchased for cash. Unless otherwise provided by the Board, an
option granted under the 1996 Plan is exercisable for a term of ten years (or
for a shorter period up to ten years). The 1996 Plan is administered by the
Board of Directors and its Compensation Committee, which has discretion to
determine optionees, the number of shares to be covered by each option, the
exercise schedule, and other terms of the options. The 1996 Plan may be amended,
suspended, or terminated by the Board, but no such action may impair rights
under a previously granted option. Each option is exercisable only so long as
the optionee remains employed by the Company. No option is transferable by the
optionee other than by will or the laws of descent and distribution.
The Company also has developed three stock option plans to award certain
employees, directors, and consultants with the opportunity to purchase the
Company's Common Stock. Under the Company's 1993 Incentive Stock Option Plan
("1993 ISO Plan") up to 262,500 (shares of Common Stock may be purchased
pursuant options by eligible employees). Under the Non-Qualified Stock Option
Plan for Non-Employee Directors ("Director's Plan") option to purchase up to
75,000 shares of Common Stock were granted to non-employee directors. Under the
Non-Qualified Stock Option Plan for Consultants ("Consultant's Plan") options to
purchase up to 112,500 shares of Common Stock were granted to certain
consultants. As of August 31, 1998, options to acquire 69,644, 42,500, and
14,625 shares of Common Stock were outstanding under the 1993 ISO Plan,
Director's Plan and Consultant's Plan, respectively.
<TABLE>
<CAPTION>
OPTION GRANTS IN THE YEAR ENDED DECEMBER 31, 1997
INDIVIDUAL GRANTS
Number of % of Total Options
Securities Granted to
Underlying Options Employees in Fiscal Exercise or Base
Name Granted 1997 Year Price ($/SH) Expiration Date
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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% $0.531 12/31/07
Former Exec. VP
GEMS
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>32
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION VALUE
Number of Securities Underlying Value(1) of Unexercised In-the-
Unexercised Options/SARs at FY Money Options/SARs at FY End
End (#) ($)
Exercisable/Unexercisable Exercisable/Unexercisable
Name Options at December 31, 1997 Options at December 31, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) The value of unexercised in-the-money stock options is based on a per share
price of $.531 as quoted on the OTC Bulletin Board on December 31, 1997.
The following table sets forth the repricing of options held by current
directors and executive officers of the Company during the last ten complete
fiscal years.
<TABLE>
<CAPTION>
TEN YEAR OPTION REPRICINGS
Length of
Number of Exercise Original
Securities Market Price Price at Optional Term
Underlying of Stock at Time of New Remaining at
Effective Date Options Time of Repricing Exercise Date of
Name of Reprice Repriced (#) Repricing ($) ($) Price ($) Repricing
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fred Thompson December 31, 1997 4,375 $ .53 $1.58 $ .58 1 year
President December 31, 1997 3,750 .53 1.58 .58 1 year
December 31, 1997 4,500 .53 1.58 .58 2 years
December 31, 1997 6,875 .53 1.58 .58 3 years
December 31, 1997 312,500 .53 1.44 .53 8 years
February 13, 1997 4,375 1.44 3.20 1.58 2 years
February 13, 1997 3,750 1.44 3.20 1.58 2 years
February 13, 1997 4,500 1.44 2.40 1.58 3 years
February 13, 1997 6,875 1.44 6.00 1.58 4 years
February 13, 1997 312,500 1.44 5.20 1.44 9 years
- -----------------------------------------------------------------------------------------------------------------------------
Michael Schieber February 23, 1998 37,500 .60 1.00 .60 9 years
Director February 13, 1997 6,250 1.44 2.80 1.44 7 years
February 13, 1997 13,750 1.44 2.00 1.44 8 years
February 13, 1997 6,250 1.44 5.60 1.44 8 years
February 13, 1997 37,500 1.44 4.75 1.44 9 years
February 13, 1997 12,534 1.44 5.50 1.44 9 years
- -----------------------------------------------------------------------------------------------------------------------------
James Peretti December 31, 1997 375,000 .53 1.44 .53 8 years
Chief Operating February 13, 1997 375,000 1.44 5.20 1.44 9 years
Officer
- -----------------------------------------------------------------------------------------------------------------------------
<PAGE>33
- -----------------------------------------------------------------------------------------------------------------------------
Tate Holt February 23, 1998 37,500 .60 1.00 .60 9 years
Director February 13, 1997 7,808 1.44 5.50 1.44 9 years
February 13, 1997 75,000 1.44 4.75 1.44 9 years
- -----------------------------------------------------------------------------------------------------------------------------
Jerome Carlson February 23, 1998 75,000 .60 1.00 .60 9 years
Director
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Report on Repricing of Stock Options
During calendar 1997 there was a substantial decrease in the market
price of the Company's Common Stock due, in part, to regulatory delays in the
approval of E-SAT's Little 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 exercise prices ranging from $1.44 to $1.58 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 exercise prices ranging
from $1.44 to $1.58, were reissued with exercise prices ranging from $0.53 to
$0.58 per share, which approximated the fair market value on the date of
repricing. In February 1998, options to acquire 150,000 shares of Common Stock
to non-employee directors were repriced from their original exercise price of
$1.00 per share to $.60 per share which approximated the fair market value on
the date of repricing.
Stock options are intended to provide incentives to the Company's
directors, officers and employees. The Board of Directors believes that such
equity incentives are a significant factor in the Company's ability to attract,
retain and motivate directors, officers and employees who are critical to the
Company's long-term success. In repricing the stock options, the Board of
Directors considered the fact that directors are not compensated for their
services other than through stock options. Further, many of the Company's
officers and employees are not being compensated in accordance with industry
standards, and have had to either defer their salary or were delayed in
receiving their salary at times during the current and prior calendar year due
to the poor financial condition of the Company. The Board of Directors believes
that the repricing of the options is a form of incentive to the directors,
officers, and employees of the Company and believes that it is in the best
interests of the Company and its shareholders.
Board of Directors
Fred W. Thompson H. Tate Holt
Michael T. Schieber Jerome W. Carlson
E. A. James Peretti
<PAGE>34
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
of its directors, officers, employees and agents 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 directors, officers, employees and
agents 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.
<PAGE>35
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of September 11,
1998, with respect to the beneficial ownership of the Company's Common Stock for
(i) each director, (ii) all directors and officers of the Company as a group,
and (iii) each person known to the Company to own beneficially five percent (5%)
or more of the outstanding shares of the Company's Common Stock.
<TABLE>
<CAPTION>
Name and Address of Beneficially and
Beneficial Owner Record Owned(1) Percent of Class
<S> <C> <C>
Fred W. Thompson 848,753(2) 9.9%
100 Shoreline Highway, Suite 190A
Mill Valley, CA 94941
Michael T. Schieber 328,989(3) 3.8%
100 Shoreline Highway, Suite 190A
Mill Valley, CA 94941
E.A. James Peretti 300,000(4) 3.5%
100 Shoreline Highway, Suite 190A
Mill Valley, CA 94941
H. Tate Holt 137,629(5) 1.6%
100 Shoreline Highway, Suite 190A
Mill Valley, CA 94941
Jerome W. Carlson 87,500(6) 1.0%
100 Shoreline Highway, Suite 190A
Mill Valley, CA 94941
Officers and Directors as a Group (5 persons) 1,702,871 19.6%
MJH Partners, L.P. 800,000(7) 8.7%
21 Tamal Vista Blvd., #204
Corte Madera, CA 94925
Friedman Family Partnership 500,000(7) 5.5%
21 Tamal Vista Blvd., #204
Corte Madera, CA 94925
Eddie Barretto 500,000(7) 5.5%
21 Tamal Vista Blvd., #204
Corte Madera, CA 94925
Astoria Capital Partners, L.P. 2,000,000(7) 20.4%
6600 Southwest 92nd Street, Suite 370
Portland, OR 97223
Microcap Partners, L.P. 500,000(7) 5.5%
6600 Southwest 92nd Street, Suite 370
Portland, OR 97223
</TABLE>
<PAGE>36
(1) The persons named in the table have sole voting and investment power
with respect to all of the Common Stock shown as beneficially owned by
them, subject to community property laws where applicable and the
information contained in the footnotes to the table.
(2) Includes (i) 599,558 shares held in Thompson 1996 Revocable Trust and
(ii) options to purchase 234,375 shares at $0.531 per share expiring
January 1, 2006, and 4,375, 3,750, 3,750, 3,945 and 2,750 shares of
Common Stock exercisable at $0.584 per share and expiring February 8,
1999, February 8, 1999, February 15, 2000, and December 31, 2000,
respectively.
(3) Includes (i) 205,625 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 13,750, 12,534 and 37,500 shares of Common
Stock all exercisable at $1.4375 per share which expire on February 15,
2005, February 15, 2006 and April 30, 2006, respectively, and options to
purchase 37,500 shares of Common Stock exercisable at $0.60 per share
which expire May 13, 2007, and options to purchase 12,500 shares of
Common Stock at $2.1875 which expire on May 12, 2008.
(4) Options to purchase 300,000 shares of Common Stock exercisable at $0.531
per share, which expire January 1, 2006.
(5) Includes (i) 4,821 shares held solely by Mr. Holt, and (ii) options to
purchase 7,808 and 75,000 shares of Common Stock all exercisable at
$1.4375 per share which expire December 31, 2006 and April 30, 2006,
respectively, and options to purchase 37,500 shares of Common Stock
exercisable at $0.60 per share which expire May 13, 2007, and options to
purchase 12,500 shares of Common Stock at $2.1875 per share which expire
May 12, 2008.
(6) Includes options to purchase 75,000 shares of Common Stock exercisable
at $0.60 per share which expire May 13, 2007, and options to purchase
12,500 shares of Common Stock at $2.1875 per share which expire May 12,
2008.
(7) Of the shares of Common Stock beneficially owned, one-half represent
shares of Common Stock and the remaining one-half represent shares of
Common Stock that may be immediately acquired pursuant to Warrants.
PLAN OF DISTRIBUTION
The Selling Stockholders may, from time to time, sell all or a portion
of the shares of Common Stock on any market upon which the Common Stock may be
quoted, in privately negotiated transactions or otherwise, at fixed prices that
may be changed, at market prices prevailing at the time of sale, at prices
related to such market prices or at negotiated prices. The shares of Common
Stock may be sold by the Selling Stockholders by one or more of the following
methods, without limitation, (a) block trades in which the broker or dealer so
engaged will attempt to sell the shares of Common Stock as agent but may
position and resell a portion of the block as principal to facilitate the
transaction, (b) purchases by broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus, (c) an exchange
distribution in accordance with the rules of such exchange, (d) ordinary
brokerage transactions and transactions in which the broker solicits purchasers,
(e) privately negotiate transactions, (f) market sales (both long and short to
the extent permitted under the federal securities laws), and (g) a combination
of any such methods of sale. In effecting sales, brokers and dealers engaged by
the Selling Stockholders may arrange for other brokers or dealers to
participate. Brokers or dealers may receive commissions or discounts from the
Selling Stockholders (or, if any such broker-dealer acts as agent for the
purchaser of such shares, from such purchaser) in amounts to be negotiated which
are not expected to exceed those customary in the types of transactions
involved. Broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares of Common Stock at a stipulated price per share,
and, to the extent such broker-dealer is unable to do so acting as agent for the
Selling Stockholders, to purchase as principal any unsold shares of Common Stock
at the price required to fulfill the broker-dealer commitment to the Selling
Stockholders. Broker-dealers who acquire shares of Common Stock as principal may
thereafter resell such shares of Common Stock from time to time in transactions
(which may involve block transactions and sales to and through other
broker-dealers, including transactions of the nature described above) in the
over-the-counter market or otherwise at prices and on terms then prevailing at
the time of sale, at prices then related to the then-current market price or in
negotiated transactions and, in connection with such resales, may pay to or
receive from the purchasers of such shares of Common Stock
<PAGE>37
commissions as described above. The Selling Stockholders may also sell the
shares of Common Stock in accordance with Rule 144 under the Securities Act,
rather than pursuant to this Prospectus.
The Selling Stockholders and any broker-dealers or agents that
participate with the Selling Stockholders in sales of the shares of Common Stock
may be deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales. In such event, any commissions received by such
broker-dealers or agents and any profit on the resale of the shares of Common
Stock purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
From time to time, the Selling Stockholders may pledge their shares of
Common Stock pursuant to the margin provisions of its customer agreements with
its brokers. Upon default by the Selling Stockholders, the broker may offer and
sell the pledged shares of Common Stock from time to time. Upon sales of the
shares of Common Stock, the Selling Stockholders intend to comply with the
Prospectus delivery requirements, under the Securities Act, by delivering a
Prospectus to each purchaser in the transaction. The Company intends to file any
amendments or other necessary documents in compliance with the Securities Act
which may be required in the event a Selling Stockholder defaults under any
customer agreement with brokers.
In addition, the Company is registering Warrants to purchase up to
1,250,000 shares of Common Stock for resale by the Selling Warrantholders. The
Selling Warrantholders may sell all, some or none of its Warrants under the same
manner and methods as the Common Stock by the Selling Stockholders as discussed
above.
The Company is required to pay all fees and expenses incident to the
registration of the shares of Common Stock and Warrants, including fees and
disbursements of counsel to the Selling Stockholders and the Selling
Stockholders. The Company has agreed to indemnify the Selling Stockholders and
the Selling Warrantholders, against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
SELLING STOCKHOLDERS AND WARRANTHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of shares of Common Stock by the Selling Stockholders as of
September 11, 1998, and the number of shares of Common Stock covered by this
Prospectus.
<TABLE>
<CAPTION>
Number of Shares of Number of Common
Common Shares Number of Shares Beneficially
Beneficially Common Shares Owned Following
Name of Shareholder Owned Prior to the Offering Offered Hereby the Offering
- ------------------- --------------------------- -------------- ------------
# of Shares % of Class # of Shares # of Shares % of Class
<S> <C> <C> <C> <C> <C>
Paul Bakker 200,000(1) 1.1 200,000 -0- -0-
William R. Geery 80,000(1) * 80,000 -0- -0-
Ted Landkammer 12,000(1) * 12,000 -0- -0-
Lloyd & Dee Chelli 12,000(1) * 12,000 -0- -0-
David Sutherland 110,000(1) 1.2 110,000 -0- -0-
<PAGE>38
MJH Partners 800,000(1) 8.7 800,000 -0- -0-
Eddie Barretto 500,000(1) 5.5 500,000 -0- -0-
Friedman Family Partnership 500,000(1) 5.5 500,000 -0- -0-
Blaine Miller 20,000(1) * 20,000 -0- -0-
Viviana Partners L.P. 400,000(1) 4.4 400,000 -0- -0-
Mallory Hill 140,000(1) 1.6 140,000 -0- -0-
H & N Partners 400,000(2) 4.3 400,000 -0- -0-
Coach House Group 100,000(2) 1.1 100,000 -0- -0-
Securities Trading Services, Inc. 400,000(2) 4.3 400,000 -0- -0-
Bartel Eng Linn & Schroder 300,000(2) 3.3 300,000 -0- -0-
The Genesis Group 43,000(3) * 43,000 -0- -0-
William Arthur & Joyce Appling 20,000(1) * 20,000 -0- -0-
Vivian L. Schneider 25,000(1) * 25,000 -0- -0-
Caryl Hogan 10,000(1) * 10,000 -0- -0-
Paul Schoos 50,000(1) * 50,000 -0- -0-
Jerome Rossel 20,000(1) * 20,000 -0- -0-
Michael J. & Barbara Stoiber 55,000(1) * 55,000 -0- -0-
Astoria Capital Partners L.P. 2,000,000(1) 11.3 2,000,000 -0- -0-
Microcap Partners L.P. 500,000(1) 5.5 500,000 -0- -0-
Performance Programming 200,000(1) 2.2 200,000 -0- -0-
Cardinal Capital L.P. 250,000(4) 2.7 250,000 -0- -0-
Zimmerman Revocable Trust 50,000(1) * 50,000 -0- -0-
Yelina Investments 150,000(2) 1.7 150,000 -0- -0-
Barbara Drew 215,000(5) 2.2 215,000 -0- -0-
Paul Dix 11,080(2) * 11,080 -0- -0-
Leslie Taylor Associates 74,971 * 58,392 16,579 *
<PAGE>39
Randall Smith
Former Executive Vice President 10,321 * 10,321 -0- -0-
Karen Haddad 6,881 * 6,881 -0- -0-
Serria Delta Corp. 13,640 * 13,640 -0- -0-
George DiCostanzo 4,701 * 4,701 -0- -0-
W. L. Pritchard 7,500 * 7,500 -0- -0-
Michael Schieber
Director 328,989 3.8 12,500 316,489 3.8
</TABLE>
* Less than 1% of the outstanding Common Stock.
(1) Of the shares of Common Stock beneficially owned, one-half represent
shares of Common Stock owned and one-half represent shares of Common
Stock that may be immediately acquired pursuant to Warrants.
(2) Represents shares of Common Stock that may be immediately acquired
pursuant to Warrants.
(3) Includes 35,000 shares of Common Stock that may be acquired pursuant to
Warrants.
(4) Includes 200,000 shares of Common Stock that may be acquired pursuant to
Warrants.
(5) Includes 200,000 shares of Common Stock that may be acquired pursuant to
a Warrant.
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Warrants held by the Selling
Warrantholders as of September 11, 1998. The Warrants were sold pursuant to a
purchase agreement dated August 27, 1998, which was part of a private placement
of three million Units with each Unit consisting of one share of Common Stock
and a Warrant to purchase one share of Common Stock at $3.00 per share. Pursuant
to a contractual agreement, the Selling Warrantholders are registering Warrants
to purchase up to 1,250,000 shares of Common Stock. The Company is also
registering the 1,250,000 shares of Common Stock underlying the Warrants owned
by the Selling Warrantholders disclosed in the table above. The Selling
Warrantholders may sell some, all or none of their Warrants.
<TABLE>
<CAPTION>
Warrants
Warrants Beneficially Owned Warrants to Beneficially Owned
Name of Warrantholder Prior to Offering be Offered After Offering
Number Percent(1) Number Percent
<S> <C> <C> <C> <C> <C>
Astoria Capital Partners, L.P. 1,000,000 33.3% 1,000,000 0 0
6600 Southwest 92nd Street, Suite 370
Portland, OR 97223
Microcap Partners, L.P. 250,000 8.3% 250,000 0 0
6600 Southwest 92nd Street, Suite 370
Portland, OR 97223
</TABLE>
(1) Based upon three million Warrants outstanding that were sold pursuant to a
private placement.
<PAGE>40
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During past fiscal years 1997 and 1996, the Company has not been a party
to any transaction or proposed transaction involving of the Company any director
or executive officer, five percent beneficial shareholder, or any member of the
immediate family of the foregoing persons, and in which the amount involved
exceeds $60,000, except as follows.
Pursuant to a purchase agreement among the Company, Astoria Capital and
Microcap, the Company is obligated to register with the Commission the
Registrable Securities acquired by Astoria Capital and Microcap in a private
placement. The registration statement must be declared effective by the
Commission by December 4, 1998. In the event the registration statement is not
declared effective by the Commission by December 4, 1998, the Company will be
obligated to refund to Astoria Capital and Microcap, in the aggregate, an amount
equal to $2.5 million times 3% for each 30 days (pro-rata as to a period of less
than 30 days) the registration statement is not declared effective, subject to
certain exceptions, or the effectiveness of such registration statement or
related prospectus is suspended because such prospectus includes an untrue
statement of a material fact or omits to state a material fact required to be
stated.
In addition, upon request by the holders owning a majority of the
Registrable Securities, the Company will file, not more than once, a
registration statement under the Securities Act, registering the Registrable
Securities. Further, if the Company files a registration statement registering
securities other than the Registrable Securities, the holders of the Registrable
Securities will have the right to include their Registrable Securities in such
registration statement.
All expenses of the registration statements including, but not limited
to, legal, accounting, printing and mailing fees will be borne by the Company.
The Company has agreed to indemnify Astoria Capital and Microcap against certain
liabilities under the Securities Act. The Company's registration obligations to
Astoria Capital and Microcap will cease upon disposable of the Registrable
Securities by such holders.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, $.0004 par value, and 5,000,000 shares of Preferred Stock, $.0004
par value. As of September 11, 1998, there were outstanding 8,762,841 shares of
Common Stock held of record by stockholders and no shares of Preferred Stock
outstanding.
Common Stock
Each stockholder is entitled to one vote for each share of Common Stock
held on all matters submitted to a vote of stockholders. Cumulative voting for
the election of directors is not provided for in the Company's certificate of
incorporation, which means that the holders of a majority of the shares of
Common Stock voted can elect all of the directors then standing for election.
Subject to such preferences as may apply to any Preferred Stock outstanding at
the time, the holders of outstanding shares of Common Stock are entitled to
receive dividends out of assets legally available therefor at such times and in
such amounts as the Board of Directors may from time to time determine. The
Common Stock is not entitled to preemptive rights and is not subject to
conversion or redemption. Upon the liquidation, dissolution, or winding up of
the Company, the holders of Common Stock and any participating Preferred Stock
outstanding at that time would be entitled to share ratably in all assets
remaining after the payment of liabilities and the payment of any liquidation
preferences with respect to any outstanding Preferred Stock.
<PAGE>41
Preferred Stock
The Board of Directors is authorized, subject to any limitations
prescribed by the General Corporation Law of the State of Delaware, to provide
for the issuance of additional shares of Preferred Stock in one or more series,
to establish from time to time the number of shares to be included in each such
series, to fix the powers, designations, preferences and rights of the shares of
each wholly-unissued series and any qualifications, limitations or restrictions
thereon and to increase or decrease the number of shares of any such series (but
not below the number of shares of such series then outstanding) without any
further vote or action by the stockholders. The Board of Directors may authorize
the issuance of Preferred Stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of Common
Stock. Therefore, the issuance of Preferred Stock may have the effect of
delaying, deterring or preventing a change in control of the Company.
Warrants
In connection with its private placement of Units, the Company, pursuant
to a purchase agreement among the Company and Astoria Capital and Microcap, has
issued Warrants to purchase 1,250,000 shares of Common Stock at $3.00 per share.
The Warrants may be exercised as to all or any lesser number of shares of Common
Stock during a three year period ending August 27, 2001, and may be subject to
redemption upon 30 days' notice by the Company in the event that the trade price
of a share of Common Stock exceeds $4.50 per share for fourteen consecutive
days. The redemption price is $.01 per Warrant. The exercise price and number of
shares of Common Stock that the Selling Warrantholders will receive upon
exercise of the Warrants are subject to adjustment to protect the Warrantholder
against dilution in certain events. The Company is registering Warrants held by
the Selling Warrantholders to purchase up to 1,250,000 shares of Common Stock.
Other Warrants
As of September 11, 1998, the Company has other Warrants outstanding
providing for the purchase of an aggregate of 1,739,080 shares of Common Stock.
The exercise price of the Other Warrant range from $.50 to $3.00 per share, and
the Other Warrants expire on dates ranging from January 28, 1998, to January 13,
2006.
CERTIFICATE OF INCORPORATION
Certain provisions of the Company's Certificate of Incorporation and
bylaws have the effect of deterring a change of control of the Company. The
Company's Certificate of Incorporation contains provisions requiring the
approval of 80% of the Company's stockholders for certain merger, sales of all
or substantially all of the Company's assets and certain other corporate action
unless the transaction is approved by seventy-five percent of the disinterested
board members or unless all shareholders receive a price for their shares of the
Company's capital stock which meets certain minimum price criteria. In addition,
the Company's Certificate of Incorporation also contains a provision with
establishes a classified Board of Directors consisting of three classes, members
of which would serve staggered terms of three years. A vacancy of the Board can
be filled only by vote of 75% of the Continuing Directors (as defined). Further
directors would be removable, for cause only, by either a 80% vote or by vote of
a majority of the Continuing Directors (as defined). The Company's Certificate
of Incorporation also requires the approval of 80% of the Company's stockholders
in order to amend the provisions.
<PAGE>42
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings. However, on July
21, 1998, a complaint was filed in the Superior Court of Marin County (Case No.
174493) by the Bridge Group (HK) International, Ltd. ("Bridge Group") against
Fred W. Thompson, the Company's president. The complaint alleges that Mr.
Thompson agreed to transfer to the Bridge Group on or before March 31, 1997,
Common Stock worth $100,000 at the lowest option pricing available to Mr.
Thompson, and that Mr. Thompson has failed to make the transfer. The Bridge
Group seeks cash or specific performance compelling transfer of the shares of
Common Stock worth $100,000. Mr. Thompson has filed an answer denying the claim.
Although the Company has not been named in the complaint, the Company has agreed
to pay for Mr. Thompson's legal expenses since the alleged promise by Mr.
Thompson occurred while he was an officer of the Company.
LEGAL MATTERS
The validity of the shares of Common Stock offered by Selling
Stockholders will be passed upon by the law firm of Bartel Eng Linn & Schroder,
Sacramento, California. Certain members of the firm own shares of Common Stock
of the Company representing less than 1% of the outstanding shares of Common
Stock. In addition, the firm has a Warrant to purchase up to 300,000 shares of
Common Stock which are being registered by this registration statement.
EXPERTS
The consolidated balance sheet as of December 31, 1996 and 1997, 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, included in this Prospectus have been
included herein in reliance on the report which includes an explanatory
paragraph regarding certain financial factors raising substantial doubt about
the Company's ability to continue as a going concern, of PricewaterhouseCoopers
LLP, independent accountants, give on the authority of that firm, as experts in
accounting and auditing.
AVAILABLE INFORMATION
A Registration Statement on Form SB-2 (the "Registration Statement"
including amendments and exhibits thereto) relating to the shares of Common
Stock and Warrants offered hereby has been filed by the Company with the
Commission under the Securities Act. This Prospectus, which constitutes a part
of the Registration Statement, does not contain all of the information set forth
in the Registration Statement and the exhibits thereto. Statements contained in
this Prospectus as to the contents of any contract or other document referred to
are not necessarily complete and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Company is subject to the informational requirements of the
Exchange Act and in accordance therewith files periodic reports with the
Commission. Such reports and the Registration Statement concerning the Company
may be inspected at the Commission's public reference facilities located at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of the Company's periodic reports and all or any
part of the Registration Statement and the exhibits thereto may be obtained from
those offices upon the payment of certain fees prescribed by the Commission. The
Commission maintains a Website (address http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
<PAGE>F-1
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DBS INDUSTRIES, INC.
Page
<S> <C>
Report of Coopers & Lybrand L.L.P., Independent Accountants................................F-2
Consolidated Balance Sheets as at June 30, 1998 (unaudited)
and December 31, 1997 and 1996.............................................................F-3
Consolidated Statements of Operations for the six months ended June 30, 1998 and
1997 (unaudited) and for the years ended December 31, 1997 and December 31,
1996, and for the period
from April 25, 1990 (date of inception) to June 30, 1998...................................F-4
Consolidated Statements of Stockholders' Equity (Deficit) for
the period from December 31, 1990 to June 30, 1998.........................................F-5
Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and
1997 (unaudited) and for the years ended December 31, 1997 and December 31,
1996, and for the
period from April 25, 1990 (date of inception) to June 30, 1998...........................F-10
Notes to Consolidated Financial Statements................................................F-12
</TABLE>
<PAGE>F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and stockholders of
DBS Industries, Inc. and Subsidiary:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit), and of
cash flows present fairly, in all material respects, the financial position of
DBS Industries, Inc. and Subsidiary (a development stage company) as of December
31, 1997 and 1996, and the 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. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion expressed
above.
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.
COOPERS & LYBRAND L.L.P.
March 13, 1998, except for the last paragraph of Note 3 as to which the date is
April 1, 1998
<PAGE>F-3
<TABLE>
<CAPTION>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
June 30, 1998 December 31, December31,
(Unaudited) 1997 1996
------------------- ------------------- ------------------
ASSETS
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 24,568 $ 383,054 $ 402,588
Restrictive Cash - - 300,000
Stock subscription receivable 74,000 - -
Prepaid and other current assets 104,419 119,265 68,944
---------------- --------------- -------------
Total current assets 202,987 502,319 771,532
---------------- ---------------- --------------
Furniture and equipment (at cost) 73,277 73,277 73,277
Less accumulated depreciation 53,433 47,828 34,406
---------------- ---------------- ---------------
19,844 25,449 38,871
---------------- ---------------- ---------------
Other assets:
Investments and advances, net 851,490 1,248,649 1,496,524
Goodwill, net of accumulated amortization of
$86,170, $81,864 and $61,149, respectively 4,820 9,126 29,841
----------------- ----------------- ---------------
856,310 1,257,775 3,818,774
---------------- --------------- -------------
Total assets $ 1,079,141 $ 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 518,515 152,485 960,277
Customer advances 400,000 400,000 400,000
Accrued liabilities 125,911 145,019 499,070
Deferred compensation 246,000 216,000 108,000
--------------- ---------------- --------------
Total current liabilities 1,290,426 913,504 6,902,347
-------------- ---------------- -------------
Stockholders' equity (deficit)
Common stock 2,429 2,373 2,351
Capital in excess of par value 4,915,512 4,681,295 4,605,026
Warrants 112,500 112,500 112,500
Deficit accumulated during the development stage (5,156,726) (3,839,129) (6,908,046)
Treasury stock (85,000) (85,000) (85,000)
---------------- ---------------- ---------------
Total stockholders' equity (deficit) (211,285) 872,039 (2,273,169)
--------------- ---------------- --------------
Total liabilities and stockholders' equity
(deficit) $ 1,079,141 $ 1,785,543 $ 4,629,177
============== ============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-4
<TABLE>
<CAPTION>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
April 25,
April 25, 1990
Six Months Ended 1990 (Inception) to
June 30, Year Ended (Inception) to June 30,
(Unaudited) December 31, December 31, (Unaudited)
1998 1997 1997 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenue $ - $ - $ - $ 11,420 $ 161,420 $ 161,420
------------------------------------------------- ------------ --------------- --------------
Cost and operating expenses:
Cost of revenue - - - 10,850 127,580 127,580
General and administrative 646,380 704,186 1,472,162 2,245,588 6,462,988 7,109,368
Research and development 347,413 176,128 210,115 1,078,747 2,169,571 2,516,984
--------------- ------------- ------------ ----------- ------------- ------------
993,793 880,314 1,682,277 3,335,185 8,760,139 9,753,932
--------------- ------------- ----------- ----------- ------------- ------------
Loss from operations (993,793) (880,314) (1,682,277) (3,323,765) (8,598,719) (9,592,512)
--------------- -------------- ----------- ----------- -------------- -----------
Other income (expense):
Interest, net 2,194 (264,750) (308,094) (395,298) (741,880) (739,686)
Equity in loss of investees, net (93,410) (33,234) (80,975) (31,920) (412,777) (506,187)
Gain (loss) on sale of
investment (228,323) 6,221,270 5,221,063 - 6,057,541 5,829,218
Other, net - - - - (56,634) (56,634)
-------------------------------------------------------------------------------- -------------
(319,539) 5,923,286 4,831,994 (427,218) 4,846,250 4,526,711
--------------- ------------ ------------ ------------ ------------- ------------
Income (loss) before provision
for income taxes and
minority interests (1,313,332) 5,042,972 3,149,717 (3,750,983) (3,752,469) (5,065,801)
Provisions for income taxes 4,265 - 80,800 1,600 95,235 99,500
----------------------------------------------- -------------- --------------- -------------
Income (loss) before minority
interests (1,317,597) 5,042,972 3,068,917 (3,752,583) (3,847,704) (5,165,301)
Minority interests in income of
consolidated subsidiaries - - - - 8,575 8,575
-------------------------------------------------------------------------------- --------------
Net income (loss) $ (1,317,597) $ 5,042,972 $ 3,068,917 $(3,752,583) $ (3,839,129) $(5,156,726)
============== ============ =========== ============ ============= ============
Basic net income (loss) per
share $ (0.22) $ 0.86 $ 0.52 $ (0.65)
================================================================
Diluted net income (loss) per
share $ (0.22) $ 0.83 $ 0.49 $ (0.65)
================================================================
Weighted average number of
shares of common stock, basic 5,897,281 5,862,591 5,863,261 5,787,185
=============== ============= ========= =========
Weighted average number of
shares of common stock,
diluted 5,897,281 6,057,847 6,235,144 5,787,185
=============== ============= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-5
<TABLE>
<CAPTION>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
Deficit
Accumulated Total
Common Stock Capital in During the Stockholders'
Par Excess of Treasury Development Equity
Shares Value Par Value Warrants Stock Stage (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<PAGE>F-6
<TABLE>
<CAPTION>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
Deficit
Accumulated Total
Common Stock Capital in During the Stockholders'
Par Excess of Treasury Development Equity
Shares Value Par Value Warrants Stock Stage (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
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
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 2,244,629 - - (1,181,119) 1,065,611
Issuance of common stock for cash at $4.00 per share
(August 1993 through April 1994) 102,257 41 411,943 - - - 411,984
Stock issued in exchange for 46% of JPS stock on
November 19, 1993 3,379 1 10,137 - - - 10,138
<PAGE>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
Deficit
Accumulated Total
Common Stock Capital in During the Stockholders'
Par Excess of Treasury Development Equity
Shares Value Par Value Warrants Stock Stage (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
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
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
<PAGE>F-8
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
Deficit
Accumulated Total
Common Stock Capital in During the Stockholders'
Par Excess of Treasury Development Equity
Shares Value Par Value Warrants Stock Stage (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
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 December 31,
1995 - - - - - (662,877) (662,877)
-----------------------------------------------------------------------------
Balance at December 31, 1995 5,528,039 2,232 3,448,763 - (85,000) (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 $3.75 per share 22,743 9 85,277 - - - 85,286
August 15, 1996, at $4.80 per share 6,018 2 28,884 - - - 28,886
September 21, 1996, at $5.60 per share 4,821 2 26,996 - - - 26,998
July 1 - December 31, 1996, at $2.00 per share 7,605 3 15,207 - - - 15,210
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
<PAGE>F-9
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
Deficit
Accumulated Total
Common Stock Capital in During the Stockholders'
Par Excess of Treasury Development Equity
Shares Value Par Value Warrants Stock Stage (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
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
-------------------------------------------------------------------------------
Balance at December 31, 1997 5,882,928 2,373 4,681,295 112,500 (85,000) (3,839,129) 872,039
Common Stock issued for cash, on April 16, 1998, at
$2.00 per share (unaudited) 102,000 41 203,959 - - - 204,000
Common Stock issued upon exercise of options, on
June 11, 1998, at $1.44 per share (unaudited) 12,500 5 17,964 - - - 17,969
Common Stock issued (voided) in connection with
services rendered (unaudited):
February 12, 1998, at $0.53 per share 26,209 10 13,906 - - - 13,916
April 1, 1998, at $3.25 per share 10,000 4 32,496 - - - 32,500
May 14, 1998, at $3.75 per share 13,646 6 51,168 - - - 51,174
May 14, 1998, at $3.75 per share (22,743) (9) (85,277) - - - (85,286)
Net loss for the six month period ended June 30,
1998 (unaudited) (1,317,597) (1,317,597)
---------------------------------------------------------------------------------
Balance at June 30, 1998 (unaudited) 6,010,894 $ 2,429 $ 4,915,512 $112,500 $ (85,000) $ (5,156,726) $ (211,285)
==================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
April 25,
1990
Six Months Ended April 25, 1990 (Inception) to
June 30, Year Ended (Inception) to June 30,
(Unaudited) December 31, December 31, (Unaudited)
----------- ------------ ------------ -----------
1998 1997 1997 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Reconciliation of net income (loss) to net cash used in operating activities:
Net income (loss) $(1,317,597) $ 5,042,972 $ 3,068,917 $(3,752,583) $(3,839,129) $(5,156,726)
Adjustments to reconcile net loss
to net cashused in operating
activities:
Depreciation and amortization 24,286 7,468 126,989 124,086 358,128 382,414
Minority interest's share of net loss - - (8,575) (8,575)
Noncash charges 202,304 76,293 268,878 510,546 712,850
Equity in loss of investees, net 93,410 576,018 80,875 31,920 429,829 523,239
Loss (gain) on sale of investments 228,323 (2,535,131) (5,221,063) - (6,057,541) (5,829,218)
Common stock issued as payment for
interest - - 7,000 7,000
Decrease (increase) in accounts
receivable and other assets 14,846 (4,244,835) (50,320) 49,416 (115,299) (100,453)
Increase (decrease) in accounts payable
and accrued liabilities 376,921 544,676 (1,053,843) 1,238,819 528,748 905,669
Increase in customer advances - - 400,000 400,000 400,000
----------------------------------------------------------- ------------------------
Net cash used in operating activities $ (377,507) $ (608,832) $(2,972,152) $(1,639,464) $(7,786,293) $(8,163,800)
-------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of investment 199,940 - - - 900,000 1,099,940
Proceeds from Loral settlement - - 3,573,677 - 3,573,677 3,573,677
Purchase of fixed assets - - - (20,499) (105,524) (105,524)
Organization costs - - - - (28,526) (28,526)
Advances to officer - - - - (31,187) (31,187)
Purchase of interest in Continental - - - (2,292,409) (2,292,409) (2,292,409)
Investments and advances (278,848) - 309,888 (283,786) (801,434) (1,080,282)
Net assets of purchased subsidiaries - - - - (147,500) (147,500)
Cash transferred from Fi-Tek IV, Inc.
pursuant to the merger and
reorganization - - - - 156,648 156,648
Cash of divested subsidiary - - - - (277) (277)
Purchase of patents - - - - (18,251) (18,251)
Proceeds from repayment of advances to - - -
affiliate - 152,500 152,500
Restricted cash on credit line - - 300,000 - 300,000 300,000
-------------------------------------------------------------------------------------
Net cash used by investing activities (78,908) 0 4,183,565 (2,596,694) 1,657,717 1,578,809
-------------------------------------------------------------------------------------
</TABLE>
<PAGE>F-11
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
April 25, 1990
Six Months Ended April 25, 1990 (Inception) to
June 30, Year Ended (Inception) to June 30,
(Unaudited) December 31, December 31, (Unaudited)
----------- ------------ ------------ -----------
1998 1997 1997 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from (repayment of) credit line - 5,000 (295,000) (5,000) (300,000) (300,000)
Issuance of debentures - 107,501 107,501 3,640,000 4,817,501 4,817,501
Issuance of common stock 97,929 45,408 - 1,000,002 3,153,516 3,251,445
Redemption of common stock warrants - - - - (19,490) (19,490)
Stock issue costs - - - - (57,235) (57,235)
Purchase of shares - - - - (5,000) (5,000)
Payment of debentures - - (1,043,445) - (1,168,445) (1,168,445)
Proceeds from stockholders' loans - 49,750 149,750 - 442,750 442,750
Payment of stockholders' loans - - (149,750) - (351,967) (351,967)
-----------------------------------------------------------------------------------------
Net cash provided (used in) by financing
activities 97,929 207,659 (1,230,994) 4,635,002 6,511,630 6,609,559
-------------- -------------- ------------- ------------- -------------- ------------
Net increase (decrease) in cash (358,486) (401,173) (19,534) 398,884 383,054 24,568
Cash and cash equivalents, beginning of
period 383,054 402,588 402,588 3,743 - -
------------- -------------- -------------- -------------- -------------- ------------
Cash and cash equivalents, end of
period $ 24,568 $ 1,415 $ 383,054 $ 402,588 $ 383,054 $ 24,568
============= ============== ============== ============== ============== ============
Supplemental Disclosures of Non-Cash
Financing activities:
Stock subscription receivable $ 74,000 $ - $ - $ - $ - $ 74,000
============= =============== ============== ============== ============= ============
Stock sale proceeds used to pay service
providers not received by the
Company $ 50,000 $ - $ - $ - $ - $ 50,000
============= =============== ============== ============== ============= ============
Interest $ - $ - $ 11,456 $ 40,695 $ 57,651 $ 57,651
============= =============== ============== ============== ============= ============
Income taxes $ 4,265 $ 800 $ 1,600 $ 3,200 $ 15,955 $ 15,955
============= =============== ============== =============== ============== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-12
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1997, is unaudited)
NOTE 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 the development 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 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
<PAGE>F-13
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1997, is unaudited)
(CONTINUED)
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 6).
In January 1998, the Company created Newstar Limited, a wholly-owned
subsidiary organized under the Laws of the Republic of Bermuda.
NOTE 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.
<PAGE>F-14
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1997, is unaudited)
(CONTINUED)
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.
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, and for the six months ended
June 30, 1998 and 1997, was $4,306 (unaudited) and $28,583 (unaudited),
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. Options and
warrants to purchase 2,507,733 (unaudited) shares of common stock with exercise
prices from $.40 to $5.60 were outstanding as of June 30, 1998, and were
excluded from the loss per share calculation for the quarter and the six month
period then ended as they have the effect of decreasing loss per share. Options
and warrants to purchase 1,330,116 (unaudited) shares of common stock with
exercise prices from $.40 to $5.60 were outstanding as of June 30, 1997,
<PAGE>F-15
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1997, is unaudited)
(CONTINUED)
and were excluded from the loss per share calculation for the six month period
ended June 30, 1997, but were included in the earnings per share calculation for
the six month period ended June 30, 1997.
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.
The Company has not determined the impact of the implementation of these
pronouncements.
Interim Financial Information
The unaudited consolidated financial statements as of June 30, 1998, and
for the six months ended June 30, 1998 and 1997, are unaudited and include all
adjustments consisting of only normal recurring adjustments which are, in the
opinion of management, necessary for the fair presentation of the interim
periods in conformity with generally accepted accounting principles. The results
of operations for the interim periods presented are not necessarily indicative
of expected results for the full fiscal year.
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.
NOTE 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
<PAGE>F-16
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1997, is unaudited)
(CONTINUED)
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 $6.2 million 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 6) and
recognized a loss on such transfer of approximately $2.3 million.
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 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.
<PAGE>F-17
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1997, is unaudited)
(CONTINUED)
The Company's total investments in E-SAT were $127,265 (unaudited) as of
June 30, 1998. The investment is accounted for using the equity method. The
Company's equity in losses of E-SAT for the six months ended June 1998 were
$93,410 (unaudited). As of June 30, 1998, the Company had a net receivable of
$724,225 (unaudited) 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 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
-------------------- -------------------
<PAGE>F-18
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1997, is unaudited)
(CONTINUED)
On April 30, 1998, the Company sold its entire interest consisting of
232,829 Seimac shares in exchange for $200,000 in cash and $51,417 in forgiven
debt. The Company recorded a loss of approximately $228,000 in connection with
this transaction (unaudited).
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.
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.
On March 31, 1998, the Federal Communications Commission approved
E-SAT's application for a Low Earth Orbit Satellite license.
<PAGE>F-19
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1997, is unaudited)
(CONTINUED)
NOTE 4. CUSTOMER ADVANCES
The Company's wholly-owned subsidiary, Global Energy Metering Services,
Inc. (GEMS), is party to a contract to deliver 10,000 satellite radio units. The
purchase order is for $1.2 million and under the terms of the purchase order,
GEMS would receive a total of $500,000 in advance payments on the contract,
based on certain milestone achievements. As of June 30, 1998, this purchase
order had been suspended by both parties due to the Company's limited access to
the Argos System. The $400,000 in milestone payments received are reported as
customer advances on the accompanying balance sheet. These milestone payments
could be subject to refund in whole or in part.
NOTE 5. 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.
NOTE 6. 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.
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
<PAGE>F-20
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1997, is unaudited)
(CONTINUED)
$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.
NOTE 7. 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
Total rent expense was $66,592 and $74,808 for the years ended December
31, 1997 and 1996, respectively.
NOTE 8. 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 of Incorporation, 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
<PAGE>F-21
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1997, is unaudited)
(CONTINUED)
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 Options and 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.
In February and March 1998, the Company granted options to two
consulting firms to purchase 400,000 and 300,000 shares of the Company's Common
Stock at prices of $1.45 and $1.50 per share, respectively. These options have
terms of five years and vest over a one year period (unaudited).
In June 1998, the Company issued 102,000 shares of its Common Stock at a
price of $2.00 per share. In connection with this stock offering, the Company
issued warrants to purchase 102,000 shares of the Company's Common Stock at an
exercise price of $3.00 per share through June 30, 2001 (unaudited).
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.
<PAGE>F-22
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1997, is unaudited)
(CONTINUED)
Information with respect to activity under these plans as consolidated in
the 1996 Plan is set forth below:
<TABLE>
<CAPTION>
Outstanding Options and Warrants
Weighted
Average
Number of Price Per Aggregate Exercise
Shares Share Price Price
<S> <C> <C> <C> <C>
Balance, January 1, 1996 16,281 $0.40-$6.00 $ 52,476 $ 3.40
Granted 1,017,535 $4.75-$5.60 5,241,115 5.15
Exercised - - - -
Terminated - - - -
-------------- --------------
Balance, December 31, 1996 1,180,116 $0.40-$6.00 5,793,591 4.91
Granted 1,373,843 $0.53-$1.44 980,835 0.71
Exercised - - - -
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
Granted (unaudited) 300,000 $0.53-$2.19 400,875 1.34
Exercised (unaudited) (12,500) $1.44 (18,000) 1.44
Terminated (unaudited) - - - -
--------------- --------------
Balance, June 30, 1998 (unaudited) 1,705,733 $0.40-$5.60 $ 1,654,523 0.97
=============== ==============
</TABLE>
<PAGE>F-23
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1997, is unaudited)
(CONTINUED)
The following table summarizes information with respect to stock options
and warrants outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options and Warrants Outstanding Options and Warrants Exercisable
Weighted
Average Weighted
Number Remaining Average Number Weighted Average
Range of Outstanding Contractual Life Exercise Exercisable Exercise
Exercise Price at 12/31/97 (years) Price at 12/31/97 Price
<S> <C> <C> <C> <C> <C>
$0.53-$1.44 1,342,949 8.19 $0.73 879,887 $0.79
$1.60-$2.80 36,875 6.55 $2.39 36,875 2.39
$3.00-$5.60 38,409 8.06 $5.23 38,409 5.23
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 - -
<PAGE>F-24
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1997, is unaudited)
(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 $1,793,791 $(5,916,026)
Net income (loss) As Reported $0.49 $(0.65)
per share Pro forma $0.29 $(1.02)
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.
NOTE 9. 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.
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.
<PAGE>F-25
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1997, is unaudited)
(CONTINUED)
NOTE 10. 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
----------------------- -------------------------
Federal State Federal State
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Deferred tax liability - - - -
Deferred tax assets:
Net operating loss carryforwards 706,000 108,000 1,700,000 165,000
Research and development credit carryforwards 95,000 - 79,000 35,000
Excess of tax over book basis of investments,
and other deferred compensation 12,000 2,000 300,000 55,000
----------- ----------- ------------- -----------
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 - - - -
----------- ----------- ------------- -----------
</TABLE>
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.
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.
NOTE 11. 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.
<PAGE>F-26
DBS INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1997, is unaudited)
(CONTINUED)
NOTE 12.SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES
During the years ended December 31, 1996 and 1997, the following noncash
activities occurred:
o 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.
o The Company issued warrants to certain individuals in
consideration for services rendered. These warrants were valued
at $112,500.
o 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.
o 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.
o 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.
o 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.
NOTE 13. SUBSEQUENT EVENTS (unaudited)
Subsequent to June 30, 1998, and through September 11, 1998, the Company
issued 2,750,000 shares of its common stock at a price of $2.00 per share. In
connection with this stock offering, the Company issued warrants to purchase
1,500,000 shares of the Company's common stock at an exercise price of $3.00 per
share through June 30, 2001, and 1,250,000 shares of the Company's common stock
at an exercise price of $3.00 per share through August 27, 2001.
Under the terms of a stock purchase agreement, the Company is required
to register 1,250,000 shares of common stock, warrants to purchase 1,250,000
shares of common stock, and common stock underlying the warrants by December 4,
1998. In the event that the related registration statement is not declared
effective by the Securities and Exchange Commission by December 4, 1998, the
Company is required to pay certain stockholders the amount of $2,500 for each
subsequent day the registration statement is not declared effective.
In July 1998, the Company's president was named as a defendant in a
lawsuit filed by a firm claiming that it was promised shares of the Company's
common stock valued at $100,000.
<PAGE>II-1
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of Delaware provides for the
indemnification of officers and directors under certain circumstances against
expenses incurred successfully defending against a claim and authorizes Delaware
corporations to indemnify their officers and directors under certain
circumstances against expenses and liabilities incurred in legal proceedings
involving such persons because of their being or having been an officer or
director. The Articles of Incorporation and the Bylaws of the Company provide
for indemnification of its officers and directors to the full extent authorized
by law.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses payable by the
Company in connection with the issuance and distribution of the securities being
registered hereunder. No expenses shall be borne by the Selling Stockholders or
Warrantholders. All of the amounts shown are estimates, except for the SEC
Registration and NASD Application Fees.
SEC registration fee $ 6,482
Printing and engraving expenses * $ 1,000
Accounting fees and expenses * $ 20,000
Legal fees and expenses * $ ________
Transfer agent and registrar fees * $ -0-
Fees and expenses for qualification
under state securities laws * $ -0-
Miscellaneous * $
TOTAL $ ________
*estimated
Item 26. Recent Sales of Unregistered Securities.
(a) On September 10, 1998, a former employee exercised his options to
acquire 17,202 shares of Common Stock at $.53 per share. No commission was
issued in connection with the transaction. The transaction was exempt from
registration upon reliance of Section 4(2) of the Securities Act.
(b) During the period from May 22, 1998 to September 14, 1998, the Company
sold 2,889,500 Units at $2.00 per Unit to 22 accredited investors. Each Unit
consisted of one share of Common Stock and a Warrant to purchase one share of
Common Stock at $3.00 per share. In connection with the sale of 1,250,000 Units,
the Company paid a commission of $125,000 to Strome Susskind Securities L.P.,
who served as placement agent for such sale. In addition, the Company will pay
an aggregate of $389,280 and Warrants to purchase 278,000 shares of Common Stock
to three entities as finders' fees. The transactions were exempt from
registration upon reliance of Rule 506 of Regulation D.
(c) On June 15, 1998, a director exercised an option to purchase 12,500
shares of Common Stock at $1.44 per share. No commission was issued in
connection with the transaction. The transaction was exempt from registration
upon reliance of Section 4(2) of the Securities Act.
<PAGE>II-2
(d) On May 15, 1998, the Company issued 10,000 shares of Common Stock at
$1.94 per share; (ii) March 4, 1998, 26,209 shares of Common Stock at $.53 per
share; (iii) November 3, 1997, 14,578 shares of Common Stock at $1.13 per share;
(iv) May 20, 1997, 7,605 shares of Common Stock at $2.00 per share; (v)
September 26, 1996, 22,743 shares of Common Stock at $3.75 per share; and (vi)
May 1, 1996, 2,933 shares of Common Stock at $5.60 per share to an attorney for
legal services. No commissions were paid in connection with these transactions.
These transactions were exempt from registration upon reliance of Section 4(2)
of the Securities Act.
(e) On August 1, 1997, the Company issued 15,000 shares of Common Stock
valued at $.56 per share to one individual in consideration of such individual
making a $100,000 loan to the Company. No commission was paid in connection with
the transaction. This transaction was exempt from registration upon reliance of
Section 4(2) of the Securities Act.
(f) The Company issued (i) 5,088 shares of Common Stock at $1.69 per share
on January 31, 1997; (ii) 7,918 shares of Common Stock at $2.00 per share on
February 28, 1997; (iii) 301 shares of Common Stock at $1.63 per share on March
31, 1997; and (iv) 332 shares of Common Stock at $1.50 per share on April 30,
1997, to a corporation in exchange for consulting services. No commission was
paid in connection with this transaction. This transaction was exempt from
registration upon reliance of Section 4(2) of the Securities Act.
(g) On April 16, 1997, the Company issued 4,701 shares of Common Stock at
$1.75 per share to a corporation for consulting services. No commission was paid
in connection with this transaction. This transaction was exempt from
registration upon reliance of Section 4(2) of the Securities Act.
(h) On April 15, 1997, the Company issued 7,500 shares of Common Stock
valued at $2.00 per share, and on September 20, 1996, the Company issued 6,018
shares of Common Stock at $4.80 per share to an individual for consulting
services. No commission was paid in connection with this transaction. This
transaction was exempt from registration upon reliance of Section 4(2) of the
Securities Act.
(i) On February 15, 1996, the Company sold 38,462 shares of Common Stock at
$5.20 per share to four accredited investors. No commissions were paid. However,
the Company issued 3,846 shares of Common Stock as a finder's fee. The Company
relied on Rule 506 of Regulation D and Section 4(2) of the Securities Act as an
exemption from registration.
(j) From January 5, 1996 to February 5, 1996, the Company sold 200,000
shares of Common Stock at $4.00 per share to twenty accredited investors. No
commission was paid in connection with this transaction. However, the Company
issued 15,975 shares of Common Stock as a finder's fee. The Company relied on
Rule 506 of Regulation D and Section 4(2) of the Securities Act as an exemption
from registration.
(k) On November 30, 1995, the Company acquired 232,829 shares of Seimac
Limited, a Canadian company, pursuant to a stock purchase and exchange agreement
for 165,519 shares of Common Stock of the Company valued at $662,010. No
commission was paid in connection with this transaction. The Company relied on
Section 4(2) of the Securities Act as an exemption from registration.
(l) On November 15, 1995, the Company issued 9,450 shares of Common Stock
at $1.80 per share to an entity in exchange for a 1% interest in JPS, the
predecessor to GEMS. The Company controlled the other 99% of JPS. No commission
was paid in connection with this transaction. This transaction was exempt from
registration upon reliance of Section 4(2) of the Securities Act.
<PAGE>II-3
Item 27. Exhibits.
*(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.
*(4.2) Specimen Stock Certificate.
(5.1) Opinion of Bartel Eng Linn & Schroder (to be filed by amendment).
*(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.
<PAGE>II-4
*(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.
*(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.
<PAGE>II-5
*(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.
*(10.36)1998 Stock Option Plan.
(10.37) Memorandum of Understanding Between DBS Industries and Matra Marconi
Space.
(10.38) Letter of Intent with SAIT-Radio Holland SA
(10.39) Purchase Agreement with Astoria Capital, L.P. and Microcap Partners,
L.P.
(10.40) Warrant Agreement with Astoria Capital, L.P. and Microcap Partners, L.P.
(21.1) List of Subsidiaries of DBS Industries, Inc.
(23.1) Consent of PricewaterhouseCoopers LLP (included on page II-7).
(23.2) Consent of Bartel Eng Linn & Schroder is contained in Exhibit 5.1 (to be
filed by amendment).
*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,
December 31, 1996, December 31, 1997 or Form 8-K where indicated.
Item 28. Undertakings
The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
<PAGE>II-6
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
<PAGE>II-7
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2 of our
report dated March 13, 1998, except for the last paragraph of Note 3 as to which
the date is April 1, 1998, which report included an explanatory paragraph noting
significant doubt over the Company's ability to continue as a going concern, on
our audits of the financial statements of DBS Industries, Inc. and Subsidiary.
We also consent to the reference to our firm under the caption "Experts."
San Francisco, California
September 11, 1998
<PAGE>II-8
SIGNATURE
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Mill Valley, State of California, on September 10,
1998.
DBS INDUSTRIES, INC.,
a Delaware Corporation
/s/ Fred W. Thompson
-------------------------------
FRED W. THOMPSON,
President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Fred W. Thompson or Michael T. Schieber
as his true and lawful attorney-in-fact and agent, with full power of
substitution and re-substitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or any of them, or of his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
Signatures Date
/s/ Fred W. Thompson September 10, 1998
FRED W. THOMPSON,
President, Director, Chief Executive
Officer, Chief Financial Officer
(Principal Executive Officer; Principal Financial
and Accounting Officer)
/s/ E. A. James Peretti September 10, 1998
E.A. JAMES PERETTI
Director
<PAGE>II-9
/s/ Michael T. Schieber September 10, 1998
MICHAEL T. SCHIEBER
Director
/s/ H. Tate Holt September 10, 1998
H. TATE HOLT
Director
/s/ Jerome W. Carlson September 14, 1998
JEROME W. CARLSON
Director
MEMORANDUM OF UNDERSTANDING
BETWEEN
MATRA MARCONI SPACE AND DBS INDUSTRIES, INC.
By and between
Matra Marconi Space France s.a., a company organized under the laws of France
and having its headquarters at 4, Rue de Presbourg, 75116, Paris, France ("MMS")
and
DBS Industries, Inc., a company organized under the laws of the State of
California, USA and having its headquarters at 100 Shoreline Highway, Suite
190A, Mill Valley, CA 94941, USA ("DBSI")
collectively the "Parties" and individually the "Party":
RECITALS
Whereas DBSI is the major shareholder of E-Sat, Inc., a Colorado corporation.
E-Sat, Inc. is the holder of Non-Voice, Non-geostationary Mobile Satellite
Service license issued by the Federal Communications Commission ("FCC"),
Whereas E-Sat, Inc. has planned to develop and operate a satellite constellation
and the associated ground segment to service the messaging market,
Whereas MMS is a major space company and is willing to build the E-Sat
satellites and possibly the Remote Terminal Unit ("RTU").
AGREEMENTS
This MOU is subject to satisfactory completion of the activities provided herein
and expresses the common interest to work out mutually acceptable agreement as
contemplated herein between the parties, within the objectives and the process
specified herein. This MOU is not, and is not intended to be, a binding
agreement between the Parties, and neither Party shall have any liability to the
other if the Parties fail to reach an acceptable agreement for any reason.
1. Objective:
a. DBSI is considering entering into a spacecraft manufacturing agreement with
MMS, appointing MMS as prime contractor for the design, construction, delivery
at launch site and launch support services of 6 LEO satellites (the "Prime
Contract"). The Prime Contract will also include launch station equipment and
launch services via EUROKOT for 2 launchers with launch insurance, development
of operation software and data processing for ground support.
b. DBSI and MMS are considering entering into a manufacturing agreement for the
manufacture of 2 million RTUs.
<PAGE>
c. In case MMS is awarded a contract for the above-mentioned item (a), MMS will
consider making an investment into DBSI.
2. Definitive agreements
After executing this MOU, the Parties shall closely work together and jointly
work out in good faith the relevant definitive agreements, and develop the E-Sat
System through three phases as follows.
Phase 1: (a) Preliminary design of the E-SAT system including detailed design of
the satellites, ground stations, RTUs and ground support software, (b)
negotiation of a contract setting forth the terms of any MMS investment in DBSI
including the disbursement dates of the investment.
Subject to satisfactory due diligence and approval by the MMS board and MMS
shareholders and subject to Prime Contractor contract signature, the MMS
investment in DBSI is intended to be of the order of US$10 million.
Phase 1 is intended to begin on 1 September 1998 and continue for 2 months.
Phase 2: Negotiations of (a) a Prime Contract for the design, construction,
delivery at launch site and launch support services of 6 LEO satellites, ground
station equipment, launch services, development of operation software and data
processing for ground support; (b) a contract for the manufacture of the RTUs.
Phase 2 is intended to begin on 1 October 1998.
The Prime Contract, as described in paragraph 1(a), is intended to have a
not-to-exceed price of US$95 million (assuming EUROKOT launch service price,
including insurance, is US$21.5 million).
The manufacturing contract for 2 million RTUs, as described in paragraph 1(b),
is intended to have a not-to-exceed price of US$70 million.
Phase 3: Entry into force of the manufacturing contracts. E-Sat System full
development concluding with the delivery to the launch site of 6 satellites and
delivery of the ground stations.
Phase 3 is intended to begin when Phase 1 and Phase 2 have been completed.
3. Conditions
The definitive agreements will be subject to the following conditions:
o Negotiation and execution of the agreements with terms and conditions
mutually acceptable to both Parties.
o Obtention all required approvals of governing boards and shareholders of
DBSI, E-Sat, Inc., and MMS, if required.
o Compliance with applicable laws and receipt of all required approval by all
governmental agencies having jurisdiction over the subject of those
agreements.
o Completion of due diligence to MMS's satisfaction.
<PAGE>
4. Press Releases and Disclosures
Each Party will not issue any press release or other disclosure of this LOI
without approval by the other Party. The disclosure issue is covered by a
separate Non-Disclosure Agreement signed between the Parties.
5. Term of LOI/Termination
This LOI shall become effective on the last date of signature hereunder and may
be terminated without liability to either Party either:
a. By mutual consent of the Parties; or
b. By any Party if Phase 2 is not completed by 1 January 1999 or such other
date as the Parties may agree; or
c. At the time definitive agreements are signed.
In the event of such termination, all provisions hereof shall terminate. The
separate Non-Disclosure Agreement signed between the Parties will remain in
force.
6. Governing Law
This agreement is governed by the laws of the State of New York excluding its
conflict of laws rules. Any dispute which cannot be settled by the Parties shall
be resolved in accordance with the Rules of Concilliation and Arbitration of the
International Chamber of Commerce by one or more arbitrators appointed in
accordance with such Rules. The venue of such arbitration shall be New York
City, New York, USA.
Date:
By: /s/ Fred W. Thompson
Fred W. Thompson, President and Chief Executive Officer,
DBS Industries, Inc.
Date:
By: /s/ Armand Cartier
Armand Cartier, Chairman & Chief Executive Officer,
Matra Marconi Space France S.A.
Letter of Intent (LoI)
Between DBS Industries and the SAIT-RadioHolland Group
Whereas DBS Industries, Inc. ("DBSI") and SAIT Systems SA ("SAIT"), a 100%
subsidiary of SAIT-RadioHolland SA, wish to explore an industrial partnering
arrangement, beneficial to both companies, dealing with the E-SAT/NEWSTAR LEO
satellite system (DBSI and SAIT both referred to as "the Parties").
Whereas both parties want to lay down their intent in this Letter of Intent:
Therefore, the Parties confirm the following:
1. This LoI & term sheet is not intended to be a legally binding agreement
between DBSI and SAIT and all rights and obligations of the Parties
with respect to the subject matters covered herein shall be subject to
and conditional upon the satisfactory completion of the Parties market
and business investigations, the CEO and Boards approvals of the
Parties, the negotiation and execution of definitive agreements between
the Parties and obtaining the necessary licenses and approvals from the
appropriate government authorities.
2. The Parties have the intent to investigate the possibility and the
economic feasibility to cooperate, on a non-exclusive basis, on the
development, production and exploitation of the E-SAT/NEWSTAR LEO
satellite system. The Parties hereto decided to start in good faith
investigations and negotiations in accordance with the principles laid
down in this LoI.
3. These investigations and negotiations will start at the date of
signature of this LoI and the Parties' intent is to reach a final
agreement within 90 days.
The LoI may be terminated before this 90 day period without any
liability to either Party either:
1. By mutual consent of the Parties; or
2. By SAIT if DBSI has not awarded (directly or indirectly) a
contract to SAIT for the Preliminary Design Review by
September 7, 1998; or
3. At the time definitive agreements are signed.
4. During the aforementioned period of 90 days the Parties will jointly
undertake a review and negotiation of three separate tasks:
1
<PAGE>
4.1 Task 1
4.1.1 DBSI wishes to enter into agreements, with SAIT as main contractor for
the engineering, development and provision of hardware and software for
its satellite ground segment.
4.1.2 SAIT wishes to review its capabilities and provide a rough order of
magnitude (ROM) for such work, within 1 month from signing the LoI, on
the following work subjects:
I. Engineering of the satellite ground segment
1. Communications system radio links.
2. E-SAT User Remote Terminal (ET).
3. Applications of the ET and interface to specific NEWSTAR
products.
4. Manufacturing of ET's.
II. Provision of Services
1. TT & C for NEWSTAR satellites.
2. Satellite data processing and scheduling.
3. Billing/data delivery to users.
The Parties will try to reach an agreement upon those work items which
can be included in Task 2.
4.1.3 Before September 7, 1998, DBSI will award on for SAIT acceptable
conditions a contract to SAIT for the Preliminary Design Review (PDR)
of the satellite ground segment. It is anticipated this PDR will take
two months.
4.2 Task 2
4.2.1 Given the output of Task 1, the parties will evaluate the potential
usage and adaptation of SAIT's previously developed assets,
capabilities and property rights for the E-SAT/NEWSTAR LEO satellite
system and its operation.
4.2.2 The Parties will try to reach agreement on the value of SAIT's
previously developed assets, capabilities and property rights to be
used for the E-SAT/NEWSTAR LEO satellite system and its operation and
on how this contribution will be recognized or paid for (cash payment
or stock ownership, or . . . .).
4.3 A positive conclusion of Task 1 and Task 2 will lead to a formal
proposal by SAIT as main contractor for the engineering, development
and provision of hardware and software for the satellite ground segment
of the E-SAT/NEWSTAR system.
2
<PAGE>
4.4 Task 3
4.4.1 DBSI wishes to enter into a relationship with SAIT for the marketing
rights for the E-SAT/NEWSTAR LEO satellite services for ITU World Zone
1 and for an ownership investment at the level of NEWSTAR/E-SAT/DBSI.
4.4.2 Subject to and conditional upon the satisfactory completion of the due
diligence of the business case by SAIT, the CEO and Board approvals of
SAIT, the contract signature for the engineering, development and
provision of hardware and software for the satellite ground segment of
the E-SAT/NEWSTAR system, SAIT investment is intended to be of the
order of US$10 million. A major part of the investment (preliminary
value is estimated to be US$8 million) will be the contribution of
SAIT's previously developed assets, capabilities and property rights
(see Task 2).
4.4.3 The Parties will evaluate the creation and ownership investment of a
company that will provide the E-SAT/NEWSTAR LEO satellite services in
ITU World Zone 1. This company will own the licenses and landing rights
for the provision of the E-SAT/NEWSTAR LEO satellite services for ITU
World Zone 1.
4.4.4 The Parties confirm that Task 3 will take place in parallel with Task 1
and 2.
4.4.5 The positive conclusion of Task 1 and 2 is not linked to a conclusion
of Task 3.
5. The Parties agree that the process under this LoI will be covered with
the appropriate confidentiality regarding the business plans and
technical information of each Party, which will be shared during the
execution of the process under this LoI, with provisions to extend the
confidentiality into the future in the event the Parties fail to reach
final agreements. (See Non Disclosure Agreement dated April 7, 1998,
already signed between the Parties.)
The Parties agree to hold this LoI in the strictest confidence and
shall not release any information regarding the subject of the LoI to
any third party without the expressed approval of the other Party.
6. The Parties confirm that by signing this Letter of Intent no Party
accepted any obligation except the obligations laid down in clauses
4.1.3 - 5 - 6 - 7 and 8.
7. This LoI shall be governed by and construed in accordance with the
laws in Belgium.
8. All disputes resulting from and/or arising under this LOI shall
exclusively be submitted to the judgement of the Courts in Brussels,
Belgium.
3
<PAGE>
Done in Brussels, in two copies, one for each Party on this 25 August 1998.
For SAIT Systems SA For DBS Industries Inc.
/s/ G. Seutin /s/ E. Ceuppens /s/ F. W. Thompson
G. Seutin E. Ceuppens F. W. Thompson
Director Director President and CEO
4
PURCHASE AGREEMENT
DBS INDUSTRIES, INC.
A Delaware corporation
1,250,000 SHARES OF COMMON STOCK, PAR VALUE, $0.0004
WARRANTS TO PURCHASE 1,250,000 SHARES OF COMMON STOCK
______________, 1998
<PAGE>
TABLE OF CONTENTS
Page
1. PURCHASES...................................................................1
1.1. Purchase of DBSI Common Stock and DBSI Warrants..........................1
1.2. Consideration............................................................1
1.3. Wire Transfer Instructions...............................................2
1.4. Closing Date.............................................................2
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY...............................2
2.1. Due Organization; Good Standing and Corporate Power......................2
2.2. Capitalization and Voting Rights.........................................2
2.3. Authorization............................................................3
2.4. Subsidiaries.............................................................4
2.5. FCC License..............................................................4
2.6. No Conflict; No Consents or Approvals Required...........................4
2.7. Disclosure...............................................................5
2.8 Negotiations.............................................................5
2.9. Offering.................................................................5
2.10 Binding Effect...........................................................5
2.11. Governmental Regulation..................................................6
2.12. Permits..................................................................6
2.13. Financial Authorization..................................................6
2.14. Litigation...............................................................6
2.15. Tax Matters..............................................................7
2.16. Absence of Certain Changes or Events.....................................7
2.17. Title and Related Matters................................................9
2.18. Intellectual Property....................................................9
3. REPRESENTATIONS AND WARRANTIES OF PURCHASER................................10
3.1. Authorization............................................................10
3.2. Purchase Entirely for Own Account........................................10
3.3. Reliance Upon Purchaser's Representations................................10
3.4. Receipt of Information...................................................10
3.5. Investment Experience....................................................10
3.6. Accredited Investor......................................................11
3.7. Restricted Securities....................................................11
3.8. Legends..................................................................11
4. RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; COMPLIANCE WITH
SECURITIES ACT; REGISTRATION RIGHTS........................................11
4.1. Restrictions on Transferability..........................................11
4.2. Restrictive Legend.......................................................11
4.3. Notice of Proposed Transfer..............................................12
4.4. Registration.............................................................12
i
<PAGE>
4.4.1. Initial Registration...................................................12
4.4.2. Incidental Registrations...............................................14
4.4.3. Registration Procedures................................................15
4.4.4. Failure to Register....................................................19
4.4.5. Expenses...............................................................20
4.4.6. Modification Upon Issuance or Distribution of Other Equity
Securities.............................................................20
4.4.7. No Inconsistent Agreements.............................................20
4.5. Indemnification and Contribution.........................................21
4.6. Information by the Purchaser.............................................22
4.7. Rule 144.................................................................22
5. MISCELLANEOUS..............................................................23
5.1. Entire Agreement........................................................23
5.2. Survival of Warranties..................................................23
5.3. Successors and Assigns..................................................23
5.4. Governing Law...........................................................23
5.5. Counterparts............................................................23
5.6. Titles and Subtitles....................................................23
5.7. Notices.................................................................23
5.8. Transaction Fees........................................................24
5.9. Attorneys' Fees.........................................................24
5.10. Amendments and Waivers..................................................24
5.11. Severability............................................................24
5.12. Defaults................................................................24
5.13 Non-Disclosure...........................................................25
ii
<PAGE>
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (the "Agreement"), dated as of_________, 1998,
is made and entered into by and between DBS Industries, Inc., a Delaware
corporation (the "Company") on the one hand and Astoria Capital Partners, L.P.
and Microcap Partners, L.P. (collectively, the "Purchaser") on the other hand.
Reference to dollars in this Agreement shall mean United States dollars.
W I T N E S S E T H
WHEREAS, the Company desires to sell shares of its Common Stock, par
value .0004 per share (the "Common Stock") and warrants to purchase Common Stock
(the "Warrants") to Purchaser who is an "accredited investor" as that term is
defined in Rule 501(a) of Regulation D, promulgated by the United States
Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as
amended (the "Securities Act") upon the terms and conditions contained herein;
and
WHEREAS, the Purchaser desires to purchase Common Stock and Warrants
upon the terms and subject to the conditions set forth herein.
NOW, THEREFORE, for and in consideration of the premises and the mutual
representations, warranties, covenants, and agreements set forth in this
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. PURCHASES
1.1. Purchase of DBSI Common Stock and DBSI Warrants. Upon the
terms and subject to the conditions set forth in this Agreement, the Purchaser
hereby agrees to purchase from the Company, and the Company hereby agrees to
issue and sell to the Purchaser, 1,250,000 shares of Common Stock (the "DBSI
Common Stock") and 1,250,000 Warrants, each Warrant granting the holder thereof
the right to purchase one share of Common Stock for $3.00 per share (the "DBSI
Warrants"). 1,000,000 shares of DBSI Common Stock and 1,000,000 DBSI Warrants
shall be allocated to Astoria Capital Partners, L.P. 250,000 shares of DBSI
Common Stock and 250,000 DBSI Warrants shall be allocated to Microcap Partners,
L.P. The exercise period of the DBSI Warrants shall be for a period of three
years, shall be redeemable under certain conditions and shall have the terms as
set forth in the Warrant Agreement, a form of which is attached hereto and made
a part hereof as Exhibit A.
1.2. Consideration. In consideration of the purchase in Section 1.1, the
Purchaser hereby agrees to pay to the Company two million five-hundred thousand
dollars ($2,500,000) (the "Consideration"). Astoria Capital Partners, L.P. shall
pay two million dollars ($2,00,000) of the Consideration and Microcap Partners,
L.P. shall pay five hundred thousand dollars ($500,000) of the Consideration.
1
<PAGE>
1.3. Wire Transfer Instructions. The Consideration provided for in Section
1.2 above should be delivered to the Company's legal counsel by the Purchaser
via wire transfer to the following:
Bartel Eng Linn & Schroder, Client Trust Account
Wells Fargo Bank
400 Capitol Mall
Sacramento, CA 95814
Account No.: 0168-032878
ABA No.: 121000248
Customer Service Phone Number: (916) 920-2507
1.4 Closing Date. On the day such consideration is delivered to
the Company as set forth in Section 1.3 above, the Company shall deliver to the
Purchaser the DBSI Common Stock and DBSI Warrants (the "Closing Date").
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser that:
2.1. Due Organization; Good Standing and Corporate Power. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has all requisite corporate power
and authority to carry on its business as now conducted and as proposed to be
conducted, and to own, lease and operate any properties related to such
business, except where the failure to have such power and authority would not
individually or in the aggregate have a Material Adverse Effect (as defined
below). The Company is duly qualified or licensed to do business and is in good
standing in the State of California. For purposes of this Agreement, a "Material
Adverse Effect" shall mean an event that could reasonably be expected to have a
material adverse effect on the business of the Company, or on its results of
operations, properties or financial condition; including, but not limited to,
any event which reasonably could be expected to result in a potential liability
to the Company either individually or in the aggregate in excess of One Hundred
Thousand Dollars ($100,000).
2.2. Capitalization and Voting Rights.
(a) On the Closing Date, the authorized capital stock of the Company will
consist of 20,000,000 shares of Common Stock, of which 8,222,139 shares shall be
issued and outstanding, including the DBSI Common Stock, and 5,000,000 shares of
Preferred Stock, par value .0004 per share, of which no shares are issued and
outstanding. All of such issued and outstanding shares of Common Stock will be
validly issued, fully paid and the holders thereof will not be entitled to any
preemptive or other similar rights. The rights, privileges, preferences and
restrictions of the Common Stock and Preferred Stock are as stated in the
Company's Articles of Incorporation. In connection with the Company's Stock
Option Plans, 1,695,547 shares of Common Stock have been reserved for issuance
to employees of the Company under the plan (the "Employee Options"). In addition
to the shares reserved for issuance pursuant to the exercise of the Employee
Options, 5,307,580 shares of Common Stock have been reserved for issuance
sufficient for the exercise of
2
<PAGE>
(i) the DBSI Warrants (the "Warrant Shares"), as more fully set forth in the
Warrant Agreement, and (ii) the options and warrants, in addition to the DBSI
Warrants, which are set forth on the Schedule of Options, Warrants and Rights
that is attached hereto and made a part hereof as Exhibit B. This Schedule
contains a complete list of warrants, options and other rights authorized and/or
issued by the Company as of the Closing Date. All of such issued and outstanding
warrants, options, Employee Options and other rights will be validly issued and
the holders thereof will not be entitled to any preemptive or other similar
rights. Except as set forth above, there are no outstanding rights, plans,
options, warrants, conversion rights or agreements for the purchase or
acquisition from the Company of capital stock.
(b) The Company is not a party or subject to any agreement or understanding
that affects or relates to the voting or giving of written consents with respect
to any security or the voting by any director of the Company.
(c) The shares of Common Stock currently outstanding, all outstanding
options, warrants, rights (including conversion or preemptive rights and rights
of first refusal) or agreements for the purchase or acquisition from the Company
of any shares of its capital stock have been granted in accordance with the
registration or qualification provisions of the Securities Act and any relevant
state securities laws or pursuant to valid exemptions therefrom.
(d) Except as set forth in the Schedule of Registration Rights which is
attached hereto and made a part hereof as Exhibit C and as contemplated herein,
the Company has not granted or agreed to grant any registration rights,
including piggyback rights, to any Person. "Person" shall mean any individual,
corporation, association, partnership, group (as defined in Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), joint
venture, business trust or unincorporated organization, or a governmental agency
or authority or political subdivision thereof. To the Company's knowledge, no
shareholder has entered into any agreements with respect to the voting of
capital shares of the Company.
(e) The Company has not issued any capital stock, warrants, options or
other rights that are subject to a right of repurchase in favor of the Company.
2.3. Authorization.
(a) All corporate action on the part of the Company, its officers,
directors and stockholders necessary for the execution and delivery of this
Purchase Agreement, the Warrant Agreement and all other agreements and
instruments contemplated thereunder, including, but not limited to, the Letter
of Intent (as hereinafter defined), the sale and issuance of the DBSI Common
Stock and DBSI Warrants pursuant hereto and the performance of the Company's
obligations hereunder has been taken.
(b) The DBSI Common Stock when issued and delivered for the consideration
expressed and in compliance with the provisions of this Agreement, will be duly
authorized, validly issued, fully paid and nonassessable, will be free of
restrictions on transfer other than restrictions on transfer under this
Agreement and under applicable federal and state securities laws.
3
<PAGE>
(c) The DBSI Warrants when issued and delivered for the consideration
expressed and in compliance with the provisions of this Agreement will be duly
authorized, validly issued and will be free of restrictions on transfer other
than restrictions on transfer under this Agreement, the Warrant Agreement and
under applicable federal and state securities laws and shall constitute binding
and enforceable obligations of the Company in accordance with the terms of the
Warrant Agreement.
(d) On the Closing Date, the Warrant Shares will have been duly and
validly reserved for issuance and, upon issuance in compliance with the Warrant
Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, will be free of restrictions on transfer other than restrictions
on transfer under this Agreement, the Warrant Agreement and under applicable
federal and state securities laws.
2.4. Subsidiaries. Global Energy Metering Service, Inc., a Delaware
corporation, and Newstar Limited, a Bermuda corporation, are wholly-owned
subsidiaries of the Company (each a "Subsidiary" and, collectively, the
"Subsidiaries"). For purposes of Sections 2.14, 2.15 and 2.19, the Company shall
include the Subsidiaries. In addition, the Company owns a 20% interest in E-SAT,
Inc. Other than as set forth in this Section 2.4, the Company does not own or
control, directly of indirectly, a majority interest in any other corporations
or other entities and is not a party in any joint venture, partnership or
similar arrangement.
2.5. FCC License. The Federal Communications Commission has
approved E-SAT, Inc.'s application for a license to operate a low earth
satellite system (the "License"). The Company has negotiated that certain Option
Agreement (the "Option Agreement"), dated June 30, 1997, between the Company and
EchoStar Communications Corporation, a Colorado corporation ("EchoStar"). Under
the Option Agreement, the Company has the right, to acquire stock in E-SAT, Inc.
in an amount such that the Company will have an 80% equity ownership interest in
E-SAT, Inc. While EchoStar has expressed its willingness to execute the Option
Agreement, the Company has recently proposed to acquire 100% of E-Sat equity
ownership that the Company does not already own in exchange for shares of the
Company's preferred stock convertible into approximately 400,000 shares of the
Company's Common Stock. In addition, the Company and EchoStar have signed a
letter of intent, dated August 29, 1997, in which the Company and EchoStar have
agreed to use commercially reasonable efforts to enter into agreements on the
terms set forth on the Term Sheet attached thereto granting the Company the
option to acquire shares of E-SAT, Inc. sufficient in number so that after
exercise of the option, the Company will own 80.1% of E-SAT, Inc. (the "Letter
of Intent"). The Company will use its best efforts to complete its negotiations
and obtain a controlling interest in E-SAT, Inc.
2.6. No Conflict; No Consents or Approvals Required. The Company is
not in violation or default of any provision of its articles of incorporation or
bylaws or in violation or default under any judgment, order, writ or decree or
agreement to which it is a party or by which it is bound, or, to the best of its
knowledge, of any provision of any federal or state statute, rule or regulation
of any country applicable to the Company which violation or default, or
violations and defaults in the aggregate, would have a Material Adverse Effect.
Neither the execution and delivery of this
4
<PAGE>
Agreement or the Warrant Agreement by the Company, nor the consummation by the
Company of the transactions contemplated therein will:
(a) conflict with or violate any provision of the Certificate of
Incorporation or Bylaws of the Company;
(b) conflict with or violate any law, rule, regulation, ordinance, order,
writ, injunction, judgment or decree applicable to the Company or by which it or
any of its properties or assets are bound or affected; or
(c) conflict with or result in any breach of or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, cancellation, suspension,
revocation, impairment, forfeiture or nonrenewal of, or result in the creation
of any lien, charge or encumbrance on any of the properties or assets of the
Company pursuant to any of the terms, conditions or provisions of, any material
note, bond, mortgage, indenture, deed of trust, lease, permit, license,
franchise, authorization, agreement or other instrument or obligation to which
the Company is a party or by which the Company or any of its respective
properties or assets are bound or affected.
2.7. Disclosure. The Company has provided the Purchaser with all
the information reasonably available to it that the Purchaser has requested for
determining whether to purchase the DBSI Common Stock and DBSI Warrants. Neither
this Agreement, the exhibits and schedules hereto, the Warrant Agreement nor any
other written statements or certificates made or delivered by the Company to the
Purchaser in connection herewith including, but not limited to, the Company's
10-KSB for the year ended December 31, 1997, the Company's 10-QSB for the six
months ended June 30, 1998, the proxy statement for the Company's 1998 annual
meeting of stockholders contains any untrue statement of a material fact or
omits to state a material fact necessary to make the statements herein and
therein not misleading.
2.8. Negotiations. The Company is currently negotiating with SAIT
Radio Holland, Enron and MATRA Marconi Space France to invest $40 million in the
Company to enable the Company to pursue its business plan of constructing,
launching and operating a two-way low-cost data messaging system utilizing low
earth satellites and designing and developing an automated meter reading service
in connection therewith (the "Business Plan"). The Company will use its best
efforts to complete its negotiations and obtain the $40 million equity infusion
in order to execute the Business Plan.
2.9. Offering. Assuming the accuracy of the representations set
forth in Section 3 hereof, the offer, sale and issuance of the DBSI Common Stock
and the DBSI Warrants to the Purchaser on the Closing Date as contemplated by
this Agreement are exempt from the registration requirements of the Securities
Act.
2.10. Binding Effect. Each of this Agreement and the Warrant
Agreement and all other agreements and instruments contemplated hereunder,
including, but not limited to, the Letter of Intent, constitutes a valid and
binding agreement of the Company, enforceable in accordance with its respective
terms subject to applicable bankruptcy, insolvency, and other laws affecting the
enforcement of creditors' rights generally. Each of the shares of DBSI Common
Stock, the DBSI
5
<PAGE>
Warrants and the Warrant Shares (collectively, the "Securities"), when issued
pursuant to this Agreement and the Warrant Agreement, shall constitute a valid
and binding obligation of the Company.
2.11. Governmental Regulation. Except as required pursuant to the
Securities Act, the Exchange Act and state securities laws, the Company is not
subject to any Federal or state law or regulation limiting its ability to issue
and perform its obligations under the Securities.
2.12. Permits. The Company has all franchises, permits, licenses and
any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could have a Material Adverse Effect, and the
Company reasonably believes it can obtain, directly or indirectly and without
undue burden or expense, any similar authority, including, but not limited to,
the License, for the conduct of its business as planned to be conducted. The
Company is not in default under any of such franchises, permits, licenses, or
other similar authority where such default, or defaults in the aggregate, would
have a Material Adverse Effect.
2.13. Financial Authorization. The consolidated balance sheet of the
Company as of December 31, 1997 (the "1997 Balance Sheet") and related
consolidated statement of operations, changes in stockholders' equity and cash
flows for the fiscal year then ended, reported on by Coopers & Lybrand L.L.P.,
included in the Company's Form 10-KSB for the year ended December 31, 1997,
fairly present, in conformity with generally accepted accounting principles, the
consolidated financial position of the Company as of such date and results of
operations and cash flows for such fiscal year.
(a) The consolidated balance sheet of the Company as of June 30, 1998
(the "June 1998 Balance Sheet") and the related unaudited consolidated statement
of operations, for the fiscal quarter then ended, included in the Company's Form
10-QSB for the six months ended June 30, 1998, fairly present, in conformity
with generally accepted accounting principles applied on a basis consistent with
the financial statements referred to in subsection (a) of this Section 2.13, the
consolidated financial position of the Company as of such date and their
consolidated results of operations for the six months then ended (subject to
normal year-end adjustments).
(b) Except as set forth in the Company's 1997 Balance Sheet and June
1998 Balance Sheet, the Company does not have any material liabilities,
contingent or otherwise, other than (i) liabilities incurred in the ordinary
course of business subsequent to June 30, 1998, and (ii) obligations under
contracts and commitments incurred in the ordinary course of business and not
required under generally accepted accounting principles to be reflected in the
Company's 1997 Balance Sheet and June 1998 Balance Sheet which, in both cases,
individually or in the aggregate are not material to the financial condition or
operating results of the Company.
2.14. Litigation. There is no action, suit, proceeding or
investigation pending or, to the knowledge of the Company, currently threatened
against the Company that questions the validity of this Agreement or any other
agreement or instrument contemplated hereunder or the right of the Company to
enter into such agreements, or to consummate the transactions contemplated
hereby or thereby, or that might have a Material Adverse Effect on the Company.
The Company is not a party to or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or
6
<PAGE>
government agency or instrumentality. There is currently no action, suit,
proceeding or investigation by the Company pending or that the Company intends
to initiate.
2.15. Tax Matters.
(a) The Company has fully and timely, properly and accurately filed all
material tax returns and reports required to be filed by them, including all
federal, foreign, state and local returns and reports for all years and periods
for which any such returns or reports were due. All income, sales, use,
occupation, property, or other taxes or assessments due from the Company have
been paid, and there are no pending assessments, asserted deficiencies or claims
for additional taxes that have not been paid. There are no tax liens on any
property or assets by any applicable government agency except those not yet due.
No state of facts exists or has existed which would constitute grounds for the
assessment of any penalty or any further tax liability beyond that shown on the
respective tax reports or returns. There are no outstanding agreements or
waivers extending the statutory period of limitation applicable to any federal,
state or local income tax return or report for any period.
(b) All taxes which the Company has been required to collect or withhold
have been duly withheld or collected and, to the extent required, have been paid
to the proper taxing authority.
(c) The Company is not a party to any tax-sharing agreement or similar
arrangement with any other party.
(d) At no time has the Company been included in the federal consolidated
income tax return of any affiliated group of corporations.
(e) The Company is not currently under any contractual obligation to pay
any government agency any tax obligations of any other person or to indemnify
any other person with respect to any tax.
(f) The Company does not have any Employee Benefit Plan, as defined
in the Employee Retirement Income Security Act of 1974.
2.16. Absence of Certain Changes or Events. Since June 30, 1998, the
Company has not:
(a) suffered any material adverse change in the assets or liabilities, or
in the business or condition, financial or otherwise, or in the results of
operations, of the Company, whether as a result of any revocation of a license
or right to do business, fire, explosion, accident, casualty, labor trouble,
flood, drought, riot, storm, condemnation or other public force or, to the
knowledge of the Company, as a result of any legislative or regulatory change or
other events or circumstances;
(b) experienced any change in the assets or liabilities, or in the business
or condition, financial or otherwise, or in the results of operations, of the
Company except (i) in the
7
<PAGE>
ordinary course of business or (ii) resulting from the private placement of the
Company's securities, as set forth on Exhibit C hereto, for cash/or services;
(c) suffered any physical damage, physical destruction or physical loss,
whether or not covered by insurance, in an aggregate amount in excess of Ten
Thousand Dollars ($10,000);
(d) granted or agreed to make any increase in the compensation payable
or to become payable by the Company to its officers or employees, except those
occurring in the ordinary course of business or approved by the Company's
Compensation Committee;
(e) declared, set aside or paid any dividend or made any other distribution
on or in respect of the shares of the capital stock of the Company or declared
any direct or indirect redemption, retirement, purchase or other acquisition by
the Company of such shares;
(f) issued any shares of capital stock of the Company, or any warrants,
rights, options other than those set forth on Exhibits B and C hereto or entered
into any commitment relating to the shares of the Company;
(g) made any change in the accounting methods or practices it follows,
whether for general financial or tax purposes, or any change in depreciation or
amortization policies or rates adopted therein;
(h) sold, leased, abandoned, or otherwise disposed of any real property or
any machinery, equipment or other operating property other than in the ordinary
course of business;
(i) sold, assigned, transferred, licensed or otherwise disposed of any
patent, trademark, trade name, brand name, copyright (or pending application for
any patent, trademark, or copyright), invention, work of authorship, process,
know-how, formula or trade-secret or interest thereunder or other intangible
asset except in the ordinary course of business;
(j) suffered any dispute, to the knowledge of the Company, involving any
employee that would have a Material Adverse Effect;
(k) engaged in any activity or entered into any material commitment or
transaction (including without limitation any borrowing or capital expenditure),
in either case, other than in the ordinary course of business;
(l) to the knowledge of the Company, incurred any liabilities absolute or
contingent except for accounts payable or accrued salaries that have been
incurred in the ordinary course of business and consistent with past practices;
(m) permitted or allowed any of its material property or assets to be
subjected to any mortgage, deed of trust, pledge, lien, security interest, or
other encumbrance of any kind, other than any purchase money security interests
incurred in the ordinary course of business;
8
<PAGE>
(n) made any capital expenditure or commitment for additions to property,
plant or equipment, in the aggregate, in excess of Ten Thousand Dollars
($10,000);
(o) paid, loaned or advanced any amount to, or sold, transferred or leased
any properties or assets to, or entered into any agreement or arrangement with
any of its affiliates, officers, directors or shareholders or any affiliate or
associate of any of the foregoing except for transactions which are normal and
customary in employment agreements relating to relocation expenses;
(p) agreed to take any action described in this Section 2.16 or outside of
its ordinary course of business or which would constitute a breach of any of the
representations contained in this Agreement.
2.17. Title and Related Matters. The Company has good and marketable
title to all the properties, interests in properties or assets, real and
personal, reflected in the June 1998 Balance Sheet (except the properties,
interests in properties and assets sold or otherwise disposed of since the date
of the June 1998 Balance Sheet in the ordinary course of business), free and
clear of all mortgages, liens, and pledges, charges, encumbrances of any kind or
character, except the lien of current taxes not yet due and payable and except
for liens which in the aggregate do not secure more than Ten Thousand Dollars
($10,000) in liabilities. To the knowledge of the Company, the equipment of the
Company and its Subsidiaries used in the operation of their respective
businesses is in good operating condition and repair, normal wear and tear
excepted. All real or personal property leases to which the Company and/or its
Subsidiaries are a party are valid, binding, enforceable and effective in
accordance with their respective terms, subject to (a) laws of general
application relating to bankruptcy, insolvency, and the relief of debtors, and
(b) rules of law governing specific performance, injunctive relief and other
equitable remedies. To the knowledge of the Company, there is not under any of
such leases any existing material default by the Company or its Subsidiaries, or
to the knowledge of the Company, any other event of default or event which, with
notice or lapse of time or both, would constitute a material default by any
other party to such leases.
2.18. Intellectual Property. The Company has sufficient title and
ownership of all patents, trademarks, service marks, trade names, copyrights,
trade secrets, information, proprietary rights and processes necessary for its
business as now conducted without, to the knowledge of the Company, any conflict
with or infringement of the rights of others. The Company has not received any
communications alleging that it has violated or, by conducting its business as
proposed, would violate any of the patents, trademarks, service marks, trade
names, copyrights or trade secrets or other proprietary rights of any other
person or entity. The Company is not aware that any of its employees is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with the use of his or
her best efforts to promote the interests of the Company, or that would conflict
with the Company's business as proposed to be conducted. Neither the execution
nor delivery of this Agreement or any other agreement or instrument contemplated
hereunder, nor the carrying on of the Company's business by its employees, nor
the conduct of its business as proposed, will, to the best of the Company's
knowledge, conflict with or result in a breach of the terms, conditions or
provisions of, or constitute a default under, any contract, covenant or
instrument under which any of such employees is now obligated. The Company does
not believe that it is or will be
9
<PAGE>
necessary to utilize any inventions of any of its respective employees (or
people it currently intends to hire) made prior to their employment by the
Company.
3. REPRESENTATIONS AND WARRANTIES OF PURCHASER
The Purchaser represents and warrants that:
3.1. Authorization. All action on the part of the Purchaser, and if
the Purchaser is a corporation, its officers, directors and stockholders,
necessary for the purchase of the DBSI Common Stock and DBSI Warrants pursuant
hereto and the performance of the Purchaser's obligations hereunder has been
taken.
3.2. Purchase Entirely for Own Account. This Agreement is made with
the Purchaser in reliance upon such Purchase's representation to the Company,
which by the Purchaser's execution of this Agreement the Purchaser hereby
confirms, that the Securities to be purchased by the Purchaser are being
acquired for investment purposes for the Purchaser's own account and not with a
view to the resale or distribution of any part thereof except in accordance with
applicable federal and state securities laws.
3.3. Reliance Upon Purchaser's Representations. The Purchaser
understands that the Securities have not been registered under the Securities
Act on the grounds that the transactions contemplated by this Agreement and the
issuance of the DBSI Common Stock and DBSI Warrants hereunder are exempt from
registration under the Securities Act pursuant to Section 4(2) thereof, and
Regulation D promulgated thereunder, and that the Company's reliance on such
exemption is predicated on the Purchaser's representations set forth herein.
3.4. Receipt of Information. The Purchaser has received all the
information, including, but not limited to, the Company's Form 10-KSB for the
year ended December 31, 1997, Form 10-QSB for the six months ended June 30,
1998, and the Company's proxy statement for its 1998 annual meeting of
stockholders, as well as all other information it considers necessary or
appropriate for deciding whether to purchase the DBSI Common Stock and DBSI
Warrants. The Purchaser further represents that it has had the opportunity to
ask questions and receive answers from the Company regarding the terms and
conditions of the offering of the DBSI Common Stock and the DBSI Warrants
hereby, and the business, properties, prospects, and financial condition of the
Company and to obtain additional information (to the extent the Company
possessed such information or could acquire it without unreasonable effort or
expense) necessary to verify the accuracy of any information furnished to the
Purchaser or to which the Purchaser has access. The foregoing, however, does not
limit or modify the representations and warranties of the Company in Section 2
hereof or the right of the Purchaser to rely thereon.
3.5. Investment Experience. The Purchaser represents that it is
experienced in evaluating and investing in securities of companies in the
development stage and acknowledges that it is able to fend for itself, can bear
the economic risk of the investment, and has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits and
risks of the investment in the DBSI Common Stock and the DBSI Warrants. The
Purchaser further represents that it has not been organized solely for the
purpose of acquiring the DBSI Common Stock and the DBSI Warrants.
10
<PAGE>
3.6. Accredited Investor. The Purchaser represents that it is an
"accredited investor" as that term is defined in SEC Rule 501(a) of Regulation
D, 17 C.F.R. 230.501(a).
3.7. Restricted Securities. The Purchaser understands that the
Securities issued, or to be issued, hereunder may not be sold, transferred, or
otherwise disposed of without registration under the Securities Act or an
exemption therefrom, and that in the absence of an effective registration
statement covering the Securities, or an available exemption from registration
under the Securities Act, the Securities must be held indefinitely. In
particular, the Purchaser is aware that the Securities may not be sold pursuant
to SEC Rule 144, 17 C.F.R. 230.144 ("Rule 144"), unless all of the conditions of
that Rule are met.
3.8. Legends. To the extent applicable, each certificate or other
document evidencing the Securities shall be endorsed with the legend set forth
in Section 4.2 herein.
4. RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; COMPLIANCE WITH
SECURITIES ACT; REGISTRATION RIGHTS
4.1. Restrictions on Transferability. The Securities shall not be
transferable, except upon the conditions specified in this Section 4. The
Purchaser will cause any successor or proposed transferee of their Securities to
agree to take and hold such Securities subject to the conditions specified in
this Section 4. The Purchaser acknowledges the restrictions upon its right to
transfer the Securities set forth in this Section 4.
4.2. Restrictive Legend. Each certificate representing the
Securities shall (unless otherwise permitted or unless the securities evidenced
by such certificate shall have been registered under the Securities Act) be
stamped or otherwise imprinted with a legend in the following form (in addition
to any legend required under applicable state securities laws):
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND MAY
NOT BE SOLD, OFFERED TO SALE, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE
ASSIGNED EXCEPT PURSUANT TO (i) A REGISTRATION STATEMENT RELATING TO THE
SECURITIES WHICH IS EFFECTIVE UNDER THE SECURITIES ACT, (ii) RULE 144
PROMULGATED UNDER THE SECURITIES ACT OR (iii) AN OPINION OF COUNSEL OR OTHER
EVIDENCE SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR ANY APPLICABLE STATE
SECURITIES LAWS IS AVAILABLE."
Each certificate evidencing the Securities which have been
transferred pursuant to Section 4.3 below shall be stamped or otherwise
imprinted with the legend set forth above unless the Company receives a written
opinion of legal counsel or other evidence reasonably satisfactory to the
11
<PAGE>
Company to the effect that such legend is not required in order to ensure
compliance with any provision of the Securities Act or applicable state
securities laws.
4.3. Notice of Proposed Transfer. Prior to any proposed transfer of
any of the Securities (other than under circumstances described in Sections
4.4.1 or 4.4.2 hereof), the Holder (as such term is hereinafter defined) thereof
shall give written notice to the Company of such Holder's intention to effect
such transfer. "Holder" shall mean the Purchaser and/or any Person who (a) is
(i) an affiliate of the Purchaser or (ii) is not an affiliate of the Purchaser
but the transfer to whom is consented in writing by the Company, (b) who is a
transferee and holder of record of Securities and (c) who agrees to be bound by
the terms of this Agreement. Each such notice shall describe the manner and
circumstances of the proposed transfer in sufficient detail. Upon reasonable
request by the Company, the Holder shall deliver a written opinion (the
"Opinion") of legal counsel, addressed to the Company and reasonably
satisfactory in form and substance to the Company and the Company's counsel, to
the effect that the proposed transfer of the Securities may be effected without
registration under the Securities Act. The Holder of such Securities shall be
entitled to transfer such Securities, subject to the restrictions contained in
this Agreement, in accordance with the terms of the notice delivered by the
holder to the Company.
4.4. Registration.
4.4.1. Initial Registration.
(a) By the Company. On or before September 15, 1998, the Company will
prepare and file with the SEC a registration statement (the "Initial
Registration Statement") with respect to the Registrable Securities (as such
term is hereinafter defined) and use its reasonable best efforts, as provided in
Section 4.4.3 hereof, to effect the registration under the Securities Act of the
Registrable Securities (the "Initial Registration"). The Initial Registration
Statement shall become effective on or before December 4, 1998. "Registrable
Securities" shall mean (i) the DBSI Common Stock owned by the Holder on the
Closing Date, (ii) the DBSI Warrants owned by the Holder on the Closing Date,
(iii) the Warrant Shares and (iv) any securities of the Company issued or
distributed after the Closing Date to a Holder in respect of the DBSI Common
Stock, the DBSI Warrants or the Warrant Shares by way of stock dividend or stock
split or other distribution, recapitalization or reclassification and any
securities of the Company acquired by a Holder upon exercise or conversion of
any such securities. As to any particular Registrable Security, such Registrable
Security shall cease to be a Registrable Security when (x) it shall have been
sold, transferred or otherwise disposed of or exchanged pursuant to a
registration statement under the Securities Act, (y) it shall have been
distributed to the public pursuant to Rule 144 (or any successor provision)
under the Securities Act, or (z) it shall have been sold, transferred or
otherwise disposed of in violation of this Agreement.
(b) Registration Requested by Holders. Upon the written request of the
Holders of the majority of Registrable Securities, which are not subject to an
effective registration statement, that the Company effect the registration under
the Securities Act of all or part of such Registrable Securities specifying the
amount and the intended method of disposition thereof (the "Demand"), the
Company will promptly give notice of such requested registration to all other
Holders of Registrable Securities and, as expeditiously as possible, use its
reasonable best efforts, as provided in Section 4.4.3 hereof, to effect the
registration under the Securities Act of the Registrable Securities
12
<PAGE>
which the Company has been so requested to register; provided, however, that the
Company shall not be required to effect more than one registration pursuant to
this Section 4.4.1(b).
(c) Registration Statement Form. If any registration pursuant to this
Section 4.4.1 which is proposed by the Company to be effected by the filing of a
registration statement on Form S-3 (or any successor or similar short-form
registration statement) shall be in connection with an underwritten public
offering, and if the managing underwriter or underwriters shall advise the
Company in writing that, in the opinion of such underwriter or underwriters, the
use of another form of registration statement or the inclusion in such form of
public information concerning the Company not required by such form is of
material importance to the success of such proposed offering, then such
registration shall be effected on such other form and such other information
shall be used or included.
(d) Registration Statement Deemed Effected. A registration pursuant to
this Section 4.4.1 will not be deemed to have been effected unless it has become
effective under the Securities Act and has remained effective for 180 days or
such shorter period as all the Registrable Securities included in such
registration have actually been sold thereunder. In addition, if within 180 days
after a registration has become effective, the intended method of distribution
of Registrable Securities pursuant to such registration is materially interfered
with by any stop order, injunction or other order or requirement of the SEC or
other governmental agency or court, or any threat thereof, or by any notice
given by the Company pursuant to Section 4.4.3(a)(vi) hereof, such registration
will be deemed not to have been effected for purposes of Section 4.4.1(a) or
4.4.1(b).
(e) Priority in Requested Registrations. Any registration under
Section 4.4.1(a) or Section 4.4.1(b) may include securities of the Company held
by Persons other than the Holders, and the Company shall have the right to
include securities for its own account. If a registration pursuant to Section
4.4.1(a) or Section 4.4.1(b) involves an underwritten offering and the managing
underwriter or underwriters in good faith advise the Holders and the Company in
writing that, in their opinion, the number of shares of Common Stock and/or
Warrants (collectively, the "Equity Securities") requested to be included in
such registration (including Equity Securities which are not Registrable
Securities) exceeds the largest number of Equity Securities which can be sold in
such offering without having an adverse effect on such offering (including the
price at which such Equity Securities can be sold) (the "Adverse Effect"), then
the Company will include in such registration (i) first, 100% of the Registrable
Securities to be registered pursuant to Section 4.4.1(a) or Section 4.4.1(b)
hereof (provided that if the number of Registrable Securities to be registered
pursuant to Section 4.4.1(a) or Section 4.4.1(b) hereof exceeds the number which
the Holders and the Company have been advised can be sold in such offering
without having the Adverse Effect, the number of such Registrable Securities to
be included in such registration by the Holders shall be allocated pro rata
among such Holders on the basis of the relative number of Registrable Securities
of each such Holder to be included in such registration); (ii) second, to the
extent the number of Registrable Securities to be registered pursuant to Section
4.4.1(a) or Section 4.4.1(b) hereof is less than the number of Equity Securities
which such Holders and the Company have been advised can be sold in such
offering without having the Adverse Effect, such number of Equity Securities
that are required to be included in such registration pursuant to a valid and
enforceable agreement with the Company (the "Priority Securities") prior to the
inclusion of any Equity Securities that the Company requests to be included in
such registration; (iii) third, to the extent that the number of Registrable
13
<PAGE>
Securities and Priority Securities to be registered pursuant to Section 4.4.1(a)
or Section 4.4.1(b) hereof is less than the number of Equity Securities which
such Holders and the Company have been advised can be sold in such offering
without having the Adverse Effect, such number of Equity Securities the Company
requests to be included in such registration; and (iv) fourth, to the extent
that the number of Registrable Securities requested to be included in such
registration pursuant to Section 4.4.1(a) or Section 4.4.1(b) hereof, Priority
Securities and the Equity Securities which the Company proposes to sell for its
own account are, in the aggregate, less than the number of Equity Securities
which such Holders and the Company have been advised can be sold in such
offering without having the Adverse Effect referred to above, such number of
other Equity Securities proposed to be sold by any other Person which, in the
opinion of such managing underwriter or underwriters, can be sold without having
the Adverse Effect (provided that if the number of such Equity Securities of
such other Persons requested to be registered exceeds the number which such
Holders and the Company have been advised can be sold in such offering without
having the Adverse Effect, the number of such Equity Securities to be included
in such registration pursuant to this Section 4.4.1(e) shall be allocated pro
rata among all such other Persons on the basis of the relative number of Equity
Securities each such Person has requested to be included in such registration).
4.4.2. Incidental Registrations.
(a) Right to Include Registrable Securities. Each time the Company shall
determine to file a registration statement under the Securities Act in
connection with the proposed offer and sale for cash of Equity Securities by it
or by any holders of Equity Securities, the Company will give prompt written
notice of its determination to each Holder and of such Holder's rights under
this Section 4.4.2 at least 21 days prior to the anticipated filing date of such
registration statement; provided, however, that no such notice shall be required
if the form of registration statement and the rules of the SEC would not permit
sales of Registrable Securities by the Holders pursuant to the registration
statement. Upon the written request of each Holder made at any time within 14
days from the date of receipt of the written notice provided for herein (which
request shall specify the number of Registrable Securities intended to be
disposed of by such Holder), the Company will use its reasonable best efforts,
as provided in Section 4.4.3 hereof, to effect the registration under the
Securities Act of all Registrable Securities which the Company has been so
requested to register by the Holders thereof and which are not subject to an
effective registration statement; provided, however, that (i) if, at any time
after giving written notice of its intention to register the sale of Equity
Securities and prior to the effective date of the registration statement filed
in connection with such registration and relating to a proposed offer and sale
of its Equity Securities by the Company, the Company shall determine for any
reason not to proceed with the proposed registration of the Equity Securities to
be sold by it, the Company may, at its election, give written notice of such
determination to each Holder of Registrable Securities and thereupon shall be
relieved of its obligation hereunder to register any Registrable Securities in
connection with such registration, and (ii) if such registration involves an
underwritten offering for the registration of the issuance and sale of Equity
Securities by the Company, all Holders of Registrable Securities requesting to
be included in the Company's registration must sell their Registrable Securities
to the underwriters on the same terms and conditions as apply to the Company,
with such differences, including any with respect to indemnification and
liability insurance, as may be customary or appropriate in combined primary and
secondary offerings. No registration effected under this Section 4.4.2 shall
relieve the Company of its obligations to effect the Initial Registration or any
registration upon demand under Section 4.4.1 hereof. There shall be
14
<PAGE>
no limit on the number of times that any Holder may participate in registrations
pursuant to this Section 4.4.2(a).
(b) Priority in Incidental Registrations. If a registration pursuant to
this Section 4.4.2 involves an underwritten offering and the managing
underwriter or underwriters in good faith advise the Company in writing that, in
their opinion, the number of Equity Securities which the Company, the Holders
and any other Persons intend to include in such registration exceeds the largest
number of such Equity Securities which can be sold in such offering without
having an Adverse Effect on such offering, then the Company will include in such
registration (i) first, if the registration pursuant to this Section 4.4.2 was
initiated by any Person holding Equity Securities exercising demand registration
rights, 100% of the Equity Securities such other Person proposes to sell (except
to the extent the terms of such other Person's registration rights provide
otherwise); (ii) second, to the extent that the number of Equity Securities
which such other Person exercising demand registration rights proposes to sell
is less than the number of Equity Securities which the Company has been advised
can be sold in such offering without having the Adverse Effect referred to
above, 100% of the Registrable Securities which the Holders have requested to be
in such registration; and (iii) third, to the extent that the number of Equity
Securities which such other Person exercising demand registration rights and the
Holders of Registrable Securities propose to sell is less than the number of
Equity Securities which the Company has been advised can be sold in such
offering without having the Adverse Effect referred to above, such number of
Equity Securities the Company proposes to sell for its own account; and such
number of Equity Securities which other Persons have requested to be included in
such registration and which, in the opinion of such managing underwriter or
underwriters, can be sold without having the Adverse Effect, such number of the
Company's Equity Securities to be included on a pro rata basis among the Company
and other Persons on the basis of the relative number of shares of Common Stock
beneficially owned (as such term is used in Rule 13d-3 of the Exchange Act) by
the Company and other Persons. For purposes of this Section 4.4.2.(b),
Registrable Securities shall include all Equity Securities of the Company
subject to, or covered by, a valid and enforceable agreement with the Company to
include such securities in the registration.
4.4.3. Registration Procedures.
(a) If and whenever the Company is required by the
provisions of Sections 4.4.1 or 4.4.2 hereof to use its reasonable best
efforts to effect or cause the registration of Registrable Securities, the
Company shall as expeditiously as possible:
i. prepare and file with the SEC a registration
statement with respect to such Registrable
Securities as soon as reasonably possible
(in the event of the Initial Registration
under Section 4.4.1(a) hereof, no later than
September 15, 1998 ) and use its reasonable
best efforts to cause such registration
statement to become effective (provided,
however, that the Initial Registration
Statement filed pursuant to Section 4.4.1(a)
shall be effective on or before December 4,
1998);
ii. prepare and file with the SEC such amend-
ments and supplements to such registration
statement and the prospectus used in
connection
15
<PAGE>
therewith as may be necessary to keep such
registration statement effective for a
period not in excess of 180 days and to
comply with the provisions of the Exchange
Act, and the rules and regulations
promulgated thereunder, with respect to the
disposition of all the Registrable
Securities covered by such registration
statement during such period in accordance
with the intended methods of disposition by
the Holders thereof set forth in such
registration statement; provided, that (A)
before filing a registration statement
(including an initial filing) or prospectus,
or any amendments or supplements thereto,
the Company will furnish to counsel selected
by each Holder of the Registrable Securities
covered by such registration statement
copies of all documents proposed to be
filed, which documents will be subject to
the review and comment of such counsel, and
(B) the Company will notify each Holder of
Registrable Securities covered by such
registration statement of any stop order
issued or threatened by the SEC, any other
order suspending the use of any preliminary
prospectus or of the suspension of the
qualification of the registration statement
for offering or sale in any jurisdiction,
and take all reasonable actions required to
prevent the entry of such stop order, other
order or suspension or to remove it if
entered;
iii. furnish to each Holder and each underwriter,
if applicable, of Registrable Securities
covered by such registration statement such
number of copies of the registration
statement and of each amendment and
supplement thereto (in each case including
all exhibits), such number of copies of the
prospectus included in such registration
statement (including each preliminary
prospectus and summary prospectus) in
conformity with the requirements of the
Securities Act, and such other documents as
each Holder of Registrable Securities
covered by such registration statement may
reasonably request in order to facilitate
the disposition of the Registrable
Securities owned by such Holder;
iv. use its reasonable best efforts to register
or qualify such Registrable Securities
covered by such registration statement under
the state securities or blue sky laws of
such jurisdictions as each Holder of
Registrable Securities covered by such
registration statement and, if applicable,
each underwriter, may reasonably request,
and do any and all other acts and things
which may be reasonably necessary to
consummate the disposition in such
jurisdictions of the Registrable Securities
owned by such Holder, except that the
Company shall not for any purpose be
required to qualify generally to do business
as a foreign corporation in any jurisdiction
where, but for the requirements of this
clause (iv), it would not be obligated to be
so qualified;
16
<PAGE>
v. use its reasonable best efforts to cause
such Registrable Securities covered by such
registration statement to be registered with
or approved by such other governmental
agencies or authorities as may be necessary
to enable the Holders thereof to consummate
the disposition of such Registrable
Securities;
vi. if at any time when a prospectus relating to
the Registrable Securities is required to be
delivered under the Securities Act any event
shall have occurred as the result of which
any such prospectus as then in effect would
include an untrue statement of a material
fact or omit to state any material fact
required to be stated therein or necessary
to make the statements therein not
misleading, immediately give written notice
thereof to each Holder and the managing
underwriter or underwriters, if any, of such
Registrable Securities and prepare and
furnish to each such Holder a reasonable
number of copies of an amended or
supplemental prospectus as may be necessary
so that, as thereafter delivered to the
purchasers of such Registrable Securities,
such prospectus shall not include an untrue
statement of material fact or omit to state
a material fact required to be stated
therein or necessary to make the statements
therein not misleading;
vii. use its reasonable best efforts to list such
Registrable Securities on any securities
exchange on which similar securities of the
Company are then listed, and enter into
customary agreements including a listing
application and indemnification agreement in
customary form, provided that the applicable
listing requirements are satisfied, and
provide a transfer agent and registrar for
such Registrable Securities covered by such
registration statement not later than the
effective date of such registration
statement;
viii. enter into such customary agreements
(including an underwriting agreement in
customary form) and take such other actions
as each Holder of Registrable Securities
being sold or the underwriter or
underwriters, if any, reasonably request in
order to expedite or facilitate the
disposition of such Registrable Securities,
including customary indemnification and
opinions;
ix. use its reasonable best efforts to obtain
all "comfort" letters and consents from the
Company's independent public accountants and
all legal opinions and consents from the
Company's legal counsel and the cooperation
of other experts, all in customary form and
covering matters of the type customarily
covered by such letters, opinions and
experts as such Holders or the underwriters
retained by such Holders shall reasonably
request;
17
<PAGE>
x. make available for inspection by
representatives of any Holder of Registrable
Securities covered by such registration
statement, by any underwriter participating
in any disposition to be effected pursuant
to such registration statement and by any
attorney, accountant or other agent retained
by any such Holder or any such underwriter,
all financial and other records, pertinent
corporate documents and properties of the
Company and its Subsidiaries, and cause all
of the Company's and its Subsidiaries'
officers, directors and employees to supply
all information and respond to all inquiries
reasonably requested by any such Holder or
representative, underwriter, attorney,
accountant or agent in connection with such
registration statement and to participate in
any reasonable marketing "road show"
presentations which any such Holder or the
underwriters retained by any Holder may
request;
xi. notify counsel for each Holder of
Registrable Securities included in such
registration statement and the managing
underwriter or underwriters, if any,
immediately, and confirm the notice in
writing, (A) when the registration
statement, or any post-effective amendment
to the registration statement, shall have
become effective, or any supplement to the
prospectus or any amendment prospectus shall
have been filed, (B) of the receipt of any
comments from the SEC and (C) of any request
of the SEC to amend the registration
statement or amend or supplement the
prospectus or for additional information;
and
xii. in the case of any underwritten public
offering pursuant to a registration effected
pursuant to Section 4.4.2 hereof, agree not
to effect any sale, transfer or other
disposition (except in connection with such
public offering or an offering on Form S-8)
of shares of Common Stock, Warrants or any
security convertible into or exchangeable or
exercisable for shares of Common Stock for a
90-day period (or such lesser period as the
managing underwriter or underwriters may
permit) beginning on the effective date of
such registration, if, and to the extent,
the managing underwriter or underwriters of
any such offering determines such action is
necessary or desirable to effect such
offering and the managing underwriter or
underwriters or the Holders give notice of
such determination to the Company.
(b) Each Holder of Registrable Securities hereby agrees that, upon receipt
of any notice from the Company of the happening of any event of the type
described in Section 4.4.3(a)(vi) hereof, such Holder shall forthwith
discontinue disposition of such Registrable Securities covered by such
registration statement or related prospectus until such Holder's receipt of the
copies of the supplemental or amended prospectus contemplated by Section
4.4.3(a)(vi) hereof, and, if so directed by the Company, such Holder will
deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in such Holder's possession, of the prospectus
covering such Registrable Securities at the time of receipt of such notice. In
the event the Company shall give
18
<PAGE>
any such notice, the period mentioned in Section 4.4.3(a)(ii) hereof shall be
extended by the number of days during the period from and including the date of
the giving of such notice pursuant to Section 4.4.3(a)(vi) hereof and including
the date when such Holder shall have received the copies of the supplemental or
amended prospectus contemplated by Section 4.4.3(a)(vi) hereof. If for any other
reason the effectiveness of any registration statement filed pursuant to Section
4.4.1 hereof is suspended or interrupted prior to the expiration of the time
period regarding the maintenance of the effectiveness of such registration
statement required by Section 4.4.3(a)(ii) hereof so that Registrable Securities
may not be sold pursuant thereto, the applicable time period shall be extended
by the number of days equal to the number of days during the period beginning
with the date of such suspension or interruption to and ending with the date
when the sale of Registrable Securities pursuant to such registration statement
may be recommended.
(c) Each Holder hereby agrees to provide the Company, upon receipt of its
request, with such information about such Holder to enable the Company to comply
with the requirements of Securities Act and to execute such certificates as the
Company may reasonably request in connection with such information and otherwise
to satisfy any requirements of law.
4.4.4. Failure to Register.
(a) The Company and the Purchaser agree that (i) the Initial Registration
of the Registrable Securities pursuant to the terms and conditions of Section
4.4 is material to the Purchaser's decision to enter into this Agreement; and
(ii) the Consideration paid by the Purchaser for the DBSI Common Stock and DBSI
Warrants is predicated on the Company's commitment to file and effectuate the
Initial Registration Statement pursuant to the Initial Registration in
accordance with the terms and conditions of this Section 4.4.
(b) The Company and the Purchaser further agree that in the event the
Company fails to effectuate the Initial Registration Statement by December 4,
1998, as required by Section 4.4.1(a) above, the Consideration automatically and
without further action by the Holders, will be adjusted as follows: the Company
shall reduce the Consideration paid for the Registrable Securities by refunding
to such Holders in cash (the "Refund") an amount equal to 3% of the total
Purchase Price (as such term is hereinafter defined) of Registrable Securities
included in the Initial Registration for each 30 day period thereafter until the
Initial Registration Statement is effective (pro-rata as to a period of less
than 30 days), provided, however, that in the event the Initial Registration
Statement is not declared effective on or before December 4, 1998 because the
Purchaser has failed to timely provide information to the Company for inclusion
in the Initial Registration Statement, which information is information required
by the Securities Act to be included in the Initial Registration Statement or
has been requested by the SEC, such Refund shall not begin to accrue until the
Purchaser has provided such information to the Company. The Purchase Price shall
mean the number of Registrable Securities included in the Initial Registration
that are shares of DBSI Common Stock, excluding the Warrant Shares, multiplied
by $2.00.
(c) An amount equal to 3% of the total Purchase Price of Registrable
Securities included in the Initial Registration shall also be paid to the
Holders in cash during any period in excess of 30 days (pro-rata as to a period
of less than 30 days) that the effectiveness of the
19
<PAGE>
Initial Registration Statement or use of the prospectus is suspended as set
forth in Section 4.4.3(b) or the prospectus is otherwise unavailable for use by
the Holders of Registrable Securities.
(d) Notwithstanding the foregoing, the Refund shall cease to accrue with
respect to any Registrable Securities that are DBSI Common Stock on the date
that a Holder may sell such Registrable Securities pursuant to Rule 144 of the
Securities Act. The Company and the Purchaser agree that the Refund, as
calculated above, is their best, arm's-length, good faith estimate of the value
of that portion of the Consideration attributable to the liquidity afforded by
the Initial Registration rights provided Purchaser by Section 4.4 hereof. Any
payment hereunder shall be made not later than 5 business days after the end of
the period with respect to which such payment is due. Notwithstanding the
provisions of Section 5.10 herein, the Purchaser and the Company agree that this
Section 4.4.4 can be modified by written agreement between the Company and the
Holders of the Registrable Securities included in the Initial Registration.
4.4.5. Expenses.
(a) The Registration Expenses (as hereinafter defined) for all
registrations effected pursuant to Sections 4.4.1 and 4.4.2 hereof shall be
borne by the Company, except any underwriting discounts or commissions or
transfer taxes, if any, attributable to the sale of Registrable Securities by
the Holders.
(b) The Registration Expenses shall include, without limitation, all
out-of- pocket expenses incident to the Company's performance of or compliance
with this Agreement and the Warrant Agreement, including, without limitation,
all SEC and stock exchange registration filing fees and expenses, printing
expenses, the fees and expenses incurred in connection with the listing of
Equity Securities to be registered on each securities exchange or national
market system on which Equity Securities issued by the Company are then listed,
all fees and disbursements of counsel for the Company and all independent
certified public accountants (including the expenses of any special audit and
"cold comfort" letters required by or incident to such performance and
compliance), securities laws liability insurance (if the Company decides to
obtain such insurance and the Holders are named insureds of such insurance), the
fees and disbursements of the underwriters (including, without limitation,
expenses relating to "road shows" and other marketing activities), the
reasonable fees and expenses of any special experts and other Persons retained
by the Company in connection with such registration and the reasonable fees of
counsel retained by Holders in connection with each such registration.
4.4.6. Modification Upon Issuance or Distribution of Other
Equity Securities. If, after the date of this Agreement, the Company issues or
distributes any equity security other than DBSI Common Stock and/or DBSI
Warrants by way of stock dividend or stock split or other distribution,
recapitalization or reclassification, the Company and Purchaser shall agree upon
appropriate additions to and modifications of this Agreement to (a) preserve to
Purchaser all of the benefits of this Agreement and the Warrant Agreement and
(b) extend to Purchaser similar rights with respect to such other securities as
are provided in this Agreement and the Warrant Agreement to Purchaser with
respect to the Equity Securities if the Company registers shares of such other
security.
20
<PAGE>
4.4.7. No Inconsistent Agreements. The Company will not
hereafter enter into any agreement with respect to its Common Stock or Warrants
which is inconsistent with the rights granted to the Holders in this Section
4.4.
4.5. Indemnification and Contribution.
(a) The Company will indemnify the Holders, their successors
and each of the Holder's officers, directors and partners, and each Person
controlling the Holders, and its or their successors, officers, directors and
partners with respect to which registration, qualification or compliance has
been effected pursuant to this Section 4, against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any prospectus, offering circular or other document (including any related
registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Securities Act or any rule or regulation thereunder applicable to
the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification or compliance, and will
reimburse the Holders, their successors and each of their officers, directors
and partners, and each Person controlling the Holders, and its or their
successors, officers, directors and partners for any legal and any other
expenses reasonably incurred in connection with investigating and defending any
such claim, loss, damage, liability or action, provided that the Company will
not be liable to any Holder in any such case to the extent that such Holder's
claim, loss, damage, liability or expense arises out of or is based on any
untrue statement or omission based upon written information furnished to the
Company by the Holders, and stated to be specifically for use therein.
(b) Each Holder and its successors will, if Registrable
Securities held by them are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify the
Company against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company and its directors and officers for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case to the extent, but only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by any Holder (or
the Holder's successors) and stated to be specifically for use therein;
provided, however, that the obligations of the Holders (or the Holders'
successors) hereunder shall be limited to an amount equal to the net proceeds to
the Holders (or their successors) of Registrable Securities sold or to be sold
in such registration.
(c) Each party entitled to indemnification under this Section
4.5 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may
21
<PAGE>
be sought and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not unreasonably be withheld or delayed), and the
Indemnified Party may participate in such defense at its own expense (except in
the event such Indemnified Party may not be represented by the counsel retained
by the Indemnifying Party due to a conflict of interest, in which case the
Indemnifying Party shall pay the counsel fees incurred by the Indemnified
Party), and provided further that the failure of any Indemnified Party to give
notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 4. No Indemnifying Party, in the defense of any
such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation alleged by such claimant or plaintiff. Each
Indemnified Party shall furnish such information regarding itself or the claim
in question as an Indemnifying Party may reasonably request in writing and as
shall be reasonably required in connection with defense of such claim and
litigation resulting therefrom.
(d) The indemnification provided for under this Agreement will
remain in full force and effect regardless of any investigation made by or on
behalf of the Indemnified Party or any officer, director or controlling person
of such Indemnified Party and will survive the transfer of Registrable
Securities. The Indemnifying Party also agrees to make such provisions, as are
reasonably requested by an Indemnified Party, for contribution to such party in
the event the Indemnifying Party's indemnification is unavailable for any
reason.
4.6. Information by the Purchaser. If Registrable Securities of a
Holder (or its successors) are included in any registration, the Holder (or its
successor) shall furnish to the Company such information regarding the Holder
(or its successor) and the distribution proposed by it as the Company may
reasonably request in writing and as shall be reasonably required in connection
with any registration, qualification or compliance referred to in this Section
4.
4.7. Rule 144. The Company will file in a timely manner the reports
required to be filed by it under the Securities Act and the Exchange Act and the
rules and regulations promulgated thereunder. If the Company is not required to
file such reports, it will, upon the request of any Holder of Registrable
Securities, make publicly available such information. In addition, the Company
will take such further action as any Holder of Registrable Securities may
reasonably request, all to the extent required from time to time to enable such
Holder to sell Registrable Securities without registration under the Securities
Act within the limitation of the exemptions provided by (a) Rule 144 under the
Securities Act, as such Rule may be amended from time to time, or (b) any
similar rule or regulation hereafter adopted by the SEC. Upon the request of any
Holder of Registrable Securities, the Company will deliver to such Holder a
written statement as to whether it has complied with such requirements.
22
<PAGE>
5. MISCELLANEOUS
5.1. Entire Agreement. This Agreement, including the Warrant
Agreement, constitutes the entire agreement among the parties and no party shall
be liable or bound to any other party in any manner by any warranties,
representations, or covenants except as specifically set forth therein.
5.2. Survival of Warranties. The warranties, representations, and
covenants of the Company and the Purchaser, jointly and severally, contained in
or made pursuant to this Agreement shall survive the execution and delivery of
this Agreement.
5.3. Successors and Assigns. Except as otherwise provided herein,
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the Company and the
Purchaser. Nothing in this Agreement, express or implied, is intended to confer
upon any party other than the Company or the Purchaser, or their respective
successors and assigns, any rights, remedies, obligations, or liabilities under
or by reason of this Agreement, except as expressly provided in this Agreement.
5.4. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California as applied to
agreements among California residents entered into and to be performed entirely
within California.
5.5. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same agreement.
5.6. Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
5.7. Notices. All notices or other communications required or
permitted hereunder shall be in writing (except as otherwise provided herein)
and shall be deemed duly given when received by delivery in person, by
facsimile, telex or telegram or by an overnight courier service or three (3)
days after deposit in the U.S. Mail, certified with postage prepaid, addressed
as follows:
If to Company: DBS Industries, Inc.
100 Shoreline Highway, Suite 190A
Mill Valley, California 94941
Attn: Fred W. Thompson
with copies to: Bartel Eng Linn & Schroder
300 Capitol Mall, Suite 1100
Sacramento, California 95814
Attn: Scott E. Bartel, Esq.
23
<PAGE>
If to Purchaser: Astoria Capital Management
6600 Southwest 92nd Street, Suite 370
Portland, Oregon 97223
Attn: Richard Koe
with copies to: Jones, Day, Reavis & Pogue
555 West Fifth Street
Suite 4600
Los Angeles, California 90013-1025
Attn: Susanne Meline
or to such other addresses as a party may designate by five (5) days' prior
written notice to the other party.
5.8. Transaction Fees. The Company shall pay the reasonable fees
and expenses of Purchaser's counsel incurred in connection with reviewing,
revising and providing advice in connection with this Agreement and the Warrant
Agreement (collectively, the Transaction Expenses). The Company shall pay any
accrued Transaction Fees and expenses hereunder as of the Closing Date to Jones,
Day, Reavis & Pogue by wire transfer of immediately available funds directly to
the account specified by Jones, Day, Reavis & Pogue on the Closing Date. All
Transaction Fees not paid on the Closing Date shall be paid as soon as
practicable thereafter. The Company and the Purchaser hereby agree that, for
purposes of this Section 5.8 and for such purposes only, Jones, Day, Reavis &
Pogue is deemed a third-party beneficiary under this Agreement.
5.9. Attorneys' Fees. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees, costs and disbursements
in addition to any other relief to which such party may be entitled.
5.10. Amendments and Waivers. This Agreement may not be amended,
modified or supplemented and no waivers of or consents to departures from the
provisions hereof may be given unless consented to in writing by the Company and
the Holders of a majority of the Registrable Securities.
5.11. Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of this Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
5.12. Defaults. A default by any Holder in such Holder's compliance
with any of the conditions or covenants hereof or performance of any of the
obligations of such Holder hereunder shall not constitute a default by any other
Holder.
24
<PAGE>
5.13. Non-Disclosure. The Company agrees not to disclose the terms
and conditions of this Agreement and the Warrant Agreement, including the
identity of the Purchaser, except as required by the Securities Act, the
Exchange Act or other applicable law, rule or regulation.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
DBS Industries, Inc.
By:
PURCHASER:
Astoria Capital Partners L.P.
By:
Richard Koe,
President, Astoria Capital Management,
General Partner of Astoria Capital
Partners L.P.
Microcap Partners L.P.
By:
Richard Koe
President, Astoria Capital Management,
Investment Manager of Microcap
Partners L.P.
25
DBS INDUSTRIES, INC.
(A Delaware Corporation)
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
NEITHER THIS WARRANT NOR THE COMMON STOCK ISSUABLE UPON ITS EXERCISE HAVE BEEN
REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR THE SECURITIES LAWS OF ANY STATE. THEY MAY NOT BE SOLD, OFFERED TO
SALE, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT PURSUANT
TO (i) A REGISTRATION STATEMENT RELATING TO THE SECURITIES WHICH IS EFFECTIVE
UNDER THE SECURITIES ACT (ii) RULE 144 PROMULGATED UNDER THE SECURITIES ACT, OR
(iii) AN OPINION OF COUNSEL OR OTHER EVIDENCE SATISFACTORY TO THE COMPANY AND
ITS COUNSEL THAT AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAWS IS AVAILABLE.
THIS CERTIFIES THAT, for value received, Astoria Capital Partners, L.P.
and Microcap Partners, L.P., or their registered assigns (collectively, the
"Holder"), are entitled to purchase at any time or from time to time during the
Exercise Period (as defined in Section 1.2 below): (i) up to a maximum of one
million two hundred fifty thousand (1,250,000) shares (the "Shares"), subject to
adjustment pursuant to the terms of Section 4 below, of fully paid and
non-assessable common stock of DBS Industries, Inc., a Delaware corporation (the
"Company"), par value $.0004 (the "Common Stock"). The Shares shall be purchased
at the per Share purchase price forth in Section 1.1 below, subject to the
further provisions of this Warrant. The term "Warrant" or "Warrants" as used
herein shall mean this Warrant instrument and the various rights into which the
rights granted under this Warrant may be subsequently divided.
1. EXERCISE OF WARRANT.
The terms and conditions under which this Warrant may be exercised and
the Common Stock subject hereto may be purchased are as follows:
1.1 Share Purchase Price. The Share purchase price shall be equal
to $3.00 per Share, subject to adjustment as provided in Section 4 below (the
"Share Purchase Price").
1
<PAGE>
1.2 Method of Exercise. The Holder of this Warrant, on or after
the grant date as stated at the end of this Warrant (the "Effective Date"), and
from time to time until three years from the Effective Date of this Warrant (the
"Exercise Period"), may exercise in whole or in part the purchase rights
evidenced by this Warrant, provided that the Holder exercises the purchase
rights with respect to at least One Thousand (1,000) Shares of Common Stock,
unless the remaining balance of such Shares is less than One Thousand (1,000).
Such exercise shall be effected by:
(a) the surrender of the Warrant, together with a duly
executed copy of the form of Subscription attached hereto, to the
Secretary of the Company at its principal offices;
(b) the payment to the Company in U.S. funds, by check or bank
draft payable to its order, of an amount equal to the aggregate Share
Purchase Price for the number of Shares which the purchase rights
hereunder are being exercised; and
(c) the delivery to the Company, if necessary, to assure
compliance with federal and state securities laws, of a document
executed by the Holder certifying that the Shares are being acquired
for the sole account of the Holder and not with a view to any resale or
distribution prior to the filing of a registration statement.
1.3 Satisfaction with Requirements of Securities Act of 1933. If
the issuance of any Shares required to be reserved for purposes of the exercise
of this Warrant requires the registration with, or approval of, any governmental
authority or requires listing on any national securities exchange or national
market system before such shares may be so issued, the Company shall at its
expense cause such Shares to be duly registered, approved or listed, as the case
may be, so that such Shares may be issued in accordance with the terms hereof;
provided, however, that any registration of such Shares and listing of such
Shares on any securities exchange shall be pursuant to the terms and conditions
of that certain Purchase Agreement between the Company on the one hand and
Astoria Capital Partners L.P. and Microcap Partners L.P. on the other, dated
__________, 1998 (the "Purchase Agreement").
1.4 Issuance of Shares and New Warrant. In the event the purchase
rights evidenced by this Warrant are exercised in whole or in part, the Company
shall issue one or more certificates for the purchased Shares as soon as
possible thereafter to the Holder exercising such rights and take such other
actions at its sole expense as are necessary to complete the exercise of this
Warrant. Such Holder shall also be issued at such time a new Warrant
representing the number of Shares (if any) for which the purchase rights under
this Warrant remain unexercised and continue in force and effect.
1.5 Payment of Expenses and Taxes. The Company shall pay all
expenses and taxes imposed by law or any governmental agency, including any
documentary stamp taxes, attributable to the issuance of this Warrant and the
Shares upon the exercise of this Warrant.
2. TRANSFERS.
2.1 Transfers. Subject to Section 8 hereof, this Warrant and all rights
hereunder are transferable in whole or in part by the Holder with the same
effect as with a negotiable instrument. To transfer rights, the transfer form
below must be completed. The transfer shall be recorded on the
2
<PAGE>
books of the Company upon the surrender of this Warrant, properly endorsed, to
the Secretary of the Company at its principal offices and the payment to the
Company of all transfer taxes and other governmental charges imposed on such
transfer. In the event of a partial transfer, the Company shall issue to the
Holder one or more appropriate new forms of Warrant.
2.2 Registered Holder. The Holder agrees that until such time as
any transfer pursuant to Section 2.1 is recorded on the books of the Company,
the Company may treat the registered Holder of this Warrant as the absolute
owner.
2.3 Form of New Warrant. All new forms of Warrant issued in
connection with transfers of this Warrant shall bear the same Effective Date as
this Warrant and shall be substantially identical in form and provision to this
Warrant except for the number of Shares purchasable thereunder.
3. FRACTIONAL SHARES.
3.1 The Company shall not be required to issue fractions of Shares upon the
exercise of this Warrant or to distribute certificates that evidence fractional
Shares nor shall the Company be required to make any cash payments in lieu
thereof upon exercise of this Warrant. Holder hereby waives any right to receive
fractional Shares.
4. ANTI-DILUTION PROVISIONS.
4.1 Stock Splits and Combinations. If the Company shall at any
time subdivide or combine its outstanding Shares of Common Stock, this Warrant
shall, after that subdivision or combination, evidence the right to purchase the
number of Shares of Common Stock that would have been issuable as a result of
that change with respect to the Shares of Common Stock that were purchasable
under this Warrant immediately before that subdivision or combination. If the
Company shall at any time subdivide or combine the outstanding shares of Common
Stock, the Share Purchase Price then in effect immediately before that
subdivision or combination shall be adjusted by multiplying the Share Purchase
Price by a fraction, the numerator of which shall be the number of Shares
purchasable upon the exercise of each Warrant immediately prior to such
adjustment and the denominator of which shall be the number of Shares
purchasable immediately thereafter. Any adjustment under this Section shall
become effective at the close of business on the date the subdivision or
combination becomes effective. Such adjustment shall be made successively
whenever such an event occurs.
4.2 Reclassification, Exchange, and Substitution. If the Common
Stock issuable upon exercise of this Warrant shall be changed into the same or a
different number of shares of any other class or classes of stock or other
securities of the Company, including any such reclassification in connection
with a consolidation or merger in which the Company is the surviving entity,
whether by capital reorganization, reclassification, or otherwise (other than a
subdivision or combination of shares provided for above), the Holder of this
Warrant shall, on its exercise, be entitled to receive the kind and number of
Shares or other securities of the Company which the Holder would have owned or
been entitled to receive had such Warrant been exercised in full immediately
prior to the happening of such reclassification, exchange or substitution for
the same aggregate consideration. If the Company shall at any time change its
Common Stock into the same or a different number of shares
3
<PAGE>
of any other class or classes of stock or other securities of the Company as set
forth in this Section 4.2, the Share Purchase Price then in effect immediately
before that reclassification, exchange or substitution shall be adjusted by
multiplying the Share Purchase Price by a fraction, the numerator of which shall
be the number of Shares purchasable upon the exercise of each Warrant
immediately prior to such adjustment and the denominator of which shall be the
number of Shares purchasable immediately thereafter. An adjustment made pursuant
to this Section 4.2 shall become effective immediately after the effective date
of such event. Such adjustment shall be made successively whenever such an event
occurs.
4.3 Reorganization, Mergers, Consolidations, or Sale of Assets. In
the event of a reorganization, merger or consolidation of the Company with or
into another entity, or the sale of substantially all of the Company's
properties and assets as, or substantially as, an entity to any other entity,
then, as part of such reorganization, merger, consolidation or sale, lawful
provision shall be made so that the Holder of this Warrant shall thereafter be
entitled to receive upon exercise of this Warrant, during the Exercise Period
and upon payment of the Share Purchase Price then in effect, the number of
Shares of Common Stock or other securities or property of the Company, or of the
successor corporation resulting from such merger or consolidation, to which a
Holder of the Common Stock would have been entitled in such reorganization,
merger, consolidation or sale if this Warrant had been exercised immediately
before that reorganization, merger, consolidation or sale. In any such case,
appropriate adjustment (as determined in good faith by the Company's Board of
Directors) shall be made in the application of the provisions of this Warrant
with respect to the rights and interests of the Holder of this Warrant after the
reorganization, merger, consolidation or sale to the end that the provisions of
this Warrant (including adjustment of the Share Purchase Price then in effect
and number of Shares purchasable upon exercise of this Warrant) shall be
applicable after that event, as near as reasonably may be, in relation to any
Shares or Warrants or other property deliverable after that event upon exercise
of this Warrant. The Company shall, within thirty (30) days after making such
adjustment, give written notice (by first class mail, postage prepaid) to
Holders of this Warrant at the address of such Holders shown on the Company's
books. That notice shall set forth, in reasonable detail, the event requiring
the adjustment and the method by which the adjustment was calculated and specify
the Share Purchase Price then in effect after the adjustment and the increased
or decreased number of Shares purchasable upon exercise of this Warrant. When
appropriate, that notice may be given in advance and include as part of the
notice required under other provisions of this Warrant.
4.4 Common Stock Dividends; Distributions. In the event the
Company should at any time prior to the expiration of this Warrant fix a record
date for the determination of the holders of Common Stock entitled to receive a
dividend or other distribution (excluding a cash dividend or distribution)
payable in additional shares of Common Stock, capital stock other than Common
Stock or other securities or rights convertible into or entitling the Holder
thereof to receive, directly or indirectly, additional shares of Common Stock or
other capital stock (hereinafter referred to as the "Stock Equivalents") without
payment of any consideration by such Holder for the additional shares of Common
Stock, other capital stock or Stock Equivalents (including the additional shares
of Common Stock or other capital stock issuable upon conversion or exercise
thereof), then, as of such record date (or the date of such distribution, split
or subdivision if no record date is fixed), the number of Shares purchasable
upon exercise of each Warrant immediately prior thereto shall be adjusted so
that the Holder of each Warrant shall be entitled to receive the kind and number
of Shares
4
<PAGE>
or other securities of the Company, including the Stock Equivalents which such
Holder would have owned or have been entitled to receive upon the happening of
any of the events described above had such Warrant been exercised in full
immediately prior to the happening of such event or any record date with respect
thereto. Whenever the number of Shares purchasable upon the exercise of each
Warrant is adjusted pursuant to this Section 4.4, the Share Purchase Price
payable upon exercise of each Warrant shall be adjusted by multiplying such
Share Purchase Price by a fraction, the numerator of which shall be the number
of Shares purchasable upon the exercise of each Warrant immediately prior to
such adjustment and the denominator of which shall be the number of Shares
purchasable immediately thereafter. An adjustment made pursuant to this Section
4.4 shall become effective immediately after the record date for such event or,
if none, immediately after the effective date of such event. Such adjustment
shall be made successively whenever such an event occurs.
4.5 Adjustment for Other Distributions. In the event the Company
shall distribute to all holders of its shares of Common Stock (a) evidences of
indebtedness or assets (excluding cash dividends or distributions payable out of
the consolidated earnings or surplus legally available for such dividends or
distributions and dividends or distributions referred to in paragraphs 4.1, 4.2,
4.3 or 4.4 above) of the Company or any Subsidiary (as such term is defined in
the Purchase Agreement) or (b) shares of capital stock of a Subsidiary
(evidences of indebtedness, assets and securities as set forth in clauses (a)
and (b) above, collectively, "Assets"), then in each case the number of Shares
thereafter purchasable upon the exercise of each Warrant shall be determined by
multiplying the number of Shares theretofore purchasable upon the exercise of
each Warrant by a fraction, the numerator of which shall be the Current Market
Price (as hereinafter defined in Section 4.8 below) per share of Common Stock on
the date of such distribution and the denominator of which shall be such Current
Market Price per share of Common Stock less the fair value as of such record
date as determined reasonably and in good faith by the Board of Directors of the
Company of the portion of the Assets applicable to one share of Common Stock.
Such adjustment shall be made whenever any such distribution is made, shall
become effective on the date of distribution retroactive to the record date for
the determination of stockholders entitled to receive such distribution.
4.6 Adjustment for Rights Issue. In the event the Company issues
rights, options or Warrants (collectively, "Rights") to all holders of its
outstanding Common Stock entitling them to subscribe for or purchase shares of
Common Stock or Convertible Securities (as such term is hereinafter defined) at
a Price Per Share (as defined in Section 4.8 below) which is lower at the record
date mentioned below than the then Current Market Price per share of the Common
Stock, the number of Shares thereafter purchasable upon the exercise of each
Warrant shall be determined by multiplying the number of Shares theretofore
purchasable upon exercise of each Warrant by a fraction, the numerator of which
shall be the number of shares of the Common Stock outstanding on the date of
issuance of such Rights plus the additional Number of Shares (as defined in
Section 4.8 below) of the Common Stock offered for subscription or purchase in
connection with such Rights and the denominator of which shall be the number of
shares of the Common Stock outstanding on the date of issuance of such Rights
plus the number of shares of the Common Stock which the aggregate Proceeds (as
defined in Section 4.8 below) received or receivable by the Company upon
exercise of such Rights would purchase at the Current Market Price per share of
the Common Stock at such record date. In addition, the Share Purchase Price
payable upon exercise of each Warrant immediately prior to such adjustment under
this Section shall be adjusted by multiplying such Share Purchase Price by a
fraction, the numerator of which shall be the number of Shares purchasable upon
5
<PAGE>
the exercise of each Warrant immediately prior to such adjustment and the
denominator of which shall be the number of Shares purchasable immediately
thereafter. Such adjustment shall be made whenever Rights are issued, and shall
become effective immediately after the record date for the determination of
stockholders entitled to receive Rights. The term "Convertible Securities" as
used herein shall mean any indebtedness, capital stock or other securities of
the Company convertible into, exchangeable or exercisable for Common Stock or
Rights to subscribe for or purchase such securities. Notwithstanding the
foregoing, "Convertible Securities" shall not include securities issued by the
Company to EchoStar Communications Corporation in connection with any
acquisition or transfer of ESAT, Inc.
4.7 Adjustment for Common Stock and Convertible Securities Issue.
In case the Company shall issue Common Stock or Convertible Securities
(excluding the issuance of (a) Common Stock or Convertible Securities issued in
any of the transactions described in Sections 4.1, 4.2, 4.3, 4.4 or 4.5 above or
in connection with the acquisition or transfer of ESAT, Inc., or (b) Shares
issued upon the exercise of the Warrants), at a Price Per Share of Common Stock,
in the case of the issuance of Common Stock, or at a Price Per Share of Common
Stock initially deliverable upon conversion or exercise or exchange of such
Convertible Securities, in each case, together with any other consideration
received by the Company in connection with such issuance, below the then Current
Market Price per share of Common Stock on the date the Company fixed the
offering, conversion or exercise or exchange price of such additional shares,
then the number of Shares thereafter purchasable upon the exercise of each
Warrant shall be determined by multiplying the number of Shares theretofore
purchasable upon exercise of each Warrant by a fraction, the numerator of which
shall be the total number of shares of Common Stock outstanding on such date
plus the additional number of shares of Common Stock offered for subscription or
purchase and the denominator of which shall be the number of shares of Common
Stock outstanding on such date plus the number of shares of Common Stock which
the aggregate Proceeds of the total amount of Convertible Securities so offered
would purchase at the Current Market Price per share of Common Stock at such
record date. In case the Company shall issue and sell Convertible Securities for
a consideration consisting, in whole or in part, of property other than cash or
its equivalent, then in determining the "Price Per Share" of Common Stock and
the "consideration received by the Company" for purposes of the first sentence
and the immediately preceding sentence of this Section 4.7, the Board of
Directors of the Company shall reasonably and in good faith determine the fair
value of such property. The determination of whether any adjustment is required
under this Section 4.7, by reason of the sale and issuance of any Convertible
Securities and the amount of such adjustment, if any, shall be made at such time
and not at the subsequent time of issuance of shares of Common Stock upon the
exercise, conversion or exchange of Convertible Securities. If the Company shall
at any time issue Convertible Securities such that the shares purchasable upon
exercise of this Warrant shall be adjusted hereunder, then the Share Purchase
Price for such Warrants shall also be adjusted by multiplying the Share Purchase
Price by a fraction, the numerator of which shall be the number of Shares
purchasable upon the exercise of each Warrant immediately prior to such
adjustment and the denominator of which shall be the number of Shares
purchasable immediately thereafter.
4.8 Current Market Price; Price Per Share; Proceeds. (a) For the
purpose of any computation under Section 4 hereof, the "Current Market Price"
per share of Common Stock at any date shall be the average of the daily Closing
Prices for the 20 consecutive trading days preceding the date of such
computation, provided, however, that if the Current Market Price as calculated
herein
6
<PAGE>
shall exceed $4.50 per share then the Current Market Price shall be $4.50 per
share. The Closing Price for each day shall be (i) the average of the closing
bid and asked prices of the Common Stock in the over-the-counter market as
reported by The Nasdaq National Market, the Nasdaq SmallCap Market or any
comparable system; or (ii) if the Common Stock shall be then listed or admitted
to trading on the New York Stock Exchange, the closing price on the NYSE -
Consolidated Tape (or any successor composite tape reporting transactions on the
New York Stock Exchange) or, if such a composite tape shall not be in use or
shall not report transactions in the Common Stock, or if the Common Stock shall
be listed on a stock exchange other than the New York Stock Exchange, the last
reported sales price regular way or, in case no such reported sale takes place
on such day, the average of the closing bid and asked prices regular way for
such day, in each case on the principal national securities exchange on which
the shares of the Common Stock are listed or admitted to trading (which shall be
the national securities exchange on which the greatest number of shares of the
Common Stock have been traded during such 20 consecutive trading days). In the
absence of one or more such quotations, the Current Market Price per share of
the Common Stock shall be determined reasonably and in good faith by the Board
of Directors of the Company.
(b) For purposes of this Section 4, "Price Per Share" shall be
defined and determined according to the following formula:
P = R/N
where
P = Price Per Share;
R = the "Proceeds" received or receivable by the Company which (i) in the
case of shares of Common Stock is the total amount received or receivable
by the Company in consideration for the issuance and sale of such shares;
(ii) in the case of Rights or of Convertible Securities with respect to
shares of Common Stock, is the total amount received or receivable by the
Company in consideration for the issuance and sale of Rights or such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, other than the surrender of such Convertible Securities,
payable to the Company upon exercise, conversion or exchange thereof; and
(iii) in the case of Rights to subscribe for or purchase such Convertible
Securities, is the total amount received or receivable by the Company in
consideration for the issuance and sale of such Rights plus the minimum
aggregate amount of additional consideration, other than the surrender of
such Convertible Securities, payable upon the conversion or exchange or
exercise of such Convertible Securities, provided that in each case the
--------
proceeds received or receivable by the Company shall be the net cash
proceeds after deducting therefrom (A) any compensation paid or discount
allowed in the sale, underwriting or purchase thereof by underwriters or
dealers or others performing similar services, (B) the fees and
disbursements of counsel for the Company and of its
7
<PAGE>
independent public accountants, and (C) the fees and expenses of other
Persons retained or employed by the Company in connection with the
Company's performance of or compliance with this Agreement; and
N = the "Number of Shares," which (x) in the case of Common Stock is the
number of shares issued; and (y) in the case of Rights or of Convertible
Securities with respect to shares of Common Stock, is the maximum number of
shares of Common Stock initially issuable upon exercise, conversion or
exchange thereof.
4.9 Certificate as to Adjustments. In the case of each adjustment
or readjustment pursuant to this Section 4 of the Share Purchase Price, or
number Shares that are purchasable under this Warrant, the Company will promptly
and no more than 20 days from the occurrence of the event resulting in such
adjustment or readjustment compute such adjustment or readjustment in accordance
with the terms hereof and cause a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based, to be delivered to the Holder of this Warrant all at the
Company's sole expense. If, within fifteen (15) days after receipt of such
certificate, the Holder so requests in writing, the Company shall at its sole
expense cause its computations pursuant to this Section 4.9 to be recalculated
by independent certified public accountants of recognized standing selected by
the Company. The Company will, upon the written request at any time of the
Holder of this Warrant, furnish or cause to be furnished to such Holder a
certificate setting forth:
(a) Such adjustments and readjustments;
(b) The Share Purchase Price at the time in effect; and
(c) The number of Shares of Common Stock issuable upon
exercise of the Warrant and the amount, if any, of
other property at the time receivable upon the
exercise of the Warrant.
4.10 Voluntary Adjustment by the Company. The Company may at its
sole option, at any time during the term of the Warrants, reduce the then
current Exercise Price to any amount deemed appropriate by the Board of
Directors of the Company.
5. REPRESENTATIONS AND WARRANTIES OF COMPANY.
5.1 Affirmation of Representations and Warranties Contained in the
Purchase Agreement. Each of the representations and warranties contained in the
Purchase Agreement are true and correct.
5.2 Reservation of Stock Issuable Upon Exercise. The Company shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the exercise of this
Warrant, such number of its shares of Common Stock as shall from time to time be
sufficient to effect the exercise of this Warrant, free of all preemptive
rights. If at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect
8
<PAGE>
the exercise of this Warrant, in addition to such other remedies as shall be
available to the Holder of this Warrant, the Company shall immediately take such
corporate action as may, in the opinion of its counsel, be necessary in order
that the Company may validly and legally issue fully paid and nonassessable
shares, free of preemptive rights, pursuant to the terms of this Warrant.
6. RIGHTS PRIOR TO EXERCISE OF WARRANT.
This Warrant does not entitle the Holder to any of the rights of a
stockholder of the Company, including, without limitation, the right to receive
dividends or other distributions (except as provided in Section 4.4. herein), to
exercise any preemptive rights, to vote, to consent or to receive notice as a
stockholder of the Company. If, however, at any time prior to the expiration of
this Warrant and prior to its complete exercise, any of the following events
shall occur:
(a) the Company shall declare any dividend payable in any
securities upon its shares of Common Stock or make any distribution
(other than a regular cash dividend) to the Holder of its shares of
Common Stock; or
(b) the Company shall offer to the Holder of its shares of
Common Stock any additional shares of Common Stock or securities
convertible into or exchangeable for shares of Common Stock or any
right to subscribe for or purchase any thereof; or
(c) a dissolution, liquidation, or winding up of the Company
(other than in connection with a consolidation, merger, sale, transfer,
or lease of all or substantially all of is property, assets, and
business as an entirety) shall be proposed and action by the Company
with respect thereto has been approved by the Company's Board of
Directors; or
(d) a consolidation or merger to which the Company is a party
and for which approval of any stockholders of the Company is required,
or of the conveyance or transfer of a substantial portion of the
properties and assets of the Company for which approval of any
stockholders of the Company is required, or of any reclassification or
change of Shares (other than a change in par value, or from par value
to no par value, or from no par value to par value, or as a result of a
subdivision or combination), or a tender offer or exchange offer for
shares of Common Stock;
then in any one or more of said events the Company shall give notice in writing
of such event to the each Holder at its last address as it shall appear on the
Company's records at least twenty (20) days prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
stockholders entitled to such dividends, distribution, or subscription rights,
or for the determination of stockholders entitled to vote on such proposed
dissolution, liquidation, or winding up. Such notice shall specify such record
date or the date of closing the transfer books, as the case may be. Failure to
publish, mail, or receive such notice or any defect therein or in the
publication or mailing thereof shall not affect the or validity of any action
taken in connection with such dividend, distribution, or subscription rights, or
such proposed dissolution, liquidation, winding up, merger, conveyances or
transfer. Each person in whose name any certificate for shares of Common Stock
is to be issued shall for all purposes be deemed to have become the Holder of
record of such shares on the date on which this instrument was surrendered and
payment of the Share Purchase Price was
9
<PAGE>
made, irrespective of the date of delivery of such stock certificate, except
that, if the date of such surrender and payment is a date when the stock
transfer books of the Company are closed, such person shall be deemed to have
become the Holder of such shares of Common Stock at the close of business on the
next succeeding date on which the stock transfer books are open.
7. COMPANY'S RIGHT TO REDEEM WARRANTS.
At any time during the Exercise Period, the Company may seek to redeem
this Warrant for $0.01 per Warrant (the "Redemption Price") in the event that
the daily Closing Price (as such term is defined in Section 4.8 herein) per
share of Common Stock of the Company is greater than $4.50 per share for a
minimum of fourteen consecutive trading days. In order to exercise this right,
the Company must immediately thereafter send written notice to the Holder of its
intent to redeem the outstanding Warrants. The Warrant is redeemable 30 days
after the registered Holder' receipt of such written notice of the Company's
intention to redeem (the "Redemption Date"). Notwithstanding the foregoing, the
Holder shall retain all rights under this Warrant, including the right to
exercise this Warrant, on and prior to the close of business on such Redemption
Date. On the Redemption Date, the Company shall only be entitled to redeem
Warrants that have not been so exercised. If the Holder fail to exercise any
Warrants prior to the Redemption Date, the Holder shall forfeit their right to
do so and shall be entitled only to the Redemption Price with respect to such
unexercised Warrants.
8. RESTRICTED SECURITIES.
In order to enable the Company to comply with the Securities Act and
applicable state laws, the Company may require the Holder as a condition of the
transfer of this Warrant to give written assurances satisfactory to the Company
that the Warrant is being acquired for the transferee's own account, for
investment only, with no view to the distribution of the same, and that any
disposition of all or any portion of this Warrant or the Shares issuable upon
the due exercise of this Warrant shall not be made, unless and until:
(a) There is then in effect a registration statement under the
Purchase Agreement and the Securities Act covering such proposed
disposition and such disposition is made in accordance with such
registration statement and the provisions of the Purchase Agreement; or
(b) (i) The Holder has notified the Company of the proposed
disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition,
and (ii) upon reasonable request of the Company, such Holder has
furnished the Company with an opinion of counsel or other evidence,
reasonably satisfactory to the Company, that such disposition will not
require registration of such securities under the Securities Act and
applicable state law.
The Holder acknowledges that (x) this Warrant is, and each of the
shares of Common Stock issuable upon the due exercise hereof, will be restricted
securities, that (y) it understands the provisions of Rule 144 of the Securities
and Exchange Commission, and that (z) the certificate or certificates evidencing
such shares of Common Stock will bear a legend substantially similar to the
following:
10
<PAGE>
"These securities have not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), or any state securities laws and may not be
sold, offered to sale, transferred, pledged, hypothecated or otherwise assigned
except pursuant to (i) a registration statement relating to the securities which
is effective under the Securities Act, (ii) Rule 144 promulgated under the
Securities Act, or (iii) an opinion of counsel or other evidence satisfactory to
the Company and its counsel that an exemption from the registration requirements
of the securities act or any applicable state securities laws is available."
9. SURVIVAL OF WARRANTIES.
The warranties, representations, and covenants of the Company and the
Holder, jointly and severally, contained in or made pursuant to this Warrant and
the Purchase Agreement shall survive the execution and delivery of this Warrant.
10. SUCCESSORS AND ASSIGNS.
The terms and provisions of this Warrant shall inure to the benefit of,
and the binding upon, the Company and the Holder thereof and their respective
successors and permitted assigns.
11. LOSS OR MUTILATION.
Upon receipt by the Company of satisfactory evidence of the ownership
of and the loss, theft, destruction, or mutilation of any Warrant, and (a) in
the case of loss, theft, or destruction, upon receipt by the Company of evidence
reasonably satisfactory to the Company of such loss, theft, destruction or
mutilation of such warrant and, if reasonably requested by the Company,
indemnity satisfactory to it, or (b) in the case of mutilation, upon receipt of
such Warrant and upon surrender and cancellation of such Warrant, the Company
shall execute and deliver in lieu thereof a new Warrant representing the right
to purchase an equal number of shares of Common Stock.
12. NOTICES.
All notices or other communications required or permitted hereunder
shall be in writing (except as otherwise provided herein) and shall be deemed
duly given when received by delivery in person, by facsimile, telex or telegram
or by an overnight courier service or three (3) days after deposit in the U.S.
Mail, certified with postage prepaid, addressed as follows:
If to Company: DBS Industries, Inc.
100 Shoreline Highway, Suite 190A
Mill Valley, California 94941
Attn: Fred W. Thompson
with copies to: Bartel Eng Linn & Schroder
300 Capitol Mall, Suite 1100
Sacramento, California 95814
Attn: Scott E. Bartel, Esq.
11
<PAGE>
If to Holder: Astoria Capital Management
6600 Southwest 92nd Avenue
Suite 370
Portland, Oregon 97223
Attn: Richard Koe
with copies to: Jones, Day, Reavis & Pogue
555 West Fifth Street, Suite 4600
Los Angeles, California 90013-1025
Attn: Susanne Meline, Esq.
13. GOVERNING LAW.
This Warrant shall be governed by and construed in accordance with the
laws of the State of California as applied to agreements among California
residents entered into and to be performed entirely within California.
14. TITLES AND SUBTITLES.
The titles and subtitles used in this Warrant are used for convenience
only and are not to be considered in construing or interpreting this Warrant.
15. NO INCONSISTENT AGREEMENTS.
The Company will not hereafter enter into any agreement which is
inconsistent with the rights granted in this Warrant.
16. AMENDMENTS; WAIVERS.
Any provision of this Warrant may be amended or waived if, and only if,
such amendment or waiver is in writing, and signed by the Company and the Holder
of a majority of the Warrants then outstanding. No failure or delay by either
the Company or the Holder in exercising any right, power or privilege hereunder
shall operate as a waiver thereof nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies herein provided shall
be cumulative and not exclusive of any rights or remedies provided by law.
12
<PAGE>
17. SEVERABILITY.
If one or more provisions of this Warrant are held to be unenforceable
under applicable law, such provision shall be excluded from this Warrant and the
balance of this Warrant shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.
DATE OF GRANT: ____________, 1998.
DBS Industries, Inc.
Fred Thompson,
President
13
<PAGE>
SUBSCRIPTION
Mr. Fred Thompson
President
DBS Industries, Inc.
100 Shoreline Highway
Suite 190A
Mill Valley, California 94941
Dear Mr. Thompson:
_______ hereby elects to purchase, pursuant to the provisions of the
foregoing Warrant held by the undersigned, _____________________________( )
shares of the Common Stock of DBS Industries, Inc. ("DBSI").
Payment of the total Share Purchase Price required under such Warrant
accompanies this Subscription.
DATED: ______________________, 1998
By: ________________________________________________
14
<PAGE>
TRANSFER OF WARRANT
Mr. Fred Thompson
President
DBS Industries, Inc.
100 Shoreline Highway
Suite 190A
Mill Valley, California 94941
Dear Mr. Thompson:
For value received, ______________________________________ hereby assigns
this Warrant to ______________________________________________________________
whose address is ____________________________________________________________.
DATED: _________________________, 1998
By:_________________________________________
15
Exhibit 21.1
Subsidiaries of DBS Industries, Inc.:
Global Energy Metering Service, Inc., a Delaware Corporation
Newstar Limited, a Bermuda corporation
