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PROSPECTUS
DBS INDUSTRIES, INC.
COMMON STOCK
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Certain stockholders of DBS Industries, Inc. ("DBSI" or "we") are
offering up to 2,924,906 shares of DBSI Common Stock ("Common Stock"). These
stockholders (who DBSI will refer to as the "Selling Stockholders") will be
selling shares of Common Stock which they own or which they can acquire by
exercising certain outstanding warrants. For more complete information, refer to
the Prospectus sections entitled "The Offering" and "Selling Stockholders."
We will not receive any proceeds from the resale of shares of Common
Stock by the Selling Stockholders. Expenses of this offering will be paid by
DBSI.
DBSI's Common Stock is traded in the over-the-counter market and quoted
on the OTC Bulletin Board under the symbol "DBSS." On May 21, 1999, the average
of the high and low quotation for one share of Common Stock was $2.69, as
reported on the OTC Bulletin Board. The Warrants are not quoted or traded on any
exchange or quotation system.
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An Investment in the Common Stock Involves Significant Risks. See "Risk
Factors" Commencing on Page 4 for Certain Considerations Relevant to an
Investment in the Common Stock.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
DBSI's business is subject to many risks and an investment in its Common
Stock or Warrants will also involve significant risks. You should carefully
consider the various Risk Factors described on pages 4 to 12 before investing in
the Common Stock or Warrants.
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The date of this Prospectus is June 1, 1999.
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY...........................................................................3
RISK FACTORS.................................................................................4
THE OFFERING................................................................................12
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....................................................................................21
PROPERTY....................................................................................29
MANAGEMENT..................................................................................30
EXECUTIVE COMPENSATION......................................................................33
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.......................................................................39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................40
PLAN OF DISTRIBUTION........................................................................41
SELLING STOCKHOLDERS........................................................................42
DESCRIPTION OF CAPITAL STOCK................................................................43
CERTIFICATE OF INCORPORATION................................................................44
LEGAL PROCEEDINGS...........................................................................44
LEGAL MATTERS...............................................................................44
EXPERTS.....................................................................................44
AVAILABLE INFORMATION.......................................................................45
FINANCIAL STATEMENTS AND SCHEDULES.................................................F-1 to F-27
</TABLE>
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
Prospectus. This summary is not complete and does not contain all of the
information that you should consider before investing in the Common Stock of DBS
Industries, Inc. ("DBSI"). You should carefully read the entire Prospectus,
including the documents and information incorporated by reference into it. This
Prospectus contains forward-looking statements that are subject to risks and
uncertainties, including those risk factors discussed elsewhere in this
Prospectus, and in DBSI's Annual Report on Form 10-KSB as filed with the
Commission.
Our Business
DBSI proposes to design, construct, launch and operate a system of six
(6) satellites positioned in a low earth orbit ("Little LEO") which will provide
two-way, low-cost data messaging services worldwide (the "E-SAT System"). The
E-SAT System, when operational, would be capable of collecting and transmitting
data at regular intervals from fixed devices such as meters (i.e., electric/gas
meters, vending machines, stream or river flow gauges, etc.) at a cost
substantially less than manually retrieving the information.
DBSI is currently pursuing its business through its twenty percent (20%)
interest in E-SAT, Inc. ("E-SAT"). On March 31, 1998, the Federal Communications
Commission ("FCC") approved E-SAT's application for a Little Leo satellite
license. This license authorizes E-SAT to launch and operate six (6) Little LEO
satellites providing messaging services in the U.S. utilizing specified radio
frequency bands.
Pursuant to DBSI's business objectives, DBSI has entered into a contract
with two European companies to build the satellites and to launch them into
orbit. DBSI is also actively negotiating with another company to serve as the
prime contractor to design and supervise the building of the satellites.
Because DBSI intends to develop and operate the E-SAT System, it is
essential to DBSI's overall business objectives to obtain control of E-SAT and
the FCC license which E-SAT holds. DBSI is currently negotiating with EchoStar
Communications Corporation ("EchoStar") for the transfer of a controlling
interest in E-SAT. However, as of the date of this Prospectus for the transfer
of controlling, EchoStar has not yet transferred control of E-SAT to DBSI.
DBSI is a Delaware corporation with its business offices located at 100
Shoreline Highway, Suite 190A, Mill Valley, California 94941, and its telephone
number is (415) 380-8055. DBSI has two (2) wholly-owned subsidiaries, Global
Energy Metering Service, Inc. ("GEMS") and Newstar Limited ("Newstar").
Summary Of Risk Factors
An investment in DBSI's Common Stock involves a number of risks which
should be carefully considered and evaluated. These risks would include:
(i) DBSI's minority interest in E-SAT;
(ii) The fact that DBSI is a development stage company and has not had
operating revenues;
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(iii) The technological challenges involved in developing a new
communication system using Little LEO satellites; and
(iv) The need to raise a significant amount of capital (estimated at
over $100 million) to design, build and launch the E-SAT System.
For a more complete discussion of risk factors relevant to an investment
in DBSI's Common Stock and Warrants, see the "Risk Factors" section.
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. The Selling Stockholders acquired
their shares or Warrants from DBSI in private placements or as compensation for
services rendered to DBSI. DBSI will receive no proceeds from the sale of Common
Stock by the Selling Stockholders.
Summary Consolidated Financial Data
The summarized consolidated financial data presented below should be
read in conjunction with the more detailed financial statements of DBSI 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."
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For the three For the year For the year For the year April 25, 1990
months ended ended ended ended (Inception) to
March 31, 1999 December 31, December 31, December 31, March 31, 1999
(Unaudited) 1998 1997 1996 (Unaudited)
------------- ------------- ------------- --------------- ---------------
Revenue $ -- $ -- $ -- $ 11,420 $ 161,420
Loss from operations (1,118,643) (2,995,848) (1,682,277) (3,323,765) (12,713,210)
Net Income (Loss) (1,106,274) (3,293,493) 3,068,917 (3,752,583) (8,238,896)
Income (Loss) per
Share (0.11) (0.47) .49 (.65) -
Working Capital
(Deficit) 8,727,069 233,078 (411,185) (6,130,815) -
Total Assets 12,576,992 3,512,511 1,785,543 4,629,177 -
Stockholders' Equity
(Deficit) $11,939,696 $ 2,382,740 $ 872,039 $ (2,273,169) -
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RISK FACTORS
An investment in DBSI's Common Stock involves a number of very
significant risks. You should carefully consider the following risks and
uncertainties in evaluating DBSI and its proposed business before purchasing
shares.
Minority Ownership in E-SAT, Inc.
E-SAT has been granted an FCC license to construct, launch and operate
six Little LEO satellites to provide two-way, low-cost data messaging services
in the U.S. DBSI holds only 20% of the issued and outstanding shares of E-SAT
common stock with EchoStar holding the remaining 80%. Although DBSI holds only
20% of the issued shares in E-SAT, in anticipation of obtaining control of
E-SAT, DBSI 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 collecting and
transmitting data. DBSI and EchoStar have held and are currently having
negotiations regarding the transfer of control of E-SAT (holder of the FCC
license) to DBSI. As of the date of this Prospectus, EchoStar has not yet
transferred control of E-SAT to DBSI and there is no assurance that DBSI will
obtain control of E-SAT. Unless and until DBSI obtains control of E-SAT on terms
deemed acceptable to DBSI, DBSI's investments in the E-SAT System will be
subject to its minority interest in E-SAT and the control disadvantages which
such a minority position represents, including the possible inability of DBSI to
proceed with its current plans to develop and launch the E- SAT System
satellites.
Development Stage Company
DBSI is a development stage company which is involved in technology
development of the E- SAT System. As such, DBSI has not yet started offering
commercial services and, as a result, is not generating any revenues.
DBSI's ability to provide commercial service and to eventually generate
operating revenue 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.; (iii) construct the
necessary ground infrastructure inside and outside the U.S.; and (iv) obtain or
control n necessary regulatory licenses and authorizations in the U.S. and
worldwide. Given DBSI's limited operating history and lack of revenues, there
can be no assurance that it will be able to construct and establish the E-SAT
System, and, if established, to develop a sufficiently large customer base to be
profitable.
Lack of Revenues and Increasing Costs
DBSI and its subsidiaries have earned no substantial revenues since
their formation. Furthermore, DBSI expects its operating expenses to
significantly increase as the E-SAT System reaches critical stages of
development.
DBSI recorded operating losses of approximately $2,996,000 for 1998 and
approximately $1,119,000 for the first quarter of 1999 and does not anticipate
any revenues during the remainder of 1999. It expects to incur substantial and
increasing operating losses and negative net cash flow until the E-SAT System is
developed, deployed and operating in a profitable manner.
Development Contract Commitments
In order to comply with development milestones required by E-SAT's FCC
license, DBSI has entered into various development contracts including a
satellite construction contract and a satellite launch contract. DBSI is also
negotiating with another company to become the prime contractor for
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development of the E-SAT System. Entering into these and other development and
service contracts is critical to the overall development of the E-SAT System.
The satellite construction and launch contracts require progress payments of
approximately $24 million over the next 12 months. Failure to maintain these
contracts would adversely affect the construction of the E-SAT System.
In addition, if DBSI were unable to obtain a controlling interest in
E-SAT's FCC license, or if other technological or financial difficulties were to
arise, DBSI might be unable to proceed with its current satellite construction
and launch agreements. Any cancellation or termination of these contracts could
result in substantial costs to DBSI.
Need for Future Capital and its Dilutive Effect
DBSI currently estimates that it will incur in excess of $100 million in
capital expenditures relating to the development and operating costs in building
and deploying the E-SAT System. Given the risks in an undertaking of this
nature, there can be no assurance that actual cash requirements will not exceed
DBSI's estimates. In particular, additional capital, over and above that amount
already anticipated, will be required in the event that: (i) DBSI incurs
unexpected costs in completing the system design or encounters any unexpected
technical or regulatory difficulties, (ii) DBSI incurs delays and additional
expenses as the result of a launch or satellite failure, (iii) DBSI is unable to
enter into marketing agreements with third parties, or (iv) DBSI incurs any
significant unanticipated expenses. The occurrence of any such events could
adversely affect DBSI's ability to meet its business plan.
DBSI will depend almost exclusively on outside capital to pay for the
E-SAT System development, including the sale of additional stock or debt
securities. There can be no assurance that capital will be available to DBSI to
meet development costs or on terms acceptable to DBSI. The issuance of
additional equity securities by DBSI would result in a significant dilution in
the equity interests of the current stockholders. Selling debt securities will
increase DBSI's liabilities and future cash commitments.
If DBSI is unable to obtain financing in the amounts and at the terms
necessary, DBSI's business and future success will be adversely affected.
Technological Risks
The design and construction of the E-SAT System are exposed to risks
associated with a space- based communications system. Although DBSI believes
that the E-SAT System is based on sound technology, its design will contain
certain technology that has not been used in a commercial application. Although
DBSI will engage contractors who are experienced in the satellite and
communications industry, it has no experience in developing, constructing, and
operating a data communications system. Furthermore, an agreement with a prime
contractor for building the E-SAT System has not yet been reached. 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 anticipated.
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 DBSI. Such technological advances could also lower
the costs of other products or services that may compete with
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the E-SAT System, resulting in pricing pressures on DBSI's products and
services, which could adversely affect its results of operations.
Unscheduled Delays
Delays and related 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 DBSI; (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 DBSI to enter into agreements with space craft manufacturers and
other technology providers and with marketing providers at the times or on the
terms expected; 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 DBSI's
competitive position, could result in cancellation of E-SAT's FCC license, and
could have a material adverse effect on its 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.
Furthermore, each launch is expected to carry three satellites. Consequently, an
unsuccessful launch could adversely affect one-half of DBSI's planned satellite
constellation. DBSI will seek to obtain insurance to cover its exposure to loss
in this area.
DBSI has entered into a launch services agreement providing for two
payload launches from a launch site in 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 launches
will take place as planned 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 System'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 of
satellite performance or capacity could have a material adverse effect on the
efficiency of the overall system and the operation of the E-SAT System.
Limited Insurance
DBSI expects to obtain launch insurance for each of its satellite
launches. This insurance would, in the event of a launch failure, provide funds
for replacement launch services. In addition, DBSI expects to obtain satellite
replacement insurance, which would provide funds for rebuilding satellites
damaged in construction, shipment or launch. Lastly, DBSI is considering
obtaining insurance to cover loss or
<PAGE>8
damage to a satellite while in orbit. However, this insurance is available on a
very limited basis and it is very expensive. Consequently, DBSI may find it
uneconomical to cover this type of loss exposure. No assurance can be given that
in the event of a launch or construction failure, the insurance proceeds will be
sufficient to cover the costs of the launch and satellite. In the event a
covered loss occurs prior to the next event that would be subject to any such
policy, DBSI will need to satisfy the insurance underwriters that the
technological or other problems associated with the covered loss have been
addressed. The launch and replacement insurance marketplace is volatile and
there can be no assurance that launch or replacement insurance, or both, will be
available to DBSI, or if available, will be available on terms acceptable to
DBSI. DBSI will continue to evaluate the insurance marketplace to determine the
level of risk it is willing and able to absorb internally versus the amount of
risk to be transferred to third parties.
Regulatory Risks
United States License. The E-SAT System is subject to U.S. regulation.
Pursuant to its license from the FCC, E-SAT is authorized to provide data
messaging services in the U.S. Operation of the E-SAT System and the FCC license
it operates under 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, E-SAT must commence construction of the first two satellites by
March 1999 and the remaining four satellites by March 2001. On March 31, 1999,
DBSI, on E-SAT's behalf, entered into an agreement with a European space craft
manufacturer for the construction of the E-SAT satellites. DBSI notified the FCC
on April 8, 1999 that it had met the first milestone of E-SAT's license
(commencement of satellite construction by March, 1999). The FCC has neither
confirmed nor denied DBSI's assertion. If the FCC or any competing licensee
challenged DBSI's assertion, E-SAT's FCC license could be jeopardized. Further,
although E-SAT intends to meet future 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 or DBSI. In the event that E-SAT cannot meet these milestone
requirements, and the FCC does not waive or modify such requirements, E-SAT will
lose its FCC license. Such a loss would have an immediate and significant
adverse effect on DBSI's financial position and results of operations. 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 is effective for ten (10) years from the date on which
E-SAT certifies to the FCC that its initial satellites have been successfully
placed into orbit and that the operations of such satellites conform to the
terms and conditions of the FCC license. While DBSI 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.
<PAGE>9
In addition, the E-SAT System's remote terminal units ("RTU") to be
integrated with the fixed devices must be a type accepted (i.e., Part 15) by the
FCC. DBSI intends to seek approval of the RTU's under a separate application
with the FCC.
Foreign Authorization. In addition to the FCC license for operation of
the E-SAT System in the U.S., 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 DBSI proposes to offer its services, or that such
authorizations will be obtained in a timely manner or in the form necessary to
implement DBSI's proposed operations. In the event DBSI is not successful in
obtaining a foreign license in a particular country, it will be unable to offer
E-SAT System services in such country. Depending on the number of proposed RTU's
to be operating in a country, the unavailability to offer data messaging
services to such country may materially adversely affect DBSI'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 filings although the ITU
encourages applicants to cooperate to enable as many satellite systems as
possible to be implemented. While there can be no assurance that the E-SAT
System will successfully complete the international coordination process, most
countries seek to accommodate satellite systems of other countries and
historically, virtually all coordination requests are ultimately successful.
However, any delays in obtaining international satellite coordination would
result in delays in offering messaging services outside the U.S.
Utility Industry Acceptance
DBSI's success is largely dependent, at least initially, on whether
utility companies will contract for services utilizing the E-SAT System.
Although DBSI has other proposed uses of the data messaging services, utility
companies, such as gas, electrical and water utility companies remain the
primary focus of DBSI's marketing and development efforts. Although DBSI has
demonstrated the ability of Little LEO satellites to read data from meters
(RTUs) in proof-of-concept trials with utility companies, no assurance can be
given that DBSI will be successful in completing the development and commercial
implementation of automatic meter reading ("AMR") using the E-SAT System. DBSI
must complete a number of technical developments and continue to expand and
upgrade its capabilities prior to implementing its AMR services on a full
commercial basis. Utility companies typically go through numerous steps before
making final decisions which can take up to several years to complete.
Further, automatic meter reading utilizing satellite data messaging
services is a relatively new and 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 the E-SAT System is but one possible
solution for hard-to- access meter sites. No assurances can be given that DBSI
will be successful in achieving the adoption of the E-SAT System or to what
extent utilities will employ it. In the event that utility companies do not
<PAGE>10
adopt this technology, or do so less rapidly than expected, DBSI's future
results, including its ability to achieve profitability, will be materially and
adversely affected.
The development of low-cost RTU's 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 operated at a low cost in order to make E-SAT's data messaging services
attractive to commercial users. It is expected that the cost of RTUs will
decline as the volume of units produced increases. DBSI believes that 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 and with the capabilities that will attract a large enough
commercial subscriber base for DBSI to achieve profitability.
Reliance on United States and International Distributors to Market Services
DBSI intends to rely in part on third parties with existing distribution
channels in 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. DBSI has
committed significant time and resources to developing these potential
relationships and believes additional corporate opportunities may develop from
such business alliances. The ability and willingness of third parties to market
DBSI'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 profit on marketing the service, the cost
of the RTU, and the competitive environment. There can be no assurance that DBSI
will be successful in identifying distributors or value added resellers ("VARs")
for all of its target markets, or that such distributors and VARs that are
willing to market the services will be successful in their sales efforts.
DBSI 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 DBSI will be successful in identifying international distributors
in each country in which it intends to operate, or that the international
distributors will be successful in obtaining regulatory authorizations to offer
E-SAT System's services. Failure to do so may preclude DBSI from operating in
those markets.
Reliance on Vendors and Consultants
DBSI has relied on and will continue to rely on vendors and consultants
that are not employees of DBSI 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. DBSI has no long-term contractual
relationship with these vendors and consultants. While DBSI 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 deemed acceptable to DBSI.
<PAGE>11
In addition, DBSI relies and will continue to rely on outside parties to
manufacture parts and equipment for the E-SAT System such as meters,
transmitters, antennas, and other Little LEO satellite related devices. No
assurances can be given that these manufacturers will be able to meet DBSI's
needs in a satisfactory and timely manner or that DBSI 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 DBSI'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 DBSI's deployment of
the E-SAT System. Any such delay or increased costs could have a material
adverse effect on DBSI's business.
Development of Business and Management Growth; Key Personnel
DBSI expects to experience significant and rapid growth in the scope and
complexity of its business as it proceeds with the development of the E-SAT
System. In the future, DBSI will need to add staff to manage operations, control
the operations of the proposed satellites, handle sales and marketing efforts
and perform finance and accounting functions. See "Risk Factors - Reliance on
Vendors and Consultants." DBSI will be required to hire a broad range of
additional personnel before it begins commercial operations. This growth is
likely to place a strain on DBSI'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.
DBSI's performance is substantially dependent on the performance of its
executive officers and key personnel and on its ability to retain and motivate
high-quality personnel. The loss of any of DBSI's key personnel, particularly
Fred W. Thompson, President, could have a material adverse effect on DBSI's
business, financial condition, and operating results. In order to mitigate such
a loss, DBSI has a "key person" life insurance policy on Mr. Thompson in the
aggregate amount of $2,000,000.
Competition
DBSI 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 DBSI's
present and future competitors using Little LEO satellites have begun to address
collecting and transmitting data from the fixed devices for the utility industry
and vending machine industry and have substantially greater: (i) financial,
marketing, technical and manufacturing resources, (ii) name recognition, and
(iii) experience than DBSI. Such competitors may be able to respond more quickly
to new or emerging advancements in the industry and to devote greater resources
to the development, promotion and sale of their products and services. While
DBSI 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
systems.
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 commercial customers or
<PAGE>12
subscribers of data messaging services. Further, terrestrial-based wireless
communication systems are providing data messaging services to the utility
industry. Such existing and future competition could affect DBSI's ability to
form and maintain agreements with utility companies and other customers. No
assurances can be given that DBSI will be able to compete successfully against
current and future competitors, and any failure to do so would have a material
adverse effect on DBSI's business.
Penny Stock Regulations
The Securities and Exchange Commission (the "SEC") 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. DBSI'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 a 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 of the purchaser 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 DBSI's securities and affect the
ability of existing stockholders to sell their shares in the secondary market.
Certain Anti-Takeover Provisions
DBSI's Certificate of Incorporation contains a fair price provision that
requires a certain threshold approval by DBSI's board of directors in the event
of a merger, sale of assets or other type of business combination. In addition,
DBSI'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 DBSI. See "Certificate of Incorporation."
No Dividends
DBSI 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.
THE OFFERING
The Selling Stockholders are offering for resale up to 2,329,906 shares
of Common Stock and up to 595,000 shares of Common Stock assuming the exercise
of outstanding Warrants and options.
The shares of Common Stock, Warrants and options were issued in
connection with the following transactions:
(1) The issuance of 50,000 Units to an accredited investor at $2.50
per Unit. Each Unit consisted of one share of Common Stock and a
Warrant to purchase one share of Common Stock at $3.50 per share.
The unit holder has exercised the Warrants so that a total of
100,000 shares of Common Stock are included in this offering.
<PAGE>13
(2) The issuance of a total of 500,000 Units to four accredited
investors at $3.00 per Unit. Each Unit consists of one share of
Common Stock and a Warrant to purchase one share of Common Stock
at $4.00 per share. A total of 1,000,000 shares of Common Stock
are included in this Offering.
(3) The issuance of 75,000 Warrants issued as selling compensation to
one accredited investor. Each Warrant provides for the purchase
of one share of Common Stock at $3.75 per share. A total of
75,000 shares of Common Stock are included in this Offering.
(4) The issuance of 63,239 shares of Common Stock in settlement of a
legal dispute.
(5) The issuance of 1,333,334 shares of Common Stock to one purchaser
at $3.00 per share. All of the shares of Common Stock are
included in the Offering.
(6) The issuance of 333,333 shares of Common Stock to one purchaser
at $3.00 per share. All of the shares of Common Stock are
included in this Offering.
(7) Options to purchase 20,000 shares of Common Stock at $4.6875 per
share. All of the shares underlying the options are included in
this Offering.
The shares of Common Stock offered for resale and the shares of Common
Stock to be issued upon the exercise of the Warrants or options may be sold in a
secondary offering by the holders thereof pursuant to this Prospectus.
Pursuant to the terms of those private placements, DBSI is contractually
required to register the shares of Common Stock issued in the legal settlement
and the Common Stock which are part of the Units and the shares of Common Stock
to be issued upon the exercise of the Warrants or options.
USE OF PROCEEDS
DBSI will not receive any proceeds from the resale of the shares of
Common Stock by the Selling Stockholders. DBSI is registering the shares of
Common Stock, and shares of Common Stock upon the exercise of the Warrants for
resale pursuant to contractual terms incurred in the private placements.
<PAGE>14
PRICE RANGE OF COMMON STOCK
The following table sets forth the high and low bids for DBSI's Common
Stock during each quarter for the past two fiscal year ends and until the
quarter ended March 31, 1999, as quoted on the OTC Bulletin Board. DBSI's
trading symbol is "DBSS." Subject to meeting The Nasdaq Stock Market, Inc.
requirements, DBSI intends to apply to list the Common Stock included in this
registration on The Nasdaq SmallCap Market.
Common Stock
------------
Quarter Ended High Low
- --------------------- ------- ------
March 31, 1999 4.97 4.06
December 31, 1998 4.25 4.00
September 30, 1998 4.63 1.88
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
These quotations reflect inter-dealer prices, without retail markup,
mark-down or commission, and may not represent actual transactions.
As of March 31, 1999, DBSI had 12,508,760 shares of Common Stock
outstanding and approximately 443 stockholders of record. This number does not
include stockholders who hold DBSI securities in street name.
DIVIDEND POLICY
DBSI has not declared or paid any cash dividends since its inception.
DBSI currently intends to retain future earnings, if any, for use in the
operation and expansion of its business and 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
This discussion, other than the historical financial information, may
consist of forward-looking statements that involve risks and uncertainties,
including quarterly and yearly fluctuations in results, the timely availability
of new communication products, the impact of competitive products and services,
and the other risks described in DBSI's SEC filings, including this report.
These forward-looking statements speak only as of the date hereof and should not
be given undue reliance. Actual results may vary significantly from those
projected.
DBSI undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
General
DBSI has historically funded the operating and development costs
associated with the E-SAT system in excess of its pro rata amount evidenced by
its 20% share ownership of E-SAT. This financing excess has been treated as a
receivable from EchoStar. Since the approval of E-SAT's application for an FCC
license in March 1998, development costs associated with the E-SAT license have
increased significantly.
Plan of Operation
An essential element of DBSI's business plan is the negotiation with
EchoStar to obtain a controlling interest in E-SAT and/or the FCC license to
operate the Little LEO satellite system. Although DBSI will continue its plans
to develop the E-SAT System, such plans are contingent on the assumption that
current negotiations with EchoStar will result in DBSI gaining a controlling
interest in E- SAT and/or the FCC license.
Throughout 1999, DBSI plans to advance the development of the E-SAT
license by negotiating vendor agreements with the objectives of beginning
construction of the LEO satellites, securing a launch service provider, and
developing the ground support network. The plan includes a Research and
Development program to produce a low cost ASIC chip CDMA-DSSS RTU. DBSI plans to
satisfy all milestone conditions provided within the Little Leo license issued
by the FCC.
DBSI plans to attract partners to the E-SAT project who would be engaged
in technical and marketing aspects to effectuate the business plan. Technical
and marketing personnel resources may be increased and will depend on those
resources provided by E-SAT partners.
DBSI will seek to satisfy its 1999 cash requirements by supplementing
its present cash base with the potential future exercise of previously issued
warrants and other outside sources of capital including the sale of additional
stock or debt securities. In addition, DBSI will seek to attract new equity
partners in the E-SAT project.
<PAGE>16
Results of Operations
Three Months Ended March 31, 1999 Compared to March 31, 1998
Revenues
DBSI remains in the development stage and did not generate any revenues
in either the quarter ended March 31, 1999 or March 31, 1998.
Cost and Operating Expenses
Cost and operating expenses for the quarter ended March 31, 1999, were
$1,118,643 as compared to $404,464 for the quarter ended March 31, 1998. General
and administrative expenses increased by approximately $592,560 to $898,042
during the quarter ended March 31, 1999, compared to $305,482 in the quarter
ended March 31, 1998. This significant increase in general and administrative
expenses was due primarily to approximately $260,000 in compensation expense
relating to stock options granted for services provided by consultants and
non-employee directors, and the expansion of DBSI's business interests in Europe
and the U.S.
Research and development expenditures increased approximately $121,619
to $220,601 during the quarter ended March 31, 1999, compared to $98,982 in the
quarter ended March 31, 1998. This significant increase in research and
development was due primarily to the issuance of E-SAT's FCC license in April
1998 and related increases in engineering and design costs associated with
meeting the terms of the FCC license and the development of the satellite
system. In addition, $94,000 in compensation expense was incurred relating to
options granted for services provided by a consultant for the E-SAT project.
Other Income (Expense)
DBSI experienced a non-operating gain of $12,369 for the quarter ended
March 31, 1999, compared to a loss of $1,678 for the quarter ended March 31,
1998. During 1999, interest income was recognized on cash received in connection
with the exercise of approximately 2.5 million warrants to purchase the Common
Stock of DBSI at an exercise price of $3.00 per share.
Net Loss
DBSI's net loss for the quarter ended March 31, 1999, was $1,106,274
compared to a net loss of $406,142 for the quarter ended March 31, 1998.
Year Ended December 31, 1998 Compared to December 31, 1997
Revenues
DBSI remains in the development stage and did not generate any revenues
in either of the last two fiscal years ended December 31, 1998 or December 31,
1997.
<PAGE>17
Cost and Operating Expenses
Cost and operating expenses for the year ended December 31, 1998, were
$2,995,848 as compared to $1,682,277 for the year ended December 31, 1997.
General and administrative expenses increased by approximately $726,500 to
$2,198,701 during the year ended December 31, 1998, compared to $1,472,162 spent
in the year ended December 31, 1997. This 50% increase in general and
administrative expenses was due primarily to approximately $350,000 in stock and
cash as settlement of a lawsuit against an officer of DBSI, a compensation
expense of $159,000 relating to options for services provided by consultants,
and the expansion of DBSI's business interests in Europe and the U.S.
Research and development expenses increased approximately $587,000 to
$797,147 during the year ended December 31, 1998, compared to $210,115 spent in
the year ended December 31, 1997. This significant increase in research and
development was due primarily to the issuance of the E-SAT license in April 1998
and related increases in engineering and design costs not capitalized by DBSI
and associated with meeting the terms of the FCC license and the development of
the E-SAT System.
Other Income (Expense)
DBSI experienced a non-operating loss of $296,045 for the year ended
December 31, 1998, compared to a non-operating gain of $4,831,994 for the year
ended December 31, 1997. During 1998, interest income was recognized on cash
received in connection with the sale of approximately 2.8 million units of
DBSI's stock and warrants 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. Interest income was more than offset by losses in 1998 of $328,466 from
the sale of investment in Seimac and its equity interest in the results of
operations of E-SAT. DBSI sold its interest in Seimac during 1998. During 1997,
DBSI incurred interest expense of $308,094 relating to certain outstanding
debentures owed to EchoStar. During 1997, these debentures were exchanged for
EchoStar Common Stock that EchoStar held as collateral against such debentures.
DBSI experienced a loss of approximately $1 million relating to this exchange.
DBSI also incurred a loss of $80,975 attributed to its equity interest in the
results of operations of E-SAT and Seimac. These expenses/losses were more than
offset by a gain of approximately $6.2 million on the sale of equitable
securities.
Net Loss and Income
DBSI's net loss for the year ended December 31, 1998, was $3,293,493
compared to a net income of $3,068,917 for the year ended December 31, 1997.
During 1997, DBSI's net income was due primarily to a one-time gain on sale of
equity securities of approximately $6.2 million offset by operating and
non-operating expenses.
Liquidity and Capital Resources
DBSI has been in the development stage since its inception and has not
generated any significant revenues. DBSI's monthly expenses averaged
approximately $350,000 per month during the first quarter of 1999 which included
approximately $250,000 per month for operating, legal and consulting expenses,
and $100,000 per month for E-SAT research & development. Expenses will continue
to increase during 1999 with the demands of developing the satellites for the
E-SAT System (and contractual obligations related to such development) and
business applications of the E-SAT System, and additional capital will be
<PAGE>18
necessary to expand operations or continue current operations. During the
quarter ended March 31, 1999, DBSI raised $1.5 million in gross proceeds from a
private placement of its Common Stock and $7.5 million from the exercise of
outstanding warrants. DBSI made approximately $1.1 million in payments to
several contractors during the first quarter of 1999. Subsequent to the quarter
ended March 31, 1999, DBSI made additional contractual payments of $7.8 million.
Traditionally, DBSI has relied on equity and debt financings to fund its
operations. This financing was supplemented from the sale of DBSI's interest in
entities that held direct broadcast satellite licenses. DBSI no longer has any
interest in direct broadcast satellite licensees. DBSI will need substantial
additional capital, an estimated $111 million over the next 24 months, to
construct and launch the satellites comprising the E-SAT System. Further, the
construction of the first two of the six planned satellites was required to
commence by March 1999 pursuant to the terms of the FCC license granted to E-SAT
and will require milestone payments of an additional $24.5 million over the next
12 months, through April of 2000.
DBSI had cash and cash equivalents of $9,306,274 and $1,291,711 as of
March 31, 1999 and at December 31, 1998, respectively. DBSI had working capital
of $8,727,069 as of March 31, 1999 compared to working capital of $233,078 as of
December 31, 1998. Until DBSI is able to develop, construct and operate its
E-SAT System and derive revenues therefrom, DBSI will continue to use cash
obtained from outside sources for its operations and development of the E-SAT
System.
Net cash used in operating activities was $1,229,075 for the quarter
ended March 31, 1999, as compared to $50,007 for the quarter ended March 31,
1998. Net cash used in operating activities increased during 1999 as compared
with the same quarter last year was a result of increased cash expenditures as
DBSI expanded its development activity relating to the E-SAT System. The
increased level of development costs is expected to continue through 1999.
Net cash used in operating activities was $2,161,111 for the year ended
December 31, 1998, as compared to $2,972,153 for the year ended December 31,
1997. Net cash used in operating activities during 1998 as compared with the
prior year was a result of the 1998 loss of $3,293,493 as offset by certain
non-cash charges, a loss on sale of investment in Seimac and the equity in E-SAT
losses. Cash expenditures accelerated in the fourth quarter of 1998 as DBSI
increased its level of development activity relating to the E-SAT System. An
increased level of development costs is expected to continue into 1999. Net cash
used in operating activities was $2,972,153 for the year ended December 31,
1997, which reflects an increase compared to 1996, due to the payment of
accounts payable which accrued during 1996 and were paid in 1997.
Net cash used in investing activities for the quarter ended March 31,
1999, was $1,126,342. This net cash used represents a loan to a director secured
by DBSI's stock for $60,000 and approximately $1 million in progress payments
relating to satellite construction costs. Net cash used in investing activities
was $204,848 in 1998 and was comprised of investments in and advances to E-SAT
or EchoStar.
Net cash used in investing activities for the year ended December 31,
1998, was $1,484,958. This net cash used represents the difference between the
proceeds from the divestiture of Seimac of $199,940 less DBSI's advances to
E-SAT of $407,292 and approximately $1.2 million in progress payments relating
to satellite construction costs. Net cash provided by investing activities was
$4,183,565 in 1997 as DBSI received proceeds of $3,573,677 in connection with
its divestiture of its interest in Continental Satellite Corporation.
<PAGE>19
Net cash provided by financing activities for the quarter ended March
31, 1999, was $10,369,980 compared to no financing activities for the quarter
ended March 31, 1998. Net cash provided by financing activities during 1999
related to the net proceeds from the sale of units of common stock for $1.5
million, exercise of warrants for $7.5 million, and the exercise of options by
directors, officers and employees of DBSI, as well as other non-employee grants.
Net cash provided by financing activities for the year ended December
31, 1998, was $4,554,726 compared to $1,230,994 used in financing activities for
the year ended December 31, 1997. Net cash provided by financing activities
during 1998 related to the net proceeds from the sale of units of common stock.
Net cash used in financing activities of $1,230,994 during 1997 related
primarily to the repayment of debentures in the amount of $1,043,445.
Risks and Uncertainties Affecting Future Operating Results
A number of factors could cause future results to differ materially from
historic results. Among these factors is the fact that DBSI is currently
negotiating with EchoStar regarding DBSI's obtaining a controlling interest in
E-SAT, which owns the FCC license. EchoStar owns 80% of E-SAT. To date,
negotiations have not produced acceptable terms for the transfer of control of
the FCC license. Other factors, in addition to those identified in this report,
which could affect future results would include DBSI's ability to retain a prime
contractor for the development, construction and deployment of the E- SAT
System, DBSI's ability to raise significant additional capital from outside
sources for the development of the E-SAT System, the availability of capital on
commercially acceptable terms, the completion of a commercially viable E-SAT
System, the dependence and uncertainty of utility companies or other commercial
customers to utilize such data messaging service, the reliance on third parties
for the advancement of the design, manufacturing and marketing of the E-SAT
System, satisfying the milestones of E-SAT's FCC license and construction
contracts, the fulfillment of contract obligations by suppliers and other third
parties, the availability of qualified personnel and equipment, delays in the
receipt of or failure to receive necessary governmental approvals, obtaining
permits and licenses or renewals thereof, risks and uncertainties relating to
general economic and political conditions, both domestically and
internationally, changes in the law and regulations governing DBSI's activities
in the Little LEO satellite technology, results of DBSI's financing efforts and
marketing conditions, and other risk factors related to DBSI's business. Readers
of this report are cautioned not to put undue reliance on "forward looking"
statements which are, by their nature, uncertain as reliable indicators of
future performance.
Successfully addressing the factors discussed above is subject to
various risks described in this report, as well as other factors which generally
affect the market for stocks of development stage, high technology companies.
These factors could affect the price of DBSI's stock and could cause such stock
prices to fluctuate significantly over relatively short periods of time.
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 DBSI'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 DBSI's assessment, because DBSI's and its subsidiaries'
information systems are primarily comprised of recently purchased personal
<PAGE>20
computers and software, DBSI does not believe that the Year 2000 Issue will
materially affect its operations.
In addition, in developing the E-SAT System, DBSI 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 control stations which are Y2K compliant. DBSI has
entered into contracts with several vendors to develop the E-SAT System, and, an
assessment has been made as to their Year 2000 compliance. As part of ongoing
contract negotiations, DBSI will request and determine the vendors' 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 DBSI's business plans.
<PAGE>21
BUSINESS
This discussion, other than the historical financial information, may
consist of forward-looking statements that involve risks and uncertainties,
including quarterly and yearly fluctuations in results, the timely availability
of new communication products, the impact of competitive products and services,
and the other risks described in DBSI's SEC reports. These forward-looking
statements speak only as of the date hereof and should not be given undue
reliance. Actual results may vary significantly from those projected.
DBSI undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
General
DBSI was formed August 3, 1989, under the laws of the State of Delaware.
DBSI is involved in designing and developing a data messaging service utilizing
low earth orbit ("LEO") satellites. DBSI anticipates developing its business
primarily through its investment in E-SAT, Inc., a Colorado corporation
("E-SAT") and through DBSI's subsidiary, Newstar Limited ("Newstar") and to a
lesser extent through its second subsidiary, Global Energy Metering Service,
Inc. ("GEMS").
DBSI, through its wholly-owned subsidiary, Newstar, proposes to
construct, launch and operate a system (the "E-SAT System") utilizing six
non-voice, non-geostationary mobile ("Little LEO") satellites to provide
two-way, low-cost data messaging services worldwide. In March 1998, E-SAT was
granted a license by the Federal Communications Commission ("FCC") to develop
and operate the E-SAT System. (See "FCC Regulations".) DBSI's proposed
development of the E-SAT System is intended to utilize the FCC license granted
to E-SAT.
With DBSI's technology, these Little LEO satellites are capable of
collecting and transmitting data at regular intervals from fixed devices such as
meters (i.e., electric/gas meters on homes and buildings, vending machines,
stream gauges, etc.) at a cost substantially less than manually retrieving the
information. Meters equipped with DBSI's designed Remote Terminal Units ("RTU")
will allow Little LEO satellites to retrieve data from the meters, store such
data, and forward the data at specified times to an earth station to be
processed, validated and delivered to the customer. DBSI intends to provide data
messaging services for the energy industry including gas and electrical
utilities and water agencies, as well as for vending machines, heavy equipment
usage, and environmental monitoring, worldwide.
Our goal is to provide low-cost data messaging services using Little LEO
satellites to enable businesses to economically gather data from fixed devices
located in remote and hard-to-access locations. With the emergence of automatic
meter reading ("AMR") and the deregulation of the utility industry, one of
DBSI's target markets is the electric and natural gas utilities, particularly
their high-cost-to-read metering segment which historically required such "meter
reading" to be conducted by utility personnel. This labor intensive activity
presents 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, all
of which can contribute to higher costs for utilities.
Other target markets include vending machines, where numerous machines
could be monitored for stock and coin levels; heavy equipment usage, where heavy
equipment could be monitored worldwide for in-use time, mileage and maintenance
<PAGE>22
scheduling; and environmental monitoring, where plant waste discharge, streams,
lakes or air could be continuously monitored for pollutants, volume, etc.
DBSI began business operations by purchasing interests in direct
broadcast satellite licensees. in the past, DBSI has had an interest in Direct
Broadcast Satellite Corporation which was subsequently acquired by EchoStar
Communications Corporation ("EchoStar"). In addition, DBSI had an equitable
interest in Continental Satellite Corporation. During 1997, DBSI sold its last
indirect interest in a direct broadcast satellite licensee and settled
litigation involving DBSI's equitable interest in another direct broadcast
satellite licensee.
Prior to its involvement with E-SAT, DBSI was developing hardware and
software for data collection and transmission. DBSI has conducted
proof-of-concept demonstrations with utility companies to determine the
effectiveness and viability of Little LEO satellites to collect and transmit
data from fixed devices. DBSI has also been evaluating rocket and satellite
vendors in anticipation of acquiring an FCC license to operate a Little LEO
satellite system. As a result of these efforts, DBSI had identified several
potential prime contractors to construct the LEO satellites and a launch service
provider to lift the satellites into their intended orbit. (See "Satellite
Constellation".)
Ownership Interest in E-SAT
E-SAT was incorporated in 1994 by DBSI and EchoStar. Currently, DBSI
holds 20% of the issued and outstanding shares of E-SAT common stock and
EchoStar holds the remaining 80%. E-SAT was formed for the purpose of acquiring
an FCC license to develop, construct and operate a Little LEO satellite system.
Since E-SAT's formation, DBSI has had negotiations with EchoStar to transfer
control of E-SAT to DBSI. If and when DBSI obtains a controlling interest in
E-SAT or the FCC license, DBSI, through its subsidiary Newstar, will assume full
responsibility for the development, launching and operation of the E-SAT System
and the marketing of its transmission capacity through joint ventures with other
partners. In light of the recent satellite construction and launch services
agreements entered into by DBSI, DBSI is actively negotiating with EchoStar
regarding the future development rights of the FCC license and the E-SAT System.
However, despite several months of negotiations, EchoStar has not yet
transferred control of E-SAT to DBSI. No assurance can be given that DBSI will
be able to obtain control of E-SAT or enter into a leasing or other arrangement
with E-SAT on terms deemed acceptable to DBSI. Further, any transfer of a
controlling interest in E-SAT will be subject to FCC approval.
In the event that DBSI cannot obtain control of E-SAT or otherwise
acquire the rights to utilize E-SAT's FCC license, DBSI will continue to have a
minority interest in E-SAT and be subject to the limitations inherent in such a
position. Furthermore, DBSI's percentage of ownership in E-SAT may be subject to
dilution if DBSI cannot meet E-SAT's future funding requirements. The total
capital requirements for the E-SAT System's proposed data transmission system,
including the anticipated six satellites and other start up costs, is estimated
to be approximately $111 million. For the years ended December 31, 1998 and
1997, DBSI funded E-SAT expenses of $407,292 and $385,671, respectively. These
amounts represent greater than 20% of E-SAT's total expenditures for those years
and includes advances made by us on behalf of EchoStar. No assurance can be
given that DBSI will have sufficient resources to meet the financial
requirements of E-SAT to maintain DBSI's current equity interest in E- SAT.
<PAGE>23
In addition, if DBSI does not obtain control of E-SAT's FCC license,
DBSI's business plans set forth in this Prospectus may have to be curtailed or
suspended. There is also the possibility that DBSI would be unwilling or unable
to proceed with DBSI's development plans as currently described below. This
might result in DBSI's inability to proceed with DBSI's current satellite
construction and launch agreements. Any cancellation or significant revision of
these contracts could result in substantial costs to DBSI.
Little LEO Satellite Technology Development
The technology of using Little LEO satellites has been in existence for
over 40 years and has been used extensively in weather satellite applications
worldwide. However, the commercial use of Little LEO satellites is in its
development stage.
GEMS, a wholly-owned subsidiary of DBSI, was formed in December 1994 to
develop commercial service applications utilizing Little LEO satellite
technology. A previous company, JPS Systems, Inc. ("JPS") had been working on
this technology and, in 1995, the business of JPS was consolidated with GEMS and
JPS was 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. JPS conducted a proof-of-concept trial
for Pacific Gas & Electric Co. in California, in which data from several natural
gas wellhead meters was collected and transmitted by Little LEO satellites to
the customer. 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 utility companies as well as collection and
transmission of data from other fixed devices. This plan is intended to provide
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 were conducted in
conjunction with ABB Power T&D Company, Inc. ("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. These early trials
utilized 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").
We also had an agreement with North American CLS, Inc. ("NACLS"), which
provided access to a limited amount of Little LEO satellite capacity for trials
of DBSI's AMR applications utilizing the Argos System. In 1996, GEMS received a
purchase order for Little LEO transmitters that could be used with the Argos
System as part of its overall development of a satellite transmitter integrated
with an electronic utility meter from ABB. DBSI's agreement for use of the Argos
System expired on December 31, 1997, and in March 1998, NOAA established new
criteria which limits future commercial use of the Argos System and effectively
prohibits us from using the Argos System. The expiration of the NACLS agreement
and the future limits on use of the Argos System have caused GEMS and ABB to
suspend the purchase order. Although DBSI and ABB intend to pursue the use of
the LEO satellite 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 DBSI.
<PAGE>24
The E-SAT System
DBSI is focusing its technology development on the E-SAT System. The
E-SAT System will consist of the following: six Little LEO satellites; a Mission
Control Center (to manage data flow); a Satellite Control Center (to handle
telemetry, tracking and control of the satellites); an Earth Station (serving as
the network control center); a Ground Support Network (to distribute data to
customers); and numerous RTU's (transmitting data to the satellites). The E-SAT
System has been designed to provide low cost messaging services worldwide for
use primarily by industrial/commercial customers. The E- SAT System is
specifically suited for the projected service markets and is intended to provide
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, will electronically
transmit the relevant data in digital form to E-SAT's satellite which stores the
collected data to be forwarded to the Earth Station. The Mission Control Center
will provide overall operational control of the collection and retrieval of
data, and will interface with the Earth Station and the Satellite Control Center
which will provide overall operational control of the satellites. Based on the
current design, E- SAT estimates that these 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.
Similar advantages could be realized with numerous vending machines, residential
propane gas tanks or remote environmental monitoring.
The E-SAT System will be transmitting non-voice data in short data
transmissions and will not be designed for transmitting data that requires
real-time or near real-time communications. As a result, the System's
infrastructure is expected to be simpler and less costly than those Little LEO
systems offering real-time data information services. The E-SAT System will also
incorporate emergency back-up systems.
CDMA/DSSS Technology
Due to the continuing growth of electrical and electronic equipment,
such as personal paging systems that incorporate wireless communication
technology, the radio frequency spectrum has become crowded or "noisy".
Commercial applications demand the communication system transmit data reliably
and accurately. This objective is harder to achieve with conventional solutions
because of numerous wireless systems creating more noise in the frequency bands
of operation. To minimize the impact of noise and interference on the data being
transmitted, the E-SAT System will use Code Division Multiple Access/Direct
Sequence Spread Spectrum ("CDMA/DSSS") modulation techniques. CDMA/DSSS will
enable the E-SAT System to function well in a noisy radio frequency environment
and achieve its particular data transmission objectives.
With most conventional modulation techniques, energy concentration is
maximized for a narrowband transmission channel. While narrowband transmission
normally uses a single carrier channel, the transmitted signal must be strong
enough to be recognized over the background noise. Therefore, RTU's operating in
a narrowband channel must have relatively high power capability. CDMA/DSSS
spreads the data signal over the entire band of operations reducing the power
required by an E-SAT RTU to transmit data to a satellite. E-SAT is presently the
only commercial Little LEO system to implement CDMA/DSSS in its communications
design. DBSI believes CDMA/DSSS is a strategic advantage over competing systems
to effectively transmit data messages.
<PAGE>25
In operation, the E-SAT System would assign each RTU with an individual
and a group identification number. All individual and group transmissions
between the RTU and the LEO satellite would be managed by the Mission Center
based on a predetermined schedule. The receiver on each E- SAT satellite will
store the incoming code stream over the entire frequency band of operation and
forward that code stream to the Earth Station as it passes over. Signal
processing performed at the Mission Center regenerates the original RTU data
messages by digitally screening out unwanted background noise signals. This
schedule would be synchronized with the Satellite Control Center so that each
satellite can download collected data and receive new instructions as it passes
over the Earth Station. The total time of connectivity scheduled between a group
of RTU's and a satellite will be optimized by the number of RTU's in any
particular group.
Satellite Constellation
The initial constellation to be launched in the E-SAT System will
consist of six satellites. DBSI's plans are to initially launch three satellites
on a single launch vehicle in a circular, near polar orbit at an altitude of
approximately 550 miles and a 99 degree inclination angle. At this altitude,
there will be fourteen revolutions per satellite per day. After the initial
three satellites are deployed and become operational, and the system is
established, an additional three satellites will be deployed in a second near
polar orbital plane within FCC guidelines. The Little LEO satellites will be
almost constantly illuminated by the sun, thereby significantly reducing battery
usage. Supplemental battery power will be required only for power load leveling,
occasional brief eclipse periods and contingencies.
In August 1998, DBSI and Matra Marconi Space France s.a. ("MMS") entered
into a non-binding memorandum of understanding to engage and appoint MMS as
prime contractor for the design, construction, delivery and launch support
services of six Little LEO satellites. Further, in August 1998, DBSI and SAIT
Radio Holland SA ("SAIT") entered into a non-binding letter of intent to explore
an arrangement dealing with SAIT as the main contractor for the engineering,
development and provision of hardware and software for E-SAT's RTU's. In the
latter part of September 1998, DBSI and MMS mutually agreed to terminate their
non-binding memorandum of understanding. DBSI engaged SAIT to perform studies on
antennas for the proposed RTU, develop and test RTU prototypes, and assist in
RTU design in anticipation of manufacturing RTU's for us. The letter of intent
with SAIT expired under its terms on November 23, 1998. No assurance can be
given that DBSI and SAIT will enter into a contract to manufacture the RTU.
On December 15, 1998, DBSI and Alcatel Space Industries ("Alcatel")
entered into a Memorandum of Understanding ("MOU") and an Authority to Proceed
("ATP") pursuant to which Alcatel would become the prime contractor for the
design, construction and delivery into orbit of the E- SAT System satellites.
DBSI and Alcatel are currently negotiating a definitive construction agreement.
Upon signing the MOU and ATP, DBSI paid $1,000,000 to Alcatel to commence
project work. DBSI made two additional payments of $500,000 each to Alcatel in
January and February of 1999. The MOU expired on March 15, 1999, while the ATP
was extended to and completed on April 15, 1999. At this time, both companies
are continuing to negotiate a final contract. Although DBSI believes a
definitive agreement will be reached with Alcatel, there can be no assurance
that such will be the case. If no final agreement is reached, DBSI would have to
find some other company to be the prime contractor for the E- SAT System.
On March 31, 1999, DBSI entered into a contract with Surrey Satellite
Technology Ltd. of the U.K. ("SSTL") to design and construct the six satellites
for the E-SAT System. The construction contract includes SSTL providing
<PAGE>26
designing, developing, manufacturing, and testing the E-SAT microsatellites. The
contract contains provisions whereby SSTL will provide integration support with
other satellite sub-systems and will provide launch and early operation support
once the satellites are placed into orbit. The contract has a term of two (2)
years.
DBSI previously entered into a launch reservation agreement with
Eurockot Launch Services GmbH ("Eurockot"). On March 31, 1999, DBSI entered into
a formal launch service agreement with Eurockot. The first three satellites,
when constructed, are expected to be launched on a single Eurockot launch
vehicle. Under the terms of the launch service 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.
The SSTL and Eurockot contracts provide for contract payments totaling
$47 million.
Investment in Seimac Limited
In November 1995, DBSI purchased a 20% equity ownership interest in
Seimac Limited ("Seimac"), a privately-held Canadian satellite radio design and
manufacturing company. On April 30, 1998, DBSI sold its interest in Seimac for
$200,000 in cash and cancellation of $51,417 of debt owed to Seimac.
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 from the FCC to launch and operate their satellites and to provide
permitted services in assigned spectrum segments.
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 guidelines 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. 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. 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
<PAGE>27
engage in consultations as required by Article 14 of the INTELSAT Agreement and
Article 8 of the Inmarsat Convention.
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. 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. DBSI
believes that the contract with Surrey Satellite Technology, Ltd. represents the
commencement of satellite construction and satisfies the initial FCC requirement
that satellite construction commence on or before March 31, 1999. By letter
dated April 18, 1999, DBSI's representative notified the FCC of this
achievement. To comply with the requirements of the FCC license, DBSI is
currently negotiating with Alcatel for the design and development of the E-SAT
satellites, however, no contract has yet been entered into. (See "Satellite
Constellation".) In the event E- SAT fails to meet these and other specified
conditions, absent any modification of terms by the FCC, E- SAT could jeopardize
its license with the FCC.
International Regulations
The E-SAT System operates in frequencies that are allocated on an
international basis under the authority of the International Telecommunications
Union ("ITU"). The U.S., on behalf of various Little LEO service providers,
pursued international allocations of additional frequencies for use by Little
LEO systems. 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. The coordination 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 second 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. E-SAT is working with the FCC to
complete the necessary coordination as well as to update both the first and
second ITU filings with the 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 E-SAT System will successfully complete the
international coordination process, most countries seek to accommodate satellite
systems of other countries and historically, virtually all coordination requests
are ultimately successful. However, any delays in obtaining international
satellite coordination would result in delays in offering messaging services
outside the U.S. The United States permits its licensed systems to be
implemented even when the coordination process has not been completed. In
addition, E-SAT must receive operational authority called "landing rights" from
each of the foreign countries in which it proposes to provide services. DBSI
intends to utilize international distributors or licensees of each country to
obtain such authority. In the event DBSI is unable to obtain authority to offer
<PAGE>28
its service in a particular country or region, this may have a material adverse
affect on its business plans and operations.
Potential Markets
Our goal is to provide low cost data messaging satellite services
worldwide using the Little LEO satellite technology. DBSI believes that E-SAT's
two-way, low cost data messaging services will reduce costs for customers by
providing a more efficient and reliable 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. DBSI expects to 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.
We envision a customer base 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 that have dispersed
operations and may require aggregate billing services. It is the rural and
hard-to-access meter segment that DBSI will initially focus its marketing
efforts. DBSI intends to 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. DBSI 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 cooperatives 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. DBSI believes its
planned data messaging services will address these needs.
Natural Gas Wells. The natural gas industry is regulated by the U.S.
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. (Pennwell Publications). It is estimated that more than
285,000 well heads exist 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
U.S. Collecting data from these fixed locations is another service DBSI intends
to 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. The waste disposal
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-rates from multiple points. In
addition, DBSI believes that existing irrigation systems for agricultural and
land management applications will benefit significantly from E- SAT System's
monitoring and remote control services.
<PAGE>29
Vending Machines. The E-SAT System is also designed to remotely communicate
with stand- alone equipment, such as vending machines. This remote
communications capability is expected to increase the efficiency of the
personnel servicing the vending machines, and has the potential to increase
sales for those companies. For example, a soda distributor tracks the contents
of each soda vending machine, thus allowing the soda truck driver to know
exactly which kind and quantity of soda to bring to refill the vending machine.
As of 1997, in the U.S. there were approximately 6.9 million vending machines
owned and operated by independent vending machine companies (Vending Time Census
of Industry Issue 1998).
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 FCC licensed commercial Little LEO satellite operators (Orbcomm,
LeoOne, and Final Analysis). A fifth Little LEO operator is Volunteers In
Technical Assistance ("VITA"), a non-profit organization established to transmit
humanitarian/ emergency data and is not deemed to be a competitor to DBSI.
Our competitors are all attempting to serve multiple markets such as
cargo and vehicle mobile asset tracking, monitoring and remote control personal
communications services, emergency services and transaction processing. By
choosing to address markets requiring near real time inter-connectivity, DBSI's
competitors (excluding VITA) 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
compared to the E-SAT System. DBSI believes the RTU's designed for other Little
LEO operators are more expensive and require more power to operate than E- SAT's
RTU's. DBSI believes that the lower uplink power requirement for an E-SAT RTU
will give E- SAT System a cost competitive advantage when targeting fixed device
applications.
A number of competitors are currently developing proposals to implement
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 densely populated urban areas, it may not be cost effective to
implement in rural and hard-to-access areas; and it is in these niche market
locations that DBSI intends to compete effectively by utilizing E-SAT System's
satellite technology.
Employees
As of March 31, 1999, DBSI had nine full-time employees. DBSI considers
its relationship with its employees to be good.
<PAGE>30
PROPERTY
DBSI and its subsidiaries 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.
MANAGEMENT
Directors and Executive Officers of DBSI
The present directors, executive officers, and key employees of DBSI,
their ages, positions held in DBSI, and duration as such, are as follows:
<TABLE>
<S> <C> <C> <C>
Name Position Age Period
- --------------------------- ----------------------------------- --------- --------------------------
Fred W. Thompson Chairman of the Board, President, 56 December 1992 - present
Chief Executive Officer, and
Chief Financial Officer November 1993 - present
Michael T. Schieber Director, Secretary 59 December 1992 - present
E. A. James Peretti Director, Chief Operating Officer 56 February 1996 - present
H. Tate Holt Director 47 February 1996 - present
Jerome W. Carlson Director 62 May 1997 - present
Jessie J. Knight, Jr. Director 48 February 1999 - present
Gregory T. Leger Executive Vice President 43 March 1998 - present
Engineering
Frederick R. Skillman, Jr. Vice President, Business 37 August 1995 - present
Development
</TABLE>
DBSI adopted staggered terms for its Board of Directors at its 1996
Annual Stockholders Meeting. Messrs. Thompson, Peretti and Knight will serve
until the 1999 annual meeting of stockholders or until their successors have
been elected; Mr. Carlson will serve until the 2000 annual meeting of
stockholders or until his successor has been elected; 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 does not have a standard
arrangement for compensation, but has in past received, stock options as
compensation.
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.
<PAGE>31
Fred W. Thompson, serves as Chairman of the Board, President, and CEO of DBSI.
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 DBSI 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. 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 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 a director of Valley Community Bank and Tri-Valley Business Council, as well
as director and advisor for several private companies. He holds a BS degree from
the University of California at Davis and an MBA from the Stanford Graduate
School of Business.
<PAGE>32
Jessie J. Knight, Jr., Director, appointed in February 1999, is President and
Chief Executive Officer of the Greater San Diego Chamber of Commerce. He was a
Commissioner of the California Public Utilities Commission from 1993 through
December 1998. Appointed by former Governor Peter Wilson, he was one of five
individuals responsible for economic and regulatory oversight of California's
$52 billion telecommunications, utility, trucking and rail industries. Before
his appointment to the Commission, he was Executive Vice-President of the San
Francisco Chamber of Commerce, responsible for international operations,
economic development and attracting businesses to San Francisco. He also served
as Vice- President, Marketing for the San Francisco Newspaper Agency, a $400
million publishing operation encompassing the San Francisco Chronicle and the
San Francisco Examiner. Mr. Knight is a director of Blue Shield of California
and serves on the board of directors of Avista, Inc. Mr. Knight holds a BA
degree from St. Louis University and an MBA from the University of Wisconsin.
Gregory T. Leger, Executive Vice President Engineering, joined DBSI 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.
Frederick R. Skillman, Jr., Vice President Business Development, joined DBSI in
August 1995. Mr. Skillman manages the business case development and oversees the
marketing and the sales activities for DBSI. Mr. Skillman has been working in
the utility industry for 14 years, with extensive utility operating experience,
contract administration, product development, project management and direct line
supervision. Prior to joining DBSI, 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, Carlson,
and Peretti, a nominating committee consisting of Messrs. Holt, Carlson and
Thompson, and a compensation committee consisting of Messrs. Schieber and
Carlson.
The primary functions of the audit committee is to review the scope and
results of audits by DBSI's independent auditors, DBSI'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 DBSI's various stock option plans
and approves compensation, remuneration and incentive arrangements for officers
of DBSI.
<PAGE>33
Family Relationships
There are no family relationships between any director, executive
officer.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation of DBSI's Chief Executive Officer and each employee of DBSI or its
subsidiaries who earned in excess of $100,000 for the year ended December 31,
1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Long-Term
Annual Compensation Compensation
--------------------- --------------
Other Securities
Name and Annual Underlying All Other
Principal Position Year Salary Bonus Compensation(1) Options Compensation
- --------------------- ------ ---------------- -------- ---------------- -------------- ---------------
Fred W. Thompson 1998 $ 180,000 $20,000 $ 8,005 - 0 - $235,691(2)
Chief Executive 1997 $ 80,000(3) - 0 - $ 6,705 185,000
Officer 1996 $ 80,000(4) - 0 - $ 4,245 312,500
- -----------------------------------------------------------------------------------------------------------
E.A. James Peretti 1998 $ 155,000 - 0 - $ 2,576 - 0 -
Chief Operating 1997 $ 155,000 - 0 - $ 3,732 150,000
Officer 1996 $ 155,000 - 0 - $ 971 375,000
- -----------------------------------------------------------------------------------------------------------
Randall Smith 1998 $ 72,917 - 0 - $ 1,798 - 0 - $ 52,0839(5)
Former Executive VP 1997 $ 125,000 - 0 - $ 2,385 87,500
GEMS 1996 $ 125,000 - 0 - $ 2,216 125,500
- -----------------------------------------------------------------------------------------------------------
Gregory T. Leger 1998 $ 93,230 $20,000 $1,914 125,000
Executive VP
- -----------------------------------------------------------------------------------------------------------
Frederick R. Skillman, 1998 $ 110,000 - 0 - $2,512 - 0 -
Jr., Vice President
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Consists entirely of payment of insurance premiums.
(2) Represents $27,691 of pay in lieu of vacation and $208,000 of compensation
deferred in 1996 and 1997.
(3) $80,000 paid in cash, $100,000 deferred pursuant to his employment
agreement.
(4) $72,000 paid in cash, $108,000 deferred pursuant to his employment
agreement.
(5) In July 1998, DBSI agreed to a severance package with Mr. Smith consisting
of $125,000 in cash payments to be made through July 1999 (of which $52,083
was paid in 1998) and the immediate vesting of all of Mr. Smith's unvested
stock options.
Employment Agreements
Mr. Thompson entered into an employment agreement with DBSI 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
DBSI's Common Stock. In October 1998, DBSI paid Mr. Thompson the amount of
$208,000 related to his previously deferred compensation through December 31,
1997. DBSI maintains 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.
<PAGE>34
DBSI also entered into an employment contract with E.A. James Peretti,
Chief Operating Officer of DBSI and 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.
Effective March 1, 1998, DBSI entered into a three-year employment
agreement with Mr. Gregory T. Leger to serve as Executive Vice President
Engineering. Under the employment agreement, Mr. Leger's annual salary is
$120,000. He also received $20,000 upon the execution of the agreement and
received an additional $20,000 in March 1999, as a bonus. Mr. Leger also
received an option to purchase 125,000 shares of DBSI Common Stock subject to
vesting requirements.
Stock Option Plans
DBSI has established the 1998 Stock Option Plan (the "1998 Plan") which
was approved by the stockholders 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 DBSI. 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 DBSI 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 DBSI on the date of grant. The aggregate Fair Market Value (determined
as of the Grant Date) of the Stock for which Incentive Stock Options may first
become exercisable by Optionee during any calendar year under this Plan,
together with that of Stock subject to Incentive Stock Options first exercisable
by such Optionee under any other plan of DBSI or any Subsidiary, cannot 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 option is exercisable only so long as the optionee remains employed by
DBSI. No option is transferable by the optionee other than by will or the laws
of descent and distribution. As of March 31, 1999, options to acquire 150,000
shares of Common Stock were outstanding.
DBSI 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 DBSI. The 1996 Plan
provided for the grant of up to 1,650,000 non-statutory and incentive stock
options of which 860,236 were outstanding as of March 31, 1999. Under the 1996
Plan, officers, directors, consultants and employees of DBSI 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 DBSI 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
$100,000. Shares subject to options under the 1996 Plan may be purchased for
cash. Unless otherwise provided by the Board, an option granted under the 1996
Plan is exercisable for a term of ten years (or for a shorter period up to ten
<PAGE>35
years). The 1996 Plan is administered by the Board of Directors and its
Compensation Committee, which has discretion to determine optionees, the number
of shares to be covered by each option, the exercise schedule, and other terms
of the options. The 1996 Plan may be amended, suspended, or terminated by the
Board, but no such action may impair rights under a previously granted option.
Each option is exercisable only so long as the optionee remains employed by
DBSI. No option is transferable by the optionee other than by will or the laws
of descent and distribution.
DBSI also has established three stock option plans to award certain
employees, directors, and consultants with the opportunity to purchase DBSI's
Common Stock. Under DBSI's 1993 Incentive Stock Option Plan ("1993 ISO Plan")
options to purchase up to 69,644 shares of Common Stock were issued to eligible
employees. Under the Non-Qualified Stock Option Plan for Non-Employee Directors
("Director's Plan") options to purchase up to 48,750 shares of Common Stock were
granted to non-employee directors. Under the Non-Qualified Stock Option Plan for
Consultants ("Consultant's Plan") options to purchase up to 14,625 shares of
Common Stock were granted to certain consultants. As of March 31, 1999, options
to acquire 24,875, 42,500, and 14,625 shares of Common Stock were outstanding
under the 1993 ISO Plan, Director's Plan and Consultant's Plan, respectively.
OPTION GRANTS IN THE YEAR ENDED DECEMBER 31, 1998
INDIVIDUAL GRANTS
<TABLE>
<S> <C> <C> <C> <C>
Number of
Securities
Underlying % of Total Options
Options Granted to Employees Exercise or Base Expiration
Name Granted 1998 in Fiscal Year 1998 Price ($/SHARE) Date
- --------------------------- ---------------- ---------------------- ------------------- ------------
Gregory T. Leger,
Executive Vice President 125,000 100% $.53 3/1/08
</TABLE>
FISCAL YEAR-END OPTION VALUE
<TABLE>
<S> <C> <C>
Number of Securities Value(s) of Unexercised In-the-
Underlying Unexercised Money Options/SARs at FY
Options/SARs at FY End (#) End ($) *
Exercisable/Unexercisable Exercisable/Unexercisable
Name Options at December 31, 1998 Options at December 31, 1998
- -------------------------------- ------------------------------- --------------------------------
Fred W. Thompson,
President, CEO 312,612 / 204,388 $1,328,601 / $868,649
E. A. James Peretti,
CEO GEMS 350,000 / 175,000 $1,487,500 / $743,750
Gregory T. Leger
Executive Vice President 65,000 / 60,000 $276,250 / $255,000
Frederick R. Skillman, Jr. 50,000 / 100,000 $212,500 / $425,000
</TABLE>
* The value of unexercised in-the-money stock options is based on a per share
price of $4.25 as quoted on the OTC Bulletin Board on December 31, 1998.
<PAGE>36
OPTION REPRICING SCHEDULE
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Length of
Number of Exercise Original
Securities Market Price Price at Optional Term
Underlying of Stock at Time of New Remaining at
Effective Date Options Time of Repricing Exercise Date of
Name of Reprice Repriced (#) Repricing ($) ($) Price ($) Repricing
- ---------------------- ------------------- -------------- -------------- ------------ ----------- -----------------
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
- ---------------------- ------------------- -------------- -------------- ------------ ----------- -----------------
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 DBSI'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 DBSI's quality employees and
directors who had lost a significant portion of their financial interest in DBSI
because their options were "out of the money." In February 1997, DBSI completed
the first stock option repricing program for DBSI'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, DBSI completed a
second stock option repricing program for DBSI's employees (including employee
<PAGE>37
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. Directors maintained their original vesting schedules.
Stock options are intended to provide incentives to DBSI's directors,
officers and employees. The Board of Directors believes that such equity
incentives are a significant factor in DBSI's ability to attract, retain and
motivate directors, officers and employees who are critical to DBSI'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 DBSI'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 DBSI. The
Board of Directors believes that the repricing of the options is a form of
incentive to the directors, officers, and employees of DBSI and believes that it
is in the best interests of DBSI and its stockholders.
Board of Directors Date: February 12, 1998
As Supplemented: February 23, 1998
Fred W. Thompson H. Tate Holt
Michael T. Schieber Jerome W. Carlson
E. A. James Peretti
Directors Compensation
DBSI reimburses directors for expenses incurred in connection with
attending Board meetings but does not pay directors's fees or other cash
compensation for services rendered as a director. In lieu of fees, DBSI has
granted to each non-employee director options to purchase 37,500 shares of
Common Stock upon first becoming a director and for each year of service
successfully completed, under a stock option plan as approved by a shareholder
vote in 1996 and the 1998 Plan which allows an unspecified number of options to
be awarded to directors. Options are issued at the time of the Annual
Shareholders Meeting and vest over the next 12-month period.
<PAGE>38
Current non-employee directors of DBSI have been awarded the following
stock options (all of which have a 10-year term):
<TABLE>
<S> <C> <C> <C>
Date Number of Exercise
Director Options Granted Options Granted Price
- ----------------------- ----------------- ---------------- -------------
Michael T. Schieber April 1996 37,500 $1.4375*
May 1997 37,500 $0.60**
May 1998 37,500 $2.1875
H. Tate Holt February 1996 37,500 $1.4375*
April 1996 37,500 $1.4375*
May 1997 37,500 $0.60**
May 1998 37,500 $2.1875
Jerome W. Carlson May 1997 75,000 $0.60**
May 1998 37,500 $2.1875
Jessie J. Knight, Jr. February 1999 37,500 $5.50
</TABLE>
* Repriced 2/13/97 from $4.75
** Repriced 2/23/98 from $1.00
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 DBSI's
certificate of incorporation states that DBSI may provide indemnification of its
agents, including its officers and directors for reach of duty to DBSI, to the
maximum extent permitted by the General Corporation Law. Article VI of the
Bylaws provide that DBSI shall, to the maximum extent and in the manner
permitted in the Commercial Corporations Laws, indemnify each of its agents,
including its officers, directors, and employees, 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 DBSI.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
DBSI pursuant to the foregoing provisions, or otherwise, DBSI 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 DBSI of expenses incurred or paid by a director, officer or
controlling person of DBSI 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, DBSI 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.
<PAGE>39
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
The following table set forth certain information as of April 30, 1999,
with respect to the beneficial ownership of DBSI's Common Stock for (i) each
director, (ii) all directors and officers of DBSI as a group, and (iii) each
person known to DBSI to own beneficially five percent (5%) or more of the
outstanding shares of its Common Stock.
<TABLE>
<S> <C> <C>
Name and Address of Beneficially and
Beneficial Owner Record Owned(1) Percent of Class
- ------------------------------------------------ ------------------------ -----------------------
Fred W. Thompson
100 Shoreline Highway, Suite 190A
Mill Valley, CA 94941 868,267 (2) 6.1%
Michael T. Schieber
100 Shoreline Highway, Suite 190A
Mill Valley, CA 94941 353,989 (3) 2.5%
E.A. James Peretti
100 Shoreline Highway, Suite 190A
Mill Valley, CA 94941 425,000 (4) 3.0%
H. Tate Holt
100 Shoreline Highway, Suite 190A
Mill Valley, CA 94941 156,379 (5) 1.1%
-------------- --------
Officers and Directors as a Group (6 persons) 1,947,385 13.7% *
Astoria Capital Partners, L.P.
6600 Southwest 92nd Street, Suite 370
Portland, OR 97223 1,000,000 7.0%
</TABLE>
* Total percentage amount does not reflect rounding of individual
ownership percentages.
(1) The persons named in the table have sole voting or 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 this table.
(2) Includes (i) 15,418 shares held by Mr. Thompson; (ii) 474,558 shares
held in Thompson 1996 Revocable Trusts; and (iii) options to purchase
312,500 shares at $0.531 per share expiring January 1, 2006, and 4,125
and 61,666 shares of Common Stock exercisable at $0.584 per share and
expiring December 31, 2000 and December 31, 2002, respectively.
(3) Includes (i) 215,625 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 27,500 shares of Common Stock exercisable at $0.60 per share
which expire May 13, 2007, and options to purchase 37,500 shares of
Common Stock at $2.1875 which expire on May 12, 2008.
<PAGE>40
(4) Options to purchase 375,000 and 50,000 shares of Common Stock
exercisable at $0.531 per share, and expiring January 1, 2006 and
December 31, 2007, respectively.
(5) Includes (i) 21,488 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 20,833 shares of Common Stock
exercisable at $0.60 per share which expire May 13, 2007, and options to
purchase 37,500 shares of Common Stock at $2.1875 per share which expire
May 12, 2008.
(6) Includes 37,500 shares held by Mr. Carlson, options to purchase 37,500
shares of Common Stock exercisable at $0.60 per share which expire May
13, 2007, and options to purchase 37,500 shares of Common Stock at
$2.1875 per share which expire May 12, 2008.
(7) Options to purchase 37,500 shares of Common Stock exercisable at $5.50
per share which expire February 19, 2009.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as otherwise indicated below, during 1997 and 1998, and through
the first quarter of 1999, DBSI has not been a party to any transaction,
proposed transaction, or series of transactions in which the amount involved
exceeds $60,000, and in which, to the knowledge of DBSI any director or
executive officer, nominee, five percent beneficial security holder, or any
member of the immediate family of the foregoing persons have or will have a
direct or indirect material interest. In March 1999, DBSI indemnified its
president relating to a lawsuit filed against the president. (See "Legal
Proceedings.")
On March 31, 1999, DBSI entered into a launch services agreement with
Eurockot. Pursuant to that agreement, DBSI paid Eurokot an initial payment of
$4.4 million. On April 8, 1999, Eurockot purchased 1,333,334 shares of DBSI's
restricted Common Stock for a total of $4 million.
On March 31, 1999, DBSI entered into a satellite construction agreement
with Surrey. Pursuant to that agreement, DBSI paid Surrey an initial payment of
$1 million. On April 14, 1999, Surrey purchased 333,333 shares of DBSI's
restricted Common Stock for a total of $1 million.
Pursuant to a purchase agreement among DBSI, Astoria Capital and
Microcap, DBSI was obligated to register with the SEC the Registrable Securities
acquired by Astoria Capital and Microcap in a private placement. The
registration statement had to be declared effective by the SEC by December 4,
1998. In the event the registration statement was not declared effective by the
SEC by December 4, 1998, DBSI was obligated to refund to Astoria Capital and
Microcap, in the aggregate, an amount equal to $2.5 million times 3% for each 30
days (prorata 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. DBSI filed a registration statement with
the SEC which was declared effective on November 30, 1998, thus fulfilling its
obligation under the purchase agreements.
All expenses of the registration statement including, but not limited
to, legal, accounting, printing and mailing fees were borne by DBSI. DBSI has
agreed to indemnify Astoria Capital and Microcap against certain liabilities
under the Securities Act. DBSI's registration obligations to Astoria Capital and
Microcap ceased effective upon disposition of the Registrable Securities by such
holders pursuant to the above referenced effective registration statement.
<PAGE>41
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 negotiated 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 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 a Selling Stockholder, the broker may offer and
sell such pledged shares of Common Stock from time to time. Upon a sale of the
shares of Common Stock, the Selling Stockholder intends to comply with the
Prospectus delivery requirements, under the Securities Act, by delivering a
Prospectus to each purchaser in the transaction. DBSI 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.
DBSI is required to pay all fees and expenses incident to the
registration of the shares of Common Stock, including fees and disbursements of
counsel to the Selling Stockholders. DBSI has agreed to indemnify the Selling
<PAGE>43
Stockholders against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act.
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of shares of Common Stock by the Selling Stockholders as of
April 30, 1999, and the number of shares of Common Stock covered by this
Prospectus.
<TABLE>
<S> <C> <C> <C> <C> <C>
Number of Number of
Common Shares Number of Common Shares
Beneficially Common Beneficially Owned
Owned Prior to Shares Offered Following the
Name of Shareholder the Offering Hereby Offering
# Of % Of # Of # Of % Of
Shares Class Shares Shares Class
- ----------------------- ----------- --------- -------------- --------- -------------------
Michael Associates 100,000 * 100,000 -0- -0-
Lodestone Capital 133,334 (1) * 133,334 -0- -0-
Michael Fitzsimmons 33,334 (1) * 33,334 -0- -0-
Fourteen Hill Capital 666,666 (1) 4.7 666,666 -0- -0-
High Peak Ltd. 166,666 (1) 1.2 166,666 -0- -0-
Bridge Group Holdings 65,453 * 63,239 2,214 *
Eurockot Launch
Services GmbH 1,333,334 9.4 1,333,334 -0- -0-
Surrey Satellite
Technology 333,333 2.3 333,333 -0- -0-
Cyrrus Consulting 20,000 (2) * 20,000 -0- -0-
Cardinal Capital LLC 325,000 (3) 2.3 75,000 250,000 2.0
</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 Options to acquire 20,000 shares of Common Stock.
(3) Includes 225,000 shares of Common Stock that may be acquired pursuant to
Warrants.
<PAGE>43
DESCRIPTION OF CAPITAL STOCK
DBSI's authorized capital stock consists of 50,000,000 shares of Common
Stock, $.0004 par value, and 5,000,000 shares of Preferred Stock, $.0004 par
value. As of April 30, 1999, there were outstanding 14,195,427 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 DBSI'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
DBSI, 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.
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 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 DBSI. There are no
shares of Preferred Stock outstanding.
Warrants
As of April 30, 1999, DBSI had Warrants outstanding providing for the
purchase of an aggregate of 1,329,920 shares of Common Stock. The exercise price
of the Warrants range from $1.4375 to $4.00 per share, with terms expiring on
dates ranging from April 26, 2001 to January 13, 2006.
<PAGE>43
Options
As of April 30, 1999 DBSI had non-employee Options outstanding for the
purchase of an aggregate of 278,250 shares of Common Stock. The exercise price
of the options range from $1.45 to $4.6875 per share with terms expiring on
dates ranging from February 1, 2003 to February 18, 2009.
CERTIFICATE OF INCORPORATION
Certain provisions of DBSI's Certificate of Incorporation and bylaws
have the effect of deterring a change of control of DBSI. DBSI's Certificate of
Incorporation contains provisions requiring the approval of 80% of its
stockholders for certain merger, sales of all or substantially all of its assets
and certain other corporate action unless the transaction is approved by 75% of
the disinterested board members or unless all stockholders receive a price for
their shares of DBSI's capital stock which meets certain minimum price criteria.
In addition, DBSI's Certificate of Incorporation also contains a provision which
establishes a "classified" Board of Directors consisting of three classes, the
members of which serve staggered terms of three years. A vacancy on the Board
can be filled only by vote of 75% of the Continuing Directors (as defined).
Further, directors can be removed, for cause only, by either a 80% vote or by
vote of a majority of the Continuing Directors (as defined), or by a vote of
stockholders holding 80% or more of the outstanding voting stock which vote must
include at least 67% of the outstanding voting stock exclusive of voting stock
held by an "Interested Stockholder" (as defined). DBSI's Certificate of
Incorporation also requires the approval of 80% of its stockholders in order to
amend these provisions.
LEGAL PROCEEDINGS
DBSI is not a party to any legal proceedings. In July 1998, a complaint
was filed in the Superior Court of California, County of Marin, by Bridge Group
(HK) International, Ltd. (the "Bridge Group") against DBSI's president, alleging
that the Bridge Group was promised shares of DBSI's Common Stock. DBSI agreed to
indemnify its president for any damages or settlement related to this lawsuit.
In March 1999, this case was settled by issuing 63,239 shares of DBSI's Common
Stock and paying $15,000 to the Bridge Group.
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 DBSI representing less than 1% of the outstanding shares of Common Stock. In
addition, the firm has a warrant to purchase up to 200,000 shares of Common
Stock.
EXPERTS
The consolidated balance sheets as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended and for the period from April 25, 1990 (date of
inception) to December 31, 1998, included in this Prospectus have been
<PAGE>44
included herein in reliance on the report which includes an explanatory
paragraph regarding certain factors raising substantial doubt about DBSI's
ability to continue as a going concern, of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm, as experts in
accounting and auditing.
AVAILABLE INFORMATION
DBSI files annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, statements or other information on file at the Commission's
Public Reference Section in Washington, D.C. You can request copies of those
documents, upon payment of a duplicating fee, by writing to the Commission at
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
DBSI has filed a registration statement on Form SB-2 with the
Commission. This prospectus, which forms a part of that registration statement,
does not contain all information included in the registration statement. Certain
information is omitted and you should refer to the registration statement and
its exhibits. With respect to references made in this prospectus to any contract
or other document of DBSI, such references are not necessarily complete and you
should refer to the exhibits attached to the registration statement for copies
of the actual contract or document. You may review a copy of the registration
statement at the Commission's public reference room, and at the Commission's
regional offices located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and Seven World Trade Center, 13th Floor, New York, New York
10048. Please call the Commission at 1-800-SEC-0330 for further information on
the operation of the public reference rooms. DBSI's filings and the registration
statement can also be reviewed by accessing the Commission's website at
http://www.sec.gov.
<PAGE>F-1
FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements
The following Financial Statements pertaining to DBSI are filed as part
of this Prospectus:
<TABLE>
<S> <C>
Report of Independent Accountants..........................................................F-2
Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998 and 1997.............................................................F-3
Consolidated Statements of Operations for the three months ended March 31, 1999
and 1998 (unaudited) and for the years ended December 31, 1998 and 1997 and for
the period from April 25, 1990
(date of inception) to March 31, 1999......................................................F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the period
from December 31, 1990 to March 31, 1999...........................................F-5 to F-10
Consolidated Statements of Cash Flows for the three months ended March 31, 1999
and 1998 (unaudited) and for the years ended December 31, 1998 and 1997 and for
the period from April 25, 1990
(date of inception) to March 31, 1999.............................................F-11 to F-12
Notes to Consolidated Financial Statements........................................F-13 to F-27
<PAGE>F-2
REPORT OF INDEPENDENT ACCOUNTANTS
February 5, 1999, except for Note 14,
as to which the date is April 8, 1999
To the Board of Directors and Stockholders of
DBS Industries, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity, and of
cash flows present fairly, in all material respects, the financial position of
DBS Industries, Inc. and Subsidiaries (a development stage company) as of
December 31, 1998 and 1997, 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, 1998, 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.
\s\ PricewaterhouseCoopers LLP
San Francisco, California
<PAGE>F-3
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
March 31, 1999 December 31, December 31,
(Unaudited) 1998 1997
----------- ---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 9,306,274 $ 1,291,711 $ 383,054
Prepaid and other current assets 58,091 71,138 119,265
--------------- -------------- ---------------
Total current assets 9,364,365 1,362,849 502,319
--------------- -------------- ---------------
Furniture and equipment (at cost) 65,516 65,516 73,277
Less accumulated depreciation 45,738 42,989 47,828
--------------- --------------- ---------------
19,778 22,527 25,449
--------------- -------------- ---------------
Other assets:
Investments and advances 851,490 851,490 1,248,649
Goodwill, net of accumulated amortization of
$88,050, $87,428 and $81,864, respectively 2,934 3,562 9,126
Satellite construction costs 2,338,425 1,272,083 -
--------------- -------------- ---------------
3,192,849 2,127,135 1,257,775
--------------- -------------- ---------------
Total assets $12,576,992 $ 3,512,511 $ 1,785,543
=============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 143,431 $ 240,240 $ 152,485
Customer advances 400,000 400,000 400,000
Accrued liabilities 93,865 489,531 145,019
Deferred compensation - - 216,000
--------------- -------------- ---------------
Total current liabilities 637,296 1,129,771 913,504
--------------- -------------- ---------------
Commitments (Notes 8 and 14)
Stockholders' equity
Common stock, $0.0004 par value; 20,000,000 shares
authorized; 12,507,661, 8,581,117 and 5,882,928
issued and outstanding at March 31, 1999, December
31, 1998 and 1997, respectively 5,023 3,452 2,373
Capital in excess of par value 19,124,433 8,511,410 4,681,295
Warrants 1,194136 1,085,500 112,500
Note receivable from stockholder (60,000) - -
Deficit accumulated during the development stage (8,238,896) (7,132,622) (3,839,129)
Treasury stock (51,562 shares as of March 31, 1999,
and December 31, 1998 and 1997) (85,000) (85,000) (85,000)
--------------- -------------- ---------------
Total stockholders' equity 11,939,696 2,382,740 872,039
--------------- -------------- ---------------
Total liabilities and stockholders' equity $ 12,576,992 $ 3,512,511 $ 1,785,543
--------------- ============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-4
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
April 25, 1990
Three Months Ended April 25, 1990 (Inception) to
March 31, (Inception) to March 31
(Unaudited) December 31, December 31, (Unaudited)
----------- ----------- ------------ ---------------
1999 1998 1998 1997 1998 1999
---- ---- ---- ---- ---- ----
Revenue $ - $ - $ - $ - $ 161,420 $ 161,420
-------------- ------------- --------------- -------------- ------------ --------------
Cost and operating expenses:
Cost of revenue - - 127,580 127,580
General and administrative 898,042 305,482 2,198,701 1,472,162 8,661,689 9,559,731
Research and development 220,601 98,982 797,147 210,115 2,966,718 3,187,319
-------------- ------------ --------------- -----------------------------------------
1,118,643 404,464 2,995,848 1,682,277 11,755,987 12,874,630
------------- ----------- ------------ ------------- ---------------------------
Loss from operations (1,118,643) (404,464) (2,995,848) (1,682,277) (11,594,567) (12,713,210)
------------- ----------- ------------ ------------ ------------- -------------
Other income (expense):
Interest, net 12,369 (1,678) 32,421 (308,094) (709,459) (697,090)
Equity in loss of investees,
net - - (100,143) (80,975) (512,920) (512,920)
Gain (loss) on sale of
investments - - (228,323) 5,221,063 5,829,218 5,829,218
Other, net - - - - (56,634) (56,634)
------------------------------------------------------------------------------ --------------
12,369 (1,678) (296,045) 4,831,994 4,550,205 4,562,574
--------------- ------------- ------------ --------------------------- ---------------
Income (loss) before provision
for income taxes and minority
interests (1,106,274) (406,142) (3,291,893) 3,149,717 (7,044,362) (8,150,636)
Provisions for income taxes - - 1,600 80,800 96,835 96,835
----------------------------------------------- --------------------------------------------
Income (loss) before minority
interests (1,106,274) (406,142) (3,293,493) 3,068,917 (7,141,197) (8,247,471)
Minority interests in income of
consolidated subsidiaries - - - - 8,575 8,575
---------------------------------------------------------------------------------------------
Net income (loss) $ (1,106,274) $ (406,142) $(3,293,493) $ 3,068,917 $ (7,132,622)$ (8,238,896)
============= ============= =========== ============ ============= =============
Basic net income (loss) per
share $ (0.11) $ (0.07) $ (0.47) $ 0.52
================= ============= =============== =================
Diluted net income (loss) per
share $ (0.11) $ (0.07)$ (0.47)$ 0.49
================= ============= =============== =================
Weighted average number of
shares of common stock, 9,632,620 5,896,906 6,979,818 5,863,261
========= ========= ========= =========
basic
Weighted average number of
shares of common stock,
diluted 9,632,620 5,896,906 6,979,818 6,235,144
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-5
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deficit
Common Stock Note Accumulated
Capital in Receivable During the Total
Par Excess of from Treasury Development Stockholders'
Shares Value Par Value Warrants Stockholder Stock Stage Equity
------- ----- ------------ ---------- ------------ ---------- ------------- --------------
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)
Stock issue costs for the
twelve months ended
December 31, 1991 - - (15,774) - - - - (15,774)
Net loss for the twelve months
ended December 31, 1991 - - - - - - (115,339) (115,339)
------ ----- --------- -------- ------ ------- ------------- --------------
Balance at December 31,
1991 1,065,500 426 202,650 - - - (335,329) (132,253)
Issuance of common stock
for cash at $.01 to
$1.00 per share 1,317,290 527 538,998 - - - - 539,525
Issuance of common stock
for professional
services at $.01
to $.10 per share 214,240 86 12,338 - - - - 12,424
Issuance of common stock
in payment of stockholder
loans: June 1992 at $.01
per share 230,000 92 2,208 - - - - 2,300
Net loss for the seven
months ended July 31,
1992 - - - - - - (90,750) (90,750)
--------- ------ --------- -------- ------ ------- ------------- --------------
Balance at July 31, 1992 2,827,030 1,131 756,194 - - - (426,079) 331,246
Shares of Fi-Tek IV, Inc.
from August 3, 1989
(inception) through
December 2, 1992 817,540 327 155,450 - - - - 155,777
Issuance of common stock
for cash at $.01 to
$3.20 per share 1,313,926 527 998,088 - - - - 998,615
Issuance of common stock
for interest at $5.00
per share 10,000 4 4,996 - - - - 5,000
Issuance of common stock
for JPS common stock on
September 11, 1992, at
$.80 per share 61,447 24 49,134 - - - - 49,158
Issuance of common stock
for professional
services on
September 11, 1992, at
$.10 per share 6,679 3 665 - - - - 668
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
</TABLE>
<PAGE>F-6
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deficit
Common Stock Note Accumulated
Capital in Receivable During the Total
Par Excess of from Treasury Development Stockholders'
Shares Value Par Value Warrants Stockholder Stock Stage Equity
------- ----- ------------ ---------- ------------ ---------- ------------- -------------
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
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
</TABLE>
<PAGE>F-7
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deficit
Common Stock Note Accumulated
Capital in Receivable During the Total
Par Excess of from Treasury Development Stockholders'
Shares Value Par Value Warrants Stockholder Stock Stage Equity
------- ----- ------------ ---------- ------------ ---------- ------------- -------------
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 10,000 4 18,796 - - - - 18,800
$1.88 per share
May 15, 1995, at $2.00
per share 10,724 4 21,443 - - - - 21,447
July 15, 1995, at $1.60
per share 11,373 5 18,192 - - - - 18,197
Net loss for the twelve months
ended July 31, 1995 - - - - - - (1,284,558) (1,284,558)
--------- ----- --------- --------- -------- --------- ---------- -----------
Balance at July 31, 1995 5,350,136 2,161 2,758,990 - - (85,000) (2,492,586) 183,565
Issuance of common stock for
1% JPS common stock on
September 21, 1995, at
$1.20 per share 9,450 4 11,336 - - - - 11,340
Issuance of common stock for
20% Seimac Limited
common stock on
December 13, 1995, at
$4.00 per share 165,519 66 662,010 - - - - 662,076
Issuance of common stock for
professional services at
$5.60 per share 2,934 1 16,427 - - - - 16,428
Net loss for the five months
ended 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
</TABLE>
<PAGE>F-8
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deficit
Common Stock Note Accumulated
Capital in Receivable During the Total
Par Excess of from Treasury Development Stockholders'
Shares Value Par Value Warrants Stockholder Stock Stage Equity
------- ----- ------------ ---------- ------------ ---------- ------------- -------------
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
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
</TABLE>
<PAGE>F-9
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deficit
Common Stock Note Accumulated
Capital in Receivable During the Total
Par Excess of from Treasury Development Stockholders'
Shares Value Par Value Warrants Stockholder Stock Stage Equity
------- ----- ------------ ---------- ------------ ---------- ------------- -------------
Common Stock issued for
cash, on April 16, 1998,
at $2.00 per share 102,000 41 203,959 - - - - 204,000
Common Stock issued upon
exercise of options, on June
11, 1998, at $1.44 per
share 12,500 5 17,964 - - - - 17,969
Common Stock issued
(voided) in connection with
services rendered:
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)
Common Stock issued for cash
in August and September
1998 at $2.00 per share net
of issuance costs of
$485,826 2,800,000 1,120 5,113,054 - - - - 5,114,173
Common Stock issued upon
exercise of options at
$0.53 per share 17,202 6 9,128 - - - - 9,134
Fair value of Common Stock
warrants committed to
representing stock
issuance costs (973,000) 973,000 - - - 0 -
</TABLE>
<PAGE>F-10
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deficit
Common Stock Note Accumulated
Capital in Receivable During the Total
Par Excess of from Treasury Development Stockholders'
Shares Value Par Value Warrants Stockholder Stock Stage Equity
------- ----- ------------ ---------- ------------ ---------- ------------- -------------
Fair value of options granted in
connection with services
rendered - - 159,000 - - - 159,000
Common Stock issued for
exercise of options $.60
per share 10/1/98 37,500 15 22,485 - - - - 22,500
Common Stock returned to
investees at $2.00 per
share in October 1998 (400,000) (160) (799,840) - - - - (800,000)
Common Stock issued upon
exercise of options $.531
per share in October 1998 94,375 38 50,075 - - - - 50,113
Common Stock issued
representing stock issuance
costs 7,500 3 14,997 - - - - 15,000
Net loss for the year ended
December 31, 1998 - - - - - - (3,293,493) (3,293,493)
--------- ------- ----------- ---------- ---------- --------- ---------- ------------
Balance at December 31,
1998 8,581,117 3,452 8,511,410 1,085,500 - (85,000) (7,132,622 2,382,740
Interim Transactions
Fair value of options
granted in connection
with services
rendered (unaudited) - - 353,250 - - - - 353,250
Common stock issued for
cash in February 1999
at $3.00 per share, net
of issuance costs of
$79,925 (unaudited) 500,000 200 1,420,075 - - - - 1,420,275
Common stock issued
upon exercise of
warrants and
options (unaudited) 3,426,544 1,371 9,109,698 (161,364) - - - 8,949,705
Note receivable from
stockholder (unaudited) - - - - $ (60,000) - - (60,000)
Value of warrants granted
representing
stock issuance costs
(unaudited) - - (270,000) 270,000 - - - -
Net loss (unaudited) - - - - - - (1,106,274) (1,106,274)
----------- -------- ------------ ---------- ----------- -------- ------------- ------------
Balance of March 31,
1999 (Unaudited) 12,507,661 $ 5,023 $19,124,433 $1,194,136 $ (60,000) $(85,000) $(8,238,896)$11,939,696
=========== ======== =========== ========== ========= ========== ============ ==========
</TABLE>
<PAGE>F-11
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
April 25, 1990
Three Months Ended Inception April 25, 1990
March 31, Year Ended to Inception to
(Unaudited) December 31, December 31 March 31
----------- ------------ ----------- -------------
1999 1998 1998 1997 1998 1999
---- ---- ---- ---- ---- ----
Reconciliation of net income
(loss) to net cash used in
operating activities:
Net income (loss) $ (1,106,274) $ (406,142) $ (3,293,493) $ 3,068,917 $ (7,132,622) $ (8,238,896)
Adjustments to reconcile net
income (loss) to net cash
used in operating activities:
Depreciation and amortization 3,377 30,012 73,122 126,989 431,256 434,633
Minority interest's share of
net loss 353,250 13,916 - - (8,575) (8,575)
Noncash charges - - 573,999 76,293 1,084,545 1,437,795
Equity in loss of investees,
net - - 100,143 80,875 529,972 529,972
Loss (gain) on sale of
investments - - 228,323 (5,221,063) (5,829,218) (5,829,218)
Allowance for losses on
advances - - 216,932 - 216,932 216,932
Common stock issued as
payment for interest - - - - 7,000 7,000
Decrease (increase) in
accounts receivable and
other assets 13,047 (20,096) 48,127 (50,320) (51,934) (38,887)
Increase (decrease) in
accounts payable and
accrued liabilities (492,475) 332,303 (108,264) (1,053,843) 405,240 (87,235)
Increase in customer
advances - - - 400,000 400,000
----------- --------- ------------- ----------- ------------- --------------
Net cash used in operating
activities (1,229,075) (50,007) (2,161,111) (2,972,153) (9,947,404) (11,176,479)
Cash flows from investing
activities:
Proceeds from sale of
investment - - 199,940 - 1,099,940 1,099,940
Proceeds from Loral
settlement - - - 3,573,677 3,573,677 3,573,677
Purchase of fixed assets - - (5,523) - (111,047) (111,047)
Satellite Construction
Payments (1,066,342) - (1,272,083) - (1,272,083) (2,338,425)
Organization costs - - - - (28,526) (28,526)
Advances to officer - - - - (31,187) (91,187)
Purchase of interest in
Continental - - - - (2,292,409) (2,292,409)
Investments and advances (60,000) (204,848) (407,292) 309,888 (1,208,726) (1,208,726)
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
----------- --------- ------------- ----------- ------------- --------------
Net cash provided by (used in)
investing activities $(1,126,342) $(204,848) $ (1,484,958) $ 4,183,565 $ 172,759 $ (953,583)
----------- --------- ------------- ----------- ------------- --------------
</TABLE>
<PAGE>F-12
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
April 25, 1990
Three Months Ended Inception April 25, 1990
March 31, Year Ended to Inception to
(Unaudited) December 31, December 31 March 31
----------- ------------ ----------- -------------
1999 1998 1998 1997 1998 1999
---- ---- ---- ---- ---- ----
Cash flows from financing
activities:
Repayment of borrowing
under credit line - - - (295,000) (300,000) (300,000)
Issuance of debentures - - - 107,501 4,817,501 4,817,501
Issuance of common stock 10,449,705 - 4,997,226 - 8,150,742 18,600,447
Redemption of common
stock warrants - - - - (19,490) (19,490)
Stock issue costs (79,725) - (442,500) - (499,735) (579,460)
Purchase of shares - - - - (5,000) (5,000)
Payment of debentures - - - (1,043,445) (1,168,445) (1,168,445)
Proceeds from stockholder's
loans - - - 149,750 442,750 442,750
Payment of stockholders'
loans - - - (149,750) (351,967) (351,967)
------------ ------------ ------------- --------------- ---------------- -------------
Net cash provided by (used in)
financing activities 10,369,980 - 4,554,726 (1,230,994) 11,066,356 21,436,336
----------- ------------ ------------- --------------- ---------------- ------------
Net increase (decrease) in cash 8,014,563 (254,855) 908,657 (19,534) 1,291,711 9,306,274
Cash and cash equivalents,
beginning of period 1,291,711 383,054 383,054 402,588 - -
----------- ------------ ------------- --------------- ---------------- ------------
Cash and cash equivalents, end
of period $ 9,306,274 $ 128,199 $ 1,291,711 $ 383,054 $ 1,291,711 $ 9,306,274
============ ========== ============= ============== ============= =============
Supplemental Disclosures of
Cash Flow information:
Interest $ - $ - $ $ 11,456 $ 57,651 $ 57,651
============ ========== ============= ============== ============= =============
Income taxes $ - $ - $ 4,265 $ 1,600 $ 20,220 $ 20,220
============ ========== ============= ============== ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-13
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three month periods ended
March 31, 1998 and 1999, and subsequent to December 31, 1998, 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 subsidiaries, Global
Energy Metering Service, Inc. ("GEMS"), and Newstar Limited ("Newstar").
Intercompany transactions and balances have been eliminated in consolidation.
DBSI was organized as a Delaware corporation on August 3, 1989. Since
inception DBSI has been in the development stage. DBSI's current business plan
is to develop a low earth orbit satellite constellation through its subsidiary
Newstar and through proposed licensing arrangements with its 20% investor,
E-SAT. DBSI's financial statements have been prepared assuming DBSI will
continue as a going concern. Since inception, DBSI has devoted substantially all
of its efforts to developing its business. DBSI has therefore incurred
substantial losses and negative cash flows from operating activities as
reflected in these financial statements. Accordingly, DBSI has relied primarily
upon obtaining equity capital and debt financing to support its operations.
DBSI does not expect revenue to exceed costs and expenses in 1999 and,
accordingly, will continue to incur losses and negative cash flows from
operating activities. To address financing needs, DBSI is pursuing various
financing alternatives. These circumstances raise substantial doubt about DBSI's
ability to continue as a going concern. During fiscal 1998, DBSI raised
approximately $5 million from the sale of shares of Common Stock. During the
first quarter of 1999, DBSI raised approximately $9 million from warrant
exercises and sale of shares of common stock. However, DBSI will need
substantial additional capital, at least $100 million, to construct its proposed
E-SAT satellite constellation. Such financing is likely to result in a
significant dilution in the equity interests of the current stockholders. The
construction of the first two of the six planned satellites is required to
commence by April 1999 pursuant to the terms of the Federal Communications
Commission (FCC) license granted to E-SAT. As discussed in Note 14, DBSI
notified the FCC that it has entered into a construction contract on March 31,
1999. These financial statements do not reflect any adjustments that might
result from the outcome of this uncertainty.
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.
DBSI's investment in E-SAT Corporation, in which DBSI has an ownership
interest of 20%, is accounted for using the equity method. DBSI's investment in
EchoStar Communication Inc. (EchoStar) and interest in Continental Satellite
Corporation were disposed of during 1997 (see Notes 3 and 6) and its interest in
Seimac Limited was disposed of during 1998 (see Note 3).
In January 1998, DBSI created Newstar Limited, a wholly-owned subsidiary
organized under the Laws of the Republic of Bermuda.
<PAGE>F-14
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three month periods ended
March 31, 1998 and 1999, and subsequent to December 31, 1998, is unaudited)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hereafter, unless otherwise specified, all references to the "Company"
include DBS Industries, Inc. and its wholly-owned subsidiaries.
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
DBSI considers all money market instruments and other highly liquid
investments with original maturities of three months or less to be cash
equivalents.
Depreciation and Amortization
Furniture and equipment are depreciated over the estimated useful lives
of the assets ranging from five to seven years using the straight-line method of
depreciation. When assets are disposed of, the related cost and accumulated
depreciation are removed from the books and the resulting gain or loss is
recognized in the year of disposal.
Goodwill
Goodwill is amortized using the straight-line method over five years.
Amortization expense charged to operations for the years ended December 31, 1998
and 1997, was $36,513 and $20,715, respectively. Amortization expense charged to
operations for the three months ended March 31, 1999 and 1998, was $628 and
$28,802, respectively.
Income Taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. 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
<PAGE>F-15
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three month periods ended
March 31, 1998 and 1999, and subsequent to December 31, 1998, is unaudited)
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 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 diluted effects of all outstanding common stock equivalents. Options to
purchase 2,044,156 shares of common stock with exercise prices ranging from
$0.40 to $5.60 were outstanding as of December 31, 1998, and were excluded from
the loss per share calculation for the year ended December 31, 1998, as they
have the effect of decreasing loss per share. Options and warrants to purchase
1,418,233 shares of common stock with exercise prices from $.40 to $5.60 were
outstanding as of December 31, 1997, and were included in the earnings per share
calculation for the year ended December 31, 1997. Options and warrants to
purchase 3,607,906 shares of common stock with exercise prices from $.53 to
$5.60 were outstanding as of March 31, 1999, and were excluded from the loss per
share calculation for the three month period then ended as they have the effect
of decreasing loss per share. Options and warrants to purchase 1,418,233 shares
of common stock with exercise prices from $.40 to $5.60 were outstanding as of
March 31, 1998, and were excluded from the loss per share calculation for the
quarter then ended as they have the effect of decreasing loss per share.
Recently Issued Accounting Pronouncements
In March 1997, SFAS No. 129, Disclosure of Information About Capital
Structure, was issued and has been implemented by DBSI. In June 1997, SFAS No.
130, Reporting Comprehensive Income and SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information were issued and are effective for the
year ended December 31, 1998. DBSI has not implemented SFAS Nos. 130 and 131 as
their provisions are not applicable to DBSI's operations.
Interim Financial Information
The consolidated financial statements as of March 31, 1999, and for the
three months ended March 31, 1999 and 1998, 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.
<PAGE>F16
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three month periods ended
March 31, 1998 and 1999, and subsequent to December 31, 1998, is unaudited)
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' equity as previously reported.
NOTE 3. INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES
Following is a summary of DBSI's significant investment activities:
Direct Broadcasting Satellite Corporation (DBSC)
DBSC is one of nine permittees of the Federal Communications Commission
for Direct Broadcast Satellite (DBS) services. As of December 31, 1996, DBSI
owned approximately 25% of the common stock of DBSC. DBSI accounted for its
investment using the equity method.
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
stockholders 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, DBSI owned 401,107 shares of
the common stock of DBSC. The requisite government approvals were obtained and
the merger consummated on January 8, 1997. On January 23, 1997, DBSI 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, DBSI recorded a gain of
approximately $6.2 million in its first quarter of 1997.
On August 29, 1997, DBSI transferred the 270,414 shares back to EchoStar
in exchange for the retirement of certain debentures and recognized a loss on
such transfer of approximately $2.3 million due to a decline in the market value
in the EchoStar stock.
E-SAT Corporation (E-SAT)
In October 1994, DBSI 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. DBSI holds a 20% interest in
E-SAT. DBSI's total investments in E-SAT were $127,265 as of December 31, 1998
and 1997. The investment is accounted for using the equity method. DBSI's equity
in losses of E-SAT for the years ended December 31, 1998 and 1997, were $134,524
and $66,469, respectively. The equity in losses for the year ended December 31,
1997, was recorded in December 1997, when financial information became
available. As of December 31, 1998, DBSI had a receivable of $724,225 from
<PAGE>F-17
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three month periods ended
March 31, 1998 and 1999, and subsequent to December 31, 1998, is unaudited)
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.
On March 31, 1998, the Federal Communications Commission approved
E-SAT's application for a low earth orbit satellite license. E-SAT is required
to meet certain milestones and other covenants in order to maintain its license.
Seimac Limited
On November 30, 1995, DBSI 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 DBSI, valued at $662,010. DBSI's investment of
$662,010 was $464,255 in excess of DBSI'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
$30,949 and $92,851 for the years ended December 31, 1998 and 1997. This
investment is accounted for using the equity method.
For the years ended December 31, 1998 and 1997, DBSI has recorded its
proportionate share of Seimac Limited's net (loss) income of $34,381 and
$(14,506), respectively.
On April 30, 1998, DBSI sold its entire interest consisting of 232,829
Seimac shares in exchange for $200,000 in cash and $51,417 in forgiven debt.
DBSI recorded a loss of approximately $228,000 in connection with this
transaction.
Continental Satellite Corporation (Continental)
On January 12, 1996, DBSI 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, DBSI issued a three-year, Series B
convertible debenture 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 stockholders alleging that
the common shares purchased by DBSI 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 DBSI was not without
equitable remedy and allowed DBSI to commence an action against Loral.
<PAGE>F-18
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three month periods ended
March 31, 1998 and 1999, and subsequent to December 31, 1998, is unaudited)
On April 21, 1997, the Superior Court of Santa Clara County awarded DBSI
damages of approximately $4.1 million, plus 50 percent annual interest. On
August 17, 1997, DBSI and Loral formally completed an agreement wherein DBSI
received a cash payment of approximately $3.5 million from Loral in exchange for
dismissals of appeals by both parties.
The agreement provides that DBSI return the Continental stock DBSI
acquired, that DBSI acknowledge that all Continental stock held by DBSI owned is
invalid, and that DBSI 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 DBSI'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.
NOTE 4. SATELLITE CONSTRUCTION COSTS
On December 15, 1998, the Company and Alcatel Space Industries
("Alcatel") entered into a Memorandum of Understanding and authorization to
proceed ("MOU") pursuant to which Alcatel would become the General Contractor
for the design, construction and launch services for the Company's planned low
earth orbit satellites. The Company and Alcatel are negotiating a definitive
agreement.
Upon signing of the MOU with Alcatel, the Company made a $1 million
advance payment to Alcatel and made additional payments totaling $1 million in
January and February 1999.
During the construction of the E-SAT System, the Company is capitalizing
all construction costs. Included in Satellite Construction Costs are
approximately $300,000 in engineering and other costs in connection with the
design of the satellites and the $2 million payments to Alcatel for design
services.
On March 31, 1999, the Company signed construction and launch contracts
with two European entities and made advance payments of $7.8 million in April
1999. Total payments under such cancelable contracts will amount to
approximately $47 million through January 2001. On April 8, 1999, the Company
notified the FCC that it had entered into a construction contract for the first
two satellites of the E-SAT System.
NOTE 5. CUSTOMER ADVANCES
DBSI'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 December 31, 1998, this purchase
order had been suspended by both parties due to DBSI's limited access to the
Argos System. The $400,000 in milestone
<PAGE>F-19
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three month periods ended
March 31, 1998 and 1999, and subsequent to December 31, 1998, is unaudited)
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 6. LINE OF CREDIT
DBSI 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,
DBSI 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 7. CONVERTIBLE DEBENTURES
On July 1, 1995, DBSI issued Convertible Debenture 1995 Series A to
EchoStar, the majority shareholder of E-SAT, and received $1,000,000 in proceeds
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 DBSI.
On January 12, 1996, DBSI 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 had a security interest in 72,030 shares of common stock of
Continental and 200,000 shares of common stock of DBSC held by DBSI.
On December 5, 1996, DBSI 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 DBSI.
On August 29, 1997, DBSI completed an agreement with EchoStar to retire
three convertible debentures, Series A, Series B, and Series C, with accrued
interest of $722,811 and certain legal fees and other expenses related to the
transaction. In exchange for EchoStar's retirement of the debt, DBSI 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.
<PAGE>F-20
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three month periods ended
March 31, 1998 and 1999, and subsequent to December 31, 1998, is unaudited)
NOTE 8. COMMITMENTS
Operating Leases
DBSI and its wholly-owned subsidiaries 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,
-----------------------------
1999 102,891
2000 17,149
------------
$ 120,040
Total rent expense was $82,615 and $66,592 for the years ended December
31, 1998 and 1997, respectively.
Other
In July 1998, DBSI's president was named as a defendant in a lawsuit
filed by a firm claiming that it was promised shares of DBSI's Common Stock. In
March 1999, DBSI settled this matter by issuing 63,239 shares of DBSI's Common
Stock, valued at approximately $324,000, and paying $15,000 in cash to the
plaintiff.
In July 1998, DBSI agreed to a severance package with one of its former
employees which consists of $125,000 in cash payments to be made through July
1999 and the acceleration of vesting of all of the former employee's unvested
options.
Refer to Note 14 for certain contract commitments.
Construction and Launch Contracts
As discussed in Note 4, the Company signed construction and launch
contracts with two European entities in March 1999. Total payments under such
cancelable contracts will amount to approximately $47 million through January
2001.
<PAGE>F-21
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three month periods ended
March 31, 1998 and 1999, and subsequent to December 31, 1998, is unaudited)
NOTE 9. STOCKHOLDERS' EQUITY
Common Stock
DBSI's Certificate of Incorporation, as amended in April 1999,
authorizes the issuance of 50,000,000 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
DBSI'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 DBSI is authorized to issue preferred stock
from time to time in series and is further authorized to establish such series,
to fix and determine the variations in the relative rights and preferences as
between the series, and to allow for the conversion of preferred stock into
common stock. No preferred stock has been issued by DBSI as of December 31,
1998.
Equity Transactions With Non-Employees
On January 13, 1996, DBSI issued warrants for the purchase of 75,000
shares of DBSI's Common Stock at an exercise price of $7.30. On December 31,
1997, DBSI 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, DBSI issued warrants for the purchase of 200,000 shares
of DBSI'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 DBSI. As of December 31, 1997, the loan had been repaid.
In April 1998, DBSI granted options to two consulting firms to purchase
400,000 and 300,000 shares of DBSI'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.
In June 1998, DBSI issued 102,000 shares of its Common Stock at a price
of $2.00 per share. In connection with this stock offering, DBSI issued warrants
to purchase 102,000 shares of DBSI's Common Stock at an exercise price of $3.00
per share through June 30, 2001.
During the six months ended December 31, 1998, DBSI issued 2,800,000
units each consisting of a share of Common Stock at a price of $2.00 per share
and a warrant to purchase a share of common
<PAGE>F-22
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three month periods ended
March 31, 1998 and 1999, and subsequent to December 31, 1998, is unaudited)
stock at an exercise price of $3.00. In connection with this stock offering,
DBSI incurred the following stock issuance costs: (i) cash payments of $485,000,
(ii) 7,500 shares of Common Stock with a fair value of $15,000, and (iii)
warrants to purchase 728,000 shares of DBSI's Common Stock at exercise prices
varying from $1.50 to $3.00. The fair value of such warrants amounted to
$973,000 and was recorded as a separate element of DBSI's equity.
In October 1998, at the request of two stockholders due to changes in
their financial condition, DBSI rescinded stock purchase agreements relating to
400,000 units and refunded $800,000 in proceeds to the two stockholders.
Under the terms of the above stock offering, DBSI registered such shares
and warrants in December 1998.
During April 1999, the two European contractors purchased 1,666,667
shares of the Company's Common Stock for a total of $5 million in cash.
Equity Transactions With Employees
In February 1996, DBSI adopted the 1996 Stock Option Plan (the "1996
Plan") to consolidate its three existing plans. In May 1998, DBSI adopted the
1998 Stock Option Plan (the "1998 Plan"), which provides for the issuance of a
maximum of 500,000 shares of DBSI's Common Stock. Provisions of the 1996 and
1998 Plans are substantially similar to those of the earlier plans. The overall
purpose of the 1996 and 1998 Plans is to advance the long-term interest of DBSI
by motivating its employees, directors and consultants with the opportunity to
obtain an equity interest in DBSI and to attract and retain such persons upon
whose judgments the success of DBSI largely depends.
Eligible employees, directors, and consultants can receive options to
purchase shares of DBSI's Common Stock at a price generally not less than 100%
of the fair market value of the common stock on the date of the grant of stock
options. The options granted under the 1996 and 1998 Plans 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 and 1998 Plans are
subject to various restrictions as to resale.
<PAGE>F-23
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three month periods ended
March 31, 1998 and 1999, and subsequent to December 31, 1998, is unaudited)
Information with respect to activity under these plans is set forth
below:
<TABLE>
<S> <C> <C> <C> <C>
Outstanding Options and Warrants
Weighted
Average
Number of Price Per Aggregate Exercise
Shares Share Price Price
------------- ------------ -------------- ----------
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 787,500 $0.53-$2.19 614,380 0.78
Exercised (161,577) $0.53-$1.44 (99,722) 0.617
Terminated - - -
------------ ------------
Balance, December 31, 1998 2,044,156 $0.40-$5.60 $ 1,786,306 0.87
----------- ------------
Granted (unaudited) 37,500 $5.50 $ 206,250 5.50
Exercised (unaudited) (119,561) $.53-$2.80 $ (118,341) 0.99
Terminated (unaudited) - - -
------------ -------------
Balance, March 31, 1999 (unaudited) 1,962,095 $ 1,906,051 0.97
=========== ============
</TABLE>
The following table summarizes information with respect to stock options
and warrants outstanding at December 31, 1998:
<TABLE>
<S> <C> <C> <C> <C> <C>
Options and Warrants Outstanding Options and Warrants Exercisable
Weighted
Average Weighted
Remaining Average Weighted Average
Range of Number Contractual Life Exercise Number Exercise
Exercise Price Outstanding (years) Price Exercisable Price
- -------------- --------------- --------------- --------- --------------- ---------------
$0.53-$1.44 1,856,372 7.76 $0.65 1,379,140 $0.69
$1.60-$2.80 149,375 8.44 $2.24 105,797 2.26
$3.00-$5.60 38,409 7.06 $5.23 38,409 5.23
-------------- ------------
2,044,156 1,523,346
============== ===========
</TABLE>
<PAGE>F-24
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three month periods ended
March 31, 1998 and 1999, and subsequent to December 31, 1998, is unaudited)
The following information concerning DBSI'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 1998 was $0.90 and $0.68,
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:
1998 1997
----------- -----------
Risk free interest rate 5.7% 5.7%
Expected life 7.3 years 8.2 years
Volatility 227% 80%
Dividend yield - -
The following pro forma net income (loss) information has been prepared
following the provisions of SFAS No. 123:
December 31, December 31,
1998 1997
----------------- -----------------
Net income (loss) As Reported $(3,293,493) $3,068,917
Pro forma $(3,713,942) $1,793,791
Net income (loss) As Reported $ (0.47) $ 0.49
per share Pro forma $ (0.53) $ 0.29
In February 1997, DBSI 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, DBSI 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 DBSI has maintained the vesting
schedule from the original grants.
<PAGE>F-25
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three month periods ended
March 31, 1998 and 1999, and subsequent to December 31, 1998, is unaudited)
NOTE 10. RELATED PARTY TRANSACTIONS
In January 1997, DBSI began to defer payment of a portion of all future
compensation of DBSI's president. The deferred compensation balance was $216,000
as of December 31, 1997. In October 1998, DBSI paid its president the amount of
$246,000 related to his deferred compensation through September 1998. The
president also received a cash bonus of $20,000 in connection with his efforts
in securing the E-SAT license.
On April 28, 1997, DBSI's president provided a bridge loan to DBSI for
$47,750 representing collateral funds pledged to Pacific Bank for DBSI's bank
overdraft. As of December 31, 1997, both the bank overdraft and the bridge loan
have been repaid.
During 1997, DBSI 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 7 for disclosures regarding related party
transactions with EchoStar.
NOTE 11. 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, 1998 and 1997, is as follows:
<TABLE>
<S> <C> <C> <C> <C>
1998 1997
------------------------- -------------------------
Federal State Federal State
------------- ----------- ------------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 1,785,000 $ 305,000 $ 706,000 $ 108,000
Research and development credit
carryforwards 115,000 - 95,000 -
Excess of tax over book basis of investments,
deferred compensation, and other 10,000 1,500 12,000 2,000
------------- ----------- ------------- -----------
Deferred tax assets 1,910,000 306,500 813,000 110,000
Valuation allowance (1,910,000) (306,500) (813,000) (110,000)
------------- ----------- ------------- -----------
Net deferred tax assets $ - $ - $ - $ -
===================================================
</TABLE>
Due to the uncertainty of realization, a valuation allowance has been
provided to offset the net deferred tax assets. The increase (decrease) in the
valuation allowance was approximately $1,293,500 and ($1,411,000) during the
years ended December 31, 1998 and 1997, respectively. The provision for
<PAGE>F-26
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three month periods ended
March 31, 1998 and 1999, and subsequent to December 31, 1998, is unaudited)
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, 1998, DBSI has net operating loss carryforwards of
approximately $5,250,000 and $5,000,000 for federal income tax purposes and
California state franchise tax purposes, respectively. DBSI has also research
and development credit carryforwards of $115,000 and $0 for federal income tax
purposes and California state franchise tax purposes, respectively. Such
carryforwards expire in varying amounts between 1998 and 2018.
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 12. RISKS AND UNCERTAINTIES
DBSI periodically maintains cash balances at banks in excess of the
Federal Deposit Insurance Corporation insurance limit of $100,000.
NOTE 13. SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES
During the years ended December 31, 1998 and 1997, the following noncash
activities occurred:
o In April 1998, DBSI granted options to two consulting firms to
purchase 700,000 shares of DBSI's Common Stock. DBSI recorded a
compensation charge of $159,000 in connection with this
transaction during 1998.
o DBSI issued 728,000 warrants to purchase shares of Common Stock
to certain individuals for services rendered in connection with
the placement of the September 1998 sales of DBSI's Common Stock.
These warrants were valued at $973,000 and were offset against
the proceeds.
o During 1997, DBSI 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, DBSI 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, DBSI settled all principal and accrued
interest balances outstanding under its convertible debentures,
in exchange for 270,414 shares of EchoStar common stock and a
cash payment of approximately $936,000.
<PAGE>F-27
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three month periods ended
March 31, 1998 and 1999, and subsequent to December 31, 1998, is unaudited)
NOTE 14. SUBSEQUENT EVENTS
In February 1999, the Company issued 500,000 units each consisting of a
share of Common Stock at a price of $3.00 per share and a warrant to purchase a
share of Common Stock at an exercise price of $4.00. Sale of these units
resulted in gross proceeds to the Company of $1.5 million.
In March 1999, the Company received proceeds of approximately $7.5
million from the exercise of warrants to purchase 2.5 million shares of the
Company's Common Stock issued in connection with the 2.8 million unit offering
discussed above.
Under the terms of the MOU signed with Alcatel, the Company made
additional payments totaling $1 million in January and February 1999. The ATP
was extended to April 15, 1999. The Company and Alcatel are negotiating a
definitive agreement.
On March 31, 1999, the Company signed construction and launch contracts
with two European entities and made advance payments of $4.4 million. Total
payments under such cancelable contracts will amount to approximately $47
million through January 2001.
On April 8, 1999, the Company notified the FCC that it has entered into
a construction contract for the first two satellites of the E-SAT System on
March 31, 1999.
Subsequent to December 31, 1998, the Company solicited stockholder
approval to increase the number of authorized shares of Common Stock from
20,000,000 to 50,000,000. The requisite stockholder approval was obtained.
