UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-QSB
-------------------------
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934 for the quarterly period
ended June 30, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934 for the transition period
from _______ to ________
Commission File No. 0-28348
DBS INDUSTRIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 84-1124675
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
100 Shoreline Highway, Suite 190A
Mill Valley, CA 94941
(Address of principal executive offices)
(415) 380-8055
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Securities: Common Stock, $.0004 Par Value
Shares Outstanding as of October 31, 2000: 15,418,125
Transitional Small Business Disclosure Format: Yes: No: X
--- ---
<PAGE>
INDEX
PAGE
PART I - FINANCIAL INFORMATION.................................................1
ITEM 1. Financial Statements.................................................1
Condensed Consolidated Balance Sheets:
As of September 30, 2000 (unaudited) and December 31, 1999.....................1
Condensed Consolidated Statements of Operations (unaudited):
For the Three and Nine Months Ended September 30, 2000 and September
30, 1999 and for the period from April 25, 1990 (Inception) to
September 30, 2000.............................................................2
Condensed Consolidated Statements of Cash Flows (unaudited):
For the Nine Months Ended September 30, 2000 and September 30, 1999
and for the period from April 25, 1990 (Inception) to September 30, 2000 ......3
Notes to Condensed Consolidated Financial Statements.........................4-9
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................10-14
PART II - OTHER INFORMATION...................................................15
ITEM 1. Legal Proceedings....................................................15
ITEM 2. Recent Sales in Unregistered Securities...........................15-16
ITEM 6. Exhibits and Reports on Form 8-K.....................................16
ii
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2000 1999
(Unaudited)
------------- ------------
Current assets:
Cash and cash equivalents $ 24,287 $ 282,945
Prepaid and other current assets 108,939 114,439
------------ ------------
Total current assets 133,226 397,384
------------ ------------
Furniture and equipment, net 38,921 48,211
Investments and license acquisition costs 2,369,571 2,370,618
Satellite construction costs 12,227,017 12,072,873
Deferred stock offering costs 0 673,500
------------ ------------
14,635,509 15,165,202
Total assets $ 14,768,735 $ 15,562,586
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,444,682 $ 478,334
Customer advances 400,000 400,000
Accrued liabilities 1,366,354 460,577
------------ ------------
Total current liabilities 3,211,036 1,338,911
------------ ------------
Stockholders' equity:
Preferred stock, $0.0004 par value; 5,000,000
shares authorized; 34,231 issued and
outstanding at September 30, 2000 14 --
Common stock, $0.0004 par value; 50,000,000
shares authorized; 15,323,107 and 14,354,911
issued and outstanding at September 30, 2000
and December 31, 1999, respectively 6,149 5,762
Capital in excess of par value 28,862,053 26,968,174
Warrants 2,994,747 1,890,436
Note receivable from stockholder (60,000) (60,000)
Deferred stock-based compensation (842,237) (1,532,582)
Deficit accumulated during the development
stage (19,403,027) (13,048,115)
------------ ------------
Total stockholders' equity 11,557,699 14,223,675
------------ ------------
Total liabilities and stockholders'
equity $ 14,768,735 $ 15,562,586
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
1
<PAGE>
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
April 25, 1990
Three Months Ended Nine Months Ended (Inception) to
September 30, September 30, September 30,
2000 1999 2000 1999 2000
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue $ -- $ -- $ -- $ -- $ 161,420
------------ ------------ ------------ ------------ ------------
Cost and operating expenses:
Cost of revenue -- -- -- -- 127,580
Marketing and sales 235,288 297,791 902,260 297,791 1,824,883
General and administrative 2,383,578 1,453,861 5,033,771 3,130,660 17,756,370
Research and development 181,554 455,606 419,357 814,830 4,431,371
------------ ------------ ------------ ------------ ------------
2,800,420 2,207,258 6,355,388 4,243,281 24,140,204
------------ ------------ ------------ ------------ ------------
Loss from operations (2,800,420) (2,207,258) (6,355,388) (4,243,281) (23,978,784)
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest, net 270 25,804 2,197 101,453 (593,926)
Equity in loss of
investees, net -- -- -- -- (512,920)
Gain on sales of
investments -- -- -- -- 5,829,218
Other, net -- -- (1,721) -- (58,355)
------------ ------------ ------------ ------------ ------------
270 25,804 476 101,453 4,664,017
------------ ------------ ------------ ------------ ------------
Loss before provision
for income taxes and
minority interests (2,800,150) (2,181,454) (6,354,912) (4,141,828) (19,314,767)
Provision for income taxes -- -- -- -- (96,835)
------------ ------------ ------------ ------------ ------------
Loss before minority
interests (2,800,150) (2,181,454) (6,354,912) (4,141,828) 19,411,602)
Minority interests in income of
consolidated subsidiaries -- -- -- -- 8,575
------------ ------------ ------------ ------------ ------------
Net loss $ (2,800,150) $ (2,181,454) $ (6,354,912) $ (4,141,828) $(19,403,027)
============ ============ ============ ============ ============
Basic net loss per share $ (0.19) $ (0.15) $ (0.44) $ (0.33)
============ ============ ============ ============
Diluted net loss per share $ (0.19) $ (0.15) $ (0.44) $ (0.33)
============ ============ ============ ============
Weighted average number of
shares of common stock,
basic 14,946,553 14,266,067 14,615,607 12,665,510
============ ============ ============ ============
Weighted average number of
shares of common stock,
diluted 14,946,553 14,266,067 14,615,607 12,665,510
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
<PAGE>
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
April 25, 1990
Nine Months Ended (Inception) to
September 30, September 30,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Reconciliation of net loss to net cash
used in operating activities:
Net loss $ (6,354,912) $ (4,141,828) $(19,403,027)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 11,320 10,737 458,295
Minority interest's share of net loss -- -- (8,575)
Non-cash charges (60,000) -- 1,024,545
Amortization of stock-based compensation 690,345 -- 1,648,100
Issuance of options and warrants
for services rendered 1,776,325 28,859 2,550,623
Issuance of common stock in connection
with litigation settlement -- 324,291 324,391
Equity in loss of investees, net -- -- 529,972
Gain on sales of investments -- -- (5,829,218)
Loss on disposal of equipment 1,721 -- 1,721
Allowance for losses on advances -- -- 216,932
Common stock issued as payment for interest -- -- 7,000
Decrease (increase) in prepaid and other
current assets 5,500 13,427 (89,735)
Increase (decrease) in accounts payable and
accrued liabilities 2,242,496 1,760,347 2,852,411
Increase in customer advances -- -- 400,000
------------ ------------ ------------
Net cash used in operating activities (1,687,205) (2,004,167) (15,316,565)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of investment -- -- 1,099,940
Proceeds from Loral settlement -- -- 3,573,677
Purchase of furniture and equipment (2,704) (17,511) (148,145)
Satellite construction costs (154,144) (11,892,646) (12,227,017)
Organization costs -- -- (28,526)
Advances to officer -- (60,000) (91,187)
Purchase of interest in Continental -- -- (2,292,409)
Investments and license acquisition costs -- (1,517,187) (2,726,807)
Net assets of purchased subsidiaries -- -- (147,500)
Cash transferred from Fi-Tek IV, Inc.
pursuant to the merger and reorganization -- -- 156,648
Cash of divested subsidiary -- -- (277)
Purchase of patents -- -- (18,251)
Proceeds from repayment of advances to
affiliate -- -- 152,500
Restricted cash on credit line -- -- 300,000
------------ ------------ ------------
Net cash used in investing activities (156,848) (13,487,344) (12,397,354)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of borrowing under credit line -- -- (300,000)
Issuance of debentures -- -- 4,817,501
Issuance of preferred and common stock 1,688,710 15,559,354 25,080,007
Redemption of common stock warrants -- -- (19,490)
Stock issue costs (103,315) (154,100) (757,150)
Purchase of shares -- -- (5,000)
Payment of debentures -- -- (1,168,445)
Proceeds from stockholders' loans -- -- 442,750
Payment of stockholders' loans -- -- (351,967)
------------ ------------ ------------
Net cash provided by financing
activities 1,585,395 15,405,254 27,738,206
------------ ------------ ------------
Net increase in cash and cash equivalents (258,658) (86,257) 24,287
Cash and cash equivalents, beginning
of period 282,945 1,291,711 --
------------ ------------ ------------
Cash and cash equivalents, end of period $ 24,287 $ 1,205,454 $ 24,287
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 UNAUDITED INTERIM FINANCIAL STATEMENTS
--------------------------------------
The information presented in these condensed consolidated
financial statements of DBS Industries, Inc. (DBSI or the Company)
and its wholly owned subsidiaries, Global Energy Metering Services,
Inc. and NewStar Limited (the subsidiaries), is unaudited.
The financial statements include all adjustments consisting of
only normal recurring adjustments which are, in the opinion of
management, necessary to present fairly the condensed consolidated
financial position of DBSI at September 30, 2000 and condensed
consolidated results of operations and cash flows for the interim
periods reported. The results of operations for the 2000 interim
period presented are not necessarily indicative of expected results
for the full 2000 fiscal year.
These condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. Since
inception, the Company has devoted substantially all of its efforts
to developing its business. The Company has therefore incurred
substantial losses and negative cash flows from operating activities
and requires substantial capital. To address financing needs, the
Company is pursuing various financing alternatives. These factors
raise substantial doubt about the Company's ability to continue as a
going concern. These financial statements do not reflect any
adjustments that might result from the outcome of this uncertainty.
Certain information and footnote disclosures normally
contained in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. The condensed consolidated financial statements should be
read in conjunction with the financial statements and notes contained
in DBSI's 1999 Annual Report to Shareholders.
NOTE 2 INVESTMENTS AND LICENSE ACQUISITION COSTS
-----------------------------------------
E-SAT, Inc. (E-SAT)
In October 1994, the Company and EchoStar Communications, Inc.
formed E-SAT for the purpose of filing with the Federal
Communications Commission (FCC) for a license to operate a low earth
orbit (LEO) satellite system. E-SAT filed a license application with
the FCC on November 16, 1994. The Company holds a 20% interest in
E-SAT. The Company's total investments in E-SAT and license
acquisition costs were $2,369,571 as of September 30, 2000. The
investment is accounted for using the equity method.
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.
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 on March 31, 1999.
On July 30, 1999, the Company entered into an agreement with
EchoStar under which it will receive 60.1% of E-SAT's shares from
EchoStar in exchange for consideration, including the grant of rights
to use up to 20% of the satellite capacity of the E-SAT system by
EchoStar. As a result of this transaction, the Company will own 80.1%
4
<PAGE>
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
of the E-SAT shares. This transfer of control agreement is subject to
approval by the FCC, which was formally requested by the Company and
EchoStar on May 2, 2000.
NOTE 3 SATELLITE CONSTRUCTION COSTS
----------------------------
During the construction of the System, the Company is
capitalizing all design, engineering, launch and construction costs.
Such costs amounted to approximately $12.2 million as of September
30, 2000.
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. Upon
signing of the MOU, the Company made a $1 million advance payment to
Alcatel. In January and February 1999, the Company made additional
payments to Alcatel totaling $1 million for design services.
On March 31, 1999, the Company signed construction and launch
contracts with Surrey Satellite Technology Limited ("Surrey") and
Eurockot, respectively, and made advance payments of $9.8 million in
1999. Total payments under these cancelable contracts will amount to
approximately $47 million. In July 1999, the Company, Surrey and
Eurockot reached agreements under which $3.2 million of the required
milestone payments due in July 1999 totaling $4.8 million were
deferred to yet to be agreed upon dates.
On October 8, 1999, the Company and Alcatel entered into an
agreement under which Alcatel will serve as prime contractor for the
construction of the Company's low earth orbit satellite
communications system. This agreement becomes effective upon the
Company's payment of $14.1 million to Alcatel. As of October 31, 2000
this payment, which was originally due in November, 1999, has not
been made and therefore the agreement with Alcatel is not currently
in effect.
NOTE 4 CUSTOMER ADVANCES
-----------------
The Company's wholly-owned subsidiary, Global Energy Metering
Services, Inc. (GEMS), is party to a contract to deliver 10,000
satellite radio units. The purchase order is for $1.2 million and
under the terms of the purchase order, GEMS would receive a total of
$500,000 in advance payments on the contract, based on certain
milestone achievements. As of December 31, 1998, this purchase order
had been suspended by both parties when the Argos System became
unavailable. The $400,000 in milestone payments received is reported
as customer advances on the accompanying balance sheet. These
milestone payments could be subject to refund in whole or in part.
5
<PAGE>
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 NET LOSS PER SHARE
------------------
Basic net income (loss) per share is computed based on the
weighted average number of common shares outstanding and excludes any
potential dilution. Diluted net income per share reflects diluted
effects of all outstanding common stock equivalents. Options and
warrants to purchase 6,666,737 and 6,018,531 shares of common stock
with exercise prices from $0.39 to $5.60 were outstanding as of
September 30, 2000 and September 30, 1999 respectively. These options
and warrants were excluded from the loss per share calculation for
the quarter and the nine month periods then ended as they have the
effect of decreasing loss per share.
NOTE 6 EQUITY TRANSACTIONS
-------------------
Preferred Stock
The Company's Certificate of Incorporation, as amended in
1999, authorizes the issuance of 5,000,000 shares of preferred stock
with par value of $0.0004 per share. The Board of Directors of the
Company is authorized to issue preferred stock from time to time in
series. The Board is further authorized to establish such series, to
fix and determine the variations in the relative rights and
preferences, and to allow for the conversion of preferred stock into
common stock.
During the nine months ended September 30, 2000, the Company
sold an aggregate of 35,897 shares of its Series A Convertible
Preferred Stock at $30 per share, for an aggregate placement of
$1,076,910. The shares of preferred stock have a liquidation
preference of $30.00 per share and were initially convertible, at the
option of the holder, into ten shares of our common stock, or at a
rate of $3.00 per common share. Per the conversion terms, the
conversion rate was adjusted based upon the 5-day average closing
price of the Company's common stock three months after the shares
were issued, because the Company's common stock was trading below
$3.00 per share. Commissions were paid to one placement agent in the
aggregate amount of approximately $7,000, plus a warrant was issued
in July 2000 to the placement agent to purchase 57,586 shares of
common stock at the exercise price of $3.00 per share. As of
September 30, 2000, 34,231 shares of Series A Preferred Shares were
issued and outstanding and accreted dividends totaled $28,112.
Common Stock
The Company's Certificate of Incorporation, as amended in
1999, authorizes the issuance of 50,000,000 shares of common stock
with a par value of $0.0004 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.
Equity Transactions With Non-Employees
During the nine months ended September 30, 2000, the Company
issued 35,897 shares of the Company's Series A Preferred Stock in
exchange for gross proceeds of $1,076,910 in cash. The shares of
preferred stock have a liquidation preference of $30.00 per share and
were initially convertible, at the option of the holder, into ten
shares of our common stock, or at a rate of $3.00 per common share.
Per the conversion terms, the conversion rate was adjusted based upon
the 5-day average closing price of the Company's common stock three
months after the shares were issued, because the Company's common
6
<PAGE>
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
stock was trading below $3.00 per share. In September 2000, 1,666
shares of the Company's Series A Preferred Stock were converted into
29,728 shares of the Company's common stock.
In May 2000, the Company granted warrants to purchase 300,000
shares of common stock to a consultant for services rendered. The
warrants are exercisable through May 2003 at an exercise price of
$0.67 per share. The fair value of such warrants of $470,700 was
expensed and was estimated on the date of grant using the Black
Scholes model with volatility of 150%, expected life of 3 years, risk
free interest rate of 6% and a fair market value of the common stock
of $1.75 per share.
In June 2000, the Company issued 66,667 shares of the
Company's Common Stock, valued at $100,000 to one of the Company's
suppliers for services rendered.
In June 2000, the Company issued 166,298 shares of the
Company's Common Stock, in exchange for gross proceeds of $166,298 in
cash, to three accredited investors.
On June 2, 2000, the Company entered into an agreement to sell
shares of its Common Stock, at the Company's option, to Torneaux
Ltd., a corporation organized in the Bahamas. In connection with this
transaction, the Company issued a Warrant to purchase 250,000 shares
of its Common Stock at an exercise price of $1.01 per share for which
the fair market value of $294,500 was recorded as an expense and was
estimated on the date of grant using the Black Scholes model with
volatility of 150%, expected life of 3 years, risk free interest rate
of 6% and a fair market value of the common stock of $0.90 per share.
In July 2000, the Company granted warrants to purchase 57,586
shares of common stock to a consultant for services rendered. The
warrants are exercisable through July 2005 at an exercise price of
$3.00 per share. The fair value of such warrants of $69,909 was
expensed and was estimated on the date of grant using the Black
Scholes model with volatility of 150%, expected life of 5 years, risk
free interest rate of 6% and a fair market value of the common stock
of $1.38 per share.
Also in July 2000, the Company received $100,000 from a
private placement of 133,333 shares of Common Stock and granted
warrants to purchase 10,000 shares of common stock per previous
agreement. The warrants are exercisable through July 2004 at an
exercise price of $0.75 per share.
In August 2000, the Company granted warrants to purchase
49,000 shares of common stock to a consultant for services rendered.
The warrants are exercisable through August 2003 at an exercise price
of $0.9062 per share. The fair value of such warrants of $36,309 was
expensed and was estimated on the date of grant using the Black
Scholes model with volatility of 150%, expected life of 3 years, risk
free interest rate of 6% and a fair market value of the common stock
of $0.90 per share.
In September 2000, warrants for 125,000 shares of common stock
were exercised at the reduced price of $.70 per share and a new
warrant to purchase an additional 125,000 shares of common stock at
7
<PAGE>
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
an exercise price of $1.1875 per share was issued. The warrants were
originally issued in connection with the agreement with Torneaux Ltd.
to sell, at the Company's option, shares of its common stock.
In September 2000, the Company granted warrants to purchase
200,000 shares of common stock to a consultant for services rendered.
The warrants are exercisable through September 2003 at an exercise
price ranging from $1.50 to $2.50 per share. The fair value of such
warrants of $194,500 was expensed and was estimated on the date of
grant using the Black Scholes model with volatility of 150%, expected
life of 3 years, risk free interest rate of 6% and a fair market
value of the common stock of $1.25 per share. Also in September, the
Company sold 84,490 shares of common stock valued at $.9863 per share
and granted warrants to purchase 42,245 shares of common stock at an
exercise price of $1.1342 per share as per agreement with Torneaux
Ltd. The warrants are exercisable through September 2003 at an
exercise price of $1.1342 per share.
Also in September, the Company issued 29,728 shares of the
Company's Common Stock in exchange for 1,666 shares of the Company's
Series A Preferred Stock.
As of September 30, 2000, the total year-to-date proceeds from
the sale of 391,572 shares of Common Stock was $360,482, the total
year-to-date proceeds from the sale of 35,897 shares of Series A
Preferred Stock was $1,076,910, and the total year-to-date proceeds
from the exercise of warrants and options to purchase 266,370 shares
of Common Stock was approximately $251,318.
NOTE 7 SUBSEQUENT EVENTS
While we continue the fund-raising efforts that are necessary
to complete construction of our E-Sat satellite system, our continued
cost of operations significantly exceeds our short-term capital. In
October, we reduced our monthly operating expenses by discontinuing
our NewStar marketing efforts and certain of our engineering efforts
in Toulouse, France, so as to concentrate all resources on funding
issues. H.Tate Holt, the President of Newstar, will remain on the
Board of Directors after his contract terminates at the end of
November.
On October 5, 2000, the company received gross proceeds of
$55,556 from the sale of 63,092 shares of Common Stock and issued a
warrant for the purchase of 31,546 shares of Common Stock at an
exercise price of $1.0126 per share pursuant to agreement with
Torneaux Ltd. Dated June 2, 2000.
On October 18, the company issued 29,728 shares of Common
Stock as a result of the conversion of 1,666 Series A Preferred
Stock.
On October 6, 2000 the Company received gross proceeds of
$400,000 from the sale to two investors of convertible preferred
stock and warrants for common stock. In connection with this stock
offering, the company issued: (1) 400 shares of series B convertible
preferred stock ("Series B Preferred") and (2) warrants to purchase
83,660 shares of common stock with an exercise price of $1.052 per
share and (3) warrants to purchase 83,660 shares of common stock with
8
<PAGE>
DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
an exercise price of $1.434 per share. The Series B Preferred may not
be converted, and the company has the right to redeem these shares,
if the company repays within six months the purchase price plus an
additional 5-7% depending on repayment date, plus dividends at a rate
of 10% per annum. After six months, the Series B Preferred are
convertible into common stock at the lesser of (1) approximately $.96
per share which was the closing bid price at the time of the purchase
or (2) 80% of the average of the three lowest closing bid prices of
the common stock for the 20 day trading period prior to the
conversion date. After six months, the company also has the
obligation to register the common stock underlying the warrants and
common stock underlying any unredeemed Series B Preferred.
Intercoastal Financial Services Corp. receives an agent fee that is
in negotiation but is estimated to be 40 shares of Series B Preferred
and warrants to purchase 120,000 shares of common stock with an
exercise price of $1.052 per share.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 the Company's SEC reports, 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.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
General
DBS Industries, Inc. ("DBSI" or "We" or the "Company") is a
telecommunications company dedicated to providing low-cost satellite-to-Internet
data messaging to and from remote locations. DBSI is the only company currently
licensed by the Federal Communications Commission (through the E-SAT license) to
provide commercial two-way data messaging using Code Division Multiple Access
technology and low-earth-orbiting satellites operating below the 1Ghz frequency
range. We expect to begin providing our data messaging services, currently
marketed under the "NewStar" name, during 2002.
Plan of Operations
Throughout 2000, it has been our plan to continue the deployment of our
license and the construction of our system. This plan has been, and continues to
be, dependent upon our success in raising adequate financing. As of October 31,
2000, difficulties in the satellite industry continue to impede our financing
efforts.
In addition, uncertainty in the United States surrounding utility
deregulation has delayed U.S. utility firms from signing pre-launch commitments
for the Company's services and from investing in our meter reading system.
Based upon these financing difficulties, management initiated an
intensive effort to identify and commence negotiations with strategic partners
who could serve as both customers and financiers of the Company's system - both
in and out of the company's target meter reading market. The Company is involved
in a number of such discussions and we have retained outside advisors to assist
us in identifying and contacting other significant opportunities.
At the same time, management has initiated efforts to reduce the
overall cost of our system and thereby reduce the investment required to
commence commercial service.
The difficulties facing the satellite industry as a whole have also led
to delays in raising short-term operating capital. The Company's right to raise
capital by selling common shares to the Tourneaux Fund has been limited by the
Company's stock price, which, as of October 31, 2000 is below the contractual
minimum threshold price of $1.00 per share. As a result, the Company has delayed
payment to many of its vendors and delayed payroll to its employees. As of
September 30, 2000, the Company's Cash and cash equivalents amounted to $24,287
while its Accounts Payable and Accrued liabilities, including amounts owed to
employees, amounted to $2,811,036. Throughout the year, management has continued
to focus on reducing operating expenses while concentrating its efforts on
raising short term and strategic financing. (See "Subsequent Events").
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We continue to seek to satisfy our fiscal 2000 cash requirements by
raising new equity and debt capital, as well as by seeking the exercise of
previously issued third-party warrants and stock options. Through September 30,
2000 we issued 35,897 shares of the Company's Series A preferred stock in
exchange for gross proceeds of $1,076,910 in cash and the Company has received
$251,318 in options and warrants exercised. The Company has also received
$360,482 through the private sale of common stock.
Revenues
The Company remains in the development stage and did not generate
revenues in either the three or nine months ended September 30, 2000 or
September 30, 1999.
Operating Expenses
Total operating expenses for the three months ended September 30, 2000
and 1999, were $2,800,420 and $2,207,258 respectively. Total operating expenses
for the nine months ended September 30, 2000 were $6,355,388 as compared to
$4,243,281 for the nine months ended September 30, 1999. These costs are related
to marketing and sales expenses, general and administrative expenses, and
research and development expenses.
Marketing and Sales Expenses
Marketing and sales expenses are primarily the costs of personnel
(including non-cash stock compensation) and travel. Marketing and sales expenses
for the three months ended September 30, 2000 were $235,288 (8.4% of operating
expenses). Marketing and sales expenses for the three months ended September 30,
1999 were $297,791 (13.5% of operating expenses). For the nine months ended
September 30, 2000, marketing and sales expenses totaled $902,260 (14.2% of
operating expenses). For the nine months ended September 30, 1999, marketing and
sales expenses totaled $297,791 (7.2% of operating expenses). This increase in
expenses is due to the establishment of our dedicated marketing and sales group
in June 1999.
General and Administrative Expenses
General and administrative expenses include the costs of finance,
legal, administrative and general management functions of DBSI. General and
administrative expenses for the three months ended September 30, 2000 and 1999
were $2,383,578 (85.1% of operating expenses), and $1,453,861 (65.9% of
operating expenses) respectively. The increase of $1,903,111 to $5,033,771
(79.2% of operating expenses) during the nine months ended September 30, 2000,
compared to $3,130,660 (73.8% of operating expenses) in the nine months ended
September 30, 1999, was primarily due to increased personnel related costs, and
increased consulting fees primarily related to our fundraising activities. In
addition, in the quarter ending September 2000, $733,500 of deferred stock
offering costs were expensed.
Research and Development Expenses
Research and development expenses represent non-capitalized costs
incurred to develop our system. Research and development expenses for the three
months ended September 30, 2000 and 1999 were $181,554 (6.5% of operating
expenses), and $455,606 (20.6% of operating expenses) respectively. The decrease
of $395,473 to $419,357 (6.6% of operating expenses) during the nine months
ended September 30, 2000, compared to $814,830 (19.3% of operating expenses) in
the nine months ended September 30, 1999, was primarily due to a decrease in
consulting expenses of $163,000.
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Non-Cash Stock Compensation
In order to attract and retain personnel, we have granted options to
purchase 2,033,106 shares of Common Stock at exercise prices ranging from $0.39
to $2.81 to several employees and service providers. Some of the exercise prices
were below the fair market value of the Common Stock at the time of grant,
resulting in deferred stock compensation of $2,490,337. This amount is being
amortized over the vesting periods of the granted options. As of December 31,
1999 the Company had amortized $957,755 of this expense. The Company recognized
a total of $690,345 as non-cash stock compensation expense in the nine months
ended September 30, 2000. The Company recognized $710,477 in the three months
ended September 30, 1999.
Other Income (Expense)
The Company experienced a non-operating gain of $270 for the three
months ended September 30, 2000, as compared to a gain of $25,804 for the three
months ended September 30, 1999. The Company had a non-operating gain of $476
for the nine months ended September 30, 2000, as compared to a gain of $101,453
for the nine months ended September 30, 1999. The reduced gains incurred in 2000
were a result of the reduction in net interest due to the reduction of cash and
cash equivalents.
Net Loss
The Company's net loss for the three months ended September 30, 2000
was $2,800,150 compared to $2,181,454 for the three months ended September 30,
1999. Net loss for the nine months ended September 30, 2000 was $6,354,912
compared to a net loss of $4,141,828 for the nine months ended September 30,
1999.
Liquidity and Capital Resources
The Company has been in the development stage since its inception and
has not recognized any significant revenues. Our monthly cash expenditures
averaged approximately $324,000 per month during the third quarter of 2000 which
included approximately $78,000 per month for marketing and sales, approximately
$185,000 per month for finance, legal, administrative and general management
expenses and approximately $61,000 per month for E-SAT research & development.
Additional capital will be necessary to expand operations or continue current
operations, which will result in further dilution to our stockholders. We cannot
be certain that additional funding will be available on acceptable terms or at
all.
Traditionally, we have relied on equity and debt placements to finance
our operations. This financing was supplemented from the sale of our interest in
entities that held direct broadcast satellite licenses. We no longer have any
interest in direct broadcast satellite licensees.
During the nine months ended September 30, 2000, we received proceeds
from the sale of common and preferred stock totaling $1,688,710 before stock
issuance costs of $103,315. These transactions included a private placement of
35,897 shares of the Company's Series A preferred stock at $30 per share for an
aggregate amount of $1,076,910 before stock issuance costs of $91,666; a private
placement of 166,298 shares of the Company's common stock at $1.00 per share for
an aggregate of $166,298 before stock issuance costs of $11,641; 133,333 shares
of the Company's common stock at $0.75 per share for an aggregate of $100,000; a
draw down of Equity 1-A for 84,490 shares of the Company's common share at
$0.9863 for an aggregate of $83,333; and proceeds in the amount of $254,530 from
the exercise of 271,870 options and warrants.
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In addition to the above, the Company also received $10,851 from the
sale of 7,451 shares of common stock to employees pursuant to the 1999 Employee
Stock Purchase Plan for the offering periods ended December 31, 1999 and June
30, 2000. The proceeds were used primarily to fund our satellite construction
costs and financing activities
We had cash and cash equivalents of $24,287 and $1,205,454 as of the
nine months ended September 30, 2000 and 1999 respectively. We had negative
working capital of $3,077,810 as of September 30, 2000, compared to working
capital of $941,527 as of the nine months ended September 30, 1999. Until we are
able to develop, construct and operate the NewStar System and derive revenues
therefrom, we must continue to raise cash from outside sources for operations
and for the development of the NewStar System.
Net cash used in operating activities for the nine months ended
September 30, 2000 was $1,687,205, as compared to $2,004,167 for the nine months
ended September 30, 1999. The $1,687,205 results from a net loss of $6,354,912
offset primarily by (1) non-cash stock compensation of $690,345 (2) non cash
warrants issues of $1,109,651, (3) an increase in accounts payable and accrued
liabilities of $2,242,496 arising from increased marketing and general
administrative expenses and (4) a decrease in accounts receivable and other
current assets of $5,500 due to a reduction in prepaid insurance and employee
receivables.
Net cash used in investing activities for the nine months ended
September 30, 2000, was $156,848 compared to $13,487,344 for the same nine
months ended September 30, 1999. This was a decrease of $13,330,496 over the
nine month period ending September 30, 1999, which was as a result of a decrease
in satellite construction costs. Approximately $154,000 of the net cash used in
investing activities during the nine months ended September 30, 2000 was related
to satellite construction payments made to our satellite contractors in Europe.
Net cash provided by financing activities for the nine months ended
September 30, 2000, was $1,585,395 compared to $15,405,254 for the same nine
months ended September 30, 1999. Net cash provided by financing activities
during the nine months ended September 30, 2000 was related primarily to the net
proceeds from the sale of units of preferred stock and the exercise of options
and warrants by our stockholders.
In 1996, we received milestone payments under the terms of a $1.2
million purchase order for 10,000 satellite radio units from ABB. Under this
agreement, the Company was eligible to receive up to $500,000 towards
development costs upon meeting the milestone requirements of the contract. We
met the first four milestones of the contract and have received $400,000 in
cash. The parties agreed to suspend all development under this agreement due to
the expiration of the Company's agreement for the use of the Argos System on
December 31, 1997, and the subsequent limits placed on future commercial use of
the Argos System. Therefore, such milestone payments could be subject to refund,
in whole or in part.
Risks and Uncertainties Affecting Future Operating Results
A number of factors could cause future results to differ materially
from historic results. We are a development stage company and as of September
30, 2000, we had no customers. Given our limited operating history and lack of
revenues, no assurances can be given that we will be able to construct and
implement our system, and, if implemented, to develop a sufficiently large
customer base to be profitable.
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While we continue the strategic fund-raising efforts (see "Plan of
Operations") that are necessary to our ultimate success, our continued cost of
operations significantly exceeds our short-term capital. In addition, we
currently estimate that we will require approximately $120 million in capital
related to the construction and launch costs associated with our system. No
assurance can be given that capital will be available to us on commercially
acceptable terms to meet development costs or on terms acceptable to us. The
issuance of additional equity securities by us will result in significant
dilution of the equity interests of the current stockholders. Selling debt
securities such as bonds will increase our liabilities and future cash
commitments. In order to comply with development milestones required by the FCC
license, we have entered into various development contracts including a
satellite construction contract and a satellite launch contract. All of these
contracts require that we have available capital which is not currently
available.
Other factors, in addition to those identified in this report, which
could affect future results would include 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 (including but not limited to FCC approval of
our transfer of control of E-Sat, Inc. from EchoStar), 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 the Company's activities in the
Little LEO satellite technology, unscheduled delays or technological
difficulties, satellite launch risks, potential satellite malfunction, limited
availability of insurance, results of the Company's financing efforts and
marketing conditions, competition, and other risk factors related to the
Company's business. Readers of this report are cautioned not to put undue
reliance on "forward looking" statements that 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 and in the Company's SB-2 document filed
with the Securities and Exchange Commission on August 10, 2000, as well as other
factors that generally affect the market for stocks of development stage, high
technology companies. These factors could affect the price of the Company's
stock and could cause such stock prices to fluctuate significantly over
relatively short periods of time.
Impact of the Year 2000 Issue
As of November 1, 2000, we had not encountered any material year 2000
problems with the hardware and software systems used in our operations. In
addition, none of our critical vendors have reported any material year 2000
problems nor have we experienced any decline in service levels from such
vendors.
We expect to continue to monitor internal and external issues related
to year 2000. While no material problems have been discovered, we cannot assure
you that material problems will not materialize in the future.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. RECENT SALES IN UNREGISTERED SECURITIES
(a) During the nine months ended September 30, 2000, the Company sold an
aggregate of 35,897 shares of its Series A Convertible Preferred Stock
at $30 per share, for an aggregate placement of $1,076,910. The shares
of preferred stock have a liquidation preference of $30.00 per share
and were initially convertible, at the option of the holder, into ten
shares of our common stock, or at a rate of $3.00 per common share. Per
the conversion terms, the conversion rate was adjusted based upon the
5-day average closing price of the Company's common stock three months
after the shares were issued, because the Company's common stock was
trading below $3.00 per share. Commissions were paid to one placement
agent in the aggregate amount of approximately $7,000, plus a warrant
was issued in July 2000 to the placement agent to purchase 57,586
shares of common stock at the exercise price of $3.00 per share. The
offers and sales were made by the Company in reliance upon the
exemption from registration provided by Section 4(2) of the Securities
Act. During the three months ended September 30, 2000, 29,728 shares of
common stock were issued to one investor upon conversion of 1,666
shares of preferred stock.
(b) On June 2, 2000, the Company entered into an agreement to sell shares
of its Common Stock, at the Company's option, to Torneaux Ltd., a
corporation organized in the Bahamas. No commission was paid, however,
the Company issued a Warrant to purchase 250,000 shares of its Common
Stock at an exercise price of $1.01 per share as a finder's fee. The
transaction was exempt from registration in reliance upon Section 4(2)
of the Securities Act. During the three months ended September 30, 2000
the Company sold 84,490 shares of common stock to Torneaux Ltd. in
accordance with the agreement, resulting in gross proceeds to the
Company of $83,333 and issued a warrant to purchase 42,245 shares of
common stock at an exercise price of $1.1342 per share.
(c) On July 25, 2000, the Company sold 133,333 shares of its Common Stock
to an accredited investor. The stock was sold for $.75 per share
resulting in gross proceeds to the Company of $100,000. In addition,
the Company issued a warrant to purchase 10,000 shares of its common
stock at $.75 per share. transaction was performed by the Company in
reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act.
(d) In August 2000, the Company granted a warrant to purchase 49,000 shares
of its Common Stock to a consultant for past services. The warrant has
an exercise price of $0.9062 per share. The transaction was exempt from
registration in reliance upon Section 4(2) of the Securities Act.
(e) In August 2000, the Company granted to an employee an option to
purchase 120,000 shares of Common Stock at $.9062 per share.
(f) In August 2000 a warrant to purchase 125,000 shares of common stock was
exercised by an investor at a reduced exercise price of $.70 per share.
A new warrant to purchase 125,000 shares of common stock was issued to
the same investor at an exercise price of $1.1875 per share. The
transaction was exempt from registration in reliance upon Section 4(2)
of the Securities Act.
(g) In September 2000 the Company granted a warrant to purchase 200,000
shares of its common stock to a consultant as part of an agreement
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dated September 8, 2000. No commissions were paid. The warrant has an
exercise price ranging from $1.50 to $2.50 per share. The transaction
was exempt from registration in reliance upon Sec. 4(2) of the
Securities Act.
ITEM 6.
(a) Exhibits:
3.4 Certificate of Designation, creating the Series B
Convertible Stock
10.58 Stock purchase agreement dated June 2, 2000 with Courtney
Benham
10.59 Stock purchase agreement dated June 2, 2000 with Codera
Wine Group Profit Sharing Plan
10.60 Stock purchase agreement dated June 2, 2000 with Patrick
Watt House Living Trust
10.61 Stock purchase agreement dated July 25, 2000 with Barbara
J. Drew
27.1 Financial Data Schedule
(b) Reports on Form 8-K: none
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
DBS INDUSTRIES, INC.
DATE: November 10, 2000 By: /S/FRED W. THOMPSON
-------------------------------
FRED W. THOMPSON
President
By: /S/STANTON C. LAWSON
-------------------------------
STANTON C. LAWSON
Director Principal Financial Officer
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