10-Q/A 1 a71114e10-qa.txt AMENDMENT TO FORM 10-Q FOR PERIOND ENDED 6/30/2000 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q/A (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to _________________ Commission File Number 000-26039 eSAT, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) NEVADA 95-0344604 -------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10 UNIVERSAL CITY PLAZA, SUITE 1130, UNIVERSAL CITY, CA 91608 -------------------------------------------------------------------------------- (Address of principal executive offices, including zip code) (818) 464-2600 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. PAR VALUE $.001 21,882,021 ----------------------- ---------------------------------- (Class of Common Stock) (Outstanding at August 10, 2000) ================================================================================ 2 eSAT, INC. AND SUBSIDIARIES TABLE OF CONTENTS

2 3 eSAT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS

The accompanying notes are an integral part of the financial statements. LIABILITIES AND STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of the financial statements. 3 4 eSAT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

The accompanying notes are an integral part of the financial statements. 4 5 eSAT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

The accompanying notes are an integral part of the financial statements. 5 6 ESAT, INC. AND SUBSIDIARIES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2000 AND 1999 (UNAUDITED) (1) BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated financial statements of eSat, Inc. (the "Company") and subsidiaries include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly its financial position as of June 30, 2000 and 1999, and the results of operations, and cash flows for the three months and six months ended June 30, 2000 and 1999. The results of operations for the three months and six months ended June 30, 2000 and 1999, are not necessarily indicative of the results to be expected for the full year or for any future period. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. The consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Stock-Based Compensation The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of APB 25, Accounting for Stock Issued to Employees, and complies with the disclosure provisions of SFAS 123, Accounting for Stock-Based Compensation. Under APB 25, compensation cost is recognized on fixed plans over the vesting period based on the difference, if any, on the date of grant between the fair value of the Company's stock and the amount an employee must pay to acquire the stock. For variable plans, APB 25 requires recognition of compensation cost over the vesting period based on the difference, if any, on the period-end date between the fair value of the Company's stock and the amount an employee must pay to acquire the stock. Forfeitures of variable plan options result in a reversal of previously recognized compensation cost. Due to the large number of variable plan options granted by the Company in 1998 and the significant difference between the exercise price of those options and the fair value of the Company's stock at December 31, 1998, the Company recognized a substantial amount of non-cash compensation cost in 1998. Subsequently, a large number of forfeitures and the re-pricing to market of those options in 1999 and 2000 caused a considerable reversal of the previously recognized non-cash compensation cost. The resulting net income from operations for the period ended June 30, 2000 and 1999, should not be construed as profitable operations during those periods (See Note 3 for Going Concern disclosure). 6 7 ESAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2000 AND 1999 (UNAUDITED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) b) Net Earnings or Loss Per Share The following data show the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of dilutive potential common stock:

7 8 ESAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2000 AND 1999 (UNAUDITED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) b) Net Earning or Loss Per Share (Continued)

For the six months and three months ended June 30, 2000 the calculation of certain earnings per share amounts are the same because potential dilutive securities would have had an antidilutive effect. The securities that would have had an antidilutive effect are presented above. (3) GOING CONCERN The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern; however, the Company has sustained substantial operating losses in recent years. In view of this matter, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent on the Company's ability to meet its financing requirements, and the success of its future operations. Management believes that actions presently being taken to revise the Company's operating and financial requirements provide the opportunity for the Company to continue as a going concern. The Company feels certain financing arrangements coupled with product and services market introductions will provide sufficient cash to meet its operating and business expansion requirements in 2000. (4) DISCONTINUED OPERATIONS On June 30, 2000 the Company adopted a formal plan to dispose of its majority owned subsidiary, iXposure, Inc., which is no longer part of the Company's strategic long-term growth objectives. The subsidiary is reported as a discontinued operation and its net assets and results of operations are reported separately in the unaudited consolidated financial statements. The disposal of the subsidiary is expected to be completed prior to December 31, 2000. During the six months ended June 30, 2000 iXposure completed a private placement of its common stock and is contemplating another private placement before December 31, 2000. 8 9 ESAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2000 AND 1999 (UNAUDITED) (4) DISCONTINUED OPERATIONS (Continued) The estimated loss on disposal of the discontinued operations of $967,050 (net of income tax benefit of $-0-) represents the Company's share of the provision of $1,050,000 for expected losses during the phase out period from July 1, 2000 to December 31, 2000. The Company's weighted average ownership percentage was 92.1 percent during the three months and six months ended June 30, 2000. Assets and liabilities of iXposure, Inc. to be disposed of consisted of the following at June 30, 2000: Cash $ 82,191 Accounts Receivable 118,950 Other current assets 31,208 Property and equipment 218,646 ----------- Total assets 450,995 Accounts payable 189,926 Loans payable 250,000 Loan payable-related party 646,512 Losses and expenses accrued 1,050,000 Minority interest in equity 750,427 ----------- Net assets to be disposed of $(2,435,870) ===========

Assets are shown at their expected net realizable value and liabilities are shown at their face amounts. Operating results of iXposure, Inc. for the three months and six months ended June 30, 2000 are shown separately in the accompanying income statement. iXposure had no operations during the first six months of 1999. Net sales of iXposure were $16,193 and $529,571 for the three months and six months ended June 30, 2000 respectively. These amounts are not included in net sales in the accompanying income statements. (5) BUSINESS ACQUISITIONS On April 13, 2000 the Company acquired InterWireless, Inc. in a business combination accounted for as a purchase. The purchase price of $4,197,881 exceeded the fair value of the net assets by $4,152,219, which will be amortized as goodwill using the straight-line method over 7 years. The results of operations of InterWireless, Inc. have been included with the result of the Company beginning April 13, 2000. On April 13, 2000 the Company acquired all of the outstanding common stock of PacificNet Technologies, Inc. in exchange for 2,750,000 shares of the Company's common stock, in a business combination account for as a pooling of interests. Historical financial information presented has been restated to include PacificNet Technologies, Inc. (6) NOTE RECEIVABLE -- EMPLOYEE Note receivable -- employee consists of a $250,000 note receivable from an employee dated June 9, 2000, due in monthly payments of $1,580, including interest at 6.5%, secured by personal property of the employee, matures June 9, 2030. Subsequent to year-end the employee left the Company. The former employee will forfeit to the Company 34,988 shares of the Company's stock, in exchange for the Company's forgiveness of the debt. At June 30, 2000 a valuation allowance of $178,932 was placed on the note receivable. (7) PREFERRED STOCK On April 13, 2000 all of the outstanding shares of Series A 12% convertible preferred stock were converted into 550,000 shares of common stock. The conversion price was $2 per share. On April 13, 2000 the Company issued 75,000 shares of 6% Series D preferred stock. This stock has a par value of $0.001, is fully participating and convertible into shares of common stock. The proceed were partially used to finance the acquisition of Interwireless, Inc. 9 10 (8) RESTATEMENT FOR ADJUSTMENT TO APB 25 REVERSAL The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of APB 25, Accounting for Stock Issued to Employees. Under APB 25, compensation cost is recognized on fixed plans over the vesting period based on the difference, if any, on the date of grant between the fair value of the Company's stock and the amount an employee must pay to acquire the stock. For variable plans, APB 25 requires recognition of compensation cost over the vesting period based on the difference, if any, on the period-end date between the fair value of the Company's stock and the amount an employee must pay to acquire the stock. Forfeitures of variable plan options result in a reversal of previously recognized compensation costs. Subsequent to the issuance of the Company's consolidated financial statements for the quarterly period and six months ended June 30, 2000, it was determined that certain amounts related to exercised options had been inadvertently reversed. Only options that are forfeited under APB 25 should be reversed. Exercises are deemed to be permanent expenses of the Company and costs related to such exercises should not be reversed. The 2000 financial statements were restated to record the expense reversal while taking into consideration the effect of the exercised options. The initial expense in 1998 was recorded against additional paid-in capital. As illustrated below, the effect of this adjustment is to reclassify certain amounts from the Compensation Adjustment Recognized Under APB 25 line on the income statement to the Additional Paid-in Capital account on the balance sheet. No other financial statement lines were affected. A summary of the effects of the restatements is as follows: 11

12 eSAT, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Sales from continuing operations for the three months ended June 30, 2000 increased to $1,341,499 from $1,080,652 in the prior year period. For the six month period ended June 30, 2000, revenues increased to $2,396,203 from $1,824,167 for the same period in the prior year. The 2000 revenue increased primarily due to an increase in the subscriber base and ancillary services revenue at the PacificNet subsidiary, as well as an increase in sales of the Company's disaster recovery products and services. Cost of sales for the second quarter 2000 totaled $1,510,861 as compared to $1,119,201 in 1999. For the six months ended June 30, 2000, cost of sales increased to $2,461,642 from $1,925,678 in the prior year period. The increase in 2000 is related to an increase in satellite access fees, data center equipment lease expenses and increases in technical staffing. General and administrative expenses increased from $2,340,378 for the quarter ended June 30, 1999 to $3,804,514 in the current year period. For the six month period ended June 30, 2000, general and administrative expenses totaled $6,458,138 as compared to $3,784,543 in the prior year period. The increase in 2000 reflect the cost of business continuity marketing and corporate investor relations programs, staffing increases in the areas of business and technical development, and legal and accounting fees associated with the Company becoming a full SEC reporting company in late 1999. Other income totaled $2,190,609 and $4,249,176, respectively, for the three and six month periods ended June 30, 2000, as compared to $53,744,116 and $67,796,002, respectively, for the three and six month periods ended June 30, 1999. Other income primarily represents a compensation adjustment recognized under APB 25. The loss from the operations and disposal of the discontinued subsidiary total $1,004,142 and $967,050, respectively, for the three months ended June 30, 2000. For the six month period ended June 30, 2000, the loss from the operations and disposal of the discontinued subsidiary total $1,184,404 and $967,050, respectively. These losses reflect costs associated with the Company's plan to divest of its majority-owned subsidiary, i-Xposure, Inc. The disposal of the subsidiary is expected to be completed by December 31, 2000. 10 13 eSAT, INC. LIQUIDITY AND CAPITAL RESOURCES The Company's operations have historically been financed from the sale of preferred and common stock. At June 30, 2000, the Company had cash and cash equivalents on hand of $667,375 and working capital of ($3,609,129), as compared to cash and cash equivalents of $3,412,205 and working capital of $1,993,158 at December 31, 1999. The deficit working capital at June 30, 2000 includes ($2,435,870) relating to the net assets of the discontinued subsidiary. Net cash used in operating activities of $6,208,387 and $3,067,844 for the six months ended June 30, 2000 and 1999, respectively, is attributable primarily to operating losses as adjusted for compensation expense recognized under APB 25 and FAS 123. Net cash used in investing activities totaled $2,842,308 and $545,030 for the six months ended June 30, 2000 and 1999, respectively. Net cash used in 2000 represents primarily the purchase of Interwireless as offset by the recognition of the disposal of the Company's investment in the i-Xposure subsidiary. Net cash provided by financing activities totaled $6,305,865 for the six months ended June 30, 2000 as compared to $1,612,955 in 1999. The 2000 and 1999 balances primarily reflect the sale of preferred and common stock, respectively. To the extent that the Company's revenues increase in the remainder of the fiscal year, we anticipate significant increases in operating expenses, working capital and capital expenditures. The cost to purchase additional fixed assets, primarily satellite and microwave transmission and receiving equipment, and to finance working capital requirements is approximately $25,000,000. In April 2000, all of the outstanding Series A Preferred Stock was converted into 550,000 shares of common stock. In April 2000, the Company entered into an agreement with the holder of the Series C Preferred Stock for the purpose of raising additional capital. Pursuant to that agreement, a total of $7,500,000 of Series D 6% Convertible Preferred Stock was sold. In addition to the shares purchased, the agreement calls for the issuance of warrants to purchase 1,283,422 shares of common stock at an initial exercise price of $3.9844 per share. In August, 2000 a total of $3,000,000 of Series E 6% Convertible Preferred Stock was sold. In addition to the shares sold, the agreement calls for the issuance of warrants to purchase 666,075 shares of common stock at an exercise price of $1.5225 per share. The Company also modified the terms of its equity line of credit with Wentworth, LLC. A total of $7,000,000 is available under this facility. We believe that the receipt of the net proceeds from the preferred stock described above plus cash generated internally from sales and externally from other financing arrangements will be sufficient to satisfy our future operating, working capital and other cash requirements for at the remainder of the fiscal year. We believe that we have sufficient internal and external resources to fund current operations, develop new or enhanced products and/or services, and to respond to competitive pressures and acquire complementary products, businesses or technologies. 11 14 eSAT, INC. IMPACT OF YEAR 2000 We experienced no interruptions in our operations when the calendar year changed to the year 2000. We believe that our products and services, and products which we purchase from third party vendors, are designed to operate continuously regardless of date changes. 12 15 eSAT, INC. RISK FACTORS WE HAVE REPORTED LOSSES FROM OPERATIONS FOR OUR LAST THREE YEARS AND FOR THE SIX MONTHS ENDED JUNE 30, 2000, AND, IF WE DO NOT BECOME PROFITABLE, OUR BUSINESS WILL BE ADVERSELY AFFECTED AND THE VALUE OF YOUR INVESTMENT WILL DECLINE. For the six months ended June 30, 2000, we incurred a loss from continuing operations of $6,960,934, including all research and development costs. For the fiscal year ended December 31, 1999, we incurred a loss from operations of $8,925,896 as compared to a loss from operations of $2,957,991 for the fiscal year ended December 31, 1998. The losses were primarily due to: (i) employee compensation, which increased because of additional sales and operations staff hired in 1998 in anticipation of future growth of our operations; (ii) expenses related to marketing; and (iii) lack of product sales. In addition, we incurred significant research and development costs associated with new products. There can be no assurance that we will be able to generate sufficient revenues to operate profitably in the future or to pay our debts as they become due. The company is dependent upon successful completion of future capital infusions to continue operations. See "Management's Discussion and Analysis of Financial Condition." The Company's net income in 1999 is primarily a result of its method of accounting for stock-based compensation. The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of APB 25, Accounting for Stock Issued to Employees, and Complies with the disclosure provisions of SFAS 123, Accounting for Stock-Based Compensation. Under APB 25, compensation cost is recognized on fixed plans over the vesting period based on the difference, if any, on the date of grant between the fair value of the Company's stock and the amount an employee must pay to acquire the stock. For variable plans, APB 25 requires recognition of compensation cost over the vesting period based on the difference, if any, on the period-end date between the fair value of the Company's stock and the amount an employee must pay to acquire the stock. Forfeitures of variable plan options result in a reversal of previously recognized compensation cost. Due to the large number of variable plan options granted by the Company in 1998 and the significant difference between the exercise price of those options and the fair value of the Company's stock at December 31, 1998, the Company recognized a substantial amount of non-cash compensation cost in 1998. Subsequently, a large number of forfeitures and the re-pricing to market of those options in 1999 caused a considerable reversal of the previously recognized non-cash compensation cost. The resulting net income for the three and six month periods ended June 30, 1999 should not be construed as profitable operations during those periods. WE DEPEND ON SATELLITE TRANSMISSION. SATELLITE FAILURE COULD HAVE A SUBSTANTIAL NEGATIVE EFFECT ON OUR BUSINESS OPERATIONS. We currently use a single satellite to provide satellite Internet services. There is risk associated with this dependence. There are two types of possible failures to the satellite: a failure of the individual transponder that is used and a failure of the entire satellite. If there is a failure of a transponder, the satellite operator is contractually obligated to move us to another transponder. This would create a minimum interruption to customers, likely less than 24 hours. If the satellite itself completely fails, we will have to move our services to another satellite. Our transmissions conform to industry standards so there are several possible alternative satellites. Our current satellite provider engages in quarterly reviews of available like-satellite space and is ready to contract for that space if needed. If the entire satellite were to fail, a one to five day outage of services might occur depending on the availability of other satellites. Additionally, a repointing of the receiving dishes on the ground would likely be required. The repointing of the receiving dishes on the ground would cost us approximately $300 per customer. In the event of any service disruption due to satellite failure, our customers would be credited for the dollar value of the amount of time they are without the satellite Internet service. Based on a standard contract paying $495 per month for the use of our GSI(TM) equipment and related satellite Internet service, this would be equal to $16.50 per day per customer. Nexstream based business continuity customers might not be impacted but could cost $27.00 per day. Other Nexstream customers would represent a potential loss of between $27.00 and $155.00 per day depending on the level of service subscribed. We intend to install a second U.S. Network Operating Center ("NOC") in the first half of fiscal 2000. This second NOC will be located in Los Angeles, California, and will utilize a different satellite than the existing NOC. This second NOC and satellite provides certain redundancies in the event of a failure. In the event of a satellite failure, we could also be subject to loss-of-business claims, due to the reliance by business customers on the satellite Internet services we provide. A sustained disruption in satellite service could materially impact our ability to continue operations. 13 16 eSAT, INC. WE HAVE A LIMITED OPERATING HISTORY Any of these occurrences could have a material adverse effect on our business, financial condition and operating results. Each of our products faces intense competition from multiple competing vendors. Our principal competitors include Loral, Inc., Hughes Network Systems and Spacenet. Many of our current and potential competitors have: - longer operating histories, - greater name recognition, - access to larger customer bases, or - substantially greater resources than we have. As a result, our principal competitors may respond more quickly than we can to new or changing opportunities and technologies. For all of the reasons stated above, we may be unable to compete successfully against our current and future competitors. WE MAY HAVE INSUFFICIENT CAPITAL FOR FUTURE OPERATIONS WHICH WOULD DIMINISH THE VALUE OF YOUR INVESTMENT. Based on current proposed plans and assumptions relating to our operations, we anticipate that current cash reserves, together with projected cash flow from operations and the sale of additional securities, will be sufficient to satisfy our contemplated cash requirements through fiscal 2000. Thereafter, we will require substantial additional financial resources to fund our operations. The expansion into new product areas will also require substantial funding. The failure to acquire additional funding when required will have a material adverse effect on our business prospects. Without the proper financing of customer contracts by a finance company or additional equity, we are likely to have difficulty in sustaining on-going operations. OUR FINANCIAL STATEMENTS CONTAIN A "GOING CONCERN" QUALIFICATION. The audit reports accompanying our Financial Statements for the years ended December 31, 1998 and 1999 contain a qualification that certain conditions indicate that we may not be able to continue as a going concern. The financial statements do not contain any adjustments that might be necessary in such a case. Note 2 to the financial statements indicates that substantial operating losses account for this uncertainty. Many investment bankers and investors view companies with a "going concern" qualification as less desirable for investment. Accordingly, we may have a more difficult time raising equity capital or borrowing capital at all on favorable terms. Our suppliers might be less willing to extend credit. Our potential customers might be less willing to purchase our products and services if they believe that we will not be viable enough to provide service, support, back-up, and follow-on products when needed. Furthermore, we might be disadvantaged in recruiting employees who might be concerned about the stability of employment with us. Therefore, the "going concern" qualification can have severe adverse consequences on us. 14 17 eSAT, INC. WE ARE DEPENDENT ON SUCCESSFUL NEW PRODUCTS AND PRODUCT ENHANCEMENT INTRODUCTIONS AND MAY SUFFER PRODUCT DELAYS. Our success in the Internet access business depends on, among other things, the timely introduction of successful new products or enhancements of existing products to replace declining revenues from older, less efficient products. Consumer preferences for software products are difficult to predict, and few consumer software products achieve sustained market acceptance. If revenues from new products or enhancements do not replace declining revenues from existing products, our business, operating results and financial condition could be materially adversely affected. The process of developing Internet access products such as ours is extremely complex and is expected to become more complex. A significant delay in the introduction of one or more new products or enhancements could have a material adverse effect on the ultimate success of such products and on our business, operating results and financial condition. WE HAVE NO ASSURANCE OF MARKET ACCEPTANCE OF OUR PRODUCTS AND SERVICES. IF WE ARE UNABLE TO RAISE MARKET AWARENESS OF OUR PRODUCTS AND SERVICES, WE MAY EXPERIENCE DECLINING OPERATING RESULTS WHICH WOULD DIMINISH THE VALUE OF YOUR INVESTMENT. We are at an early stage of development and our earnings growth depends primarily upon market acceptance of our products and services. There can be no assurance that our product development efforts will progress further with respect to any potential new products or that they will be successfully completed. In addition, there can be no assurance that our potential new products will be capable of being produced in commercial quantities at reasonable costs or that they will achieve customer acceptance. There can be no assurance that our products and services will be successfully marketed. In addition to our own direct sales force, we are dependent on value-added resellers and distributors to market our products. There is no assurance that any distributor or other reseller will be successful in marketing our products. Our success is dependent in part on our ability to sell our products and services to governmental agencies, including public school districts, and large business organizations. Selling to governmental agencies and larger companies generally requires a long sales process, with multiple layers of review and approval. In sales to governmental agencies, nonbusiness factors often enter into the purchase decision. Such factors include the residence and origin of the supplier of the products, the nature of the supplier and the distributor, the ethnic and gender characteristics of personnel and owners of the company selling or distributing the products, political and other contacts, and other peculiar factors. Accordingly, the success of selling to these potential customers is uncertain. We do not have sufficient experience in marketing our products to determine the optimum distribution methods. It is unclear whether marketing through distributors or value-added resellers or mass retailers will result in acceptable sales levels. Accordingly, as we learn 15 18 eSAT, INC. more, we may have to revise our sales, distribution, and marketing strategies and implementation. WE MIGHT BECOME SUBJECT TO FURTHER GOVERNMENT REGULATION WHICH COULD HARM OUR PROSPECTS. Except for a license from the Federal Communications Commission, we are not currently subject to direct regulation by any government agency in the United States, other than regulations applicable to businesses generally. There are currently few laws or regulations directly applicable to access to or commerce on the Internet. However, due to the increasing popularity and use of the Internet, it is possible that laws and regulations may be adopted with respect to the Internet, covering issues such as user privacy, pricing and characteristics and quality of products and services. Such laws or regulations could limit the growth of the Internet, which could in turn decrease the demand for our proposed products and services or increase our cost of doing business. Any new legislation or regulation or the application of existing laws and regulations to the Internet in unexpected ways could have an adverse effect on our business and prospects. WE MIGHT FACE LIABILITY FOR INFORMATION OBTAINED OR DISTRIBUTED THROUGH THE PRODUCTS AND SERVICES WE PROVIDE. Because materials may be downloaded by the Internet services which we operate or facilitate and may be subsequently distributed to others, there is a potential that claims will be made against us for defamation, negligence, copyright or trademark infringement, personal injury or other theories based on the nature and content of such materials. Such claims have sometimes been successful against Internet service providers. Our general liability insurance might not cover potential claims of this type or might not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability or legal defense expenses that are not covered by insurance or that are in excess of insurance coverage could have a material adverse effect on our business, operating results and financial condition. LOSS OF KEY MEMBERS OF OUR SENIOR MANAGEMENT COULD ADVERSELY AFFECT OUR BUSINESS AND PROSPECTS. Our success will be dependent largely upon the personal efforts of our Chief Executive Officer, Michael C. Palmer, and our Chief Operating Officer, Chester L. Noblett, as well as other senior managers. The loss of their services could have a material adverse effect on our business and prospects. We have no life insurance on any of our officers. Mr. Palmer's and Mr. Noblett's services are governed by agreements. Our success is also dependent upon our ability to hire and retain additional qualified management, marketing, technical, financial and other personnel. Competition for qualified personnel is intense and there can be no assurance that we will be able to hire or retain qualified personnel. Any inability to attract and retain qualified management and other personnel could have a material adverse effect on us. 16 19 eSAT, INC. IF OUR COMMON STOCK IS SUBJECT TO PENNY STOCK RULES, YOU MAY HAVE GREATER DIFFICULTY SELLING YOUR SHARES. The Securities Enforcement and Penny Stock Reform Act of 1990 applies to stock characterized as "penny stocks," and requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Securities and Exchange Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. The exceptions include exchange-listed equity securities and any equity security issued by an issuer that has - net tangible assets of at least $2,000,000, if the issuer has been in continuous operation for at least three years; - net tangible assets of at least $5,000,000, if the issuer has been in continuous operation for less than three years; or - average annual revenue of at least $6,000,000 for the last three years. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. If our financial condition does not meet the above tests, then trading in the common stock will be covered by Rules 15g-1 through 15g-6 and 15g-9 promulgated under the Securities Exchange Act. Under those rules, broker-dealers who recommend such securities to persons other than their established customers and institutional accredited investors must make a special written suitability determination for the purchaser and must have received the purchaser's written agreement to a transaction prior to sale. These regulations would likely limit the ability of broker-dealers to trade in our common stock and thus would make it more difficult for purchasers of common stock to sell their securities in the secondary market. The market liquidity for the common stock could be severely affected. 17 20 WE WILL PAY NO DIVIDENDS TO YOU. We have not paid, and do not expect to pay, any dividends on common stock in the foreseeable future. FORWARD-LOOKING STATEMENTS YOU SHOULD NOT RELY ON OUR FORWARD-LOOKING STATEMENTS. This prospectus contains forward-looking statements that involve risks and uncertainties. Discussions containing forward-looking statements may be found in the material set forth under "Prospectus summary," "Management's discussion and analysis of financial condition and results of operations," and "Business," as well as within this prospectus generally. In addition, when used in this prospectus, the words "believes," "intends," "plans," "anticipates," "expects," and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements as a result of the risk factors set forth and the information provided in this prospectus generally. We do not intend to update any forward-looking statements. 18 21 eSAT, INC. PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES (c) Recent sales of unregistered securities In August 2000, the Company issued 30,000 shares of Series E 6% convertible preferred stock to Wentworth, LLC for a total of $3,000,000. The preferred stock has a liquidation preference of $100 per share, bears cumulative dividends at 6% per annum payable in cash or common stock, and is convertible into common stock at the lesser of $1.5225 or 85% of the average closing pice for the five trading days immediately prior to the conversion. The shares were issued to accredited investors pursuant to Section 4(2) of the Securities Act of 1933, as amended. ITEM 5. OTHER INFORMATION On June 30, 2000 the Company adopted a formal plan to dispose of its majority owned subsidiary, i-xposure, Inc., which is no longer part of the Company's strategic long-term growth objectives. The subsidiary is reported as a discontinued operation and its net assets and results of operations are reported separately in the unaudited consolidated financial statements. The disposal of the subsidiary is expected to be completed prior to December 31, 2000. During the six months ended June 30, 2000 i-xposure, Inc. completed a private placement of its common stock and is contemplating another private placement before December 31, 2000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 3.1 Series E 6% Convertible Preferred Stock Certificate of Designations(1) 3.2 Amended Series D 6% Convertible Preferred Stock Certificate of Designations(1) 4.1 Same as Exhibit 3.1 4.2 Same as Exhibit 3.2 10.1 Modification Agreement between Wentworth, LLC and the Company dated August 9, 2000(1) 10.2 Private Equity Credit Agreement by and between Esat, Inc. and Wentworth, LLC dated August 9, 2000(1) 10.3 Wentworth, LLC Registration Rights Agreement dated August 9, 2000(1) 27.1 Financial Data Schedule (1) Filed as an Exhibit to the Company's Form 10-K for the period ended June 30, 2000 and incorporated herein by reference. (b) REPORTS ON FORM 8-K (i) A report on Form 8-K was filed on April 19, 2000 relating to the acquisition of PacificNet Technologies, Inc. and Interwireless, Inc. Financial statements for the businesses acquired and pro forma financial information was filed on May 24, 2000 with Amendment no. 2 to the Company's Registration Statement on Form S-1 file no. 333-95451. 19 22 eSAT, INC. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized. eSAT, INC. Date: August 14, 2000 By: /s/ Mark S. Basile --------------- ------------------------------- Mark S. Basile Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 20 23 EXHIBIT INDEX

ESAT INC 10-Q/A