10-Q 1 a72566e10-q.txt FORM 10-Q FOR PERIOD ENDED 3/31/01 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 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) 464-2670 -------------------------------------------------------------------------------- (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 27,274,020 ----------------------- ---------------------------------- (Class of Common Stock) (Outstanding at May 11, 2001) ================================================================================ 2 eSAT, INC. TABLE OF CONTENTS

3 eSAT, INC. CONSOLIDATED BALANCE SHEETS ASSETS

The accompanying notes are an integral part of the financial statements. 4 LIABILITIES AND STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of the financial statements. 5 eSAT, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

The accompanying notes are an integral part of the financial statements. 6 eSAT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

The accompanying notes are an integral part of the financial statements. 7 ESAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2001 AND 2001 (UNAUDITED) (1) BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated financial statements of eSat, Inc. (the "Company") include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly its financial position as of March 31, 2001 and 2000, and the results of operations, stockholders' equity and cash flows for the three months ended March 31, 2001 and 2000. The results of operations for the three months ended March 31, 2001 and 2000, 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, 2000. (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 2000 caused a considerable reversal of the previously recognized non-cash compensation cost. 8 ESAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2001 AND 2000 (UNAUDITED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) b) Net Loss Per Share The following data show the amounts used in computing earnings per share. Basic and diluted earnings per share are the same because potentially dilutive securities would have an anti-dilutive effect.

The following transactions occurred after March 31, 2001, which, had they taken place during the first quarter, would have changed the number of shares used in the computations of earnings per share: (1) on April 16, 2001, 182 shares of Preferred Series D Stock was converted into 1,296,302 shares of common stock; (2) common stock warrants issuable in connection with the funding of loan amounts under the Company's May 2001 secured note agreement with Wentworth, LLC. (c) Revenue Recognition In accordance with SEC Staff Accounting Bulletin No. 101, the company recognizes revenues from the sale of satellite access equipment over the life of the underlying access agreement, not upon the installation of the equipment. The unrecognized portion of the sales value of the equipment is recorded as deferred revenue and amortized using the straight-line method over the life of the satellite access contract. 9 ESAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2001 AND 2000 (UNAUDITED) (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 upon the Company's ability to meet its financing requirements, and the success of its future operations. The Company's management estimates that its current cash, cash equivalents and cash generated from operations will only be sufficient to meet its anticipated cash needs through approximately August 15, 2001. Accordingly, the Company will require either an increase in sales activity, or a substantial additional cash infusion to continue its operations. Management is not certain if additional capital will be available. Management is considering an asset sale or other comparable transaction as part of a financial restructuring. If the Company is not successful in completing a strategic transaction, it will be required to cease operations. (4) NOTE PAYABLE Note payable consists of a $325,000 secured note, plus accrued interest to payable Wentworth, LLC. The note bears interest at 8% and was originally due April 30, 2001. The note was subsequently refinanced; see Note 5 for additional detail. (5) SUBSEQUENT EVENTS In May 2001, the Company issued a secured note payable to Wentworth, LLC of up to $1,332,655. $325,000 of the note bears interest at 8% and represents a refinancing of the previous note due April 30, 2001. Amounts advanced in excess of $325,000 under the note bear interest at prime plus 4%. The note is due April 30, 2003. Additionally, should the Company receive funds as a result of the sale of stock or the sale of all or substantially all of the assets of any of its subsidiaries, it shall, after paying all reasonable expenses in connection with such sale, immediately pay the balance thereof in reduction of the amounts outstanding on the note. A total of $375,000 has been funded to the Company under this facility. 10 eSAT, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenues totaled $2,211,886 and $937,387 for the three months ended March 31, 2001 and 2000, respectively. The 2001 revenue reflects an increase in subscriber based revenues at the Company's managed internet services business and to a lesser extent, increases in sales of the Company's satellite and wireless services businesses. Approximately $90,000 of the revenue increase in 2001 is due to the inclusion of the results of the Company's wireless services business, which was acquired in April, 2000. For the three months ended March 31, 2001 and 2000, cost of sales totaled $2,139,030 and $950,780, respectively. The 2001 cost of sales reflects increases in staffing and operating costs at the Company's wireless and managed internet services businesses as well as increases in installation and satellite access fees at the satellite services business. General and administrative expenses totaled $965,196 for the period ended March 31, 2001 as compared to $2,653,624 for the prior year period. The decrease is due to substantial cost reductions undertaken at the Company's corporate offices, primarily in the area of business development. Cost containment measures were also undertaken during the 2001 period at the Company's satellite services business. The prior year balance also includes approximately $540,000 of SFAS 123 expense relating to the issuance of common stock warrants. Other income for the period ended March 31, 2001 and 2000 totaled $41,040 and $2,058,567, respectively. The 2001 balance includes a gain on the sale of fixed assets, whereas the prior period balance represents primarily a compensation adjustment recognized under APB 25. The loss from operations of discontinued subsidiary of ($180,262) recorded in the period ended March 31, 2000 represents the Company's interest in the net loss of its i-xposure subsidiary. The Company sold the majority of its interest in this subsidiary in October, 2000. The subsidiary is no longer in operation. 11 eSAT, INC. LIQUIDITY AND CAPITAL RESOURCES Our operations have historically been financed from the sale of preferred and common stock. At March 31, 2001, the Company had cash and cash equivalents on hand of $75,673 and working capital of ($4,234,800) as compared to cash and cash equivalents of $452,144 and working capital of ($3,503,540) at December 31, 2000. Net cash used in operating activities of ($610,350) for the three months ended March 31, 2001 is attributable primarily to the operating loss as adjusted for depreciation and amortization. Net cash used in operating activities in the prior period of ($1,864,108) includes the effect of a compensation expense recognized under APB 25 and FAS 123. Net cash used in investing activities of ($84,029) and ($210,653) for the three months ended March 31, 2001 and 2000, respectively, is attributable to the purchase and sale of fixed assets. Net cash provided by financing activities of $317,908 for the three months ended March 31, 2001 represents primarily the Company's issuance of a note payable to an investor. Net cash used by financing activities of ($449,274) in the prior year period reflects repayment of debt financing, loans made to a discontinued subsidiary and distributions to the owners of the managed internet services business prior to its acquisition by the Company in April, 2000. In January, 2001 the company received funding of $325,000 through the issuance of a secured note to Wentworth, LLC. The note bears interest at 8%, was originally due on April 30, 2001 and is collateralized by all of the assets of the Company. Concurrent with this funding, the company entered into an agreement with Wentworth, LLC whereby the $2,000,000 previously advanced under the PECA in October, 2000 will be converted to a secured note also collateralized by the assets of the company. The note is expected to be convertible to equity under provisions substantially identical to those of the PECA. In May, 2001 the Company issued a note to Wentworth LLC of up to $1,332,655. This note incorporates the balance and terms of the $325,000 note issued in January, 2001, and is collateralized by all of the assets of the Company. The remainder of the May, 2001 note bears interest at prime plus 4%. The May, 2001 note is due April 30, 2003. A total of $375,000 has been advanced under this note. Since November 15, 2000, we have stated that our cash, cash equivalents and cash that may be generated from operations are not expected to be sufficient to meet our operating needs. At this time, it appears that our current cash, cash equivalents and cash generated from operations will only be sufficient to meet our anticipated cash needs to approximately August 15, 2001, although there can be no assurance in this regard. In order to continue operations beyond that date, we would require an increase in sales activity or a substantial cash infusion. Additional capital may not be available to us. We are currently assessing strategic alternatives that may include an asset sale or comparable transaction as part of a financial restructuring. However, in the event that we are unsuccessful in completing one of these strategic alternatives, we would be required to cease operations. In that case, our common stock will have no value. In addition, potential investors in our securities should consider the risk that, even if we are successful in completing a strategic transaction as described above, our common stock will nonetheless have no value. 12 RISK FACTORS WE WILL CEASE OPERATIONS AT OR AROUND AUGUST 15, 2001 UNLESS WE EXPERIENCE INCREASED SALES ACTIVITY, OBTAIN ADDITIONAL CAPITAL OR PURSUE OTHER STRATEGIC ALTERNATIVES Our current cash, cash equivalents and cash generated from operations will only be sufficient to meet our anticipated cash needs to approximately August 15, 2001, although there can be no assurance in this regard. Accordingly, we will require an increase in sales activity or an additional substantial cash infusion to continue our operations. We do not believe that additional capital will be available to us. We are also considering an asset sale or other comparable transaction as part of a financial restructuring. If we are unsuccessful in all of these measures, we will be required to cease operations, and our common stock will have no value. In addition, potential investors in our securities should consider the risk that, even if we are successful in completing a strategic transaction, our common stock will nonetheless have minimal value. AS A RESULT OF QUESTIONS CONCERNING OUR STATUS AS A GOING CONCERN, OUR CUSTOMERS AND VENDORS MAY DECIDE NOT TO DO BUSINESS WITH US Due to concerns regarding our ability to continue operations, customers and vendors are likely to decide not to conduct business with us, or may conduct business with us on terms that are less favorable than those customarily extended by them. In that event, our net sales would further decrease, and our business will suffer significantly. OUR FINANCIAL STATEMENTS CONTAIN A "GOING CONCERN" QUALIFICATION. The audit reports accompanying our financial statements for the years ended December 31, 2000 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 will 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. WE ARE DEFENDANTS IN TWO LAWSUITS WHICH, IF SUCCESSFUL, COULD FORCE US TO SEEK PROTECTION FROM THE BANKRUPTCY COURT. In December 2000, Michael C. Palmer, our former CEO, and Vantage Capital, Inc.(controlled by Mr. Palmer), commenced an arbitration proceeding seeking $325,000 in severance benefits he alleges were part of his contractual arrangements with the company. In January 2001, i-xposure, Inc. filed a lawsuit against us seeking approximately $351,000 plus interest and costs, allegedly due from us under guaranties which were part of a bridge financing arrangement. Due to our limited working capital position, if we cannot successfully defend either of these actions, we may be forced to seek protection from the bankruptcy court. That circumstance would likely have a material and negative impact on the value of your investment. WE ARE HIGHLY DEPENDENT ON THE UNINTERRUPTED OPERATION OF THE NETWORK OPERATIONS CENTER AT OUR UNIVERSAL CITY, CALIFORNIA, SITE. We currently have all of the equipment used for our PacificNet subsidiary's network operations located in our Universal City facility. While it is protected by standard protective devices such as redundant power supplies, multiple internet connections, fire systems, climate control, and 24 hour security/access control, we are at risk for catastrophic events that would require a backup location. Failure of this equipment for any material length of time would adversely affect our revenue generated from our managed internet services business which presently accounts for a substantial portion of our revenue. WE ARE CURRENTLY DEPENDENT ON A SINGLE CUSTOMER FOR A SIGNIFICANT PORTION OF OUR REVENUE. We provide and manage the actual connection to the Internet to the subscriber base of a large national telephone dial-up Internet access provider. Approximately seventy percent of our revenues in the first quarter of 2001 were generated by our service to that company. Loss of that account would have a material adverse effect on our revenues, which could negatively affect the value of your investment. Furthermore, we anticipate that revenues derived from this customer will experience a reduction in the second quarter of 2001 as compared to the first quarter of 2001. 13 WE DEPEND ON SATELLITE TRANSMISSION. SATELLITE FAILURE COULD HAVE A SUBSTANTIAL NEGATIVE EFFECT ON OUR BUSINESS OPERATIONS. We 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. Such credits would be between to $16.50 per day per customer and $155.00 per day depending on the level of service subscribed. 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 and negatively impact the value of this portion of our business and could force us to discontinue operations. WE ARE CURRENTLY ASSESSING THE DISCONTINUATION OF CERTAIN OF OUR BUSINESS LINES. THIS WILL RESULT IN OUR BEING A SMALLER COMPANY. While a reorganization is expected to reduce our operating losses, it will also reduce the size of our operations and reduce our visibility in the satellite and/or Internet service provider community. Our reduced size could result in our being less competitive. It could also reduce the value of your investment. WE HAVE A LIMITED OPERATING HISTORY. We were incorporated in 1995, but did not commence operations until 1997. Since then, our business has been substantially refocused and is currently undergoing further assessment. Thus, we have a limited operating history upon which an evaluation of us can be based. Our prospects are subject to the risks, expenses and uncertainties frequently encountered by companies in the new and rapidly evolving markets for Internet products and services. In addition, should we survive as a going concern in the near term, we will be subject to all of the risks, uncertainties, expenses, delays, problems and difficulties typically encountered in the growth of an emerging business and the development and market acceptance of new products and services. There can be no assurance that unanticipated expenses, problems or technical difficulties will not occur which would result in material delays in market acceptance of our products and services or that our efforts will result in such market acceptance. TIMING OF ORDERS FOR AND CONTINUED DEVELOPMENT OF OUR SERVICES AND PRODUCTS WILL CAUSE OUR QUARTERLY RESULTS TO FLUCTUATE AND CONSEQUENTLY YOU SHOULD NOT RELY ON THE RESULTS OF ANY PERIOD AS AN INDICATION OF FUTURE PERFORMANCE. 14 We have experienced material period-to-period fluctuations in revenue and operating results. We anticipate that these periodic fluctuations in revenue and operating results will occur in the future. We attribute these fluctuations to a variety of business conditions that include: - the volume and timing of orders we receive from quarter to quarter; - the introduction and acceptance of our new services and products and product enhancements by us; - purchasing patterns of our customers and distributors; and - market acceptance of services and products sold by our distributors. As a result, we believe that quarterly revenue and operating results are likely to vary significantly in the future and that quarter-to-quarter comparisons of our operating results may not be meaningful. You should therefore not rely on the results of one quarter as an indication of future performance. OUR INTELLECTUAL PROPERTY MAY BE CHALLENGED. As is the case with many technology companies, the rapid pace of change in technology could cause our intellectual property to be challenged. These challenges could come from stronger companies who believe that the use of our technology interferes with their use or that they own all of the technology and related rights. If any of these challenges were successful, our ability to sell products based on our technology or intellectual property could be severely impaired. WE MUST DO BUSINESS IN A DEVELOPING MARKET AND FACE NEW ENTRANTS. FAILURE TO MEET THE CHALLENGES OF NEW PRODUCTS AND SERVICES AND COMPETITORS WILL REDUCE OUR MARKET SHARE AND THE VALUE OF YOUR INVESTMENT. The market for Internet products and computer software is rapidly evolving and is characterized by an increasing number of market entrants who have introduced or developed products and services. The diverse segments of the Internet market may not provide opportunities for more than one dominant supplier of products and services similar to ours. If a single supplier other than us dominates one or more market segments, our revenue is likely to decline and we will become a less valuable company. BECAUSE WE LACK THE NAME RECOGNITION, CUSTOMER BASE AND RESOURCES OF OTHER COMPANIES PROVIDING INTERNET ACCESS AND OTHER INTERNET RELATED PRODUCTS AND SERVICES, WE MAY BE UNABLE TO COMPETE SUCCESSFULLY WHICH WOULD REDUCE OUR REVENUE AND THE VALUE OF YOUR INVESTMENT. The markets for our products are intensely competitive and are likely to become even more competitive. Increased competition could result in: - pricing pressures, resulting in reduced margins; - decreased volume, resulting in reduced revenue; or - the failure of our products and services to achieve or maintain market acceptance. Any of these occurrences could have a material adverse effect on our business, financial condition and operating results. Our products and services face intense competition from multiple competing vendors. Our principal competitors in the Internet management business are IBM Corporation and TRW, Inc. Our principal competitors in the satellite services business are Loral Inc. 15 and Hughes Network Systems. 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 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 depend primarily upon market acceptance of our products and services. There can be no assurance that our development efforts will progress further with respect to any potential new services or that they will be successfully completed. In addition, there can be no assurance that our potential new services will achieve customer acceptance. There can be no assurance that our services will be successfully marketed. In addition to our own direct sales force, we use value-added resellers and distributors to market our satellite products and services. There is no assurance that any distributor or other reseller will be successful in marketing our products. 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 possibility 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 16 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 and Chairman of the Board, Chester L. Noblett, and David Pennells, Senior Vice President of the company and President of PacificNet, 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. Noblett's and Mr. Pennells' services are governed by contracts. 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. 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. Our financial condition does not meet the above tests. Thus, 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. 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. MANY SHARES WILL BECOME ELIGIBLE FOR FUTURE SALE, WHICH MIGHT ADVERSELY AFFECT 17 THE MARKET PRICE FOR THE SHARES. As of May 11, 2001, there are 6,063,171 shares of our common stock outstanding which cannot be sold on the public market. Of these shares, 1,084,684 shares are held by directors, officers, or stockholders who have beneficial ownership of 10% or more of the outstanding shares, excluding shares subject to options held by them. 4,978,487 shares are held by other stockholders. These shares will become eligible for trading at various dates in 2001. In addition, shares of common stock which may be acquired pursuant to outstanding convertible preferred stock or warrants will be eligible for trading at various dates after they are acquired. We are unable to predict the effect that sales of such shares may have on the then prevailing market price of the common stock. Nonetheless, the possibility exists that the sale of these shares may have a depressive effect on the price of our common stock. 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 eSAT, INC. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 10.1 Bridge Loan Financing Agreement and Form of Warrant 10.2 Secured Note and Security Interest Provisions (b) REPORTS ON FORM 8-K. During the quarter ended March 31, 2001, the Company filed the following documents: (i) A current report on Form 8-K, dated March 28, 2001 reporting that the Company's Board of Directors is currently assessing alternatives to the formerly announced plan to discontinue all of its unprofitable business lines and focus on the operations of its wholly owned subsidiary, PacificNet Technologies, Inc. (ii) A current report on Form 8-K, dated February 1, 2001 reporting that the Company had commenced the implementation of a plan to discontinue all unprofitable business lines and to consolidate certain operations at its Universal City headquarters. The Company also announced that it had received funding of $325,000 through the issuance of a secured note to Wentworth, LLC. 19 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: May 15, 2001 By: /s/ Mark Basile ------------- ------------------------------------- Mark Basile Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.1 Bridge Loan Financing Agreement and Form of Warrant 10.2 Secured Note and Security Interest Provisions

ESAT INC 10-Q