Why here is another article on ESAT which looked so promising to Dr. Viet Phan at one time.
Dow Jones Newswires -- March 15, 1999
Tiny eSat Offers High Hope, Big Risks On Bulletin Board
By Shawn Young
NEW YORK (Dow Jones)--It's every tiny company's dream.
Work hard, create an innovative product, slug away at sales and eventually forge relationships with a couple of the titans in your industry. Get rewarded with a rich stock price.
eSat Inc. (ASAT), of Fountain Valley, Calif., formerly Technology Guardian Inc., is a young satellite Internet company trading on the over-the-counter bulletin board that appears to be chasing that dream in one of the market's hottest sectors. Its stock has gone from around 4 when it started trading under the symbol TEGI to a high on Jan. 22 of $23.50. Earlier Monday it was at $15.75.
Investors in bulletin board companies must often contend with a dearth of verifiable public information; and an investor doing homework on eSat could find the story of its progress hard to follow. Consider:
-eSat, called Technology Guardian at the time, issued two press releases and ran an ad in Investor's Business Daily last fall that boasted of broad endorsements from Lucent Technologies Inc. (LU) and Hewlett-Packard Co. (HWP), but those high-tech heavyweights tell a different story about their relationships with eSat.
-eSat had an adviser performing investor relations services for it who was among the stock promoters sued by the Securities and Exchange Commission last fall in a sweeping crackdown on securities fraud on the Internet.
-eSat began as a publicly traded company last year when the former Technology Guardian merged with a shell corporation. There is little information about the merger publicly available. Shells are typically companies with little or no actual business that have something many tiny companies covet: publicly traded stock.
-eSat, like many small companies that trade on the bulletin board, has not been required to make regular SEC filings disclosing such basic things as sales, earnings or even the number of shares outstanding.
In an ad that covered nearly half a page in The Wall Street Journal on March 5, the company said it is preparing to make an SEC filing. Revenue is expected to jump dramatically in the second and third quarters, said the ad, which also said the company is expected to become profitable by the second quarter.
President and Chief Executive David B. Coulter has declined repeated oral and written requests from Dow Jones for financial and other information.
According to a private placement memorandum obtained by Dow Jones from someone who had considered investing in eSat, the company recently had about 12.5 million shares outstanding. Its revenue for the first nine months of 1998 was $376,700.
Yet the company has had a market capitalization as high as nearly $294 million. Earlier Monday, the company's market value was about $197 million.
eSat trades under the symbol ASAT, because the symbol ESAT is already taken by Esat Telecom Group PLC, an Irish telecommunications company that isn't connected to eSat.
To be sure, eSat has enthusiastic supporters.
A California school that has been using the company's satellite Internet technology raved about how fast it works.
Recently, CompUSA Inc. (CPU) said it would begin selling a line of eSat's products in its stores. eSat also announced a five-year contract with Galaxy Internet of Indianapolis that it valued at $37.5 million. A Galaxy spokeswoman confirmed the deal. In its ad in The Wall Street Journal, the company said the contract is "designed to generate revenues in excess of $30 million." It characterized the revenue figure as a goal. In addition to the deals with CompUSA and Galaxy, eSat in January announced an Internet video-broadcasting technology that it said it expected to ship in the first quarter. It also said it is expanding in Asia.
Despite these accomplishments, the company may have exaggerated its relationships with a couple of the giants in the high-tech arena.
Some Claims In Company Press Releases Disputed
On Oct. 22 of last year, the former Technology Guardian, announced that Lucent had received its first delivery of Technology Guardian products. The company's press release gushed that Lucent would be selling its products nationwide.
"Our products in the Lucent Solution is fantastic for the future of Technology Guardian and has validated our products and their performances," Coulter, the chief executive, was quoted as saying in a press release.
But a check with Lucent reveals a quite different relationship between the two companies.
"We have no direct relationship whatever with Technology Guardian," said Jeff Baum, a spokesman for the Murray Hill, N.J., telecommunications equipment maker.
Lucent used some Technology Guardian equipment it got from a third party as part of a package for some schools in northeastern Pennsylvania, Baum said. The national distribution deal the company trumpeted doesn't exist, he said.
About a week after the Lucent release came another positive press release, this one about an approval from Hewlett-Packard.
"The company's GSI satellite Internet server and service solution was rigorously field-tested by the HP research labs and has been approved and authorized for HP-product compatibility, including the UNIX platform," the company said.
And Coulter again was quoted as calling the news "fantastic" and a validation of the company's product.
The Lucent and Hewlett-Packard press releases were echoed in a half-page ad about Technology Guardian that appeared in Investor's Business Daily on Nov. 9. The ad also said the company was "completing negotiations for a major contract" with the U.S. Department of Agriculture.
"We do not know of any contract with them nor are we close to any contract that meets that description," said USDA spokesman Andy Solomon.
An agency within the USDA did ask the company for price information and a trial of the products, said USDA spokesman Andrew Kauders. That does not necessarily mean a contract is forthcoming, he said.
Hewlett-Packard spokeswoman Marlene Somsak said: "We would not characterize our relationship with Technology Guardian in a way that resembles the text in the ad." About the closest the Palo Alto, Calif., computer hardware maker came to testing Technology Guardian's equipment, she said, was that a Hewlett-Packard employee helped the company get some equipment running for a trade show last summer.
eSat's ad in The Wall Street Journal said Hewlett-Packard is a reseller of its products. Somsak said she has not been able to confirm any relationship between the companies. But she added that since Hewlett-Packard is large and decentralized, it is possible that someone in the company has sold or recommended eSat's products to customers at some point.
In an interview last fall after the Lucent and Hewlett-Packard press releases appeared, Chet Noblett, eSat's chief operating officer, said the Lucent announcement "tended to overstate itself."
"The wordsmithing should have been better," he said.
Noblett said he believed the Hewlett-Packard release to be accurate and said internal miscommunication at Hewlett-Packard might have led to a misunderstanding. Somsak of Hewlett-Packard said that's not the case.
"We regret that anybody could have possibly been misled," Noblett said. "That was not our intention." Controversy over the releases had led to tighter controls on publicity, he said.
The press releases and Investor's Business Daily ad were written in part by a Los Angeles company adviser named John R. Switzer who was among 44 individuals and companies accused by the SEC in October of violating securities laws. The SEC made the charges as part of a sweeping crackdown on Internet stock promoters.
The SEC alleges that Switzer and his partner, Brian M. Volmer, failed to adequately disclose payment they received for an online research report. The SEC filed a civil suit in the U.S. District Court for the Central District of California.
Switzer said he and Volmer run the www.investorsedge.net and www.brokersalley.com Web sites.
Switzer called the SEC's one allegation about him, which isn't related to eSat, "ridiculous" and "an abuse of power." Volmer also denied the claims against him, which include an allegation that he placed a false ad in Investor's Business Daily about a company that claimed to be mining for diamonds in Brazil. The accusation about the ad does not apply to Switzer.
Switzer said he served as an investment banker and adviser to the former Technology Guardian. It severed formal ties with him and asked him to remove his name from a research report he had written about it after the SEC publicized its allegation, Switzer said.
But he said eSat continued to consult him and work closely with him. His phone number continued to appear on some subsequent eSat press releases.
Information about eSat is available on the company's Web site, www.esat.org, and in Switzer's report. The report, dated Oct. 26, remains on the Broker's Alley website under the Broker's Services menu.
Switzer's report, which does not discuss Technology Guardian's risks or potential trouble spots, contains some ambitious claims.
For example, the report estimated that the company's revenue for 1998 would be $4.6 million, which would be a remarkable development for a company that apparently had revenue of less than $400,000 in the first three quarters of the year.
The report also said the company had moved to larger quarters and expanded capacity "without incurring any additional fixed costs." The company's operating margin should jump from about 15% in 1998 to more than 50% in 1999, the report said.
Switzer's report said the company was "completing its negotiations for a major contract with the USDA," the value of which the report said "could be $120 million over the next 2 years."
It said of company-founder Coulter's background that he "has been professionally involved in the technology industry since the age of 14 when he was hired by Atari as a computer programmer."
Information About eSat's Past, Present Is Sparse
What little official public information there is about eSat comes piecemeal. The company began trading last August after announcing plans to merge with a shell corporation called U.S. Connect 1995. The merger was completed in October 1998. A press release about the merger described U.S. Connect as a Houston high-tech firm.
U.S. Connect may have been based in Houston, but it was officially incorporated in Nevada, as eSat is. A look at the state's incorporation documents for U.S. Connect and the former Technology Guardian reveals little about either company's history.
A new SEC rule will require all 6,500 bulletin board companies to file updated financial information with the SEC and other regulators. But it won't affect all companies currently trading until mid-2000. Companies that don't want to meet the new requirements are expected to move in large numbers to the National Quotation Bureau's Pink Sheets, which don't require updated financial reporting.
eSat's ad in The Wall Street Journal said the company recently filed for a Nasdaq listing. The company had said in December that it filed for listing on the Nasdaq SmallCap Market, which requires reporting, but Nasdaq officials said the application is no longer pending. They declined to say why.
The private placement memo obtained by Dow Jones included audited financial data for 1996 and 1997, along with unaudited results for the first nine months of 1998. These show steep declines in revenue and dramatically accelerating losses.
"Technology Guardian Inc. has suffered recurring losses, a decline in revenue, cash shortages, and has a net deficiency in Stockholder's Equity," wrote Lichter and Associates in the independent auditor's report included in the memo. "These issues raise substantial doubt about its ability to continue as a going concern."
Another part of the private placement memo says: 'The company is dependent upon successful completion of this offering to continue operations."
According to the document, the number of shares the company has outstanding could increase sharply from the current 12.5 million, resulting in "immediate and substantial dilution."
eSat's revenue declined from $1.5 million in 1996 to $1.2 million in 1997, the memo said. In the first nine months of 1998 revenue was $376,700. The company's losses have widened from $164,000 in 1996 to $453,800 in 1997, according to the memo, which said losses for the first nine months of 1998 were $1.16 million.
The memo said the loss of a contract in Mongolia and costs associated with developing new products contributed to the 1998 loss.
eSat says it is targeting schools, businesses and government agencies as potential customers. It has a product for schools that provides access to pre-screened Web addresses suitable for kids.
The product has been a big hit at Enterprise Middle School in Compton, Calif., where 800 students have had access to service the company donated.
"I'm very pleased with it," said Principal Gipson Lyles.
"The speed of the satellite is incredible," Lyles said. "As soon as we push the mouse, it's there. It has been a wonderful experience."
One investor, too, had nothing but good things to say about the company in an interview late last year. Alex Zemelman of New York invested in eSat after hearing about it on the radio and paying the company a week-long visit.
"I recognized the potential of the Internet. It's more of a story thing," Zemelman said.
Investors hope eSat will be a story with a happy ending.
-By Shawn Young; 201-938-5248 shawn.young@cor.dowjones.com |
