<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 29, 1996
REGISTRATION NO. 333-3364
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
CYCLE-SAT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------
IOWA 7319 42-1246889
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
119 JOHN K. HANSON DR.,
FOREST CITY, IOWA 50436-0309
(515) 582-6999
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-----------
LOREN A. SWENSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CYCLE-SAT, INC.
119 JOHN K. HANSON DR.
FOREST CITY, IOWA 50436-0309
(515) 582-6999
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
JAMES M. ASH, ESQ. LEONARD J. BAXT, ESQ.
BLACKWELL SANDERS MATHENY WEARY & DOW, LOHNES & ALBERTSON
LOMBARDI L.C. 1200 NEW HAMPSHIRE AVE., N.W.
TWO PERSHING SQUARE SUITE 800
2300 MAIN STREET, SUITE 1100 WASHINGTON, D.C. 20036-6802
KANSAS CITY, MISSOURI 64108 (202) 776-2000
(816) 274-6800
-----------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement is declared effective.
-----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CYCLE-SAT, INC.
4,312,500 SHARES OF COMMON STOCK
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-1 ITEM AND CAPTION PROSPECTUS CAPTION
------------------------- ------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus..... Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus.... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges............. Prospectus Summary; Risk Factors
4. Use of Proceeds............... Prospectus Summary; Use of Proceeds
5. Determination of Offering
Price........................ Outside Front Cover Page; Underwriting
6. Dilution...................... Dilution
7. Selling Security Holders...... Outside Front Cover Page; Principal and
Selling Shareholders; Underwriting
8. Plan of Distribution.......... Outside and Inside Front Cover Pages;
Prospectus Summary; Underwriting
9. Description of Securities to
Be Registered................ Description of Capital Stock
10. Interests of Named Experts and
Counsel...................... *
11. Information with Respect to
the Registrant............... Outside and Inside Front Cover Pages;
Prospectus Summary; Risk Factors; The
Company; Use of Proceeds; Dividend Policy;
Capitalization; Dilution; Pro Forma
Statement of Operations; Selected
Financial and Operating Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations; The
Industry; Business; Management; Certain
Transactions; Principal and Selling
Shareholders; Description of Capital
Stock; Shares Eligible for Future Sale;
Underwriting; Financial Statements;
Outside Back Cover Page
12. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities.................. *
</TABLE>
- --------
*Item is omitted from the Prospectus because it is not applicable or the
answer is negative.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
3,750,000 Shares SUBJECT TO COMPLETION
MAY 29, 1996
LOGO
CYCLE:SAT, INC.
Common Stock
--------
Of the 3,750,000 shares of Common Stock offered hereby, 3,000,000 shares are
being offered by Cycle:Sat, Inc. ("Cycle:Sat" or the "Company") and 750,000
shares are being offered by the Selling Shareholders. See "Principal and
Selling Shareholders." The Company will not receive any proceeds from the sale
of shares by the Selling Shareholders. Prior to this offering, there has been
no public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $8.00 and $10.00 per
share. See "Underwriting" for the factors considered in determining the initial
offering price. The Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "CYCN."
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY(1) SHAREHOLDERS(1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........................ $ $ $ $
- -----------------------------------------------------------------------------------------------
Total(2)......................... $ $ $ $
- -----------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Before deducting expenses of the offering estimated at $900,000, of which
$720,000 will be paid by the Company and $180,000 will be paid by the
Selling Shareholders.
(2) The Selling Shareholders have granted the Underwriters a 30-day option to
purchase up to 562,500 additional shares of Common Stock, solely to cover
over-allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares at the Price to Public shown
above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to
Selling Shareholders will be $ , $ , $ and $ ,
respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1996.
Alex. Brown & Sons Wheat First Butcher Singer
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
d Cycle:Sat's patented point-to-
multi-point satellite delivery
network uses a long-term leased
satellite transponder to reach the
Company's Cyclecyphers in over 550
television stations throughout the
United States.
The Company's satellite network and
Memphis facility create a cost-
effective, highly reliable delivery
system. g
The Memphis tape duplication facility
extends the Company's deadline for
next-day deliveries. f
------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DIS-CONTINUED AT ANY TIME.
------------
The Company intends to furnish to its shareholders annual reports containing
financial statements audited by an independent public accounting firm.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus.
THE COMPANY
Cycle:Sat, Inc. ("Cycle:Sat" or the "Company") distributes broadcast quality
advertising to television stations, cable television systems and radio stations
nationwide. The Company believes that it is the leading provider of national
spot television advertising distribution services for advertisers and their
agencies on both a dollar and unit volume basis and that it is one of the
leading distributors of national spot radio advertising. The Company
distributes advertising for significant national accounts such as Anheuser-
Busch, AT&T, Chevrolet, Procter & Gamble and Twentieth Century Fox.
The Company operates a point-to-multi-point communications network delivering
video, audio and data transmissions using a patented satellite distribution
network, a fiber optic network linking Company facilities, and multiple-format
video and audio tape duplication facilities combined with air and ground
courier services. The Company's delivery network and facilities are designed to
cost-effectively serve the time-sensitive distribution needs of the advertising
industry and provide the platform for offering additional distribution
services.
Founded in 1985, the Company was the first in the advertising services
industry to deploy an automated satellite-based delivery network to television
stations nationwide. The Company's network includes a full-time, long-term
leased satellite transponder, uplink facilities located strategically across
the United States, an earth station and network operations center in Forest
City, Iowa, an earth station and tape duplication center in Memphis, Tennessee,
and the Company's proprietary Cyclecypher satellite receivers, which are leased
for a nominal amount to approximately 550 television stations throughout the
United States. The Company believes there are approximately 750 television
stations that receive more than 90% of all national spot television advertising
deliveries. The Company's installed base of Cyclecypher receivers includes
approximately 65% of these stations.
Cycle:Sat is converting its analog satellite network to a digital network to
provide enhanced services to its existing customers and to offer new services
in additional markets. The digital conversion will quadruple transmission
capacity, provide state-of-the-art video quality, allow increased television
station penetration, permit additional satellite network downlinks and, with
the addition of file servers linked to the Company's Cyclecyphers, further
accelerate delivery time. The Company believes that the anticipated completion
of its conversion in early calendar year 1997 to an operational, large-scale,
fully-digital satellite communications network will continue the Company's
leading technology position in the industry. The digital conversion will
provide the opportunity to use a single satellite transponder for simultaneous
delivery of multiple broadcast quality signals and will substantially reduce
the Company's installation and equipment cost of adding downlinks to new
network participants.
To offer a complete delivery solution for its customers and to access
television stations not linked to its satellite network, the Company operates
what it believes is the largest broadcast video tape duplication facility in
the industry, located near the Memphis hub of Federal Express Corp. ("FedEx").
Overnight satellite delivery and the Memphis location extend the Company's
deadline for next-day delivery of time-sensitive television commercials, a
service advantage available to the Company over many of its competitors. The
low variable cost of satellite delivery and the economies of scale at the
Memphis duplication facility also provide Cycle:Sat a significant cost
advantage. The Company offers complementary services to its advertiser and
agency customers, including in-house post-production services, video and audio
master archiving and warehousing, and distribution of advertising promotional
material. In addition, the Company's Satellite Shuttle service provides
delivery of broadcast quality video and audio content between most major U.S.
cities in under two hours. The Company's Memphis facility is also used for
radio advertising duplication and distribution services.
3
<PAGE>
In March 1995, the Company acquired the Tape Film Industries division ("TFI")
of MPO Videotronics, Inc. ("MPO"). This acquisition increased the Company's
delivery volume and diversified its customer base, while also expanding its
services to include computerized archiving, warehousing and rapid delivery of
video advertising materials, and the distribution of printed advertising and
other promotional materials. Cycle:Sat will continue to evaluate strategic
acquisition opportunities to increase its market share and economies of scale.
The Company may also enter into strategic relationships to develop new network
delivery service opportunities.
According to the Television Bureau of Advertising, 1994 television
advertising expenditures totaled $34.2 billion, including the national network,
national spot, local market, national syndication and cable advertising
segments. National spot advertising is commercial air time sold by a television
or radio station or cable system to advertisers located outside of its local
market. The national spot television advertising market, totaling $9.0 billion
in 1994, is currently the most important source of Cycle:Sat revenues. Radio
advertising expenditures in 1994 totaled $10.5 billion, of which $1.9 billion
represented the national spot advertising segment. The Company estimates that
the delivery services market associated with national spot television, cable
and radio advertising is in excess of $125 million annually.
The Company's business strategy is (i) to continue to provide industry
leading satellite delivery technology, (ii) to continue its market leading
position in the delivery of national spot television advertising, (iii) to
increase its installed network of television stations, (iv) to expand its
delivery volume of syndicated and other programming, (v) to maintain its low
cost position, and (vi) to continue its tradition of providing superior
customer service. Through this strategy, the Company anticipates continued
market share gains in television and radio spot advertising distribution
coupled with new revenue opportunities resulting from conversion of its
satellite network to a digital format.
The conversion to a digital format will allow the expansion of the Company's
business into syndicated and other programming delivery services, a market the
Company estimates to be $125 million annually. Other new revenue opportunities
include management of private video, voice and data communication networks, and
growth of the Company's satellite network to include radio stations and large
local cable system operators. In several of its identified new market segments,
the Company believes that a leading market share position is available due to
the fragmented nature of those markets.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors" beginning on page 7.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.... 3,000,000 shares
Common Stock offered by the Selling
Shareholders.......................... 750,000 shares
Common Stock to be outstanding after
the offering.......................... 9,985,600 shares (1)
Use of proceeds........................ For repayment of certain indebtedness,
capital expenditures, including digital
network conversion and station network
expansion, working capital and other
general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol.......... CYCN
</TABLE>
- --------
(1) Excludes 390,000 shares of Common Stock issuable upon exercise of options
granted at the effective time of the offering and which have an exercise
price equal to the offering price. See "Management--1996 Equity
Compensation Plan."
4
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
---------------------------------------------------------- -------------------------
AUGUST 31, AUGUST 29, AUGUST 28, AUGUST 27, AUGUST 26, FEBRUARY 25, MARCH 2,
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues........... $ 9,171 $ 10,299 $ 14,932 $ 18,955 $ 24,628 $ 9,976 $ 15,750
Operating income
(loss)................ (5,098) (4,285) (1,984) 1,445 547 395 1,106
Interest expense....... (701) (1,057) (402) (427) (816) (225) (627)
Net income (loss)...... (5,795) (5,342) (2,386) 1,018 (213) 199 562
Net income (loss) per
share (1) $ (1.29) $ (1.19) $ (0.34) $ 0.15 $ (0.03) $ 0.03 $ 0.08
Weighted average common
shares outstanding
(1)................... 4,485,600 4,485,600 6,985,600 6,985,600 6,985,600 6,985,600 6,985,600
PRO FORMA INFORMATION (2):
Statement of Operations Data:
Net revenues........... 32,076 15,750
Operating income
(loss)................ 742 1,106
Interest expense....... (349) (125)
Net income (loss)...... 483 1,064
Net income (loss) per
share................. 0.06 0.13
Weighted average common
shares outstanding.... 8,326,313 8,496,909
EBITDA (3)............. 4,784 2,579
OPERATING DATA (END OF
PERIOD):
Satellite network
affiliates............ 498 501 514 526 541 547 554
<CAPTION>
MARCH 2, 1996
-------------------------
AS
ACTUAL ADJUSTED (4)
------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................... $ 0 $ 11,248
Working capital
(deficit)............. (4,054) 13,911
Total assets........... 20,886 32,134
Total debt (5)......... 16,012 2,870
Shareholders' equity... 2,291 26,681
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
---------------------------------------------------------- -------------------------
AUGUST 31, AUGUST 29, AUGUST 28, AUGUST 27, AUGUST 26, FEBRUARY 25, MARCH 2,
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA (3)............. $ (3,963) $ (3,007) $ (495) $ 3,064 $ 3,498 $ 1,277 $ 2,579
Cash flows from (used
by):
Operating activities.. (5,499) (3,356) (1,801) 976 2,099 2,256 1,092
Investing activities.. 639 (477) (453) (554) (5,715) (659) (1,470)
Financing activities.. 4,238 6,296 (203) (392) 3,924 (1,031) 5
Capital expenditures... $ 737 $ 943 $ 455 $ 582 $ 845 $ 707 $ 1,656
</TABLE>
- --------
(1) Reflects a 2-for-1 stock split in the form of a stock dividend approved by
the Company's Board of Directors on March 20, 1996.
(2) Represents the results of operations for the fiscal year ended August 26,
1995 and the six months ended March 2, 1996 as if the acquisition of TFI
(which occurred on March 31, 1995) had occurred on August 28, 1994,
adjusted to give effect to the sale of sufficient shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $9.00 per share, after deducting the Company's pro rata share of
underwriting discounts and commissions and estimated offering expenses to
repay the then outstanding balance of certain debt being retired. See "Pro
Forma Statement of Operations" and "Use of Proceeds."
(3) EBITDA is defined herein as earnings before interest, taxes, depreciation
and amortization excluding gains and losses on asset sales and nonrecurring
charges. EBITDA does not represent cash generated from operating activities
in accordance with generally accepted accounting principles ("GAAP"), is
not to be considered as an alternative to net income or any other GAAP
measurements as a measure of operating performance and is not necessarily
indicative of cash available to fund all cash needs.
5
<PAGE>
The Company's definition of EBITDA may not be identical to similarly titled
measures of other companies. Management believes that in addition to cash
flows and net income, EBITDA is a useful financial performance measurement
for assessing the operating performance of the Company because, together
with net income and cash flows, EBITDA is widely used to provide investors
with an additional basis to evaluate the ability of the Company to incur and
service debt and to fund acquisitions or invest in new technologies. To
evaluate EBITDA and the trends it depicts, the components of EBITDA, such as
net revenues, cost of services, and selling, general and administrative
expenses, should be considered. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." A reconciliation of net
income to EBITDA is as follows:
<TABLE>
<CAPTION>
PRO FORMA
---------------------
SIX MONTHS
YEARS ENDED SIX MONTHS ENDED YEAR ENDED ENDED
------------------------------------------------------ --------------------- ---------- ----------
AUGUST 31, AUGUST 29, AUGUST 28, AUGUST 27, AUGUST 26, FEBRUARY 25, MARCH 2, AUGUST 26, MARCH 2,
1991 1992 1993 1994 1995 1995 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss). $(5,795) $(5,342) $(2,386) $1,018 $ (213) $ 199 $ 562 $ 483 $1,064
Add:
Depreciation and
amortization.... 1,135 1,278 1,489 1,619 2,161 882 1,488 3,218 1,488
Interest expense. 701 1,057 402 427 816 225 627 349 125
Losses (gains) on
fixed asset
sales........... (4) 61 (29) (98) 61 (98)
Abandonment of
flat antenna
product......... 673 673
------- ------- ------- ------ ------ ------ ------ ------ ------
EBITDA............ $(3,963) $(3,007) $ (495) $3,064 $3,498 $1,277 $2,579 $4,784 $2,579
======= ======= ======= ====== ====== ====== ====== ====== ======
</TABLE>
(4) Adjusted to give effect to the sale of 3,000,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $9.00 per share, after deducting the Company's pro rata share of
underwriting discounts and commissions and estimated offering expenses,
and the application of the estimated net proceeds therefrom as described
in "Use of Proceeds."
(5) Includes a bank revolving line of credit, short-term and long-term notes
payable, capital lease obligations and deferred rent.
----------
Except as otherwise specified, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. See "Underwriting." In
addition, unless otherwise specified, all information in this Prospectus
reflects a 2-for-1 stock split of the Common Stock in the form of a stock
dividend, which was effected in anticipation of this offering, and certain
changes to the Company's capital stock as set forth in its Restated Articles
of Incorporation filed on April 9, 1996. References in this Prospectus to
fiscal years are to the 52 or 53 week periods ending on the last Saturday in
August in such period.
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered by this Prospectus.
History of Losses; Future Operating Results Uncertain. The Company was
founded in 1985 and has been unprofitable in all years since its inception
other than fiscal 1994. As of March 2, 1996, the Company's accumulated deficit
was $32.7 million. Due to the time-sensitive nature of the Company's services,
its customers do not commit to specific delivery volumes. In addition, the
Company's results of operations will be affected by the general level of
demand for advertising time, which in turn is affected by general and regional
economic conditions, which are matters beyond the control of the Company.
Accordingly, the Company's existing level of sales may not be sustainable and
should not be used as an indication of future sales or of future operating
results. The Company's future success will depend in part on sales growth and
controlling operating expenses. There can be no assurance the Company's sales
will grow or be sustained in future periods or that the Company will sustain
profitability in any future period. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Dependence on Distribution Services. The Company's revenues to date have
been derived principally from the satellite and video tape delivery of
television advertising spots to television stations and cable systems in the
United States, and such services are expected to continue to account for a
substantial majority of the Company's revenues. A decline in the demand for,
or average selling prices of, the Company's television advertising delivery
services, whether as a result of competition from new advertising media, new
product introductions or price competition from competitors, technological
change or otherwise, would have a material adverse effect on the Company's
business, financial condition and results of operations. Additionally, the
Company is dependent upon its relationship with and continued support of the
television stations in which it has installed communications equipment. Such
equipment may be returned to the Company by the stations at any time. See
"Business--Customers" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Competition. The Company currently competes in the market for the
distribution of video advertising spots to television stations and, to a
lesser degree, audio advertising spots to radio stations. The principal
competitive factors affecting this market are production quality, customer
service, price, timeliness and accuracy of delivery. The Company competes with
a variety of duplication and delivery companies that have traditionally
distributed commercials on video tape via air and ground courier. Although
such duplication and delivery companies do not currently offer satellite or
electronic delivery, they have long-standing customer relationships, resulting
in significant customer loyalty. Moreover, other companies have announced
systems for delivering video and audio content electronically or via
satellite. In addition, telecommunications providers or cable television
operators could enter the market as competitors with lower delivery costs. As
a result, the Company may face additional price competition which may affect
the Company's operating margins. To the extent that the Company is successful
in entering new markets, it would expect to face competition from companies in
related communications markets and/or package delivery markets, which could
offer products and services functionally similar or superior to those offered
by the Company. Some of the Company's current and potential competitors in the
markets for video and audio transmissions have greater financial, technical,
marketing or other resources and, in radio, a larger installed network than
the Company. There can be no assurance that the Company will be able to
compete successfully against current and future competitors based on these and
other factors. The Company expects that an increasingly competitive
environment could lead to a loss of market share or price reductions,
resulting in reduced unit profit margins, all of which may have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Industry--Competition."
Customer Concentration. Historically, a small number of customers has
accounted for a substantial percentage of the Company's revenues. Twentieth
Century Fox accounted for approximately 14.3%,
7
<PAGE>
11.3% and 12.5% of revenues in fiscal 1993, 1994 and 1995, respectively.
Another motion picture studio accounted for approximately 13.3% of revenues in
fiscal 1994 and 6.4% of revenues in fiscal 1995, before ceasing to use the
Company's distribution services in May 1995. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Company has
historically had a significant concentration of its revenues in motion picture
and automotive dealers association customers and, as a result, any significant
downturn in the motion picture or automotive industries could have a material
adverse effect on the Company's business, financial condition and results of
operations. In fiscal 1993, 1994 and 1995, revenues from motion picture
customers represented 46.7%, 49.4% and 36.1% of total revenues, respectively,
and revenues from automotive dealers association customers represented 14.7%,
12.9% and 11.0% of total revenues, respectively. If the TFI acquisition had
taken place at the beginning of fiscal 1995, Procter & Gamble would have
accounted for 15.5% of the Company's revenues in that year. A significant
reduction of purchases by any one of the Company's principal customers, which
are not subject to any long-term contracts with the Company, could have a
material adverse effect on the Company's results of operations. See
"Business--Customers" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Ability to Manage Growth. The Company has recently experienced a period of
rapid growth that has resulted in new and increased responsibilities for
management personnel and has placed and continues to place increased demands
on the Company's management, operational and financial systems and resources.
To accommodate this recent growth and to compete effectively and manage future
growth, the Company will be required to continue to implement and improve its
operational, financial and management information systems, and to expand,
train, motivate and manage its work force. There can be no assurance that the
Company's personnel, systems, procedures and controls will be adequate to
support the Company's future operations. Failure to implement or improve the
Company's operational, financial and management systems or to expand, train,
motivate or manage employees could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Technological Developments; Conversion to Digital Network. The
Company's ability to remain competitive and its future success will depend in
significant part upon the technological quality of its products and processes
relative to those of its competitors and its ability both to develop new and
enhanced products and services and to introduce such products and services at
competitive prices and in a timely and cost-effective manner. The Company's
development efforts currently are focused on converting its analog satellite
transmission network to a digital network. See "Business--Products and
Services--Conversion to Digital Network." There can be no assurance that such
a conversion will be completed within the current schedule or at the
anticipated cost. If the conversion to a digital satellite network does not
achieve a significant degree of market acceptance, there could be a material
adverse impact on the Company's business, financial condition and results of
operations. The Company is relying on certain third party vendors for its
conversion to a digital satellite network. In the event that a supplier were
to experience financial or operational difficulties that resulted in a
reduction or interruption in equipment supply to the Company, the Company's
digital conversion may be delayed. The Company believes that there are
alternative suppliers that could supply the components necessary to operate
the Company's digital satellite network. The inability in the future to obtain
sufficient quantities of equipment in a timely manner as required, or to
develop alternative sources as required, could result in delays or reductions
in product shipments or product redesigns, which could materially and
adversely affect the Company's business, financial condition and results of
operations.
In addition, the Company's satellite-based delivery services are dependent
upon the continued availability of functional satellite transponder capacity.
There are a limited number of domestic communications satellites available for
the transmission of television advertising and programming. The Company has
leased a dedicated transponder on the satellite it currently uses through that
satellite's orbit life and has leased a dedicated transponder on a new higher-
powered satellite, anticipated to be launched in July 1996, for five years
with an option to renew. In the event the Company's leased transponder were
8
<PAGE>
to become unavailable, the Company would be required to lease another
transponder or purchase transponder space from others on an as needed basis
and in many instances refocus its earth station and network downlink antennae.
The unavailability of or interruption in transponder access could have a
material adverse effect on the Company.
Potential Fluctuations in Quarterly Results; Seasonality. The Company's
quarterly operating results have in the past and may in the future vary
significantly depending on such factors as the volume of customer advertising
in response to seasonal buying patterns, the timing of new product and service
introductions, increased competition, the timing of the Company's promotional
efforts, general economic conditions and other factors. For example, the
Company has historically experienced lower sales in its second fiscal quarter
and higher sales in its fourth fiscal quarter, corresponding to seasonality in
customer advertising. In particular, the Company's operating results have
historically been significantly influenced by the volume of deliveries for
motion picture companies and automobile manufacturers and dealer associations,
which are industries that are sensitive to cyclical downturns. As a result,
the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as an
indication of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Dependence on Key Personnel. The Company's success depends to a significant
degree upon the continuing contributions of, and on its ability to attract and
retain, qualified management, sales, operations, marketing and technical
personnel. The competition for qualified personnel is intense, and the loss of
any such persons or the inability to recruit additional key personnel in a
timely manner could adversely affect the Company. There can be no assurance
that the Company will be able to continue to attract and retain qualified
management, sales and technical personnel for the development of its business.
The Company generally has not entered into employment or noncompetition
agreements with its employees, nor does it maintain key man life insurance on
the lives of any of its key personnel.
Dependence on Proprietary Technology; Protection of Patent, Trademarks,
Copyrights and Other Proprietary Information. The Company considers its
patented satellite delivery network, trademarks, copyrights, advertising, and
promotion design and artwork to be of value and important to its business. The
Company relies on a combination of patent, trade secret, copyright and
trademark laws and confidentiality and other arrangements to protect its
proprietary rights. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy or obtain and use information
that the Company regards as proprietary. There can be no assurance that the
steps taken by the Company to protect its proprietary information will prevent
misappropriation of such information and such protection may not preclude
competitors from developing similar brand names or promotional materials or
developing products and services similar to those of the Company. A former
employee of the Company, Michael Diggan, d/b/a Jemi Software, has asserted
ownership of certain copyrights relating to the Company's satellite network
operations software and has commenced litigation seeking unspecified monetary
damages under an implied license with the Company in a lawsuit filed February
6, 1995 in the Iowa District Court for Winnebago County, Iowa. The Company is
not able to predict the outcome of this litigation, and there can be no
assurance that third parties will not assert infringement claims against the
Company in the future and that such claims will not have a material adverse
effect on the Company's business, financial condition or results of
operations. See "Business--Intellectual Property and Proprietary Rights" and
"Business--Litigation."
Concentration of Stock Ownership; Potential Issuance of Preferred Stock;
Anti-Takeover Provisions. Upon completion of this offering, Winnebago
Industries, Inc. ("Winnebago"), Mr. John K. Hanson and Mrs. Luise V. Hanson
will own approximately 56.0%, 4.3% and 2.2%, respectively, of the outstanding
shares of Common Stock. If the Underwriters' over-allotment option is
exercised in full, Mr. and Mrs. Hanson will each own less than 1% of the
outstanding shares of Common Stock. Mr. Hanson, Chairman of the Board and
founder of Winnebago, and Mrs. Hanson together own stock representing 42.5% of
the voting power of Winnebago, which allows them to significantly influence
Winnebago. As a result,
9
<PAGE>
Winnebago and, consequently, Mr. and Mrs. Hanson will be able to control or
significantly influence all matters requiring shareholder approval, including
the election of directors and approval of significant corporate transactions.
See "Principal and Selling Shareholders." In addition, the Company's Board of
Directors has the authority to issue up to 5,000,000 shares of Preferred Stock
and to determine the price, rights, preferences, privileges and restrictions
thereof, including voting rights, without any further vote or action by the
Company's shareholders. Although the Company has no current plans to issue any
shares of Preferred Stock, the rights of the holders of Common Stock would be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. Issuance of Preferred Stock
could have the effect of delaying, deferring or preventing a change in control
of the Company. Furthermore, certain provisions of the Company's Restated
Articles of Incorporation and Bylaws and of Iowa law could have the effect of
delaying, deferring or preventing a change in control of the Company. See
"Management," "Certain Transactions," "Principal and Selling Shareholders" and
"Description of Capital Stock."
Benefits of Offering to Existing Shareholders. In October 1986, Winnebago
purchased 80% of the stock of the Company, and the balance of the stock was
later purchased by John K. Hanson, the Chairman of the Board of Winnebago, who
subsequently transferred a portion to his wife, Luise V. Hanson. The Company
received additional equity contributions from its shareholders resulting in
total payments of approximately $35.0 million for the Common Stock outstanding
prior to the offering, or an average of $5.01 per share. Winnebago is not
selling shares of Common Stock in this offering and none of the net proceeds
of this offering will be paid to Winnebago. Based on an assumed initial public
offering price of $9.00 per share, the aggregate value of the Common Stock
held by Winnebago is approximately $50.3 million. A substantial portion of the
net proceeds will be used to repay certain indebtedness of the Company, which
is guaranteed by Winnebago. See "Use of Proceeds" and "Certain Transactions."
The net proceeds to Mr. and Mrs. Hanson from the sale of the 730,000 and
20,000 shares of Common Stock offered by them hereby, respectively, are
estimated to be approximately $5.9 million and $.2 million, respectively,
after deducting the Hansons' pro rata share of estimated underwriting
discounts and commissions and offering expenses and assuming an initial public
offering price of $9.00 per share. If the Underwriters' over-allotment option
is exercised in full, Mr. and Mrs. Hanson will receive additional estimated
net proceeds of approximately $3.6 million and $1.1 million, respectively. See
"Principal and Selling Shareholders."
No Prior Market; Possible Volatility of Share Price. Prior to this offering,
there has been no public market for the Common Stock, and there can be no
assurance that an active trading market will develop or be sustained after
this offering. The initial public offering price of the Common Stock will be
determined through negotiations among the Company and the Representatives of
the Underwriters, and may not be indicative of future market prices. There can
be no assurance that the market price of the Common Stock will not decline
below the initial public offering price. The trading price of the Common Stock
may be subject to wide fluctuations in response to a number of factors,
including variations in operating results, changes in earnings estimates by
securities analysts, announcements of extraordinary events such as litigation
or acquisitions, announcements of technological innovations or new products or
services by the Company or its competitors, as well as general economic,
political and market conditions. In addition, stock markets have experienced
extreme price and volume trading volatility in recent years. This volatility
has had a substantial effect on the market prices of securities of many high
technology companies for reasons frequently unrelated to the operating
performance of the specific companies. These broad market fluctuations may
adversely affect the market price of the Common Stock. See "Underwriting."
Shares Eligible for Future Sale. Sales of a substantial number of shares of
Common Stock in the public market following this offering could adversely
affect the prevailing market price of the Common Stock. Beginning 180 days
after the date of this Prospectus, 6,235,600 shares of Common Stock will
become eligible for sale in the public market, subject to compliance with Rule
144 under the Securities
10
<PAGE>
Act, when certain lock-up agreements between the Underwriters and the current
shareholders of the Company expire. Alex. Brown & Sons Incorporated may, at
its sole discretion, and at any time without notice, release all or any
portion of the securities subject to such lock-up agreements. The Company
intends to file a registration statement under the Securities Act covering
1,000,000 shares of Common Stock issued or reserved for issuance under the
1996 Equity Compensation Plan. That registration statement is expected to be
filed promptly after the date of this Prospectus and will automatically become
effective upon filing. All of the shares issued or issuable pursuant to the
1996 Equity Compensation Plan in the 180-day period following the date of this
Prospectus will be subject to lock-up agreements with the Underwriters and
will only become eligible for sale 180 days after the date of this Prospectus.
Thereafter, such shares will be available for resale, subject to Rule 144
volume limitations applicable to affiliates, as that term is defined in the
Securities Act, in the open market. Upon the effective date of this
Prospectus, options to purchase 390,000 shares will be granted under the 1996
Equity Compensation Plan and be exercisable. See "Management--1996 Equity
Compensation Plan" and "Shares Eligible for Future Sale."
Dilution. Assuming an initial public offering price of $9.00 per share,
investors participating in this offering will incur immediate, substantial
dilution of $7.30 per share. To the extent outstanding options to purchase the
Company's Common Stock are exercised, there will be further dilution. See
"Dilution."
THE COMPANY
The Company was incorporated in Iowa in January 1985. During the Company's
first eighteen months of existence, the feasibility of a new delivery process
for television commercials was researched through contact with advertisers and
television stations. In October 1986, Winnebago purchased 80% of the stock of
the Company, and the balance of the stock was later purchased by John K.
Hanson, the Chairman and founder of Winnebago. Winnebago's current 80%
interest in the Company will be reduced to 56% upon the consummation of this
offering.
The Company began development of its network control facility in Forest City
in 1987. During this same time period, the Company began the design of
prototypes of the Cyclecypher television station receiver, successfully tested
uplink equipment and opened a Los Angeles regional office. Shipments of
Cyclecyphers for installation at television stations commenced in early 1988.
Cycle:Sat signed a lease for transponder number 4 on the GE Americom satellite
Satcom K-2 in February 1988, and in March 1988, opened a regional office in
New York.
Customer service, speed of delivery and the ability to handle late orders
have been the cornerstone of the Company's marketing focus. Several Hollywood
motion picture studios became customers due to the Company's ability to meet
often-changing or rush delivery schedules. The Company also developed a
significant presence with agencies handling automobile dealer association
accounts due to the ability to handle complex orders with local market
customization. In the late summer of 1990, the Hollywood and New York uplinks
were installed to streamline the distribution process for major customers.
This allowed the Company to offer its Satellite Shuttle service, providing
cross-country delivery of video materials in under two hours.
In order to fulfill customer orders regardless of whether a Cyclecypher was
installed at the receiving television station, the Company also maintained
video tape duplication facilities in Forest City. The Memphis tape duplication
facility opened in October 1990, with equipment transferred from Forest City.
The strategic decision to locate an expanded tape duplication facility near
the Memphis hub of FedEx provided for the latest possible pick-up of outgoing
tape deliveries utilizing overnight courier services. The move to Memphis
essentially added several hours to the Company's deadline for delivery of
next-day commercials, an important competitive advantage for the advertising
industry.
In May 1991, Cycle:Sat introduced a program to increase penetration of its
satellite network among television stations in the top 100 broadcast markets.
Under this new program, Cycle:Sat supplied and
11
<PAGE>
installed at each new station a steerable antenna and associated computer
hardware, in addition to the Cyclecypher. By mid-1992, the installed network
had grown to over 500 television stations.
The expansion of the Company's capabilities continued in April 1994 through
the addition of radio commercial duplication equipment in Memphis. The
marketing focus expanded to provide advertisers and their agencies with one-
stop service for television and radio spot distribution.
In March 1995, Cycle:Sat acquired the TFI advertising services division of
MPO. TFI, founded in 1964, provided video advertising distribution services
for national consumer marketing companies such as American Home Products, AT&T
and Procter & Gamble. The TFI acquisition also increased the Company's
delivery volume of syndicated and other programming. By purchasing TFI, the
Company expanded its services to include a video master storage operation
through which the Company provides computerized archiving, warehousing and
rapid delivery of video advertising materials and the distribution of printed
advertising and other promotional materials.
The Company's executive offices are located at 119 John K. Hanson Drive,
Forest City, Iowa 50436-0309, and its telephone number is (515) 582-6999. Its
World Wide Web page is located at http://www.cyclesat.com/cyclesat/home.html.
Cyclecypher(R) is a registered trademark and Cycle-Sat(R) is a registered
service mark of the Company.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered by it hereby are estimated to be approximately $24.4
million, after deducting the Company's pro rata share of estimated
underwriting discounts and commissions and offering expenses and assuming an
initial public offering price of $9.00 per share. The Company will not receive
any proceeds from the sale of Common Stock by the Selling Shareholders. See
"Principal and Selling Shareholders."
The Company intends to use the net proceeds of this offering to retire
substantially all of its existing interest-bearing debt, consisting of (i)
approximately $4.5 million represented by a secured revolving line of credit
maturing on January 31, 1997, which bears interest at the 90-day LIBOR rate
plus 1.5% per year (7.44% at March 2, 1996) and (ii) approximately $8.6
million of notes payable issued in connection with the acquisition of TFI,
consisting of (a) a $5.4 million secured bank note maturing in September 1999
and guaranteed by Winnebago, which bears interest at the 90-day LIBOR rate
plus 2.5% per year (8.16% at March 2, 1996) and (b) approximately $3.2 million
under a promissory note payable to the former parent of TFI maturing in March
1998, which bears interest at a fixed rate of 8% per year. Approximately $6.5
million of the net proceeds is expected to be used for capital expenditures,
including approximately $5.0 million for the conversion of the Company's
satellite network from analog to digital and approximately $1.5 million to
expand the Cyclecypher network and to establish an earth station and a
customer service center in the Detroit market. The remaining net proceeds of
approximately $4.8 million will be used for working capital and general
corporate purposes. The Company has evaluated and will continue to evaluate
potential industry-related acquisitions, although it has no present
commitments to effect any such acquisition.
Pending the application of the net proceeds as described above, the net
proceeds from this offering will be placed in interest-bearing bank accounts
or invested in United States government securities, certificates of deposit of
major banks or high grade commercial paper.
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its Common Stock
and does not anticipate paying any cash dividends or other distributions on
its Common Stock in the foreseeable future. The current policy of the
Company's Board of Directors is to reinvest earnings to finance the expansion
of the Company's business.
12
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of March 2, 1996, and as adjusted to reflect the receipt of net
proceeds from the sale by the Company of 3,000,000 shares of Common Stock
pursuant to this offering at an assumed initial public offering price of $9.00
per share and after deducting the Company's pro rata share of underwriting
discounts and commissions and estimated offering expenses. See "Use of
Proceeds."
<TABLE>
<CAPTION>
MARCH 2, 1996
------------------
AS
ACTUAL(1) ADJUSTED
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Bank revolving line of credit............................. $ 4,500 --
Current maturities of long-term debt...................... 2,710 $ 493
Current maturities of capital leases and deferred rent.... 969 969
------- -------
Total short-term debt................................... $ 8,179 $ 1,462
======= =======
Long-term debt:
Capital lease obligations and deferred rent............... $ 726 $ 726
Long-term debt, less current portion...................... 7,107 682
Stockholders' equity (2):
Preferred Stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding............. -- --
Common Stock, $.01 par value; 50,000,000 shares
authorized; 6,985,600 shares issued and outstanding as of
March 2, 1996; 9,985,600 shares issued and outstanding,
as adjusted.............................................. 70 100
Additional paid-in capital.................................. 34,912 59,272
Accumulated deficit......................................... (32,691) (32,691)
------- -------
Total stockholders' equity.............................. 2,291 26,681
------- -------
Total capitalization.................................... $10,124 $28,089
======= =======
</TABLE>
- --------
(1) Derived from the Company's unaudited financial statements included
elsewhere in this Prospectus. See "Financial Statements."
(2) Reflects a 2-for-1 stock split in the form of a stock dividend approved by
the Company's Board of Directors on March 20, 1996.
13
<PAGE>
DILUTION
The net tangible book value (deficit) of the Company's Common Stock as of
March 2, 1996 was $(7.4 million) or approximately $(1.06) per share. "Net
tangible book value (deficit)" per share represents the amount of the
Company's tangible assets less total liabilities, divided by 6,985,600 shares
of Common Stock outstanding.
Net tangible book value dilution per share represents the difference between
the amount per share paid by purchasers of shares of Common Stock in the
offering made hereby and the as adjusted net tangible book value per share of
Common Stock immediately after completion of the offering. After giving effect
to the sale of 3,000,000 shares of Common Stock in this offering at an assumed
initial public offering price of $9.00 per share and the application of the
estimated net proceeds therefrom, the as adjusted net tangible book value of
the Company as of March 2, 1996 would have been $17.0 million, or $1.70 per
share. This represents an immediate increase in net tangible book value of
$2.76 per share to existing shareholders and an immediate dilution in net
tangible book value of $7.30 per share to purchasers of Common Stock in the
offering as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $9.00
Net tangible book value (deficit) per share at March 2, 1996.... $(1.06)
Increase per share to existing shareholders attributable to sale
of shares to new investors..................................... 2.76
------
As adjusted net tangible book value per share after the offering.. 1.70
-----
Net tangible book value dilution per share to new investors(1).... $7.30
=====
</TABLE>
The following table sets forth, on an adjusted basis as of March 2, 1996,
the difference between the existing shareholders and the purchasers of shares
in the offering (at an assumed initial public offering price of $9.00 per
share) with respect to the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
----------------- ------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1).......... 6,985,600 70.0% $34,982,036 56.4% $5.01
New investors(1).................. 3,000,000 30.0 27,000,000 43.6 9.00
--------- ----- ----------- -----
Total......................... 9,985,600 100.0% $61,982,036 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) Does not include 1,000,000 shares of Common Stock reserved for issuance
under the Company's 1996 Equity Compensation Plan, of which 390,000 shares
will be issuable upon exercise of options granted at the effective time of
the offering and which have an exercise price equal to the offering price.
14
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
The following unaudited pro forma statement of operations has been prepared
to reflect the acquisition of TFI by Cycle:Sat as if the transaction had
occurred on August 28, 1994, the beginning of fiscal 1995, and further adjusted
to give effect to the sale of sufficient shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $9.00 per share,
after deducting the Company's pro rata share of underwriting discounts and
commissions and estimated offering expenses to repay the then outstanding
balance of certain debt. See "Use of Proceeds." Cycle:Sat's fiscal year ends on
the last Saturday in August and TFI's ended on December 31. The column for TFI
includes its results of operations for the period September 1, 1994 through
March 31, 1995 and is based on TFI's historical financial data for those
periods. TFI's results are included in Cycle:Sat's historical financial results
for the period of April 1, 1995 through August 26, 1995, and the six months
ended March 2, 1996.
The pro forma statement of operations has been adjusted to reflect the
elimination of certain duplicative general and administrative costs described
in the notes thereto. No other pro forma effect has been given to operational
or other synergies that may be realized after the full integration of the two
businesses.
The pro forma statement of operations has been prepared based on the
foregoing and on certain assumptions described in the notes thereto. Such
statement should be read in conjunction with the historical financial
statements of Cycle:Sat and TFI, including the notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
which are included elsewhere in this Prospectus. The following pro forma
statement of operations does not purport to be indicative of the results of
operations that would have been reported had the TFI acquisition been effected
on the date indicated, or which may be reported in the future.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 26, 1995 SIX MONTHS
-------------------------------------------------------------------------------------- ENDED
HISTORICAL STATEMENTS MARCH 2, 1996
------------------------- -------------
CYCLE:SAT, TFI
INC. SEVEN MONTHS
YEAR ENDED ENDED
AUGUST 26, MARCH 31, ADJUSTMENTS PRO FORMA ADJUSTMENTS
1995 1995 FOR ACQUISITION FOR ACQUISITION FOR OFFERING PRO FORMA PRO FORMA(1)
----------- ------------ --------------- --------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues........... $24,627,890 $6,187,529 $ 1,260,896 (2) $32,076,315 $32,076,315 $15,750,406
Operating expenses:
Cost of services...... 13,651,156 3,537,845 1,260,896 (2) 18,449,897 18,449,897 8,868,525
Selling and
promotional.......... 1,611,017 53,498 1,664,515 1,664,515 732,530
General and
administrative....... 5,840,529 1,715,096 (315,299)(3)
(56,513)(4) 7,183,813 7,183,813 3,554,540
Depreciation and
amortization......... 2,160,639 62,510 995,300 (5) 3,218,449 3,218,449 1,488,370
Research and
development.......... 143,814 -- -- 143,814 143,814 98
Abandonment of flat
antenna product...... 673,457 -- -- 673,457 673,457 --
----------- ---------- ----------- ----------- --------- ----------- -----------
Operating income
(loss)............... 547,278 818,580 (623,488) 742,370 -- 742,370 1,106,343
Other income
(expense):
Interest expense...... (816,241) -- (449,600)(6) (1,265,841) 917,096(7) (348,745) (125,205)
Other income.......... 56,462 33,100 -- 89,562 89,562 82,610
----------- ---------- ----------- ----------- --------- ----------- -----------
Other income
(expense)........... (759,779) 33,100 (449,600) (1,176,279) 917,096 (259,183) (42,595)
Net income (loss)..... $ (212,501) $ 851,680 $(1,073,088) $ (433,909) $ 917,096 $ 483,187 $ 1,063,748
=========== ========== =========== =========== ========= =========== ===========
Net income (loss) per
share................ $ (0.03) $ (0.06) $ 0.06 $ 0.13
=========== =========== =========== ===========
Weighted average
common shares
outstanding.......... 6,985,600 6,985,600 1,340,713(7) 8,326,313 8,496,909
=========== =========== ========= =========== ===========
</TABLE>
- --------
See footnotes on following page
15
<PAGE>
(1) Adjusted to reflect the elimination of $501,329 in interest expense
related to certain debt assumed to be retired with a portion of the
proceeds from the offering based on an assumed issuance of 1,511,309
shares at $9.00 per share, after payment of underwriting discounts and
commissions and the Company's pro rata portion of the offering expenses.
See "Use of Proceeds."
(2) Reflects reclassification of TFI freight revenues from cost of sales into
sales to conform to Cycle:Sat's accounting policy.
(3) Reflects the elimination of a portion of TFI's corporate overhead
allocation from MPO, primarily salaries and fringe benefits for accounting
and human resource personnel who were terminated as a result of the TFI
acquisition.
(4) Reflects the elimination of compensation of TFI's president in excess of
the amount he would have been compensated if he had been an employee of
Cycle:Sat for the entire year.
(5) Reflects the additional amortization of goodwill and TFI noncompete
agreements for the portion of the year prior to the acquisition.
(6) Reflects the additional interest expense on long-term debt for the portion
of the year prior to the acquisition.
(7) Reflects elimination of interest expense related to certain debt assumed
to be retired with a portion of the proceeds from the offering based on an
assumed issuance of 1,340,713 shares at $9.00 per share, after payment of
underwriting discounts and commissions and the Company's pro rata portion
of the offering expenses. See "Use of Proceeds."
16
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included elsewhere
in this Prospectus. The statement of operations data set forth below with
respect to the years ended August 28, 1993, August 27, 1994 and August 26,
1995, and the balance sheet data as of August 27, 1994 and August 26, 1995 are
derived from the audited financial statements and the notes thereto included
elsewhere in this Prospectus, which have been audited by Deloitte & Touche
LLP, independent auditors. The balance sheet data as of August 28, 1993 are
also derived from the audited financial statements of the Company which are
not included in this Prospectus. The statement of operations data for the six
months ended February 25, 1995 and March 2, 1996, and the balance sheet data
as of March 2, 1996, are derived from unaudited financial statements and, in
the opinion of management, include all adjustments (consisting solely of
normal recurring adjustments) necessary for a fair presentation of the
financial position and the results of operations of the Company for such
periods. The results of operations for any interim period are not necessarily
indicative of results of operations for the fiscal year. The statement of
operations data for the years ended August 31, 1991 and August 29, 1992, and
the balance sheet data as of such dates have been derived from the unaudited
financial statements of the Company, which are not included in this
Prospectus.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
---------------------------------------------------------- ----------------------
AUGUST 31, AUGUST 29, AUGUST 28, AUGUST 27, AUGUST 26, FEBRUARY 25, MARCH 2,
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues........... $ 9,171 $ 10,299 $ 14,932 $ 18,955 $ 24,628 $ 9,976 $ 15,750
Operating expenses: ...
Cost of services..... 8,591 8,791 9,884 10,162 13,651 5,377 8,868
Selling and
promotional......... 1,345 1,218 1,553 1,596 1,611 804 733
General and
administrative...... 3,198 3,297 3,990 4,023 5,841 2,498 3,555
Depreciation and
amortization........ 1,135 1,278 1,489 1,619 2,161 882 1,488
Research and
development......... -- -- -- 110 144 20 --
Abandonment of flat
antenna product(1).. -- -- -- -- 673 -- --
--------- --------- --------- --------- --------- --------- ---------
Operating income
(loss)................ (5,098) (4,285) (1,984) 1,445 547 395 1,106
Other income
(expense):
Interest expense..... (701) (1,057) (402) (427) (816) (225) (627)
Other income......... 4 -- -- -- 56 29 83
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)...... $ (5,795) $ (5,342) $ (2,386) $ 1,018 $ (213) $ 199 $ 562
========= ========= ========= ========= ========= ========= =========
Net income (loss) per
share(2).............. $ (1.29) $ (1.19) $ (0.34) $ 0.15 $ (0.03) $ 0.03 $ 0.08
========= ========= ========= ========= ========= ========= =========
Weighted average
common
shares
outstanding(2)........ 4,485,600 4,485,600 6,985,600 6,985,600 6,985,600 6,985,600 6,985,600
========= ========= ========= ========= ========= ========= =========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
AUGUST 26, MARCH 2,
1995 1996
------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA INFORMATION:
Statement of Operations Data:(3)
Net revenues................................................................ $ 32,076 $ 15,750
Operating income (loss)..................................................... 742 1,106
Interest expense............................................................ (349) (125)
Net income (loss)........................................................... 483 1,064
Net income (loss) per share................................................. 0.06 0.13
Weighted average common shares outstanding.................................. 8,326,313 8,496,909
Balance Sheet Data:(4)
Cash........................................................................ 11,248
Working capital............................................................. 13,911
Total assets................................................................ 32,134
Total debt.................................................................. 2,870
Shareholders' equity........................................................ 26,681
EBITDA(5)..................................................................... 4,784 2,579
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
------------------------------------------------------ -----------------------
AUGUST 31, AUGUST 29, AUGUST 28, AUGUST 27, AUGUST 26, FEBRUARY 25, MARCH 2,
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA (END OF PERIOD):
Satellite network
affiliates............ 498 501 514 526 541 547 554
BALANCE SHEET DATA:
Working capital
(deficit)............. $(5,196) $ 1,630 $ (770) $ (438) $(3,301) $ (395) $ (4,054)
Total assets........... 7,807 9,372 8,043 9,146 20,772 7,887 20,886
Long-term debt (6)..... 3,791 3,160 2,550 1,206 8,912 830 7,833
Shareholders' equity
(deficit)............. (3,886) 3,272 923 1,941 1,728 2,139 2,291
OTHER DATA:
EBITDA (5)............. $(3,963) $(3,007) $ (495) $3,064 $ 3,498 $ 1,277 $ 2,579
Cash flows from (used
by):
Operating activities. (5,499) (3,356) (1,801) 976 2,099 2,256 1,092
Investing activities. 639 (477) (453) (554) (5,715) (659) (1,470)
Financing activities. 4,238 6,296 (203) (392) 3,924 (1,031) 5
Capital expenditures... $ 737 $ 943 $ 455 $ 582 $ 845 $ 707 $ 1,656
</TABLE>
- --------
(1) During fiscal 1995, the Company decided to abandon any further development
and production of its flat antenna product. All assets related to the
abandoned product, including license payments, inventory, property and
equipment, and contract settlement charges, were written off during fiscal
1995.
(2) Reflects a 2-for-1 stock split in the form of a stock dividend approved by
the Company's Board of Directors on March 20, 1996.
(3) Represents the results of operations for the fiscal year ended August 26,
1995 as if the acquisition of TFI (which occurred on March 31, 1995) had
occurred on August 28, 1994, adjusted to give effect to the sale of
sufficient shares of Common Stock to retire certain debt at an assumed
initial public offering price of $9.00 per share, after deducting the
Company's pro rata share of underwriting discounts and commissions and
offering expenses. See "Pro Forma Statement of Operations."
(4) Adjusted to give effect to the sale of 3,000,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $9.00 per share, after deducting the Company's pro rata share of
underwriting discounts and commissions and estimated offering expenses,
and the application of the estimated net proceeds therefrom as described
in "Use of Proceeds."
18
<PAGE>
(5) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization excluding gains and losses on asset sales and nonrecurring
charges. EBITDA does not represent cash generated from operating
activities in accordance with GAAP, is not to be considered as an
alternative to net income or any other GAAP measurements as a measure of
operating performance and is not necessarily indicative of cash available
to fund all cash needs. The Company's definition of EBITDA may not be
identical to similarly titled measures of other companies. Management
believes that in addition to cash flows and net income, EBITDA is a useful
financial performance measurement for assessing the operating performance
of the Company because, together with net income and cash flows, EBITDA is
widely used to provide investors with an additional basis to evaluate the
ability of the Company to incur and service debt and to fund acquisitions
or invest in new technologies. To evaluate EBITDA and the trends it
depicts, the components of EBITDA, such as net revenues, cost of services,
and selling, general and administrative expenses, should be considered.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." A reconciliation of net income to EBITDA is as
follows:
<TABLE>
<CAPTION>
PRO FORMA
---------------------
YEARS ENDED SIX MONTHS ENDED SIX MONTHS
------------------------------------------------------ --------------------- YEAR ENDED ENDED
AUGUST 31, AUGUST 29, AUGUST 28, AUGUST 27, AUGUST 26, FEBRUARY 25, MARCH 2, AUGUST 26, MARCH 2,
1991 1992 1993 1994 1995 1995 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss).... $(5,795) $(5,342) $(2,386) $1,018 $ (213) $ 199 $ 562 $ 483 $1,064
Add:
Depreciation and
amortization....... 1,135 1,278 1,489 1,619 2,161 882 1,488 3,218 1,488
Interest expense.... 701 1,057 402 427 816 225 627 349 125
Losses (gains) on
fixed asset sale... (4) 61 (29) (98) 61 (98)
Abandonment of flat
antenna product.... 673 673
------- ------- ------- ------ ------ ------ ------ ------ ------
EBITDA............... $(3,963) $(3,007) $ (495) $3,064 $3,498 $1,277 $2,579 $4,784 $2,579
======= ======= ======= ====== ====== ====== ====== ====== ======
</TABLE>
(6) Includes long-term portions of notes payable, capital lease obligations
and deferred rent.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Cycle:Sat distributes broadcast quality advertising to television stations,
cable television systems and radio stations nationwide. Cycle:Sat operates a
point-to-multi-point distribution network providing advertisers, production
facilities and agencies access to an integrated list of services. The
Company's primary business is the distribution of national spot advertising to
television stations throughout the United States.
The Company's results of operations are primarily dependent on the volume of
revenues generated by the purchase of national spot television advertising. To
the extent that advertisers shift money within their advertising budgets to
national spot advertising, the market for the Company's services would tend to
increase. Also, the proliferation of consumer brands and the use of more
defined target demographic segments have tended to increase the number of
commercials used in national spot advertising, positively impacting the
Company's market.
The conversion of the Company's satellite network from analog to digital is
expected to allow the Company to increase its distribution of syndicated
programming to individual television stations, cable systems and overseas
destinations. The Company believes that the consolidation of the cable
television industry will open further opportunities for advertisers to
purchase cable advertising on a national spot market basis. Finally, the
Company believes that its digital conversion will also allow it to provide
network management and content delivery services to private point-to-multi-
point networks and to deliver nonbroadcast quality content to personal
computer-based video receivers as that technology continues to evolve.
The Company generates revenues from network services, production services,
warehouse and distribution services, and certain other services. Network
services are defined as the physical distribution of video, audio or data to a
customer-designated location utilizing one or more of the Company's delivery
methods. Network services typically consist of deliveries of national spot
television and radio commercials and associated traffic instructions to
designated stations, supplemental deliveries to nonbroadcast destinations and
the Company's Satellite Shuttle service. Production services include video and
audio editing services, closed-captioning services, standards conversions and
other services related to the modification of video and audio content
materials prior to distribution. Warehouse and distribution services include
the storage of advertising materials on a short-term or long-term basis, the
archiving of customer supplied video, audio and printed elements which may be
retrieved for future use and the distribution of nonbroadcast customer-
supplied promotional materials to customer-designated locations on an as
needed basis. Other services principally consist of satellite time sold or
brokered on a spot market basis to third parties.
The following table sets forth revenues by source, amount and as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
-------------------------------------------------- --------------------------------
FEBRUARY 25,
AUGUST 28, 1993 AUGUST 27, 1994 AUGUST 26, 1995 1995 MARCH 2, 1996
---------------- ---------------- ---------------- --------------- ----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
------- -------- ------- -------- ------- -------- ------ -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Network services....... $13,210 88.5% $17,500 92.3% $21,479 87.2% $9,376 94.0% $12,882 81.8%
Production services.... 1,085 7.3 871 4.6 1,474 6.0 319 3.2 1,163 7.4
Warehouse and
distribution.......... 20 0.1 22 0.1 1,206 4.9 7 0.0 1,446 9.2
Other services......... 617 4.1 562 3.0 469 1.9 274 2.8 259 1.6
------- ----- ------- ----- ------- ----- ------ ----- ------- -----
Net revenues............ $14,932 100.0% $18,955 100.0% $24,628 100.0% $9,976 100.0% $15,750 100.0%
======= ===== ======= ===== ======= ===== ====== ===== ======= =====
</TABLE>
20
<PAGE>
In March 1995, the Company acquired TFI to achieve strategic industry
consolidation. As expected, this acquisition had a positive impact on revenues
and a short-term negative impact on operating income as the integration
process is being implemented. The Company made the decision to preserve in the
near-term the continuity of delivery processes for TFI customers to maintain
goodwill and make the acquisition essentially transparent to them, despite the
negative short-term operating income impact. Substantial cost savings have
since been obtained by the consolidation of redundant facilities in New York,
Chicago and Los Angeles, and the integration of administrative and accounting
functions and personnel. Further operating income improvements are expected as
more of the TFI customer base is serviced through the Company's satellite
network and high volume tape delivery capabilities. Future revenue comparisons
will likely demonstrate smaller percentage increases.
The Company's historical quarterly revenue results have demonstrated a
seasonal pattern in which the fourth and first fiscal quarters are typically
the strongest and the second fiscal quarter is typically the Company's
weakest. The addition of TFI revenues, a significant portion of which is not
as seasonal (including revenues for production services and warehouse and
distribution services), has mitigated the seasonality of revenues for the
first six months of fiscal 1996 as compared to fiscal 1995. Quarterly revenue
results demonstrate seasonal fluctuations due to the impact of the Company's
customer concentration in the motion picture, consumer packaged goods and
automotive industries. Customer concentration has been decreasing as a result
of new customers developed by the Company and through the acquisition of TFI.
In fiscal 1993, 1994 and 1995, revenues from motion picture customers
represented 46.7%, 49.4% and 36.1% of total revenues, respectively, and
revenues from automotive dealer association customers represented 14.7%, 12.9%
and 11.0% of total revenues, respectively. If the TFI acquisition had taken
place at the beginning of fiscal 1995, revenues from packaged goods customers
would have represented 19.2% of total revenues.
The Company recognizes revenue for network services upon the confirmed
delivery of customer-supplied materials to the designated delivery location.
Network services generally are based on a published rate card. The Company's
published rates vary with the time-sensitivity of customer requested delivery,
number of delivery locations and the time at which video or audio materials
are made available to the Company to begin the delivery process. Shorter
delivery schedules and later receipt of materials typically result in higher
network services rates. The lower variable cost of the satellite network and
the economies of scale at the Memphis tape duplication facility have allowed
the Company to maintain the same published rate card since late 1992. This, in
turn, has allowed the Company to compete effectively on the basis of price,
while significantly increasing its revenues and lowering cost of services as a
percentage of revenues.
Distribution of national spot television commercials for next-day delivery
is priced from $15 to $27, depending on the number of destinations, and from
$12 to $24 for economy two-day delivery. Customers often combine multiple
commercials, or spots, on the same delivery order, and those combined spots
are referred to as "tied spots." Tied spots are priced at a lower level
reflecting the lower variable cost of adding commercials to single deliveries.
The rate card price for tied television spots is $8. Invoices for delivery of
orders received after 8:00 p.m. Eastern time include a late premium, which
varies depending on the method of delivery. The Company invoices customers
based on a delivered price, regardless of method of distribution. Volume
discounts are available to customers based on historical volumes.
National spot radio commercial duplication and delivery rates range from $12
to $15 for single spots delivered the following morning and from $9 to $12 for
economy two-day delivery. Tied spots are priced at $0.40 each. The price is
determined by the number of delivery locations. Satellite Shuttle revenues
include charges for satellite transmission, typically $460 per half-hour
segment, in addition to pick-up, delivery and duplication charges.
Production services are typically billed at an hourly rate for use of the
Company's production facilities or on a firm price for specific services.
Warehousing and archiving revenues are billed monthly or
21
<PAGE>
quarterly to customers based on the specific number of elements maintained in
archives on a per-element basis. Removal or deposit of archived materials and
access to the Company's computerized archival inventory data base are included
in the monthly charge, but delivery of materials to customer locations,
including transportation charges utilizing the Company's owned and operated
trucking carrier, is billed based on the mode of delivery selected by the
customer. Other revenues consist of the sale of satellite time brokered or
sold on a per-hour basis at spot market rates and revenues which are not
related to specific products and services.
The Company believes that EBITDA is an important measure of its financial
performance. EBITDA is defined as earnings before interest, taxes,
depreciation and amortization excluding gains and losses on asset sales and
nonrecurring charges. The Company's historical investment in technology has
produced a relatively high depreciation expense, and with the addition of
amortization of TFI-related acquisition costs, depreciation and amortization
expense remains a significant non-cash charge to earnings. EBITDA is
calculated before depreciation and amortization charges and, in businesses
with significant non-cash expenses, is widely used as a measure of cash flow
available to pay interest, repay debt, make acquisitions or invest in new
technologies. As a result, the Company intends to report EBITDA as a measure
of financial performance. However, EBITDA does not represent cash generated
from operating activities in accordance with GAAP and should not be considered
in isolation or as a substitute for other measures of performance prepared in
accordance with GAAP. The Company first began to generate positive EBITDA on a
quarterly basis in the fourth quarter of fiscal 1993.
Cycle:Sat's cost structure is characterized by high operating leverage due
to the predominantly fixed nature of its operating expenses. At current
revenue levels, the Company believes it has the lowest unit cost position in
the national spot television advertising distribution industry. The
distribution network blends multiple formats and technologies with the
economies of scale from the Company's leading market share position. High unit
volumes allow the consolidation of multiple orders delivered to a particular
television station, thereby lowering per unit delivery expense. High unit
volumes also result in attractive pricing from overnight couriers and video
tape suppliers. The combination of these effects for tape deliveries with the
lower unit cost of satellite deliveries provides a blended unit cost which the
Company believes to be significantly below industry competitors.
Approximately 55% of the Company's historical Cycle:Sat customer spot
television station deliveries are currently made by satellite, with the
remaining volume utilizing the Company's tape duplication facility in Memphis.
Currently, less than 10% of historical TFI customer spot television station
deliveries are made by satellite. One of the Company's near-term integration
goals is to increase this percentage to match the Company's pre-acquisition
distribution mix. The Company expects that as the percentage of deliveries
made by satellite increases, operating results will improve as a result of the
lower variable costs associated with satellite delivery as compared with tape
delivery.
The Company's variable cost of services includes payroll for personnel in
the areas of customer service, operations, development engineering and the
regional offices, tape duplication and delivery expense. Fixed direct cost of
services consists primarily of the monthly satellite transponder expense.
Selling and promotional expenses include the salary and commission expenses
of the sales force, travel expenses and advertising and promotional costs. The
TFI acquisition did not result in an increase in the Company's sales force.
The Company historically has maintained a constant number of employees in its
sales force and does not anticipate its proposed entry into new markets will
result in a near-term increase in its sales force.
Research and development expenses for new products, processes and
technologies have historically been charged to cost of services. Research and
development expenses for fiscal 1995 relate to new audio compression
technology and to the flat antenna product, both of which were abandoned
during fiscal
22
<PAGE>
1995. The flat antenna technology was anticipated to significantly reduce
installation cost for a satellite network downlink, but production was not
feasible on a unit cost or performance basis.
Prior to the completion of this offering, Winnebago and Cycle:Sat jointly
filed consolidated federal income tax returns. For federal income tax
purposes, all Company operating losses were utilized to offset Winnebago
taxable income. Consequently, Cycle:Sat will have no net operating loss
carryforwards for federal income tax purposes after the offering. However, in
certain states Winnebago and the Company filed separate company returns.
Accordingly, Cycle:Sat may have net operating loss carryforwards in those
states for its own use after the offering.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented by
certain line items in the Company's statement of operations:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
-------------------------------- ---------------------
AUGUST 28, AUGUST 27, AUGUST 26, FEBRUARY 25, MARCH 2,
1993 1994 1995 1995 1996
---------- ---------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of services...... (66.2) (53.6) (55.4) (53.9) (56.3)
Selling and
promotional.......... (10.4) (8.4) (6.6) (8.1) (4.7)
General and
administrative....... (26.7) (21.2) (23.7) (25.0) (22.6)
Depreciation and
amortization......... (10.0) (8.5) (8.8) (8.8) (9.4)
Research and
development.......... -- (.6) (.6) (.2) --
Abandonment of flat
antenna product...... -- -- (2.7) -- --
----- ----- ----- ----- -----
Operating income (loss). (13.3) 7.7 2.2 4.0 7.0
Interest expense........ (2.7) (2.3) (3.3) (2.3) (4.0)
Other income............ -- -- .2 .3 .5
----- ----- ----- ----- -----
Net income (loss)....... (16.0) 5.4 (0.9) 2.0 3.5
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED MARCH 2, 1996 COMPARED TO SIX MONTHS ENDED FEBRUARY 25, 1995
Total revenue for the six months ended March 2, 1996 increased 58% to $15.8
million from $10.0 million for the corresponding period in fiscal 1995. The
revenue change reflected the additions of revenues primarily as a result of
the TFI acquisition for the fiscal 1996 period, and, to a lesser extent, from
increased usage of services by existing customers and revenues from new
customers and services, which together offset the impact of the loss of
revenues from Buena Vista Pictures Marketing, which accounted for $1.1 million
in revenues in the fiscal 1995 period. The Company ceased providing
distribution services for this customer in May 1995 due to a unique set of
circumstances in which the customer's media buying service initiated an
aggressively-priced advertising distribution capability for this customer as
an adjunct to its media buying functions. Since the TFI acquisition was not
closed until March 31, 1995, the six-month revenue total for fiscal 1995 does
not include any TFI-related revenues.
Cost of services for the first six months of fiscal 1996 increased 65% to
$8.9 million, or 56% of revenues, compared to $5.4 million, or 54% of
revenues, in the corresponding period of fiscal 1995. Cost of services as a
percentage of revenue increased in fiscal 1996 primarily due to $1.3 million
of subcontracted tape duplication and production expenses related to order
processing for historical TFI customers, offset somewhat by greater
utilization of the Company's satellite network. The Company anticipates full
integration of TFI will be achieved by the end of fiscal 1996, which would
substantially reduce subcontracted tape duplication and production expenses.
23
<PAGE>
Selling and promotional expenses for the first six months of fiscal 1996
decreased by 9% to $0.7 million from $0.8 million in the corresponding period
of 1995. An increase in total compensation for sales force personnel was
offset by reductions in travel expense for the six-month comparison periods.
General and administrative expense for the first six months of fiscal 1996
increased 42% to $3.6 million from $2.5 million in the corresponding period of
1995. The increase was comprised primarily of $.4 million in salaries and
benefits for certain accounting and general management personnel who were
retained in connection with the TFI acquisition and $.4 million of payments
for real estate leases on duplicate facilities in New York, Chicago and Los
Angeles prior to the integration of those offices in fiscal 1996. The increase
in general and administrative expense was offset somewhat by periodic
reductions in administrative personnel which have resulted from integration of
facilities and functions. The Company expects general and administrative
expense to decrease once the integration of TFI is complete.
EBITDA increased 103% to $2.6 million for the first six months of fiscal
1996 from the corresponding total of $1.3 million for the first six months of
fiscal 1995.
Depreciation and amortization expense increased 69% to $1.5 million from
$0.9 million exclusively due to the amortization of goodwill and non-compete
agreements related to the TFI acquisition, the total of which was $0.7 million
for the first six months of fiscal 1996.
Operating income increased 180% to $1.1 million for the first six months of
fiscal 1996 versus $0.4 million for fiscal 1995. Other expenses, including net
interest expense, increased to $0.5 million versus $0.2 million due to the
increase in interest-bearing debt related to the TFI acquisition. Net income
increased 182% to $0.6 million for the first six months of fiscal 1996 from
$0.2 million in fiscal 1995.
FISCAL YEAR ENDED AUGUST 26, 1995 COMPARED TO FISCAL YEAR ENDED AUGUST 27,
1994
Total revenue for the fiscal year ended August 26, 1995 increased 30% to
$24.6 million from $19.0 million for fiscal 1994. The revenue increase was
primarily attributable to $5.3 million of revenues from the recently acquired
TFI operations for the final five months of fiscal 1995 and, to a lesser
extent, increased usage of services by existing customers and the addition of
new customers, offset by the loss of Buena Vista Pictures Marketing as a
customer in May 1995. The fiscal 1995 increase in production and warehouse and
distribution revenues was the result of the purchase of TFI.
Cost of services increased 34% to $13.7 million for fiscal 1995, or 55% of
revenues, compared to $10.2 million, or 54% of revenues, for fiscal 1994. Cost
of services as a percentage of revenue increased in fiscal 1995 due primarily
to $1.6 million of subcontracted tape duplication and production expenses
related to order processing for historical TFI customers for the five months
following the TFI acquisition on March 31, 1995.
Selling and promotional expenses remained essentially flat at $1.6 million.
General and administrative expense increased 45% to $5.8 million in fiscal
1995 from $4.0 million in fiscal 1994. This increase was due for the most part
to the addition of TFI administrative personnel and increased facilities costs
for duplicate offices in New York, Los Angeles and Chicago, and, to a lesser
extent, increased health insurance and other employee benefit expenses.
EBITDA increased 10% to $3.4 million for fiscal 1995 from the corresponding
total of $3.1 million for fiscal 1994.
Depreciation and amortization expense increased 33% to $2.2 million from
$1.6 million principally due to the amortization of goodwill and non-compete
agreements related to the TFI acquisition, the total of which was $0.3 million
for final five months of fiscal 1995.
24
<PAGE>
Research and development expenses for fiscal 1995 principally relate to the
flat antenna product, which was deemed commercially unfeasible at year-end
1995 and which generated an additional one-time charge of $0.7 million for the
write-off of license fees, tooling and other assets associated with the
product. All costs and capitalized asset balances related to the flat antenna
product were expensed in fiscal 1995.
Operating income declined 62% to $0.5 million for fiscal 1995 from $1.4
million for fiscal 1994. Other expenses, including interest expense, increased
78% to $0.8 million versus $0.4 million due to the increased borrowings
resulting from funding the TFI acquisition. Net income declined to a loss of
$0.2 million in fiscal 1995 from a profit of $1.0 million in fiscal 1994.
FISCAL YEAR ENDED AUGUST 27, 1994 COMPARED TO FISCAL YEAR ENDED AUGUST 28,
1993
Total revenue for the fiscal year ended August 27, 1994 increased 27% to
$19.0 million from $14.9 million for fiscal 1993. Of this increase, $3.6
million represented increased sales to the Company's 15 largest customers and
$.6 million represented increased radio advertising distribution services.
Cost of services increased 3% to $10.2 million, or 54% of revenues, for
fiscal 1994 from $9.9 million, or 66% of revenues, for fiscal 1993. Cost of
services as a percentage of revenue decreased due to a greater number of
deliveries (and revenues) over the Company's satellite network leading to
fixed cost absorption of the satellite transponder lease expense. Increased
margins also resulted from higher unit tape deliveries leading to lower unit
courier delivery costs and better absorption of direct salaries.
Selling and promotional expenses remained essentially flat at $1.6 million.
General and administrative expense was essentially flat at $4.0 million.
EBITDA increased to $3.1 million for fiscal 1994 from the corresponding
total of $(0.5) million for fiscal 1993.
Depreciation and amortization expense increased to $1.6 million from $1.5
million.
Research and development expenses for fiscal 1994 included costs to
investigate several new technologies, including the flat antenna product,
rising to $0.1 million from zero in fiscal 1993.
Operating income increased to $1.4 million for fiscal 1994 versus a loss of
$2.0 million in fiscal 1993 due to the significant increases in revenues and
small increases in operating expenses. Other expenses, which included interest
expense in fiscal 1994 and 1993, remained flat at $0.4 million. Net income
increased to a profit of $1.0 million versus a loss of $2.4 million in fiscal
1993.
SUPPLEMENTAL QUARTERLY INFORMATION
The following table sets forth certain operating results for the four
quarters of fiscal 1994 and 1995 and for the first two quarters of fiscal
1996. The quarterly data is unaudited, but the Company believes that all
adjustments (which consist only of normal recurring accruals) necessary for a
fair presentation of the results of operations for the respective periods have
been included. Results of any one or more quarters are not necessarily
indicative of annual results or continuing trends.
<TABLE>
<CAPTION>
FISCAL YEAR 1994 FISCAL YEAR 1995 FISCAL YEAR 1996
---------------------------------- ---------------------------------------- -------------------
QUARTER ENDED QUARTER ENDED QUARTER ENDED
---------------------------------- ---------------------------------------- -------------------
NOV. 27, FEB. 26, MAY 28, AUG. 27, NOV. 26, FEB. 25, MAY 27, AUG. 26, DEC. 2, MARCH 2,
1993 1994 1994 1994 1994 1995 1995 1995 1995 1996
-------- -------- ------- -------- -------- -------- ------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $4,766 $4,584 $4,281 $5,324 $6,086 $3,890 $6,467(1) $8,185 (1) $8,281(1) $7,469(1)
Operating income (loss). 426 244 223 552 890 (505)(2) 327 (165)(3) 767 339
Interest expense........ 125 120 123 59 120 105 254(1) 337 (1) 309(1) 317(1)
Net income (loss)....... 301 124 100 493 770 (610) 73 (446) 505 57
</TABLE>
- --------
(1) Increase in sales and interest expense over corresponding periods of prior
year reflects acquisition of TFI.
(2) Operating loss for the quarter is due primarily to low sales volume not
covering fixed costs.
(3) Operating loss for the quarter is due primarily to the $673 thousand
write-off of flat antenna product.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through a
combination of equity financing from its principal shareholders (Winnebago and
John K. Hanson), bank loans, lines of credit, operating and capital leases and,
beginning in fiscal 1994, through positive operating cash flow. The Company
received additional equity contributions aggregating $20 million in fiscal 1990
and $12.5 million in fiscal 1992. The Company currently maintains a $4.5
million secured revolving line of credit with a commercial bank based on 80% of
the Company's eligible accounts receivables and 50% of its inventory, which
bears interest at the 90-day LIBOR rate plus 1.5% per year (7.44% at March 2,
1996). This line of credit expires on January 31, 1997, and there were no
borrowings available under this line at March 2, 1996. The bank also has
provided financing for a term note totaling $5.4 million, which matures on
September 28, 1999 and bears interest at the 90-day LIBOR rate plus 2.5% per
year (8.16% at March 2, 1996). The Company currently maintains a $2.0 million
revolving line of credit with Winnebago, which bears interest at prime plus
2.0% per year and expires on September 20, 1996. The full $2.0 million was
available for borrowing under the Winnebago line at March 21, 1996. The sellers
of TFI are providing financing for the balance due on the purchase of TFI
assets in the amount of $3.2 million, payable over two years, which bears
interest at a fixed rate of 8% per year.
In fiscal 1995, the Company generated $2.1 million in cash flows from
operations, primarily as the result of a $.2 million net loss offset by $2.2
million in non-cash depreciation and amortization charges. The Company's
significant investing activities in fiscal 1995 consisted of $.8 million of
capital expenditures primarily for new television station downlinks, production
service equipment, tape duplication equipment and computers, and $4.9 million
for the acquisition of TFI, of which $4.4 million was financed with proceeds of
a long-term note. Cash to pay for the capital expenditures discussed above, as
well as $.4 million in payments on long-term notes to the sellers of TFI and
$1.8 million in payments on capital leases, was obtained in part through
operations and in part through $1.7 million in net borrowings against the
Company's bank line of credit.
During the first six months of fiscal 1996, the Company generated $1.1
million in cash flows from operations, primarily as the result of $.6 million
in net income increased by $1.5 million in non-cash depreciation and
amortization charges and offset by a $.5 million decrease in accounts payable
and $.5 million of miscellaneous other decreases in cash to fund other changes
in working capital. The Company expended $1.7 million for purchases of fixed
assets, of which $1.2 million was expended in its regional offices in New York,
Chicago and Los Angeles to combine facilities obtained in the TFI acquisition,
and to update, refurbish and expand the three offices. These capital
expenditures were generally financed with operating cash as well as $.2 million
in proceeds from the sale of fixed assets and a $.5 million increase in the
Company's long-term bank note. Payments of $1.5 million on long-term debt and
capital leases were financed from cash from operations, a $.5 million increase
in line of credit borrowings and an additional $.5 million increase in the
Company's long-term bank note.
The Company will use a portion of the $24.4 million in net proceeds from this
offering to retire interest-bearing debt with a March 2, 1996 balance of $13.1
million. The digital conversion of the Company's satellite network will require
a total of approximately $5.0 in capital expenditures, all of which will be
spent over a one-year time frame, including $2.5 million committed to the
purchase of Digital Cyclecyphers and digital uplink equipment. The Company
expects to spend approximately $1.5 million to expand the Cyclecypher network
to additional locations, to open a Detroit sales and service office and for
working capital needs. The remaining proceeds of the offering will be used for
general corporate purposes, which may include acquisitions or joint venture
relationships.
Cycle:Sat has had no significant history of uncollectible accounts, and
management does not believe that this will change materially in the future.
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<PAGE>
The Company believes that, subsequent to this offering, its current banking
relationship will be enhanced through availability of a larger working capital
line of credit at more attractive terms and without a Winnebago guarantee. The
Company believes that cash generated from operations, borrowings under its bank
line of credit and the net proceeds to the Company from this offering will fund
necessary capital expenditures and provide adequate working capital for at
least the next 18 months.
IMPACT OF NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which will be effective for the Company beginning September 1,
1996. SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25,
which recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to
its stock-based compensation awards to employees and will disclose the required
pro forma effect on net income and earnings per share.
INFLATION
The Company believes that inflation has not had a material impact on the
Company's operating results and does not expect inflation to have a future
material impact based on current economic conditions.
THE INDUSTRY
INDUSTRY BACKGROUND
Television and Radio Advertising
According to industry sources, approximately $34.2 billion was spent in the
United States in 1994 on television advertising. This amount includes the
production of commercials and purchase of air time for (i) advertisements to
air on national broadcast and cable network and syndicated programming, where
commercials are distributed in conjunction with the origination of the
programming, (ii) local broadcast and cable television advertising, consisting
of locally produced and aired commercials, and (iii) national spot advertising,
which is produced and distributed nationally to air during commercial time
slots controlled by individual television stations and cable systems.
The market for television advertising has grown by over 300% since 1980, with
significant expansion in all segments. The following table shows the
expenditures in the television advertising market by segment for certain years
between 1980 and 1994:
TELEVISION ADVERTISING BY SEGMENT
(IN MILLIONS)
<TABLE>
<CAPTION>
TOTAL TV NATIONAL NATIONAL LOCAL NATIONAL CABLE
YEAR ADVERTISING NETWORK SPOT MARKET SYNDICATION ADVERTISING
- ---- ----------- -------- -------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1980.............. $ 11,469 $ 5,130 $3,269 $2,967 $ 50 $ 53
1985.............. 21,022 8,060 6,004 5,714 520 724
1990.............. 28,405 9,863 7,788 7,856 1,109 1,789
1991.............. 27,402 9,533 7,110 7,565 1,253 1,941
1992.............. 29,409 10,249 7,551 8,079 1,370 2,160
1993.............. 30,584 10,209 7,800 8,435 1,576 2,564
1994.............. 34,167 10,942 8,993 9,464 1,734 3,034
</TABLE>
- --------
Source: Television Bureau of Advertising
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<PAGE>
According to industry sources, approximately $10.5 billion was spent in the
U.S. in 1994 on radio advertising. This figure includes the production of
commercials and the purchase of air time for (i) advertisements distributed in
conjunction with syndicated and broadcast network programming, (ii) locally
produced and aired commercials, and (iii) national spot advertising. The
predominant methods for distributing national spot advertising to radio
stations are via physical delivery of analog audio tapes and electronic
transmission via telephone lines. The remainder of radio spots are produced in
house at radio stations, delivered by local delivery services or picked up by
station employees from the originating studio.
The following table shows the expenditures in the radio advertising market
by segment for certain years between 1985 and 1994:
RADIO ADVERTISING BY SEGMENT
(IN MILLIONS)
<TABLE>
<CAPTION>
TOTAL RADIO NATIONAL NATIONAL LOCAL
YEAR ADVERTISING NETWORK SPOT MARKET
- ---- ----------- -------- -------- ------
<S> <C> <C> <C> <C>
1985....................................... $ 6,490 $365 $1,335 $4,790
1990....................................... 8,726 482 1,635 6,609
1991....................................... 8,476 490 1,575 6,411
1992....................................... 8,654 424 1,505 6,725
1993....................................... 9,457 458 1,657 7,342
1994....................................... 10,529 463 1,902 8,164
</TABLE>
- --------
Source: Television Bureau of Advertising
The Company estimates that annual expenditures for the delivery of national
spot television and radio advertising and for syndicated television
programming total approximately $250 million. Of this amount, national spot
television advertising delivery is approximately $105 million (of which
approximately $15 million is attributable to cable system delivery), national
spot radio advertising delivery is approximately $20 million, and syndicated
and other programming delivery is approximately $125 million.
National Spot Distribution
According to industry sources, the United States has approximately 1,544
licensed television stations (the top 750 of which comprise in excess of 90%
of national spot television advertising unit volume) and 10,200 commercial
radio stations (approximately 1,000 of which are most often used for radio
advertising by national advertisers). The Company has direct satellite
connections with approximately 65% of the top 750 television stations and
distributes spot advertising via video tape to all other television stations
as well as cable systems requested by its customers. The Company distributes
spot advertising via audio tape to all radio stations as requested by its
customers.
Advertising is most frequently produced by an advertising agency under the
direction of the advertiser, or, less frequently, by the advertiser directly.
Spot advertising air time generally is purchased by advertising agencies or
their representatives based on a station's geographic and other demographic
characteristics. Less frequently, advertisers purchase air time directly from
a station, rather than using independent advertising agencies. While
advertisers and their agencies are planning air time, their creative teams are
developing the content for the spots to be broadcast. The actual commercial is
typically produced by a production company and finished on video tape.
Variations of the commercial intended for specific demographic groups or local
markets are often developed.
The processes used to create and deliver television advertising have evolved
in conjunction with technological developments in the television industry.
Initially, television commercials were created on celluloid film and delivered
by mail to the network or individual television stations where the commercial
28
<PAGE>
was to air. Later, the use of video tape in the television industry allowed
commercials to be produced and duplicated more quickly and sent to multiple
destinations in a more timely fashion. As overnight courier services
developed, commercials could be delivered more rapidly across the country.
Finally, the creation of the Company's patented satellite delivery system with
installed receivers in multiple television stations and the location of the
Memphis tape duplication facility allowed for even more rapid delivery for
next-day airing of finished spots.
Advertisers and their agencies constantly seek to increase the speed at
which advertisements are delivered to television stations and to improve the
quality of the commercial being broadcast. In addition, advertisers and
agencies require a method of rapid verification of whether and when a spot has
been received by the television stations in order to take advantage of
increasingly sophisticated marketing techniques. Advertisers seek to target
ever smaller, more specific demographic groups by advertising in select
geographic markets and by producing many variations of commercials oriented to
different demographic audiences. As a consequence, routing instructions
specifying which stations are to receive particular commercials, and the
traffic instructions given to those stations specifying the times and rotation
of spot airings, have grown increasingly complex. To the extent that spots can
be released just before their scheduled broadcast, advertising agencies have
extra creative time to re-edit spots, and advertisers gain extra time to
refine the spots to respond to competitors' promotions and shifting market
demand.
Syndicated Programming
The Company presently provides tape distribution for a small number of
syndicated programs. Syndicated television and radio programming is either
produced by the syndicator or purchased from an independent producer and
licensed to a television or radio station for broadcast. Syndicated
programming may be distributed to network-owned or affiliated stations,
independent stations and, in some cases, cable system operators. Most
syndicated programming is owned and licensed by major syndication companies
and is delivered using third-party distribution facilities such as those
provided by the Company's network. The increased capacity resulting from the
conversion to digital technology will allow the Company to deliver syndicated
television shows and other programming throughout the day without interrupting
the handling of time-sensitive advertising transmissions.
COMPETITION
The market for the distribution of advertising and other content to
television and radio stations is highly competitive. The Company currently
competes in the market for the delivery of national spot television
advertising, where it believes it is the leading market share competitor. The
principal competitive factors affecting this market are production quality,
price, and timeliness and accuracy of delivery. The Company competes with a
variety of tape duplication and delivery companies that have traditionally
distributed taped advertising spots via courier, although several companies
have announced electronic or satellite-based systems for delivering video and
audio content. The Company also competes in the distribution of advertising to
radio stations against competitors that provide distribution via courier
and/or electronically.
To the extent that the Company is successful in expanding into new markets,
such as the distribution of syndicated television programming, the management
of private network services for large corporations with multiple sites or
personal computer-based video network applications, it would expect to face
competition from companies in related communications markets and/or package
delivery markets which could offer products and services with functionality
similar or superior to that offered by the Company's products and services. In
addition, telecommunications providers and large cable operators could enter
the market as competitors with electronic technology or lower delivery costs.
See "Risk Factors--Competition."
29
<PAGE>
BUSINESS
GENERAL
The Company distributes broadcast quality advertising to television
stations, cable television systems and radio stations nationwide. The Company
believes that it is the leading provider of national spot television
advertising distribution services for advertisers and their agencies on both a
dollar and unit volume basis and that it is one of the leading distributors of
national spot radio advertising. The Company distributes advertising for
significant national accounts such as Anheuser-Busch, AT&T, Chevrolet, Procter
& Gamble and Twentieth Century Fox.
The Company operates a point-to-multi-point communications network
delivering video, audio and data transmissions using a patented satellite
distribution network, a fiber optic network linking Company facilities, and
multiple-format video and audio tape duplication facilities combined with air
and ground courier services. The Company's delivery network and facilities are
designed to cost-effectively serve the time-sensitive distribution needs of
the advertising industry and provide the platform for offering additional
distribution services.
Founded in 1985, the Company was the first in the advertising services
industry to deploy an automated satellite-based delivery network to television
stations nationwide. The Company's network includes a full-time, long-term
leased satellite transponder, uplink facilities located strategically across
the United States, an earth station and network operations center in Forest
City, Iowa, an earth station and tape duplication center in Memphis,
Tennessee, and the Company's proprietary Cyclecypher satellite receivers,
which are leased for a nominal amount to approximately 550 television stations
throughout the United States. The Company believes there are approximately 750
television stations that receive more than 90% of all national spot television
advertising deliveries. The Company's installed base of Cyclecypher receivers
includes approximately 65% of these stations.
Cycle:Sat is converting its analog satellite network to a digital network to
provide enhanced services to its existing customers and to offer new services
in additional markets. The digital conversion will quadruple transmission
capacity, provide state-of-the-art video quality, allow increased television
station penetration, permit additional satellite network downlinks and, with
the addition of file servers linked to the Company's Cyclecyphers, further
accelerate delivery time. The Company believes that the anticipated completion
of its conversion in early calendar year 1997 to an operational, large-scale,
fully-digital satellite communications network will continue the Company's
leading technology position in the industry. The digital conversion will
provide the opportunity to use a single satellite transponder for simultaneous
delivery of multiple broadcast quality signals and will substantially reduce
the Company's installation and equipment cost of adding downlinks to new
network participants.
To offer a complete delivery solution for its customers and to access
television stations not linked to its satellite network, the Company operates
what it believes is the largest broadcast video tape duplication facility in
the industry, located near the Memphis hub of FedEx. Overnight satellite
delivery and the Memphis location extend the Company's deadline for next-day
delivery of time-sensitive television commercials, a service advantage
available to the Company over many of its competitors. The low variable cost
of satellite delivery and the economies of scale at the Memphis duplication
facility also provide Cycle:Sat a significant cost advantage. The Company
offers complementary services to its advertiser and agency customers,
including in-house post-production services, video and audio master archiving
and warehousing, and distribution of advertising promotional material. In
addition, the Company's Satellite Shuttle service provides delivery of
broadcast quality video and audio content between most major U.S. cities in
under two hours. The Company's Memphis facility is also used for radio
advertising duplication and distribution services.
30
<PAGE>
BUSINESS STRATEGY
The Company's business strategy includes the following elements:
. Continue to provide industry leading satellite delivery technology. The
Company's existing satellite-based patented delivery network and
Cyclecypher technology provide significant advantages in time and
reliability of delivery. In addition, the conversion to digital
technology now underway will provide state-of-the-art satellite video
transmission.
. Expand market leading position in national spot television advertising.
The Company's market share growth is attributable to several factors,
including its broad product line, extended deadline for processing
customer orders and overall cost advantage. In addition, as it did with
the TFI acquisition in fiscal 1995, the Company may increase its market
share through acquisitions.
. Increase installed television station network. The Company intends to
increase the size of its television station network in conjunction with
the conversion to digital technology. The digital conversion will reduce
the equipment and installation cost for each new station added to the
Company's network to approximately one-third of the current cost. In
addition, by providing digital satellite reception capability to
television stations, the Company will position itself to provide
additional video delivery management services to its network stations.
. Expand delivery volume of syndicated and other programming. The
conversion to digital technology initially will quadruple the Company's
current satellite transmission capacity. This increased capacity will
allow the Company to receive and distribute multiple transmissions
simultaneously, 24 hours a day, allowing syndicated television shows and
other programming to be delivered throughout the day without interrupting
the handling of time-sensitive advertising transmissions.
. Maintain low cost position. Through its satellite network and large-scale
Memphis tape duplication facility, the Company can continue to be a low
cost leader in the delivery of national video and audio advertising,
syndicated programming and other video content.
. Continue tradition of superior customer service. The Company has built a
reputation for meeting the difficult time deadlines and complex
distribution requirements of its customers through a commitment to
service at every level of its organization.
LEADING DISTRIBUTION NETWORK
Since 1988, Cycle:Sat has offered a fully-functional, satellite-based,
point-to-multi-point delivery service to a growing number of television
stations in the United States. The Company's proprietary Cyclecypher
technology installed under a nominal lease arrangement at television stations
receives and decodes the satellite transmission of broadcast quality content
along with simultaneous printing of airplay instructions. The Cyclecypher
technology allows for selective addressability of each downlink and decoder.
In order to maintain its industry leading technology position, Cycle:Sat is in
the process of converting its nationwide satellite network to a fully digital
system utilizing MPEG2 video compression.
The Company's master satellite earth station and network operations center
is located in Forest City, Iowa, and additional satellite earth stations are
located in Memphis, New York, Los Angeles, Detroit and Chicago. The Company
also has established uplink relationships for origination of satellite service
from over 100 cities across the United States. The Forest City and Memphis
facilities, and the New York, Los Angeles and Chicago regional offices are
also interconnected with dedicated fiber optic links.
The Cycle:Sat network of television stations with installed Cyclecyphers
totals approximately 550. The Company estimates that there are approximately
1,544 television stations licensed in the United States including remote
repeater, Spanish language, religious and non-commercial stations. Of this
total, approximately 750 stations comprise in excess of 90% of national spot
television advertising unit volume and receive sufficient volume of national
spot television advertising to justify the installation of downlink
31
<PAGE>
equipment. Cycle:Sat has installed Cyclecypher receivers in approximately 65%
of these stations. The Company believes this large installed base of
television stations represents a significant opportunity to deliver additional
programming through the increased transmission capacity it will obtain through
its digital conversion.
The Company's Memphis tape duplication facility covers 19,500 square feet
and has 145 video and 51 audio tape duplication machines. This facility also
houses a fully functional satellite earth station. Through this facility, the
Company makes and distributes an average of over 3,800 video tape duplications
a day. Strategically located near the main FedEx hub, the Memphis tape
duplication facility extends the Company's deadline for processing next-day
delivery orders by several hours.
PRODUCTS AND SERVICES
Cycle:Sat operates a unique satellite and tape distribution network
providing advertisers, production facilities and advertising agencies access
to an integrated list of services. The Company's production facilities offer
the opportunity for final editing, closed-captioning and tagging for local
market customization prior to distribution. The Company's Satellite Shuttle
service offers rapid transmission by satellite of broadcast quality video and
audio content between most major U.S. cities in as little as two hours. The
Company's warehouse facilities offer archiving and storage services to
advertisers and advertising agencies.
Network Services
Cycle:Sat delivers spot commercials using a point-to-multi-point satellite
network which is inherently faster, less prone to human error and less costly
than the industry standard method of making tape duplications for each
television station and delivering them by overnight courier. Approximately 55%
of the Company's television station deliveries for historical Cycle:Sat
customers are currently made by satellite, with the remainder utilizing the
Company's tape duplication facility in Memphis. Currently, less than 10% of
historical TFI customer spot television station deliveries are made by
satellite. One of the Company's near-term integration goals is to increase
this percentage to match the Company's pre-acquisition distribution mix.
Commercials and their related distribution information are collected at one
of the uplink facilities available to the Company and transmitted over the
Company's satellite network to its facilities in Memphis and Forest City,
Iowa. It is not uncommon for orders to be received into the evening hours for
delivery the next morning. After the Company completes any required production
services, such as closed-captioning or local market customization, the
advertising spot is coupled with its distribution information and delivered by
satellite transmission to the television stations with Cyclecypher receivers
and to the Company's Memphis duplication facility for next-day tape deliveries
to all other stations throughout the United States and Canada.
Each night, the Company's Forest City network operations personnel build the
master satellite feed sequence using a digital format video cart machine and
software designed to automate the sorting and scheduling function. The nightly
feed is regionalized to begin with East Coast stations at 2:00 a.m. Eastern
time and end with West Coast stations at approximately 8:00 a.m. Eastern time.
Commercials are transmitted in an ordered process to reach only the stations
scheduled for that commercial. Each Cyclecypher is remotely addressable
utilizing its data channel sub-carrier and is turned on or off to effect
delivery of the commercial and associated traffic instructions.
The order processing and tape duplication functions for television and radio
commercial deliveries in Memphis parallel the procedure in Forest City.
Commercial masters are received throughout the day by intracompany satellite
transmission or via the Company's fiber optic network. Tape duplication
workshifts
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<PAGE>
are staggered throughout the day to allow tape duplication to be performed
from approximately noon each day through the final courier pick-up.
Once the tape duplications have been made, they are sorted and consolidated
into packages by destination, providing a major cost advantage because the
majority of deliveries contain multiple customer orders at a fixed cost for
each package. The increase in the Company's volume has historically provided a
decreasing delivery cost per order due to order consolidation and the volume
discount structure inherent in air courier pricing.
Traffic instructions that detail airplay information accompany all
deliveries. For satellite deliveries, the traffic instructions accompany the
nightly satellite feeds to network stations, utilizing a printer adjacent to
the satellite receiver at the television station. For video and audio tape
deliveries, a printed copy of the traffic instructions is included with the
tape duplications.
The Company's station relations staff contacts television stations each
morning to verify receipt of the prior night's satellite feed, allowing timely
retransmission of any unconfirmed deliveries. Tape deliveries are verified
electronically through an on-line interface with the Company's air courier
services.
Cycle:Sat has developed a proprietary order processing computer system which
has been installed at many of the Company's advertising customers. The system
allows orders and spot traffic instructions to be entered by the customer and
electronically transmitted to Cycle:Sat. The single order and traffic
instruction entry process eliminates duplicative labor functions and the
potential for input error and functionally bundles orders with instructions in
the delivery system.
As an added service to meet its customers' highly time-sensitive delivery
needs, the Company provides its Satellite Shuttle service. This service offers
point-to-point delivery of high quality audio and video materials to most
major U.S. cities in under two hours.
The Company's radio spot duplication and delivery services provide a single
point of contact for distribution services for those advertisers utilizing
spot market purchases of both radio and television advertising. At the present
time, all radio advertising is distributed in tape format, but the Company
believes that its conversion to a digital satellite system will reduce the
investment necessary to create a satellite delivery network for radio spot
advertising distribution.
Industry sources estimate that there are approximately 10,200 licensed radio
stations in the United States. The Company's experience is that the strongest
market share leaders in any particular content format account for the vast
majority of national spot radio media purchases in that market for that
format. The Company estimates that 1,000 stations comprise most of the
national spot radio advertising unit volume. In fiscal 1995, Cycle:Sat
delivered radio advertising to approximately 4,300 locations. The Company
believes that it is the second leading distributor of national spot radio
advertising.
Production Services
Cycle:Sat maintains video and audio production and editing facilities as a
component of its full service approach to its customers. Production services
are performed in the regional office in New York and at the Forest City
headquarters. The regional offices also provide the ability to make limited
numbers of tape duplications for local delivery. The Company's New York
regional office often delivers multiple copies of an advertisement for network
clearance or network delivery. Many of the Company's customers outside of New
York City utilize the Satellite Shuttle and the New York regional office to
communicate with the television networks.
Video production services typically include editing of a video tape master
for local retailer information or other market-by-market customization. The
Company also offers closed-captioning services. These services are designed to
shorten the time frame to air a spot where competitive response and local
customization are integral to the distribution function.
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<PAGE>
Warehousing and Distribution Services
With the purchase of TFI, the Company acquired one of the advertising
market's leading archiving and storage services. This computer-supported
operation archives and stores programming and television commercial production
material off-site for advertisers and advertising agencies. The archived
materials include finished television spots, film and audio elements, and
printed materials which are cataloged and stored for rapid retrieval. The
expense of maintaining libraries on-site is avoided by the customer, and the
warehousing function produces recurring revenue for the Company.
The archiving function is currently performed at facilities in Delaware and
New Jersey, and locations are being expanded in Chicago and Los Angeles. Each
customer service office has access to its archived data through the Company's
computer system, and an advertiser or agency customer of the Company can
request delivery service of its stored elements on-line. When combined with
the rapid delivery of broadcast quality video utilizing the Company's
Satellite Shuttle service, the warehousing operation provides the opportunity
to significantly expand library management revenues for several customers,
including television networks, television stations, advertisers, agencies and
post-production houses.
In addition to archiving and warehousing services, the Company distributes
printed advertising materials, "one-sheets" and promotional displays to retail
locations on behalf of advertising customers. The advertising materials are
inventoried at the Los Angeles location, packaged into orders and distributed
by a variety of carriers. For example, the Company often distributes to movie
theaters advertising posters and other promotional materials that accompany
new movie releases.
The Company believes that an excellent opportunity exists to increase
archiving and print distribution services revenues by providing these newly
acquired services to Cycle:Sat's historical customer base.
Conversion to Digital Network
The Company will complete the conversion of its satellite network from an
analog to digital format over the next 12 months to capture the additional
revenue opportunities provided by what the Company believes will be the first
large-scale, fully-deployed, broadcast quality digital delivery network in the
United States. The shift to digital will substantially reduce the cost of
adding new television stations and other locations to its network due to the
ability to use a smaller and less expensive satellite antenna. The decreased
cost of station downlinks may also provide the opportunity to create a radio
spot delivery network utilizing the low incremental variable cost of point-to-
multi-point satellite delivery.
In addition, digital conversion will utilize the MPEG2 video compression
algorithms that allow for simultaneous transmission of multiple broadcast
quality video signals on one satellite transponder. The four-fold increase of
simultaneous transmission capacity will allow Cycle:Sat to utilize its
investment in transmission and downlink network equipment to carry multiple
revenue-generating signals at the same time. The Company believes that the
digital conversion also will allow for entry into new markets not previously
available due to the constraints on transponder capacity under the Company's
existing analog network. Further, the Company believes that it will have a
significant cost advantage in several new markets due to the low incremental
cost of increased traffic on its predominantly fixed cost satellite network.
The Company has entered into three principal strategic relationships to
effect the digital conversion of its network. The first relationship is with
GE Americom, Cycle:Sat's current satellite transponder supplier. GE Americom's
Satcom K-2, on which the Company's current analog network relies for satellite
34
<PAGE>
transmission, was launched in 1985 and is currently approaching its end-of-
life in orbit. GE Americom has scheduled the launch of GE-1 in July 1996 to
replace Satcom K-2 by September 1996. The Company has leased a transponder on
GE-1 on a full-time long-term basis. GE-1 will be located at a more desirable
orbital address and, with its higher 60 watt per transponder power, will
provide better footprint coverage of North America, Hawaii and Alaska.
The second strategic relationship involves General Instrument, a respected
supplier of digital encoding equipment, digital receivers and encryption
systems and the developer of compression algorithms for decreased bandwidth
requirements for broadcast quality signal transmission. The Company has
engaged General Instrument to manufacture the Company's Digital Cyclecypher to
replace existing analog Cyclecyphers.
The third strategic relationship exists with Media Magic, a developer of
private networks for corporations including Ford Motor Company, IBM and
Merrill Lynch. Media Magic has agreed to provide the interface between the
Digital Cyclecypher and the television station video tape recorders that will
allow "plug and play" replacement of existing interfaces from the analog
Cyclecypher.
The completion of the digital conversion is scheduled to take place in three
phases. The first phase involves the installation of digital uplink encoding
equipment at Cycle:Sat facilities. The installation and testing of the five
digital uplinks in New York, Chicago, Los Angeles, Forest City and Memphis are
expected to require approximately 60 days, beginning in late summer 1996. The
second phase involves repointing the current satellite antennas installed at
television stations to the orbital address of GE-1. The Company believes that
GE-1 will be available for transmission traffic in early September 1996.
Following the antenna movements, the Company's current analog network will
remain fully functional using GE-1 as the satellite carrier. The third phase
of the conversion involves the removal of the analog Cyclecypher and the re-
installation of the new receiver and video tape recorder interface. This last
phase is projected to be completed early in the first calendar quarter of
1997. The Company estimates the conversion cost to be $2,700 per station,
consisting of $2,500 for the new Digital Cyclecypher and $200 for
installation.
Once the digital conversion has been completed, the cost of installing a
station receiver will decrease substantially from historical levels, as
illustrated by the average station installation cost information presented in
the following table:
<TABLE>
<S> <C> <C>
COMPONENT COST ANALOG SITE COST DIGITAL SITE COST
- -------------- ---------------- -----------------
(HISTORICAL) (ESTIMATED)
Antenna and hardware........................ $ 5,300 $ 1,000
Cyclecypher................................. 2,400 2,500
Site preparation............................ 1,750 0
Installation expense........................ 1,700 500
---------------- -----------------
Total installed cost per site........... $ 11,150 $ 4,000
================ =================
</TABLE>
New Markets
The increased transmission capacity provided by the digital conversion of
the Company's satellite system will allow the Company to enter or
significantly increase its presence in several new or expanding markets. The
syndicated programming distribution market is estimated to be $125 million
annually. The Company presently provides tape distribution for a small number
of syndicated programs. However, the Company has established sales
relationships with several of the largest television programming syndicators
through its advertising distribution services sales force.
The Company believes that continued consolidation of cable system ownership
among multiple system operators ("MSOs") will attract increasing national spot
advertising on local cable systems, especially in major markets. The Company
intends to expand its satellite network to include MSOs and
35
<PAGE>
cable headends, which will facilitate the ability of advertisers to purchase
cable advertising on a national spot market basis, mirroring the manner in
which broadcast television advertising is purchased.
Finally, the Company believes that the increased satellite capacity and
reduced receiver installation costs resulting from the conversion to digital
technology will allow it the opportunity to provide network management and
content delivery services to private point-to-multi-point networks and to
deliver non-broadcast quality content delivery to personal computer-based
video receivers as that technology continues to evolve.
As new revenue opportunities and markets develop, the Company believes that
it will have a significant cost and pricing advantage over its competitors.
The incremental variable cost of the converted digital satellite network for
additional usage is expected to be small, and fixed costs for depreciation and
satellite lease expense will be unaffected by increased volume.
CUSTOMERS
Since its inception, Cycle:Sat has added customers and increased market
share based on a combination of production quality, high-quality service, a
significant price advantage versus its competitors and the ability to handle
difficult spot television delivery requirements in a routine manner. The
integration of the Company's satellite delivery network with the Memphis
duplication facility has given advertisers a time advantage in their ability
to deliver commercials for airing the next broadcast day. The traffic and
order entry computer system also has increased the reliability and convenience
of the delivery process.
Sales from the motion picture and automobile industries have historically
represented a substantial portion of the Company's revenues. Advertisers in
both industries rely upon the Cycle:Sat network due to its unique
capabilities. Motion picture studios often produce final commercials for a
movie based on pre-screening or market testing of a film's creative
positioning. Consequently, orders for commercial distribution often arrive
late, with airtime already purchased to coincide with a movie opening.
Advertisers in the automobile industry, especially the regional dealers'
associations, often desire local market tagging and customization which
Cycle:Sat has a unique capacity to satisfy.
The acquisition of TFI increased the Company's presence with major national
package goods and consumer products companies. Notable customer additions from
the TFI acquisition include American Home Products, AT&T, General Mills,
Procter & Gamble, RJR Nabisco, Sony Corporation, Time Warner and Unilever. The
diversification of the Company's revenue base from both new customers and new
products, notably warehousing and archiving services, has decreased the
Company's reliance on the movie and automotive industries.
For the fiscal year ended August 26, 1995, Cycle:Sat had approximately 900
active customer accounts. The Company calls on both advertisers and their
agencies to generate distribution revenues. In many of the Company's customer
relationships, the advertiser designates Cycle:Sat as the distribution
services provider for the account. It is not customary in the advertising
services industry to enter into long- term contracts with advertisers or their
agencies.
The major advertising agencies typically have multiple offices which have
autonomy to choose distribution services providers. The Company treats each
office of the major agencies as a separate customer for billing and account
services purposes. Cycle:Sat has a national distribution services relationship
with several major advertisers.
In fiscal 1995, approximately 61% of the Company's revenues were generated
from the 15 largest national accounts. Of the these accounts, approximately
one-half are relationships where distribution
36
<PAGE>
services are billed directly to the advertiser. The remaining accounts are
billed to various agencies for services performed for the advertiser where
Cycle:Sat is designated as the principal service provider.
The motion picture and automobile dealer association industries accounted
for approximately 36.1% and 11.0%, respectively, of fiscal 1995 revenues.
These two industries accounted for 61% of fiscal 1993 revenues. In fiscal
1995, Twentieth Century Fox accounted for over 10% of the Company's revenues,
while Procter & Gamble accounted for over 10% of the Company's pro forma
revenues for that period.
SALES AND MARKETING
The Company employs a direct sales force that calls on advertising agencies
to communicate the capabilities and comparative advantages of the Company's
distribution system and its related products and services. In addition, the
Company's sales force calls on corporate advertisers who may be in a position
to influence agencies in directing deliveries to the Company. The Company
currently has field sales representatives in New York, Los Angeles, Chicago
and Dallas. Members of the Company's sales force are compensated through
salary and commissions, with additional incentives offered for sales to new
customers.
The Company's marketing programs are directed toward communicating its
unique capabilities and establishing itself as the predominant distribution
network for the advertising industry. These techniques include newsletters,
data sheets, application stories and direct mail promotional materials. The
Company also uses telemarketing and direct mail programs to increase awareness
of services like the Satellite Shuttle, closed-captioning and archiving
services. The Company also engages in public relations activities including
trade show participation and the promotion of articles in the trade and
business press. The Company engages in limited media advertising, principally
in trade publications of the advertising industry.
CUSTOMER SERVICE
Cycle:Sat has built its reputation in the market with a strong commitment to
customer service. The customer service staff develops personal relationships
with advertisers and their agencies that emphasize delivery confirmation,
meeting difficult delivery time frames, reliability and low cost. The Company
strives to make its technology transparent to the customer while emphasizing
the capabilities that its technology provides versus competitors.
The Company's emphasis on production quality, customer service, speed of
delivery and the ability to handle late orders has become the cornerstone of
its marketing focus. Several Hollywood motion picture companies are customers
due to the Company's ability to meet often-changing or rush delivery
schedules. The Company also has developed a significant presence with agencies
handling automobile dealer association accounts due to the ability to handle
complex orders with local market customization.
As of March 2, 1996, the Company has a customer service staff of 52 people
that is available to cover the work day across multiple time zones from Forest
City, the regional offices in New York, Chicago and Los Angeles, and the
Memphis facility. This staff serves as a single point of problem resolution
and supports not only the Company's customers, but also the television and
radio stations and cable systems which receive the deliveries. Customer
service calls concern such matters as the placing or revision of orders, and
inquiries by agencies, advertisers or station personnel.
FACILITIES
The Company leases all of its facilities pursuant to leases expiring between
September 2000 and October 2005. The Company believes that its facilities are
adequate for its current needs and that additional space will be available as
needed.
37
<PAGE>
GOVERNMENT REGULATION
Transmissions from the Company's earth stations to satellites must be made
pursuant to a license or other authorization granted by the Federal
Communications Commission (the "FCC"). FCC licensing decisions or changes in
U.S. government policies increasing or decreasing access to satellites could
adversely affect the Company. No FCC authorization is required for reception
of transmission from domestic satellites from points within the United States.
The Company relies on third party licenses or authorizations when it transmits
domestic satellite traffic through earth stations operated by such third
parties.
The FCC establishes technical standards for satellite transmission equipment
which change from time to time and also requires coordination of earth
stations with land-based microwave systems at certain frequencies to assure
noninterference. Transmission equipment must also be installed and operated in
a manner that avoids exposing humans to harmful levels of radio-frequency
radiation. The placement of earth stations or other antennae is typically
subject to regulation under local zoning ordinances.
The Company holds FCC licenses and other authorizations required for the
operation of its business. The Company's earth station licenses are normally
granted for a period of ten years, with the first to expire in 1997 and the
last to expire in 2005. Generally, authorizations to provide service are of
indefinite duration and are routinely renewed and valid until revoked or
surrendered.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company primarily relies upon a combination of patent, copyright,
trademark and trade secret laws and license agreements to establish and
protect proprietary rights in its technologies. The use of a satellite
communications network, which allows for selective addressability and command
of each downlink and decoder, is protected by a U.S. patent issued to the
Company on July 2, 1991. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's hardware,
software or technology without authorization or to develop similar technology
independently. In addition, effective copyright and trade secret protection
may be unavailable or limited in certain foreign countries.
Because the Company's business is characterized by rapid technological
change, the Company believes that factors such as the technological and
creative skills of its personnel, new computer hardware, software and
telecommunications developments, frequent hardware and software enhancements,
name recognition, and reliable customer service and support are more important
to establishing and maintaining a leadership position than the various legal
protections of its technology.
The Company believes that its patent, software, trademarks and other
proprietary rights do not infringe the proprietary rights of third parties.
There can be no assurance, however, that third parties will not assert such
infringement by the Company with respect to current or future software,
hardware or services. Any such claims, with or without merit, could be time-
consuming, result in costly litigation, cause software release delays or might
require the Company to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company. The Company is presently involved in one lawsuit
with a former employee relating to certain software written for the Company by
the employee. See "Litigation."
EMPLOYEES
The Company had 210 employees as of March 2, 1996, including 102 in
operations, 43 in customer support, nine in station relations, 23 in
administrative support, 15 in financial administration, nine in sales and
marketing, five in senior management and four in edit and production. The
Company's employees are
38
<PAGE>
not represented by any collective bargaining organization, and the Company has
never experienced a work stoppage. The Company considers its employee
relations to be good.
LITIGATION
The Company is a defendant in a lawsuit filed on February 6, 1995 in the
Iowa District Court for Winnebago County, Iowa, by a former employee, Michael
Diggan d/b/a Jemi Software, related to certain software written by the
employee for the Company. In September 1994, in an earlier lawsuit by the
employee, the United States District Court for the Northern District of Iowa
determined that while the software was owned by the employee, he had granted
an implied license to the Company to use the software. The present suit seeks
monetary damages in an unspecified amount on the basis of this implied
license. Management intends to vigorously defend against such claims.
In addition, the Company is subject from time to time to litigation arising
in the ordinary course of its business, and the Company believes that no such
litigation is pending that would have a material adverse effect on the
Company's business.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Loren A. Swenson............ 48 President, Chief Executive Officer and Director
Richard H. Leet, II......... 43 Vice President, Chief Operating Officer and
Chief Financial Officer
Theodore L. Henry........... 48 Vice President, Sales and Marketing
Charles A. Ahto............. 62 Senior Vice President and Director
Tom O. Mikkelsen............ 47 Vice President and Chief Technology Officer
Fred G. Dohrmann............ 64 Chairman of the Board and Director
John K. Hanson.............. 82 Director
Luise V. Hanson (1)(2)...... 82 Director
Bruce D. Hertzke............ 44 Director
Edwin F. Barker (1)......... 48 Director
Joseph M. Shuster (1)(2).... 63 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Human Resources Committee.
Mr. Swenson is a Director and the President and Chief Executive Officer of
the Company. He joined the Company in 1986 as Vice President of Operations at
the time of its acquisition by Winnebago, and directed the design and
construction of the Forest City office and network control facility. Mr.
Swenson was promoted to Vice President and Chief Operating Officer in December
1988, President in December 1989 and Chief Executive Officer in December 1993.
From 1975 to 1986, Mr. Swenson held various positions at Winnebago, including
management positions in marketing communications, public relations and
administration.
Mr. Leet is the Vice President, Chief Operating Officer and Chief Financial
Officer of the Company. He joined the Company in 1987 as Regional Sales
Manager in Chicago. In 1988, he was promoted to
39
<PAGE>
National Sales Manager and was responsible for opening the New York and
Chicago regional offices. In April 1994, he moved to Memphis as Vice President
and Chief Operating Officer to oversee the Company's operations and customer
support function and was named Chief Financial Officer in March 1996.
Mr. Henry is the Vice President, Sales and Marketing of the Company. Under
his direction, the production services staff and facilities were established
in Los Angeles. Mr. Henry joined the Company in 1989 as Vice President,
Sales--Western Region and in April 1994, was promoted to Vice President, Sales
and Marketing. He is a member of the Los Angeles Advertising Club and the
Advertising Business Affairs Association.
Mr. Ahto is Senior Vice President and a Director of the Company, having
joined the Company through the acquisition of TFI. From 1966 to 1995, he
served as President of the TFI division of MPO. Mr. Ahto was instrumental as a
conference vice president in expanding the Society of Motion Picture Engineers
to include television engineering personnel. He is a fellow of the Society of
Motion Picture and Television Engineers and a member of the corresponding
organization in the United Kingdom.
Mr. Mikkelsen is Vice President and Chief Technology Officer of the Company.
He joined the Company in February 1990 with responsibility for network
operations and technical resources. He became Director of Operations with
responsibility for the Memphis production facility in 1990. He became Vice
President and Chief Technology Officer in June 1994. Mr. Mikkelsen's career in
television network engineering spans over 20 years. He is a member and manager
for the Regional Chapter of the Society of Motion Picture and Television
Engineers, and a member of the Society of Broadcast Engineers and the Society
of Satellite Professionals.
Mr. Dohrmann became a Cycle:Sat Director in May 1990, and he became Chairman
of Cycle:Sat in October 1995. He became President and CEO of Winnebago in
December 1993. He has been a Winnebago director since 1989.
Mr. Hanson has been a Director of Cycle:Sat since 1987. Mr. Hanson founded
Winnebago in 1958, becoming its President in 1959 and Chairman in 1971. He has
been a Winnebago director since 1958.
Mrs. Hanson has been a Director of Cycle:Sat since 1987. Mrs. Hanson is the
wife of John K. Hanson. She is a former director of Winnebago.
Mr. Hertzke became a Cycle:Sat Director in October 1995. Mr. Hertzke has
served as Chief Operating Officer of Winnebago since June 1995 and Vice
President, Operations of Winnebago since June 1989.
Mr. Barker became a Cycle:Sat Director in October 1995. Mr. Barker also has
served as a Vice President of Winnebago since 1980 and its Chief Financial
Officer since December 1989.
Mr. Shuster became a Cycle:Sat Director in 1988. Mr. Shuster also is
Chairman of Teltech, Inc., an information services company based in
Minneapolis. He became a director of Winnebago in 1988.
CLASSIFIED BOARD OF DIRECTORS; COMMITTEES
Currently, directors hold office until the next annual meeting of the
shareholders of the Company, or until their successors have been elected and
qualified. Pursuant to the Company's Restated Articles of Incorporation, a
classified Board of Directors, in which the Directors will be divided into
three groups to serve staggered three-year terms, will be implemented at the
next annual meeting of shareholders to be held in January 1997.
The Board of Directors has a Human Resources Committee and an Audit
Committee. The Human Resources Committee makes recommendations to the Board of
Directors concerning salaries and incentive
40
<PAGE>
compensation for officers and employees of the Company. The Audit Committee
reviews the results and scope of the audit of the Company's financial
statements and other accounting related issues.
COMPENSATION OF DIRECTORS
Directors are reimbursed for their out-of-pocket expenses incurred in
attending Board and committee meetings, but otherwise do not receive any
compensation for their service as a director.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the Chief Executive
Officer of the Company and each of the other four most highly compensated
executive officers of the Company whose compensation exceeded $100,000 during
the fiscal year ended August 26, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION
--------------------------- -------- ----- ------------ ------------
<S> <C> <C> <C> <C>
Loren A. Swenson................. $182,725(1) -- -- $22,162(2)
President and Chief Executive
Officer
Richard H. Leet, II.............. 134,949(3) -- $ 43,413(4) 11,703(5)
Vice President, Chief Operating
Officer
and Chief Financial Officer
Theodore L. Henry................ 132,084(6) -- 100,641(7) 7,949(8)
Vice President, Sales and
Marketing
Charles A. Ahto.................. 153,846(9) -- -- 1,620(10)
Senior Vice President
Tom O. Mikkelsen................. 102,129 -- -- 530
Vice President and Chief
Technology Officer
</TABLE>
- --------
(1) Includes deferred compensation of $15,300.
(2) Includes $21,176 in accrued deferred compensation benefits and premiums
paid by the Company for group term life insurance.
(3) Includes deferred compensation of $7,280.
(4) Includes moving expenses of $29,580 for relocation from New York to
Memphis and sales commissions of $13,833.
(5) Includes $11,255 in accrued deferred compensation benefits and premiums
paid by the Company for group term life insurance.
(6) Includes deferred compensation of $4,500.
(7) Sales commissions.
(8) Includes $7,203 in accrued deferred compensation benefits and premiums
paid by the Company for group term life insurance.
(9) From date of TFI acquisition. See "Certain Transactions."
(10) For a description of certain payments under a noncompetition agreement,
see "Certain Transactions."
EMPLOYMENT AGREEMENTS
The Company does not have written employment agreements with its executive
officers other than Mr. Ahto. See "Certain Transactions."
41
<PAGE>
1996 EQUITY COMPENSATION PLAN
The Company's 1996 Equity Compensation Plan (the "Plan") was adopted as an
incentive for officers and other key employees. The Plan is administered by
the Human Resources Committee of the Board of Directors, each member of which
is "disinterested" as defined in Rule 16b-3 under the Securities Exchange Act
of 1934, as amended. The Human Resources Committee has sole discretion to
determine which officers or key employees shall be eligible for grants of
options and all terms of such options, including exercise price.
At the effective time of the offering, and pursuant to the Plan, the Company
will grant options to purchase shares of Common Stock of the Company to Mr.
Dohrmann, Mr. Swenson, Mr. Leet, Mr. Henry, Mr. Mikkelsen, Mr. Ahto and Mr.
Mark Stanton, in the amounts of 75,000 shares, 100,000 shares, 50,000 shares,
50,000 shares, 50,000 shares, 40,000 shares and 25,000 shares, respectively.
These options will be issued at the offering price, will have a term of ten
years and will be fully exercisable upon their grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Human Resources Committee was formed in March 1996 to review
and approve the compensation and benefits for the Company's executive
officers, administer the Company's 1996 Equity Compensation Plan and make
recommendations to the Board of Directors regarding such matters. The Human
Resources Committee is currently composed of Mrs. Hanson and Mr. Shuster.
Neither of these individuals has received compensation as an officer or
employee of the Company. Prior to formation of the Human Resources Committee,
the entire Board of Directors administered executive compensation programs. No
interlocking relationship exists between any member of the Company's Human
Resources Committee and any member of any other company's board of directors
or compensation committee.
CERTAIN TRANSACTIONS
As an 80%-owned subsidiary of Winnebago, the Company historically has
entered into a variety of financing and guaranty arrangements, leases and
other relationships with Winnebago. Mr. and Mrs. Hanson together own stock
representing 42.5% of the voting power of Winnebago, which allows them to
significantly influence Winnebago. Over the last two years, the Company has
substantially reduced its reliance upon Winnebago in connection with such
arrangements and relationships in a number of areas. The Company anticipates
that, as the terms of the existing arrangements between the Company and
Winnebago expire, it will further reduce its reliance upon Winnebago.
The Company has entered into certain sale/leaseback agreements and
additional capital lease arrangements for much of the Company's video
equipment and tape machines. The leases have terms ranging from two to six
years and are guaranteed by Winnebago. The total aggregate amount due under
the guaranteed capital leases was $1,057,083 as of March 2, 1996.
The Company leases its facilities in Forest City, Iowa from Winnebago for
$8,490 per month. The current lease commenced on September 1, 1995 and has a
term of five years.
In February 1995, the Company entered into a $4,500,000 secured revolving
line of credit with a commercial bank expiring on January 31, 1997, which
bears interest at the 90-day LIBOR rate plus 1.5% per year. Terms of the
agreement limit the amount advanced to the lesser of $4,500,000 or the sum of
80% of the Company's eligible accounts receivable and 50% of its inventory.
The borrowings under the revolving line of credit are secured by the Company's
accounts receivable and inventory and are guaranteed by Winnebago.
In connection with the TFI acquisition, the Company entered into a bank term
note with an original principal amount of $4,400,000 (increased to $5,400,000
as of March 2, 1996 to finance fiscal 1996 capital
42
<PAGE>
expenditures) maturing in September 1999, which bears interest at the 90-day
LIBOR rate plus 2.5% per year. The Company's obligations under the bank term
note are guaranteed by Winnebago.
In connection with the TFI acquisition, the Company issued a promissory note
to MPO dated March 31, 1995 for $4,200,000, bearing interest at 8% per year.
Additionally, MPO and the Company entered into a noncompetition agreement
which precludes MPO from competing in any business similar to the business of
the Company in North America for five years and required an initial payment of
$25,000 and additional payments by the Company of $25,000 upon each of the
first, second and third anniversaries of the agreement. The Company's
obligations under the noncompetition agreement and the promissory note are
guaranteed by Winnebago.
In connection with the TFI acquisition, the Company entered into an
employment agreement and a noncompetition agreement with Mr. Ahto, who was the
President of TFI. The employment agreement has a two-year term expiring in
April 1997, provides for an annual salary of $400,000 and an automobile, and
is terminable by the Company only for cause, as defined therein. In certain
situations resulting in the early termination of the employment agreement, Mr.
Ahto is entitled to a severance payment of $50,000 or an amount equal to one-
half of the remaining salary due Mr. Ahto for the second year of the
agreement, depending upon the event causing the termination of employment. The
Company may elect to continue to employ Mr. Ahto for an additional year
following the end of the initial two-year term of the employment agreement at
an annual salary of $200,000 plus 2% of certain Company sales. The
noncompetition agreement, which precludes Mr. Ahto from competing in any
business similar to the business of the Company in North America and Europe,
has a term of five years expiring in April 2000 and required an initial
payment by the Company of $1,108,333 and additional payments of $134,750 each
quarter through April 1, 1998. The payments due under the noncompetition
agreement are payable, notwithstanding Mr. Ahto's death or the termination of
his employment. Upon the occurrence of certain events of default, including a
change in control of Cycle:Sat or a disposition of all or substantially all of
its assets, the entire remaining payments due under the noncompetition
agreement become due and payable. Cycle:Sat's performance under both the
employment agreement and the noncompetition agreement is guaranteed by
Winnebago.
On March 21, 1996, the Company entered into an unsecured $2,000,000
revolving credit agreement with Winnebago which matures on September 20, 1996.
The principal balance earns interest at the prime rate plus 2% per year.
The Company earned $144,051 of revenue from Winnebago in fiscal 1995 and
$71,655 in the six-month period ended March 2, 1996 for production services
related to Winnebago promotional videos and materials.
Winnebago charges the Company monthly for certain operating expenses paid by
Winnebago on behalf of the Company for 401(k) profit-sharing plan
contributions, health insurance, property insurance, and certain utilities, as
well as services provided directly by Winnebago. The Company was charged
$884,419 by Winnebago for these expenses during fiscal 1995 and $480,282
during the six-month period ended March 2, 1996. Accounts payable to Winnebago
relating to these expenses were $64,047 and $85,343 at August 26, 1995 and
March 2, 1996, respectively.
The employees of the Company are eligible to participate in a qualified
profit-sharing and contributory 401(k) plan and a stock bonus retirement plan
for eligible employees sponsored by Winnebago. The plans provide for
contributions to be determined by Winnebago's Board of Directors. Winnebago
charges the Company for the Company's share of the matching contribution to
the profit-sharing and contributory 401(k) plan and the stock bonus plan.
Total amounts expensed for contributions to these Winnebago plans were
$132,686 for fiscal 1995, and $16,526 for the six-month period ended March 2,
1996.
43
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of March 2, 1996, and as
adjusted to reflect the sale of 3,000,000 shares of Common Stock offered by
the Company and 750,000 shares of Common Stock offered by the Selling
Shareholders, (i) by each shareholder who is known by the Company to own
beneficially more than 5% of the Common Stock, (ii) by each director, (iii) by
each executive officer named in the Summary Compensation Table set forth under
"Management," (iv) by all executive officers and directors as a group, and (v)
by each Selling Shareholder. Except as otherwise indicated and except to the
extent authority is shared by spouses under applicable law, each named
beneficial owner has sole voting and investment power with respect to the
shares listed.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
------------------------------------------------------
SHARES TO BE
SHARES BENEFICIALLY
BENEFICIALLY OWNED NUMBER OF OWNED AFTER
PRIOR TO OFFERING SHARES OFFERING
NAME AND ADDRESS OF --------------------- BEING --------------------
BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED SHARES PERCENT
--------------------- ----------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Winnebago Industries,
Inc.(2)................. 5,588,480 80.0% -- 5,588,480 56.0%
John K. Hanson(3)........ 1,160,932 16.6 730,000 430,932(4) 4.3
Luise V. Hanson(3)....... 236,188 3.4 20,000 216,188(4) 2.2
Bruce D. Hertzke......... -- -- -- -- --
Edwin F. Barker.......... -- -- -- -- --
Joseph M. Shuster........ -- -- -- -- --
Loren A. Swenson......... -- -- -- 100,000(5) *
Richard H. Leet, II...... -- -- -- 50,000(5) *
Theodore L. Henry........ -- -- -- 50,000(5) *
Charles A. Ahto.......... -- -- -- 40,000(5) *
Tom O. Mikkelsen......... -- -- -- 50,000(5) *
Fred G. Dohrmann......... -- -- -- 75,000(5) *
All directors and
executive
officers as a group (11
persons)................ 1,397,120 20.0% 750,000(6) 1,012,120(7) 9.8%
</TABLE>
- --------
* Less than 1%
(1) The business address for each officer and director of the Company is 119
John K. Hanson Drive, Forest City, Iowa 50436.
(2) The business address of Winnebago is Winnebago Industries, Inc., Post
Office Box 152, Forest City, Iowa 50436.
(3) The business address of Mr. and Mrs. Hanson is c/o Winnebago Industries,
Inc., Post Office Box 152, Forest City, Iowa 50436. On March 2, 1996, Mr.
and Mrs. Hanson owned, collectively, 42.5% of the stock of Winnebago and
thus may be deemed to have control of Winnebago.
(4) Mr. and Mrs. Hanson have granted an over-allotment option to the
Underwriters to purchase up to an aggregate of 430,932 and 131,568 shares
of Common Stock, respectively. If the Underwriters' over-allotment option
is exercised in full, Mr. and Mrs. Hanson will own 0 and 84,620 shares of
Common Stock, respectively.
(5) Options granted on the date of this Prospectus that are immediately
exercisable and which have an exercise price equal to the offering price.
(6) Includes shares being offered by Mr. and Mrs. Hanson. Excludes shares
owned by Mr. and Mr. Hanson subject to the Underwriters' over-allotment
option described in note (4) above.
(7) Includes options for 365,000 shares granted on the date of this Prospectus
that are immediately exercisable and which have an exercise price equal to
the offering price. If the Underwriters' over-allotment option is
exercised in full, all directors and officers as a group will beneficially
own 449,620 shares of Common Stock, representing approximately 4.3% of the
shares beneficially owned after this offering.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions of the capital stock of the
Company does not purport to be complete and is subject to, and qualified in
its entirety by, the Company's Restated Articles of Incorporation and Bylaws
which are included as exhibits to the Registration Statement of which this
Prospectus is a part, and by the provisions of applicable law.
The total amount of authorized capital stock of the Company consists of
50,000,000 shares of Common Stock, par value $.01 per share, and 5,000,000
shares of preferred stock, par value $.01 per share.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by shareholders. There is no cumulative voting. The shares of
Common Stock are neither redeemable nor convertible and the holders thereof
have no preemptive or subscription rights to purchase any securities of the
Company. In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior liquidation
rights of holders of preferred stock then outstanding, if any. Holders of
shares of Common Stock are entitled to receive such dividends as the Board of
Directors may declare in its discretion out of funds legally available
therefor.
As of March 2, 1996, there were 6,985,600 shares of Common Stock
outstanding, which were held of record by three shareholders. Upon the
consummation of this offering, there will be 9,985,600 shares of Common Stock
outstanding. The issued and outstanding shares of Common Stock are, and the
shares of Common Stock being offered will be upon payment therefor, validly
issued, fully paid and nonassessable.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "CYCN."
PREFERRED STOCK
The Company's Board of Directors may, without further action by the
Company's shareholders, from time to time, direct the issuance of shares of
preferred stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. Satisfaction of any
dividend preferences of outstanding shares of preferred stock would reduce the
amount of funds available for the payment of dividends on shares of Common
Stock. Holders of shares of preferred stock may be entitled to receive a
preference payment in the event of any liquidation, dissolution or winding-up
of the Company before any payment is made to the holders of shares of Common
Stock. Under certain circumstances, the issuance of shares of preferred stock
may render more difficult or tend to discourage a merger, tender offer or
proxy contest, the assumption of control by a holder of a large block of the
Company's securities, or the removal of incumbent management. The Board of
Directors of the Company, without shareholder approval, may issue shares of
preferred stock with voting and conversion rights which could adversely affect
the holders of shares of Common Stock. Upon consummation of the offering,
there will be no shares of preferred stock outstanding, and the Company has no
present intention to issue any shares of preferred stock.
LIMITATIONS ON CHANGE OF CONTROL
Certain provisions of the Restated Articles of Incorporation and the
Company's Bylaws could make more difficult the acquisition of the Company by
means of a tender offer, a proxy contest or otherwise and the removal of
incumbent officers and directors. These provisions are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and
to encourage persons seeking to
45
<PAGE>
acquire control of the Company to first negotiate with the Company. The
Company believes that the benefits of increased protection of the Company's
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure the Company outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
The Company's Restated Articles of Incorporation provide that the Board of
Directors will be divided into three classes, with staggered three-year terms.
The number of directors shall be not less than five nor more than ten, with
the classes to be as nearly equal in number as possible. As a result, only one
class of directors will be elected at each annual meeting of shareholders of
the Company, with the other classes of directors continuing for the remainder
of their respective three-year terms. The classification of the Board of
Directors makes it more difficult for the Company's existing shareholders to
replace the Board of Directors, as well as for another party to obtain control
of the Company by replacing the Board of Directors. Because the Board of
Directors has the power to retain and discharge officers of the Company, these
provisions could also make it more difficult for existing shareholders or
another party to effect a change in management.
The Company's Restated Articles of Incorporation and Bylaws contain
provisions requiring the affirmative vote of the holders of at least two-
thirds of the voting stock of the Company to amend the foregoing provisions of
the Restated Articles of Incorporation and Bylaws.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Restated Articles of Incorporation limit the liability of directors to
the fullest extent permitted by the Iowa Business Corporation Act. In
addition, the Restated Articles of Incorporation provide that the Company will
indemnify directors and officers of the Company, except for liability for (i)
breach of a director's duty of loyalty to the Company or its shareholders,
(ii) acts or omissions not in good faith or which involve intentional
misconduct or knowing violation of the law, (iii) any transaction from which
the officer or director derived an improper personal benefit, (iv) any
unlawful distributions in violation of Section 490.833 of the Iowa Business
Corporation Act or (v) judgments, penalties, fines and settlements arising
from any proceeding by or in the right of the Company, or against expenses in
any such case where the officer or director is judged liable to the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and the registrar for the Common Stock is Norwest Bank
Minneapolis, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
9,985,600 shares of Common Stock, assuming no exercise of outstanding stock
options. Of these shares, the 3,750,000 shares of Common Stock sold in this
offering will be freely tradeable without restriction under the Securities Act
of 1933, as amended (the "Securities Act"), by persons other than "affiliates"
of the Company (as that term is defined in Rule 144 of the Securities Act).
The remaining 6,235,600 shares of Common Stock (the "Restricted Shares") were
acquired in transactions exempt from registration under the Securities Act and
may not be resold unless they are registered under the Securities Act or are
sold pursuant to an applicable exemption from registration, such as Rule 144
under the Securities Act.
SALES OF RESTRICTED SHARES
In general, under Rule 144 as currently in effect, a person who has
beneficially owned restricted securities for at least two years, or any person
who may be deemed an affiliate of the Company, is entitled,
46
<PAGE>
subject to certain conditions, to sell within any three-month period a number
of shares which does not exceed the greater of (i) 1% of the Company's then
outstanding shares of Common Stock (99,856 shares immediately after the
consummation of this offering, assuming no exercise of outstanding stock
options) or (ii) the average weekly trading volume of the Common Stock in the
over-the-counter market during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain manner-of-sale provisions,
notice requirements and the availability of public information about the
Company.
The Company intends to file a registration statement under the Securities
Act to register 1,000,000 shares of Common Stock reserved for issuance under
the 1996 Equity Compensation Plan. Shares of Common Stock issued pursuant to
this plan will be eligible for sale, subject, generally, to compliance with
Rule 144.
LOCK-UP AGREEMENTS
All of the Restricted Shares and all shares purchasable pursuant to stock
options granted at the time of the offering are subject to lock-up agreements
with the Underwriters that prohibit their sale or other disposition for 180
days from the date of this Prospectus without the prior written consent of
Alex. Brown & Sons Incorporated.
EFFECT OF SALES OF SHARES
Prior to this offering, there has been no public market for the Common Stock
of the Company, and no predictions can be made as to the effect, if any, that
market sales of shares or the availability of shares for sale will have on the
market price of the Common Stock prevailing from time to time. Nevertheless,
sales of substantial amounts of the Common Stock in the public market could
adversely affect prevailing market prices and impair the Company's ability to
raise capital through the sale of its equity securities. See "Dilution."
47
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and Wheat, First Securities, Inc. have
severally agreed to purchase from the Company and the Selling Shareholders the
following respective numbers of shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on
the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------ ---------
<S> <C>
Alex. Brown & Sons Incorporated.......................................
Wheat, First Securities, Inc..........................................
---------
Total............................................................. 3,750,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.
The Company and the Selling Shareholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the initial public offering price set
forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. After the initial public offering, the
offering price and other selling terms may be changed by the Representatives
of the Underwriters.
The Selling Shareholders have granted to the Underwriters an option,
exercisable not later than 30 days after the date of this Prospectus, to
purchase up to 562,500 additional shares of Common Stock at the public
offering price less the underwriting discounts and commissions set forth on
the cover page of this Prospectus. Of this amount, the first 430,932 shares
would be sold by John K. Hanson and any additional shares, up to 131,568
shares, would be sold by Luise V. Hanson. To the extent that the Underwriters
exercise such options, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof that the number of shares
of Common Stock by it shown in the above table bears to 3,750,000, and the
Selling Shareholders will be obligated, pursuant to the option, to sell such
shares to the Underwriters. The Underwriters may exercise such option only to
cover over-
48
<PAGE>
allotments made in connection with the sale of Common Stock offered hereby. If
purchased, the Underwriters will offer such additional shares on the same
terms as those on which the 3,750,000 shares are being offered.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Company, the current shareholders of the Company, and all executive
officers and directors of the Company, holding in the aggregate 6,235,600
shares of Common Stock and options to purchase 390,000 shares of Common Stock,
have agreed not, directly or indirectly, to offer, sell or grant any option to
purchase or otherwise dispose of any of such Common Stock for a period of 180
days after the date of this Prospectus without the prior consent of the
Representatives of the Underwriters; provided, however, that the Company is
entitled to grant options under the 1996 Equity Compensation Plan so long as
any shares issued upon the exercise of such options are subject to this
restriction. See "Shares Eligible for Future Sale."
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock has been determined by negotiation between the Company and the
Representatives of the Underwriters. Among the factors considered in such
negotiations were prevailing market conditions, the results of operations of
the Company in recent periods, the market capitalizations and stages of
development of other companies which the Company and the Representatives of
the Underwriters believed to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Blackwell Sanders Matheny Weary & Lombardi L.C.,
Kansas City, Missouri. Certain legal matters will be passed upon for the
Underwriters by Dow, Lohnes & Albertson, Washington, D.C.
EXPERTS
In connection with the offering, Winnebago Industries, Inc. has engaged
Christenberry Collet & Company, Inc., Kansas City, Missouri, as financial
advisors.
The financial statements of Cycle:Sat, Inc. as of August 27, 1994 and August
26, 1995 and for each of the three years in the period ended August 26, 1995
included in this Prospectus and the related financial statement schedule
included elsewhere in the registration statement have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports appearing
herein and elsewhere in the registration statement, and have been so included
in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
The statements of operations and cash flows of the business acquired in
fiscal 1995, TFI, for each of the three years in the period ended December 31,
1994 included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein and are
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
49
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission ("the
Commission"), Washington, D.C. 20549, a Registration Statement (which term
shall include all amendments, exhibits and schedules thereto) on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration
Statement, omits certain of the information contained in the Registration
Statement and the exhibits and financial schedules thereto. Reference is
hereby made to the Registration Statement and related exhibits and schedules
for further information with respect to the Company and the Common Stock
offered hereby. Any statements contained herein concerning the provisions of
any document are not necessarily complete, and in each such instance reference
is made to the copy of such document filed as an exhibit to the Registration
Statement. Each such statement is qualified in its entirety by such reference.
For further information with respect to the Company and the Common Stock,
reference is made to the Registration Statement and such exhibits and
schedules, copies of which may be examined or copied at the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located
at 7 World Trade Center, Suite 1300, New York, New York 10048 and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
50
<PAGE>
CYCLE:SAT, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Cycle:Sat, Inc.:
Audited Financial Statements as of August 27, 1994 and August 26, 1995
and for each of the three years ended August 26, 1995, and unaudited
financial statements as of March 2, 1996 and for the six-month periods
ended February 25, 1995 and March 2, 1996:
Independent Auditors' Report............................................ F-2
Balance Sheets.......................................................... F-3
Statements of Operations................................................ F-4
Statements of Cash Flows................................................ F-5
Statements of Stockholders' Equity...................................... F-6
Notes to Financial Statements........................................... F-7
Tape Film Industries:
Independent Auditors' Report............................................ F-16
Divisional Statements of Operations for the years ended December 31,
1992, 1993 and 1994.................................................... F-17
Divisional Statements of Cash Flows for the years ended December 31,
1992, 1993 and 1994.................................................... F-18
Notes to Divisional Financial Statements................................ F-19
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Cycle:Sat, Inc.
Forest City, Iowa
We have audited the accompanying balance sheets of Cycle:Sat, Inc. (the
Company) (an 80%-owned subsidiary of Winnebago Industries, Inc.) as of August
27, 1994 and August 26, 1995 and the related statements of operations,
stockholders' equity and cash flows for the fiscal years ended August 28,
1993, August 27, 1994 and August 26, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Cycle:Sat, Inc. as of August 27, 1994 and
August 26, 1995 and the results of its operations and its cash flows for the
fiscal years ended August 28, 1993, August 27, 1994 and August 26, 1995 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
January 24, 1996
(April 10, 1996 as to Note 12)
F-2
<PAGE>
CYCLE:SAT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 26, MARCH 2,
ASSETS 1994 1995 1996
------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash............................... $ 64,742 $ 372,535 $ 228
Receivables, less allowance for
doubtful accounts of $73,031,
$55,792 and $204,589,
respectively...................... 4,293,995 6,058,706 6,186,852
Deposits........................... 108,319 123,976 147,522
Inventory.......................... 59,934 81,216 78,861
Prepaid expenses................... 355,987 64,296 144,483
Receivable from parent company..... 600,841
------------ ------------ ------------
Total current assets............. 5,483,818 6,700,729 6,557,946
Property and Equipment, net.......... 3,662,449 3,783,817 4,665,339
Noncompete Agreements, less
accumulated amortization of $131,667
and $395,000 for 1995 and 1996,
respectively........................ 2,501,666 2,238,333
Goodwill, less accumulated
amortization of $198,040 and
$598,859 for 1995 and 1996,
respectively........................ 7,785,391 7,424,485
------------ ------------ ------------
Total assets..................... $ 9,146,267 $ 20,771,603 $ 20,886,103
============ ============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current Liabilities:
Bank revolving line of credit...... $ 2,300,000 $ 4,000,000 $ 4,500,000
Accounts payable................... 1,266,333 2,288,786 1,788,913
Current maturities of capital
leases and deferred rent.......... 1,980,048 1,259,689 968,638
Current maturities of long-term
debt.............................. 1,787,769 2,709,873
Accrued payroll and vacation....... 320,916 515,031 500,739
Other accrued expenses............. 54,916 150,218 143,913
------------ ------------ ------------
Total current liabilities........ 5,922,213 10,001,493 10,612,076
Capital Lease Obligations and
Deferred Rent....................... 1,205,812 1,018,652 725,662
Long-Term Debt....................... 7,892,927 7,106,890
Deferred Compensation................ 77,554 130,344 150,839
Commitments and Contingencies
Stockholders' Equity:
Common stock, $0.01 par value;
50,000,000 shares authorized;
6,985,600 shares issued and
outstanding....................... 69,856 69,856 69,856
Additional paid-in capital......... 34,912,180 34,912,180 34,912,180
Accumulated deficit................ (33,041,348) (33,253,849) (32,691,400)
------------ ------------ ------------
Total stockholders' equity....... 1,940,688 1,728,187 2,290,636
------------ ------------ ------------
Total liabilities and
stockholders' equity............ $ 9,146,267 $ 20,771,603 $ 20,886,103
============ ============ ============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
CYCLE:SAT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED
------------------------------------- ------------------------
AUGUST 28, AUGUST 27, AUGUST 26, FEBRUARY 25, MARCH 2,
1993 1994 1995 1995 1996
----------- ----------- ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Network services...... $13,210,399 $17,499,856 $21,478,889 $9,376,362 $12,882,780
Production services... 1,085,190 870,747 1,473,810 318,960 1,162,780
Warehouse and
distribution......... 19,627 22,394 1,205,702 6,974 1,446,232
Other................. 616,951 561,828 469,489 273,870 258,614
----------- ----------- ----------- ---------- -----------
Net revenues........ 14,932,167 18,954,825 24,627,890 9,976,166 15,750,406
Operating Expenses:
Cost of services
(excludes
depreciation shown
separately below).... 9,883,419 10,161,756 13,651,156 5,377,537 8,868,525
Selling and
promotional.......... 1,552,690 1,596,185 1,611,017 803,741 732,530
General and
administrative
(excludes
depreciation and
amortization shown
separately below).... 3,990,414 4,022,634 5,840,529 2,498,391 3,554,540
Depreciation and
amortization......... 1,489,396 1,619,008 2,160,639 881,893 1,488,370
Research and
development.......... 214 110,348 143,814 20,011 98
Abandonment of flat
antenna product...... 673,457
----------- ----------- ----------- ---------- -----------
Total operating
expenses........... 16,916,133 17,509,931 24,080,612 9,581,573 14,644,063
----------- ----------- ----------- ---------- -----------
Operating Income (Loss). (1,983,966) 1,444,894 547,278 394,593 1,106,343
Other (Expense) Income:
Interest expense...... (402,378) (426,708) (816,241) (225,047) (626,534)
Other income
(expense)............ 173 (104) 56,462 28,967 82,640
----------- ----------- ----------- ---------- -----------
Other expense....... (402,205) (426,812) (759,779) (196,080) (543,894)
----------- ----------- ----------- ---------- -----------
Net Income (Loss)....... $(2,386,171) 1,018,082 $ (212,501) $ 198,513 $ 562,449
=========== =========== =========== ========== ===========
Net Income (Loss) Per
Share.................. $ (0.34) $ 0.15 $ (0.03) $ 0.03 $ 0.08
=========== =========== =========== ========== ===========
Weighted Average Common
Shares Outstanding..... 6,985,600 6,985,600 6,985,600 6,985,600 6,985,600
=========== =========== =========== ========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
CYCLE:SAT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED
----------------------------------- -----------------------
AUGUST 28, AUGUST 27, AUGUST 26, FEBRUARY 25, MARCH 2,
1993 1994 1995 1995 1996
----------- ---------- ---------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From
Operating Activities:
Net income (loss)..... $(2,386,171) $1,018,082 $ (212,501) $ 198,513 $ 562,449
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization....... 1,489,396 1,619,008 2,160,639 881,893 1,488,370
(Gain) loss on
disposal of
property........... (100) 190 61,523 (28,854) (97,509)
Increase (decrease)
in deferred
satellite lease
expense............ 399,070 207,168 (232,997) (101,581) (131,417)
Increase in deferred
compensation....... 32,149 36,409 52,790 26,395 20,495
(Increase) decrease
in Winnebago
receivable......... (66,307) (74,705) 600,841 600,841
(Increase) decrease
in accounts
receivable......... (1,459,512) (1,043,691) (1,764,711) 1,109,872 (128,146)
Decrease (increase)
in deposits........ 113,813 (59,961) (15,657) 49,614 (23,546)
(Increase) decrease
in inventory....... (23,711) 77,694 (21,282) (16,995) 2,355
(Increase) decrease
in prepaid
expenses........... (286,211) (66,631) 291,691 (171,388) (80,187)
Increase (decrease)
in accounts
payable............ 336,961 (705,292) 1,022,453 (278,263) (499,873)
Increase (decrease)
in accrued
expenses........... 50,026 (31,979) 156,154 (13,766) (20,597)
----------- ---------- ---------- ---------- ----------
Net cash (used in)
provided by
operating
activities....... (1,800,597) 976,292 2,098,943 2,256,281 1,092,394
Cash Flows From
Investing Activities:
Purchases of property
and equipment........ (454,520) (582,113) (845,088) (706,624) (1,655,808)
Proceeds from sale of
property and
equipment............ 1,679 28,028 63,644 47,932 225,525
Payment for purchase
of TFI acquisition... (4,933,504) (39,915)
----------- ---------- ---------- ---------- ----------
Net cash used in
investing
activities....... (452,841) (554,085) (5,714,948) (658,692) (1,470,198)
Cash Flows From
Financing Activities:
Proceeds from
revolving line of
credit............... 2,300,000 2,550,000 500,000
Payments on revolving
line of credit....... (850,000) (400,000)
Advances from
Winnebago............ 1,096,030 600,000
Payments to Winnebago. (1,696,030)
Proceeds from long-
term debt............ 4,400,000 1,000,000
Payments on long-term
debt................. (419,304) (863,933)
Payments on capital
lease obligations.... (1,299,244) (1,595,583) (1,756,898) (630,864) (630,570)
----------- ---------- ---------- ---------- ----------
Net cash (used in)
provided by
financing
activities....... (203,214) (391,613) 3,923,798 (1,030,864) 5,497
----------- ---------- ---------- ---------- ----------
Net (Decrease) Increase
in Cash................ (2,456,652) 30,594 307,793 566,725 (372,307)
Cash at Beginning of
Period................. 2,490,800 34,148 64,742 64,742 372,535
----------- ---------- ---------- ---------- ----------
Cash at End of Period... $ 34,148 $ 64,742 $ 372,535 $ 631,467 $ 228
=========== ========== ========== ========== ==========
Supplemental Cash Flow
Information--
Cash paid during the
period for:
Interest............ $ 501,413 $ 468,685 $ 741,241 $ 225,047 $ 626,534
Income taxes........ -- -- -- -- --
Non-cash transactions
during the period--
property purchased
under capital lease
obligations.......... 841,639 444,159 1,292,201 -- 177,946
Issuance of note and
obligations for:
Non-compete
agreements......... 1,500,000
Acquisition of TFI.. 4,200,000
</TABLE>
See notes to financial statements.
F-5
<PAGE>
CYCLE:SAT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance at August 29,
1992................... 6,985,600 $69,856 $34,912,180 $(31,673,259) $3,308,777
Net loss.............. (2,386,171) (2,386,171)
--------- ------- ----------- ------------ ----------
Balance at August 28,
1993................... 6,985,600 69,856 34,912,180 (34,059,430) 922,606
Net income............ 1,018,082 1,018,082
--------- ------- ----------- ------------ ----------
Balance at August 27,
1994................... 6,985,600 69,856 34,912,180 (33,041,348) 1,940,688
Net loss.............. (212,501) (212,501)
--------- ------- ----------- ------------ ----------
Balance at August 26,
1995................... 6,985,600 69,856 34,912,180 (33,253,849) 1,728,187
Net income
(Unaudited).......... 562,449 562,449
--------- ------- ----------- ------------ ----------
Balance at March 2, 1996
(Unaudited)............ 6,985,600 $69,856 $34,912,180 $(32,691,400) $2,290,636
========= ======= =========== ============ ==========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
CYCLE:SAT, INC.
NOTES TO FINANCIAL STATEMENTS
FISCAL YEARS ENDED AUGUST 28, 1993, AUGUST 27, 1994, AND AUGUST 26, 1995
AND SIX MONTHS ENDED FEBRUARY 25, 1995 AND MARCH 2, 1996 (UNAUDITED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Business Risks--Cycle:Sat, Inc. (the "Company") is an
80%-owned subsidiary of the parent company, Winnebago Industries, Inc.
("Winnebago"). The Chairman of the Board (and his spouse) of Winnebago own the
remaining 20% of the Company's common stock. The Company is a communications
company primarily serving the advertising industry by providing high-speed
distribution of national spot television and radio commercials in the United
States. Distribution is accomplished via satellite transmission or delivery of
tape via courier. The Company derives substantially all of its revenues from a
group of services related to the production, duplication, storage and
distribution of broadcast quality video and audio advertising and therefore
considers itself to operate in a single industry segment.
A substantial decline in the demand for, or average selling prices of, the
Company's television advertising delivery services would have a material
adverse effect on the Company's business, operating results and financial
condition. Additionally, the Company is dependent upon certain significant
customers (see Note 2) and its relationship with and continued support of the
television stations in which it has installed communications equipment. Also,
the Company's ability to remain competitive in an industry characterized by
rapidly changing technology depends significantly upon the technological
quality of its products and processes relative to those of its competitors.
The Company has recently decided to invest in the conversion of its satellite
network from analog to a digital format. There are risks that the conversion
could be delayed due to events beyond the Company's control (e.g., financial
or operational difficulties of one of the vendors involved) or that the
Company will not achieve a significant degree of market share once the
conversion is implemented, as certain of the Company's competitors are in
various stages of similar conversions or market expansions.
During fiscal 1995, the Company significantly expanded its distribution
business with the acquisition of the Tape Film Industries division ("TFI") of
MPO Videotronics, Inc. ("MPO"), as described in Note 11. Also, during fiscal
1995, the Company decided to abandon any further development and production of
its flat antenna product, for which development activities commenced in fiscal
1993. All assets related to the abandoned product line, including license
payments, inventory, property and equipment, and contract settlement payments
totaling $673,457, were written off during fiscal 1995.
Basis of Presentation--The accompanying financial statements have been
prepared from the separate records maintained by the Company and may not
necessarily be indicative of the conditions that would have existed or the
results of operations if the Company had been operated as an unaffiliated
company.
Fiscal Period--The Company follows a 52/53-week fiscal year period ending
the last Saturday in August. The financial statements presented for fiscal
years ending August 28, 1993, August 27, 1994 and August 26, 1995 represent
52-week periods. The unaudited interim statements of operations and cash flows
for the periods ended February 25, 1995 and March 2, 1996 represent 26-week
and 27-week periods, respectively.
Unaudited Interim Financial Statements--The balance sheet as of March 2,
1996, the statements of operations and cash flows for the six-month periods
ended February 25, 1995 and March 2, 1996, and the statement of stockholders'
equity for the six-month period ended March 2, 1996 have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations, cash flows and changes in
stockholders' equity at March 2, 1996 and for the periods ended February 25,
1995 and March 2, 1996 have been made. The Company's operations are subject to
seasonal factors with the greatest activity occurring in its first and fourth
quarters which end in November and August. Accordingly, interim results are
not necessarily indicative of the results that will be achieved for the fiscal
year.
F-7
<PAGE>
CYCLE:SAT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment--Property and equipment are carried at cost.
Depreciation of property and equipment is provided using the straight-line
method over the estimated useful lives of the related assets or the terms of
capital leases, generally three to six years. Accelerated depreciation methods
are used for tax purposes wherever permitted.
Revenue Recognition--The Company generally recognizes revenues when
transmission and distribution services are provided. Satellite revenue is
recognized upon completion of satellite transmission, and tape delivery
revenue is recognized upon shipment.
Inventories--Inventories are valued at the lower of cost or market, with
cost being determined using the first in, first out (FIFO) method and market
defined as net realizable value.
Income Taxes--The Company records income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. The statement requires the use of an asset and liability approach for
financial accounting and reporting for income taxes. If it is more likely than
not that some portion or all of a deferred tax asset will not be realized, a
valuation allowance is recognized (see Note 7 for further income tax
information).
Intangible Assets--Intangible assets are carried at cost and principally
consist of goodwill and noncompete agreements related to the acquisition
described in Note 11. Amortization is provided using the straight-line method
over a ten-year period for goodwill and over a five-year period (equivalent to
the terms of the agreements) for the noncompete agreements.
Impairment of Long-Lived Assets--Management of the Company periodically
reviews the carrying value of goodwill, covenants not to compete and other
long-lived assets for potential impairment by comparing the carrying value of
these assets with their related undiscounted, expected future net cash flows.
Should the sum of the related undiscounted, expected future net cash flows be
less than the carrying value, an impairment loss would be recognized, measured
by the amount by which the carrying value of the asset exceeds the fair value
of the asset. To date, except for the impairment recognized in fiscal 1995
related to the flat antenna product, management has determined that no
additional impairment of these assets exists.
Fair Value Disclosures of Financial Instruments--The estimated fair values
of the Company's revolving line of credit and long-term debt as of August 27,
1994 and August 26, 1995 approximate their respective carrying values due to
the market-based floating interest rate of the line of credit and the recent
issuance of the long-term debt.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the period presented. Actual results could differ from those
estimates.
Net Income (Loss) Per Common Share--Net income (loss) per common share is
based on the weighted average number of common shares outstanding during each
period. The total weighted average number of common shares outstanding has
been adjusted to reflect the stock split in the form of a stock dividend
effected on March 20, 1996 whereby each share of common stock became two
shares of common stock (see Note 12).
Assuming the line of credit, long-term bank term note and MPO promissory
note discussed in Notes 4 and 5 were repaid as of the beginning of each
period, or the date of issuance if later, using proceeds from shares being
issued pursuant to the pending public offering of common stock, supplementary
unaudited pro forma net income per common share would have been $0.04, $0.04,
and $0.13 for the fiscal
F-8
<PAGE>
CYCLE:SAT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
year ended August 26, 1995 and the six-month periods ended February 25, 1995
and March 2, 1996, respectively. These computations assume the issuance of
691,667, 255,156 and 1,365,219 weighted average shares to retire the
applicable debt during the fiscal year ended August 26, 1995 and the six-month
periods ended February 25, 1995 and March 2, 1996, respectively.
Reclassifications--Certain reclassifications have been made in the prior-
year statements of operations to conform to the current-year presentation.
Such reclassifications did not affect net income as previously reported.
2. SIGNIFICANT CUSTOMERS
Customers comprising 10 percent or more of the Company's net sales in one or
more of the periods presented are summarized in the table below. The
percentages for the fiscal six month periods and the fiscal year ended August
26, 1995 are not comparable due to the six months ended March 2, 1996
including six months of TFI revenues, the six months ended February 25, 1995
not including any TFI revenues and the fiscal year ended August 26, 1995
including only 5 months of TFI sales due to TFI being acquired on March 31,
1995.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED
------------------------------- ---------------------
AUGUST 28, AUGUST 27 AUGUST 26, FEBRUARY 25, MARCH 2,
1993 1994 1995 1995 1996
---------- --------- ---------- ------------ --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Customer A................ 14% 11% 12% 14% 5%
Customer B................ 5 13 6 11 --
Customer C................ 8 10 6 8 3
Customer D................ 11 8 5 8 3
Customer E................ -- -- 9 -- 19
</TABLE>
Total accounts receivable from customers comprising 10% or more of the
Company's net sales in one or more of the periods presented were
approximately, $2,028,000, $1,217,000, and $1,580,000 at August 27, 1994,
August 26, 1995 and March 2, 1996, respectively. The Company extends credit to
its customers on an unsecured basis. TFI, acquired in March 1995 (see Note
11), has a customer (Customer E above) that, had the acquisition taken place
at the beginning of fiscal 1995, would have comprised 15% of the combined pro
forma sales of the Company and TFI for fiscal 1995.
3. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 26, MARCH 2,
1994 1995 1996
------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Satellite equipment..... $ 2,240,218 $ 4,024,832 $ 4,823,951
Tape duplication
equipment.............. 6,423,128 6,485,735 6,931,280
Computer, office, and
other equipment........ 1,094,375 1,699,738 2,400,213
Vehicles................ 147,426 120,394 30,547
Leasehold improvements.. 337,241 322,462 855,776
------------ ----------- ------------
Total property and
equipment, at cost..... 10,242,388 12,653,161 15,041,767
Accumulated
depreciation........... (6,409,730) (8,828,894) (10,376,428)
Deferred gain (see Note
5)..................... (170,209) (40,450) --
------------ ----------- ------------
Property and equipment,
net.................... $ 3,662,449 $ 3,783,817 $ 4,665,339
============ =========== ============
</TABLE>
F-9
<PAGE>
CYCLE:SAT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company leases equipment under capital leases expiring through fiscal
2000. Equipment under capital leases aggregated $7,618,804, $7,368,361, and
$2,411,055 and related accumulated depreciation aggregated $4,978,440,
$5,012,851, and $698,155 at August 27, 1994, August 26, 1995, and March 2,
1996, respectively. Total depreciation expense for equipment under capital
leases was $1,141,664, $1,190,136, and $1,354,086 for fiscal 1993, 1994 and
1995, respectively. Total depreciation expense for equipment under capital
leases was $650,025 and $507,640 for the six-month periods ended February 25,
1995 and March 2, 1996, respectively.
4. REVOLVING LINE OF CREDIT
In February 1995, the Company entered into a $4,500,000 revolving line of
credit with a bank which expires on January 31, 1997. Terms of the agreement
limit the amount advanced to the lesser of $4,500,000 or the sum of 80% of the
Company's eligible accounts receivable and 50% of its inventory (the
"Borrowing Base"). Borrowings are secured by the Company's accounts receivable
and inventory and are guaranteed by Winnebago. As of August 26, 1995, the
Company had $274,000, of unused borrowings available. At March 2, 1996, the
Company had no borrowings available under the line of credit due to borrowings
exceeding the Borrowing Base by approximately $285,000. This amount was repaid
to the bank after March 2, 1996. The agreement provides for an interest rate
equal to the 90-day LIBOR rate plus 1.5% (9%, 7.38%, and 7.44% at August 27,
1994, August 26, 1995, and March 2, 1996, respectively) and is adjusted every
90 days. The revolving credit agreement and the long-term bank note payable
(see Note 5) are subject to the same credit agreement which requires the
Company to be profitable during fiscal years beginning in fiscal 1996 and
prohibits a change in the majority ownership of the Company without the bank's
consent. Management believes the Company will be able to comply with the debt
covenants through fiscal 1996.
See Note 12 regarding the Company's $2 million revolving line of credit
agreement with Winnebago.
5. CAPITAL LEASE OBLIGATIONS AND LONG-TERM DEBT
Capital Leases--The Company has entered into certain sale/leaseback
agreements and additional capital lease arrangements for much of the Company's
equipment. These leases have terms of five to six years and are guaranteed by
Winnebago. The sale/leaseback transactions resulted in recording deferred
gains of approximately $765,791 in fiscal 1990 which are being amortized over
the terms of the applicable leases. The unamortized deferred gain at August
27, 1994, August 26, 1995, and March 2, 1996 was $170,209, $40,450, and $0,
respectively.
Deferred Rent--The Company has a satellite transponder lease that requires
scheduled rent increases over the term of the lease, which expires in 1997.
Rent is being charged to expense on the straight-line method over the term of
the lease. The Company has recorded a deferred rent obligation of $373,241 as
of August 26, 1995 to reflect the excess of rent expense over cash payments
since the inception of the lease.
F-10
<PAGE>
CYCLE:SAT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Future annual minimum lease payments under capital leases and deferred rent
at August 26, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL DEFERRED
LEASES RENT TOTAL
---------- -------- ----------
<S> <C> <C> <C>
Fiscal years ending August
1996.......................................... $1,129,577 $262,836 $1,392,413
1997.......................................... 567,259 110,405 677,664
1998.......................................... 244,673 244,673
1999.......................................... 147,099 147,099
2000.......................................... 47,558 47,558
---------- -------- ----------
Total minimum lease payments.................... 2,136,166 373,241 2,509,407
Amounts representing interest (8.7% to 12.8%)... 231,066 231,066
---------- -------- ----------
Present value of minimum lease payments......... 1,905,100 373,241 2,278,341
Less current maturities......................... 996,853 262,836 1,259,689
---------- -------- ----------
Long-term portion of capital lease obligations
and deferred rent.............................. $ 908,247 $110,405 $1,018,652
========== ======== ==========
</TABLE>
Long-Term Debt--Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
AUGUST 26, MARCH 2,
1995 1996
---------- -----------
(UNAUDITED)
<S> <C> <C>
Bank term note, interest at 90-day LIBOR plus 2.5%
(8.38% and 8.16% at August 26, 1995 and March 2, 1996,
respectively), interest payable quarterly through
August 1996, principal and interest payable quarterly
from November 1996 through September 1999............. $4,400,000 $5,400,000
Promissory note payable to MPO, interest at 8%,
principal and interest payable quarterly through March
1998.................................................. 3,886,943 3,241,923
Obligation payable to executive, interest imputed at
8%, principal and interest payable quarterly through
March 1998............................................ 1,318,753 1,099,840
Other.................................................. 75,000 75,000
---------- ----------
9,680,696 9,816,763
Less current maturities................................ 1,787,769 2,709,873
---------- ----------
Net long-term debt..................................... $7,892,927 $7,106,890
========== ==========
</TABLE>
All of the above long-term debt at August 26, 1995 was issued in connection
with the acquisition of TFI (see Note 11).
The bank note is secured by the same bank credit agreement and Winnebago
guarantee discussed in Note 4. All other long-term debt is also guaranteed by
Winnebago.
The long-term debt agreements require all of the Company's long-term debt to
be repaid within 30 days upon occurrence of certain defined events, including
a change in control (as defined) of the Company.
Future annual principal payments under long-term debt outstanding at August
26, 1995 are as follows:
<TABLE>
<S> <C>
Fiscal years ending August
1996......................................................... $1,787,769
1997......................................................... 3,325,270
1998......................................................... 3,077,913
1999......................................................... 1,489,744
----------
Total...................................................... $9,680,696
==========
</TABLE>
F-11
<PAGE>
CYCLE:SAT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. OPERATING LEASES
The Company has entered into various noncancelable operating leases. The
Company also leases certain facilities, capital equipment, and other items
from Winnebago. These operating leases expire at various dates through 1999.
Rent expense for operating leases was as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED
-------------------------------- -----------------------
AUGUST 28, AUGUST 27, AUGUST 26, FEBRUARY 25, MARCH 2,
1993 1994 1995 1995 1996
---------- ---------- ---------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Winnebago............. $ 740,071 $ 224,928 $ 111,681 $ 57,863 $ 51,274
Unrelated lessors..... 2,319,750 2,204,368 2,548,560 1,116,792 1,680,396
---------- ---------- ---------- ---------- ----------
Total lease expense... $3,059,821 $2,429,296 $2,660,241 $1,174,655 $1,731,670
========== ========== ========== ========== ==========
</TABLE>
Future annual minimum lease payments under operating leases existing at
August 26, 1995, including the Company's new satellite transponder lease that
is expected to become effective September 1996, are as follows:
<TABLE>
<S> <C>
Fiscal years ending August
1996....................................................... $2,811,862
1997....................................................... 2,885,974
1998....................................................... 2,780,556
1999....................................................... 2,615,920
2000....................................................... 2,589,456
</TABLE>
7. INCOME TAXES
The consolidated income (loss) of the Company is included in the
consolidated federal and Iowa state tax returns of Winnebago with the income
or loss of other eligible subsidiaries of Winnebago. Winnebago allocates
income tax expense or benefits to the Company on a separate-return basis. The
Company currently files state tax returns on a separate-company basis for all
other applicable states.
The provision (benefit) for income taxes differs from the amount computed by
applying the federal statutory tax rate of 35% because of the effect of the
following items:
<TABLE>
<CAPTION>
AUGUST 28, AUGUST 27, AUGUST 26,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
U.S. federal tax (benefit) at the statutory
rate......................................... $(811,298) $356,329 $(74,375)
State taxes, net of federal benefits.......... 3,037 15,047 17,805
Nondeductible expenses........................ 4,506 3,617 11,177
Change in valuation allowance................. 803,755 (374,993) 45,393
--------- -------- --------
Total..................................... $ -- $ -- $ --
========= ======== ========
</TABLE>
As of August 26, 1995, the Company had intercompany federal and state tax
loss carryforwards of approximately $31.9 million and $4.2 million,
respectively. These intercompany tax loss carryforwards are available only as
a result of the intercompany separate return allocation policy because
Winnebago has already realized these tax benefits in its prior year's
consolidated federal and Iowa returns. Under the policy, these intercompany
tax loss carryforwards are available as long as the Company remains within
Winnebago's consolidated tax return (which requires Winnebago to continue to
own at least 80% of the Company's common stock) and must be utilized by the
Company before they begin to expire in 2002. Assuming the Company's pending
public offering is successful, the Company will no longer be eligible to
participate in Winnebago's consolidated tax return filings and will be unable
to realize the benefits of the
F-12
<PAGE>
CYCLE:SAT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
net operating loss carryforwards to offset against future taxable income.
However, because the deferred tax assets related to these operating loss
carryforwards are fully reserved by a valuation allowance, their elimination
would be offset by a similar reduction in the valuation allowance, thereby
having no impact on the financial position or results of operations of the
Company.
The following is a summary of the significant components of the Company's
deferred tax assets as of August 27, 1994 and August 26, 1995:
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 26,
1994 1995
----------- -----------
<S> <C> <C>
Current:
Bad-debt reserves.................................. $ 25,561 $ 19,527
Miscellaneous reserves............................. 58,065 100,160
Less tax asset valuation allowance................. (83,626) (119,687)
----------- -----------
Net current deferred tax asset................... $ -- $ --
=========== ===========
Noncurrent:
Federal tax loss carryforwards from intercompany
tax allocation policy............................. $11,128,979 $11,178,382
State tax loss carryforwards....................... 292,912 331,494
Property basis differences......................... 176,674 79,545
Deferred compensation.............................. 27,144 45,620
Less tax asset valuation allowance................. (11,625,709) (11,635,041)
----------- -----------
Net noncurrent deferred tax asset................ $ -- $ --
=========== ===========
</TABLE>
8. RELATED PARTIES
The Company has recognized $77,726, $68,850 and $144,051 of revenues from
Winnebago in fiscal 1993, 1994 and 1995, respectively, and $98,930 and $71,655
in the six-month periods ended February 25, 1995 and March 2, 1996,
respectively.
The Company periodically receives or pays advances to Winnebago (see Note
12). Interest on advances receivable from or payable to Winnebago is
calculated at prime plus two percent. Net interest income on advances to
Winnebago was $34,666, $8,689 and $0, during fiscal 1993, 1994 and 1995,
respectively.
Winnebago charges the Company monthly for certain operating expenses paid by
Winnebago on behalf of the Company for 401(k) profit sharing plan
contributions, payroll (until mid-fiscal 1993), health insurance, property
insurance, and certain utilities as well as services provided directly by
Winnebago. The Company was charged $2,077,179, $1,168,469 and $884,419 by
Winnebago for these expenses during fiscal 1993, 1994 and 1995, respectively,
and $422,800 and $480,282 during the six-month periods ended February 25, 1995
and March 2, 1996, respectively. Accounts payable to Winnebago relating to
these expenses were $165,144, $64,047, and $85,343 at August 27, 1994, August
26, 1995, and March 2, 1996, respectively, and are included within accounts
payable in the balance sheet.
During the six-month period ending March 2, 1996, the Company sold certain
equipment to a former employee for $225,000, recognizing a gain on the sale of
approximately $97,000. The buyer obtained financing through a bank, the
repayment of which is guaranteed by Winnebago.
F-13
<PAGE>
CYCLE:SAT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. EMPLOYEE RETIREMENT PLANS
The employees of the Company are eligible to participate in a qualified
profit sharing and contributory 401(k) plan and a stock bonus retirement plan
for eligible employees sponsored by Winnebago. The plans provide for
contributions to be determined by Winnebago's Board of Directors. Winnebago
charges the Company for the Company's share of the matching contribution to
the profit sharing and contributory 401(k) plan and the stock bonus plan.
Total amounts expensed for contributions to these Winnebago plans were
$82,836, $78,706 and $132,686, for fiscal 1993, 1994 and 1995, respectively,
and $64,691 and $16,526 for the six-month periods ended February 25, 1995 and
March 2, 1996, respectively.
Winnebago also sponsors a nonqualified deferred compensation program which
permits key employees of the Company to defer a portion of their compensation
until their retirement. The retirement benefit to be provided is fixed based
upon the amount of compensation deferred and the age of the individual at the
time of the contracted deferral. Individuals generally vest at the age of 55,
if they have a minimum of five years of service since their first deferral was
made. Deferred compensation expense was $41,145, $31,616 and $52,790, during
fiscal 1993, 1994 and 1995, respectively, and $26,395 and $20,495 during the
six-month periods ended February 25, 1995 and March 2, 1996, respectively.
10. COMMITMENTS AND CONTINGENCIES
The Company is a defendent in a lawsuit filed by a former employee related
to certain software written by the employee for the Company. The suit seeks
damages in an unspecified amount. The Company intends to vigorously defend
against such claims.
The Company is also party to various other legal proceedings incidental to
its business operations, none of which is expected to have a material adverse
effect on the financial condition or operations of the Company.
In connection with the conversion to a digital satellite network, the
Company has committed approximately $2.5 million during fiscal 1996 and fiscal
1997 to the purchase of digital encoding and decoding equipment.
11. BUSINESS ACQUISITION
On March 31, 1995, the Company acquired certain assets of TFI from MPO,
principally a tape distributor of television and radio commercials. The
Company accounted for this transaction using the purchase method of
accounting. Accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on estimated fair value. The statement
of operations for the year ended August 26, 1995 includes the operations of
TFI for the period from April 1, 1995 through August 26, 1995.
The total cost of the acquisition was approximately $10.7 million. Of this
amount, $10.1 million was the price paid to the sellers and was comprised of
$4.4 million in cash (financed by the Company with a long-term bank loan) and
$5.7 million financed with a promissory note and two long-term obligations
(see Note 5). The remaining $600,000 related to transaction costs incurred and
liabilities assumed for employee benefits.
Tangible assets acquired consisted of property and equipment valued at
$150,000. Intangible assets acquired consisted of five-year noncompete
agreements valued at $2.6 million ($2.5 million for the former president of
TFI who is a senior vice president of the Company and $.1 million for MPO) and
$8.0 million of goodwill, which are being amortized over five years and ten
years, respectively.
F-14
<PAGE>
CYCLE:SAT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
Unaudited pro forma results of operations of the Company for the years ended
August 27, 1994 and August 26, 1995 and the six months ended February 25,
1995, as if the acquisition had been completed at the beginning of the
respective periods, are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
----------------------- ------------
AUGUST 27, AUGUST 26, FEBRUARY 25,
1994 1995 1995
----------- ----------- ------------
<S> <C> <C> <C>
Sales..................................... $30,760,172 $32,076,315 $16,051,474
Net income (loss)......................... 1,170,477 (433,909) 112,321
Income (loss) per share................... $ 0.17 $ (0.06) $ 0.02
</TABLE>
The unaudited pro forma results of operations are not necessarily indicative
of the results of operations that would have occurred had the businesses
actually been combined during the periods presented. Nor is this information
indicative of expected future results of operations.
12. SUBSEQUENT EVENTS
On March 6, 1996, the Company's Board of Directors adopted the 1996 Equity
Compensation Plan as an incentive for officers and other key employees, and
reserved one million shares of common stock for future issuance under the
Plan. Pursuant to the Plan, on April 10, 1996, the Board approved to grant
options to purchase 390,000 shares of common stock at a price equal to the
offering price of the common shares offered in connection with the Company's
initial public offering. The granting of these options had no impact on the
Company's historical earnings per share.
On March 20, 1996 the Board of Directors authorized 5,000,000 shares of
preferred stock.
On March 21, 1996, the Company entered into an unsecured $2 million
revolving credit agreement with Winnebago which expires September 20, 1996.
The agreement requires interest at prime plus two percent on any borrowings.
On March 20, 1996, the Board of Directors approved a two for one stock split
in the form of a stock dividend which was effective on the same date. All
references within the financial statements to number of shares, per share
amounts and the statements of stockholders' equity have been restated to
reflect the split.
On March 20, 1996, the Board of Directors also approved a change in the par
value of the Company's common stock, after the stock split, to $0.01 per share
effective as of the filing date of the Company's amended Articles of
Incorporation. All references to par value and all amounts related to par
value have been restated to reflect this change.
F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Cycle:Sat, Inc.
We have audited the accompanying divisional statements of operations and
cash flows of Tape Film Industries ("TFI"), formerly a division of MPO
Videotronics, Inc. ("MPO"), for the years ended December 31, 1992, 1993 and
1994. These divisional financial statements are the responsibility of the
management of MPO and TFI. Our responsibility is to express an opinion on
these divisional financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the divisional financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the divisional
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall divisional financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
The accompanying divisional statements of operations and cash flows were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in the Registration
Statement on Form S-1 of Cycle:Sat, Inc.) as described in Note 1 to the
divisional financial statements and are not intended to be a complete
presentation of TFI's financial position.
In our opinion, such divisional financial statements present fairly, in all
material respects, the results of operations and cash flows of TFI for the
fiscal years ended December 31, 1992, 1993, and 1994, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
March 13, 1996
F-16
<PAGE>
TAPE FILM INDUSTRIES
(FORMERLY A DIVISION OF MPO VIDEOTRONICS, INC.)
DIVISIONAL STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
<TABLE>
<CAPTION>
1992 1993 1994
---------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Sales...................................... $9,913,635 $9,879,606 $10,008,579
Other income, net.......................... 63,574 51,635 44,413
---------- ---------- -----------
9,977,209 9,931,241 10,052,992
Costs and expenses:
Cost of sales.............................. 5,900,663 5,509,378 5,663,910
Selling, administrative, and general
expenses.................................. 2,787,391 2,792,605 2,837,166
---------- ---------- -----------
8,688,054 8,301,983 8,501,076
---------- ---------- -----------
Net income................................... $1,289,155 $1,629,258 $ 1,551,916
========== ========== ===========
Pro forma provision for income taxes (Note
1).......................................... $ 549,600 $ 684,100 $ 650,400
========== ========== ===========
Pro forma net income (Note 1)................ $ 739,555 $ 945,158 $ 901,516
========== ========== ===========
</TABLE>
See accompanying notes to divisional financial statements.
F-17
<PAGE>
TAPE FILM INDUSTRIES
(FORMERLY A DIVISION OF MPO VIDEOTRONICS, INC.)
DIVISIONAL STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
<TABLE>
<CAPTION>
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash provided by operating activities:
Net income............................ $ 1,289,155 $ 1,629,258 $ 1,551,916
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization....... 210,361 148,822 117,208
Loss on dispositions of property and
equipment.......................... 7,993
Changes in operating assets and
liabilities:
Accounts receivable............... 526,367 (364,023) 17,043
Inventories, prepaids, and other
assets........................... (28,733) 16,538 27,738
Accounts payable.................. 31,221 (186,332) 414,931
Accrued liabilities............... (221,720) 163,102 232,745
----------- ----------- -----------
Net cash provided by operating
activities..................... 1,806,651 1,407,365 2,369,574
Cash used by investing activities--
Purchases of property and equipment... (95,938) (4,370) (8,422)
Cash used by financing activities--
Distributions to MPO.................. (1,710,713) (1,402,995) (2,361,152)
----------- ----------- -----------
Net change in cash...................... -- -- --
----------- ----------- -----------
Cash at beginning and end of year....... $ 5,000 $ 5,000 $ 5,000
=========== =========== ===========
</TABLE>
See accompanying notes to divisional financial statements.
F-18
<PAGE>
TAPE FILM INDUSTRIES
(FORMERLY A DIVISION OF MPO VIDEOTRONICS, INC.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business--Tape Film Industries ("TFI") is primarily engaged in the
business of duplication and distribution of national spot advertising to
television stations throughout the United States. The Company also provides
services for storage of videotapes containing television ads and programs for
various customers.
During 1992, 1993 and 1994, TFI was an operating division of MPO
Videotronics, Inc. ("MPO"). In November 1994, MPO entered into an agreement to
sell TFI to Cycle:Sat, Inc. ("Cycle:Sat"), an 80% owned subsidiary of
Winnebago Industries, Inc. The sale was completed on March 31, 1995 (see Note
7).
Basis of Presentation--The accompanying statements of operations and cash
flows were prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission and do not include any
allocations of MPO's interest income/expense or income tax expense, but do
include allocated operating expenses (see Note 6).
Revenue Recognition--Revenues from duplication and distribution of video
tapes are recognized when the services are performed. Revenues for storage of
video tapes are recorded over the storage period.
Depreciation and Amortization of Property and Equipment--Depreciation of
property and equipment is provided over the estimated useful lives of
individual classes of assets on a straight-line basis.
The following annual rates of depreciation and amortization are in general
use:
<TABLE>
<S> <C>
Duplicating and other operating
equipment......................... 10%-20%
Office and delivery equipment...... 10%-20%
Leasehold improvements............. Shorter of useful life or lease term
</TABLE>
Expenditures for maintenance and repairs are charged to earnings, and
renewals/betterments are capitalized. The cost and accumulated depreciation of
assets retired or otherwise disposed of are eliminated from the asset and
related accumulated depreciation accounts, and any profit or loss resulting
therefrom is reflected in operations.
Income Taxes--MPO elected to be taxed as an S corporation for federal and
New York state income tax purposes. Under these regulations, TFI's income, as
part of MPO's income, was reported on the tax returns of the MPO stockholders.
Therefore, no provision for income tax has been shown in these divisional
financial statements. However, effective April 1, 1995, TFI became a division
of Cycle:Sat, which is taxed as a C corporation. A pro forma income tax
provision has been provided to illustrate what the estimated tax consequences
would have been had TFI been taxed as a C corporation on a separate return
basis.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the period presented. Actual results could differ from those
estimates.
2. SIGNIFICANT CUSTOMER
One customer comprised 44%, 36% and 40% of TFI's revenue for 1992, 1993 and
1994, respectively. No other customers comprised 10% or more of the Company's
revenues in any year.
F-19
<PAGE>
TAPE FILM INDUSTRIES
(FORMERLY A DIVISION OF MPO VIDEOTRONICS, INC.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(CONCLUDED)
3. COMPENSATION AGREEMENT
TFI had an employment agreement with the president of TFI. This agreement
could be terminated by TFI upon notice of less than one year. The agreement
provided for a fixed annual salary and profit participation in the earnings
(as defined), in excess of stipulated amounts. The agreement also provided for
severance pay in the event of early termination or death and for participation
in the net gain in the event of sale of TFI (see Note 7).
Compensation expense charged to operations in connection with this agreement
was $495,367, $609,500 and $589,875 for the years ended December 31, 1992,
1993 and 1994, respectively.
4. RETIREMENT PLAN
Eligible TFI employees were permitted to participate in MPO's salary
reduction 401 (k) plan. TFI contributed an amount equal to 100% of the amount
contributed by each participant up to a maximum of $2,500 per year. TFI
incurred $86,538, $76,922, and $71,221 of expense in connection with this plan
for the years ended December 31, 1992, 1993 and 1994, respectively.
5. LEASES
At December 31, 1994, TFI was obligated under noncancelable operating leases
on real property requiring future minimum annual rentals, exclusive of
property taxes, to be paid by TFI, as follows:
<TABLE>
<CAPTION>
ANNUAL
RENTALS
--------
<S> <C>
1995............................................................. $402,179
1996............................................................. 399,451
1997............................................................. 369,443
1998............................................................. 381,943
1999............................................................. 394,443
</TABLE>
Rent expense amounted to $539,694, $571,488, and $595,798 for the years
ended December 31, 1992, 1993 and 1994, respectively.
6. RELATED PARTIES
TFI was allocated a portion of MPO's general overhead expenses for
accounting services, computer systems support, and general and administrative
costs for the corporate offices. Such allocations amounted to $692,345,
$699,411, and $727,353 for the years ended December 31, 1992, 1993 and 1994,
respectively. TFI's management believed that these allocations were
reasonable; however, these allocations would not necessarily represent the
amounts that would have been incurred on a separate company basis.
TFI remitted all cash collected on trade receivables to MPO and drew all
cash needed for daily operations and fixed asset purchases from MPO's bank
account. Cash distributions to MPO in excess of amounts used for operations
and fixed asset purchases totaled $1,710,713, $1,402,995, and $2,361,152
during the years ended December 31, 1992, 1993 and 1994, respectively.
7. SUBSEQUENT EVENT
On March 31, 1995, certain assets and substantially all the operations of
TFI were sold to Cycle:Sat by MPO for a total of $7,600,000, including
$100,000 for an MPO five-year noncompete agreement. Of this amount, $3,325,000
was paid to MPO at closing, $4,200,000 was in the form of a three-year
promissory note bearing interest at 8%, and $75,000 was in the form of a
three-year, noninterest-bearing obligation. In connection with the sale,
Cycle:Sat also paid $2,533,000 to TFI's president (subsequently employed by
Cycle:Sat) for a covenant not to compete and an amount owed under the terms of
a compensation agreement (see Note 3).
F-20
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
The Company............................................................... 11
Use of Proceeds........................................................... 12
Dividend Policy........................................................... 12
Capitalization............................................................ 13
Dilution.................................................................. 14
Pro Forma Statement of Operations......................................... 15
Selected Financial and Operating Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
The Industry.............................................................. 27
Business.................................................................. 30
Management................................................................ 39
Certain Transactions...................................................... 42
Principal and Selling Shareholders........................................ 44
Description of Capital Stock.............................................. 45
Shares Eligible for Future Sale........................................... 46
Underwriting.............................................................. 48
Legal Matters............................................................. 49
Experts................................................................... 49
Additional Information.................................................... 50
Index to Financial Statements............................................. F-1
</TABLE>
------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT-
ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,750,000 Shares
LOGO
CYCLE:SAT, INC.
Common Stock
-------------
PROSPECTUS
-------------
Alex. Brown & Sons
INCORPORATED
Wheat First Butcher Singer
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a list of the estimated expenses to be paid by the
Registrant and the Selling Shareholders in connection with the issuance and
distribution of the securities being registered, other than underwriting
discounts and commissions:
<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 19,332
NASD Registration Fees......................................... 6,107
Nasdaq National Market Fees.................................... 42,464
Printing and Engraving Expenses................................ 150,000
Legal Fees and Expenses........................................ 175,000
Accounting Fees and Expenses................................... 175,000
Blue Sky Qualification Fees and Expenses....................... 5,000
Transfer Agent and Registrar's Fees............................ 15,000
Miscellaneous.................................................. 312,097
--------
Total...................................................... $900,000*
========
</TABLE>
- --------
*Of this total, $720,000 will be paid by the Company and $180,000 will be paid
by the Selling Shareholders.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Iowa Business Corporation Act confers broad powers upon corporations
incorporated in Iowa with respect to indemnification of any person against
liabilities incurred by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation or other business entity. These provisions are not
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement or otherwise.
The Restated Articles of Incorporation of the Company contain a provision
that eliminates the personal liability of the Company's directors to the
Company or its shareholders for monetary damages for breach of fiduciary duty
as a director, except (i) for liability for any breach of the director's duty
of loyalty to the Corporation or its shareholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or knowing violation
of the law, (iii) for any transaction from which the director derived an
improper personal benefit, or (iv) for unlawful distributions in violation of
Section 490.833 of the Iowa Business Corporation Act. Any repeal or amendment
of this provision by the shareholders of the Corporation will not adversely
affect any right or protection of a director existing at the time of such
repeal or amendment.
The Company's Restated Articles of Incorporation also contain a provision
entitling officers and directors to be indemnified and held harmless by the
Company against expenses, liabilities and costs (including attorneys' fees)
actually and reasonably incurred by such person, to the fullest extent
permitted by the Iowa Business Corporation Act.
The Underwriting Agreement, filed as Exhibit 1.1 to this Registration
Statement, provides for indemnification by the Underwriters of the
Registrant's directors, its officers who sign the Registration Statement and
its controlling persons and by the Registrant of the Underwriters' directors
and their controlling persons against certain liabilities, including
liabilities under the Securities Act of 1933, as amended, under certain
circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
There have been no sales of unregistered securities of the Company in the
last three years.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
1.1 Form of Underwriting Agreement
*3.1 Restated Articles of Incorporation of Cycle:Sat, Inc.
*3.2 Bylaws of Cycle:Sat, Inc.
*4.1(a) Credit Agreement by and among Cycle:Sat, Inc., Winnebago
Industries, Inc. and Firstar Bank Cedar Rapids, N.A.,
dated February 24, 1994.
*4.1(b) First Amendment to Credit Agreement by and among
Cycle:Sat, Inc., Winnebago Industries, Inc. and Firstar
Bank Cedar Rapids, N.A., dated January 31, 1995.
*4.1(c) Second Amendment to Credit Agreement by and among
Cycle:Sat, Inc., Winnebago Industries, Inc. and Firstar
Bank Cedar Rapids, N.A., dated November 2, 1995.
*4.1(d) Third Amendment to Credit Agreement by and among
Cycle:Sat, Inc., Winnebago Industries, Inc. and Firstar
Bank Cedar Rapids, N.A., dated January 2, 1996.
*4.1(e) Guaranty Unlimited and Continuing by and between Firstar
Bank Iowa N.A. and Winnebago Industries, Inc., dated Janu-
ary 2, 1996.
*4.1(f) Fourth Amendment to Credit Agreement by and among
Cycle:Sat, Inc., Winnebago Industries, Inc. and Firstar
Bank Cedar Rapids, N.A., dated February 1, 1996.
*4.2 Specimen of Common Stock Certificate
*5.1 Opinion of Blackwell Sanders Matheny Weary & Lombardi L.C.
*10.1 Agreement for Sale of Digicipher(R) Transmission System
DST-091 by and between
Cycle:Sat, Inc. and Cable/Home Communication Corporation,
dated January 31, 1996.
*+10.2 GE-1 Satellite Ku--Band Transponder--Protected Transponder
Service Agreement by and between GE Americom Communica-
tions, Inc. and Cycle:Sat, Inc., dated March 3, 1995.
*+10.3 K-2 Satellite Preemptible Transponder Service Agreement
between GE Americom Communications, Inc. and Cycle:Sat,
Inc., dated July 27, 1992.
*10.4 Vyvx Master Television Service Agreement by and between
Vyvx, Inc. and Cycle:Sat, Inc., dated April 29, 1992.
*10.5 Lease Agreement by and between Winnebago Industries, Inc.
and Cycle:Sat, Inc., dated August 15, 1995.
*10.6 Satellite Playback Services Agreement by and between
Cycle:Sat, Inc. and WJBK-TV, dated December 1, 1993.
*10.7 Cycle:Sat, Inc. 1996 Equity Compensation Plan.
*10.8 Credit Agreement by and between Cycle:Sat, Inc. and Winne-
bago Industries, Inc., dated March 21, 1996.
*10.9(a) Asset Purchase Agreement by and Between Cycle:Sat, Inc.
and MPO Videotronics, Inc., dated November 16, 1994.
*10.9(b) Nondisclosure and Noncompetition Agreement by and between
Cycle:Sat, Inc. and MPO Videotronics, Inc., dated March
31, 1995.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
*10.9(c) Nondisclosure and Noncompetition Agreement by and between
Cycle:Sat, Inc. and Charles A. Ahto, dated April 1, 1995.
*10.9(d) Employment Agreement by and between Cycle:Sat, Inc. and
Charles A. Ahto, dated April 1, 1995.
*10.9(e) Continuing Guarantee Agreement by and between Winnebago
Industries, Inc. in favor of MPO Videotronics, Inc., dated
March 31, 1995.
*23.1 Consent of Blackwell Sanders Matheny Weary & Lombardi L.C.
(contained in Exhibit 5.1)
23.2 Consent of Deloitte & Touche LLP
*24.1 Powers of Attorney
27.1 Financial Data Schedule
</TABLE>
- --------
*Previously filed.
+Confidential treatment has been requested with respect to certain portions of
such Exhibits pursuant to Rule 406(b) of the Securities Act of 1933 and, in
accordance therewith, such portions of such Exhibits have been omitted and
filed separately with the Securities and Exchange Commission. Redacted
copies of such Exhibits have been filed herewith.
(b) The Financial Statement Schedules filed as part of this Registration
Statement are as follows:
<TABLE>
<CAPTION>
SCHEDULE
NUMBER DESCRIPTION
-------- -----------
<S> <C>
II Valuation and Qualifying Accounts
</TABLE>
All other schedules have been omitted because they are either not required,
not applicable or the information is otherwise set forth in the Financial
Statements or Notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
II-3
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT,
CYCLE:SAT, INC., HAS DULY CAUSED AMENDMENT NO. 2 TO THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED IN THE CITY OF FOREST CITY, STATE OF IOWA, ON THIS 29TH DAY OF MAY,
1996.
CYCLE:SAT, INC.
/s/ Loren A. Swenson
By: _________________________________
Loren A. Swenson
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AMENDMENT NO. 2
TO THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS
IN THE CAPACITIES INDICATED ON MAY 29, 1996.
/s/ Loren A. Swenson
-------------------------------------
Loren A. Swenson
President,
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Richard H. Leet, II
-------------------------------------
Richard H. Leet, II
Vice President, Chief Financial
Officer
and Chief Operating Officer
(Principal Financial and Accounting
Officer)
Charles A. Ahto*
Fred G. Dohrmann*
John K. Hanson*
Luise V. Hanson*
Bruce D. Hertzke*
Edward F. Barker*
Joseph M. Shuster*
A Majority of the Board of Directors*
/s/ Loren A. Swenson
-------------------------------------
Loren A. Swenson
Attorney-in-Fact
- --------------
*Loren A. Swenson, by signing his name hereto, does hereby sign this document
on behalf of each of the above-named persons pursuant to powers of attorney
duly executed by such persons.
II-5
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- --------------------- --------- ----------
ADDITIONS
---------------------
BALANCE AT CHARGED TO DEDUCTION BALANCE AT
BEGINNING COST AND BAD DEBT CHARGE- END
PERIOD AND DESCRIPTION OF PERIOD EXPENSES RECOVERIES OFFS OF PERIOD
---------------------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended August 28,
1993--
Allowance for doubtful
accounts receivable... $248,978 $66,143 $182,835
Year Ended August 27,
1994--
Allowance for doubtful
accounts receivable... 182,835 $(89,600) 20,204 73,031
Year Ended August 27,
1995--
Allowance for doubtful
accounts receivable... 73,031 16,705 20,271 54,215 55,792
Accumulated
amortization for
goodwill.............. 198,040 198,040
Accumulated
amortization for
noncompete agreements. 131,667 131,667
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
1.1 Form of Underwriting Agreement
*3.1 Restated Articles of Incorporation of Cycle:Sat, Inc.
*3.2 Bylaws of Cycle:Sat, Inc.
*4.1(a) Credit Agreement by and among Cycle:Sat, Inc., Winnebago
Industries, Inc. and Firstar Bank Cedar Rapids, N.A.,
dated February 24, 1994.
*4.1(b) First Amendment to Credit Agreement by and among
Cycle:Sat, Inc., Winnebago Industries, Inc. and Firstar
Bank Cedar Rapids, N.A., dated January 31, 1995.
*4.1(c) Second Amendment to Credit Agreement by and among
Cycle:Sat, Inc., Winnebago Industries, Inc. and Firstar
Bank Cedar Rapids, N.A., dated November 2, 1995.
*4.1(d) Third Amendment to Credit Agreement by and among
Cycle:Sat, Inc., Winnebago Industries, Inc. and Firstar
Bank Cedar Rapids, N.A., dated January 2, 1996.
*4.1(e) Guaranty Unlimited and Continuing by and between Firstar
Bank Iowa N.A. and Winnebago Industries, Inc., dated Janu-
ary 2, 1996.
*4.1(f) Fourth Amendment to Credit Agreement by and among
Cycle:Sat, Inc., Winnebago Industries, Inc. and Firstar
Bank Cedar Rapids, N.A., dated February 1, 1996.
*4.2 Specimen of Common Stock Certificate
*5.1 Opinion of Blackwell Sanders Matheny Weary & Lombardi L.C.
*10.1 Agreement for Sale of Digicipher(R) Transmission System
DST-091 by and between
Cycle:Sat, Inc. and Cable/Home Communication Corporation,
dated January 31, 1996.
*+10.2 GE-1 Satellite Ku--Band Transponder--Protected Transponder
Service Agreement by and between GE Americom Communica-
tions, Inc. and Cycle:Sat, Inc., dated March 3, 1995.
*+10.3 K-2 Satellite Preemptible Transponder Service Agreement
between GE Americom Communications, Inc. and Cycle:Sat,
Inc., dated July 27, 1992.
*10.4 Vyvx Master Television Service Agreement by and between
Vyvx, Inc. and Cycle:Sat, Inc., dated April 29, 1992.
*10.5 Lease Agreement by and between Winnebago Industries, Inc.
and Cycle:Sat, Inc., dated September 1, 1995.
*10.6 Satellite Playback Services Agreement by and between
Cycle:Sat, Inc. and WJBK-TV, dated December 1, 1995.
*10.7 Cycle:Sat, Inc. 1996 Equity Compensation Plan.
*10.8 Credit Agreement by and between Cycle:Sat, Inc. and Winne-
bago Industries, Inc., dated March 21, 1996.
*10.9(a) Asset Purchase Agreement by and Between Cycle:Sat, Inc.
and MPO Videotronics, Inc., dated November 16, 1994.
*10.9(b) Nondisclosure and Noncompetition Agreement by and between
Cycle:Sat, Inc. and MPO Videotronics, Inc., dated March
31, 1995.
*10.9(c) Nondisclosure and Noncompetition Agreement by and between
Cycle:Sat, Inc. and Charles A. Ahto, dated April 1, 1995.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
*10.9(d) Employment Agreement by and between Cycle:Sat, Inc. and
Charles A. Ahto, dated April 1, 1995.
*10.9(e) Continuing Guarantee Agreement by and between Winnebago
Industries, Inc. in favor of MPO Videotronics, Inc., dated
March 31, 1995.
*23.1 Consent of Blackwell Sanders Matheny Weary & Lombardi L.C.
(contained in Exhibit 5.1)
23.2 Consent of Deloitte & Touche LLP
*24.1 Powers of Attorney
27 Financial Data Schedule
</TABLE>
- --------
*Previously filed.
+Confidential treatment has been requested with respect to certain portions of
such Exhibits pursuant to Rule 406(b) of the Securities Act of 1933 and, in
accordance therewith, such portions of such Exhibits have been omitted and
filed separately with the Securities and Exchange Commission. Redacted
copies of such Exhibits have been filed herewith.
<PAGE>
3,750,000 Shares
Cycle-Sat, Inc.
Common Stock
($.01 Par Value)
UNDERWRITING AGREEMENT
----------------------
______________, 1996
Alex. Brown & Sons Incorporated
Wheat, First Securities, Inc.
As Representatives of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Gentlemen:
Cycle-Sat, Inc., an Iowa corporation (the "Company"), and the shareholders
of the Company named on Schedule II hereto (the "Selling Shareholders") propose
to sell to the several underwriters (the "Underwriters") named on Schedule I
hereto for whom you are acting as representatives (the "Representatives") an
aggregate of 3,750,000 shares (the "Firm Shares") of the Company's Common Stock,
par value $.01 per share (the "Common Stock"), of which 3,000,000 shares will be
sold by the Company and 750,000 shares will be sold by the Selling Shareholders.
The respective amounts of the Firm Shares to be so purchased by the several
Underwriters are set forth opposite their names in Schedule I hereto, and the
respective amounts to be sold by the Selling Shareholders are set forth opposite
their names in Schedule II hereto. The Company and the Selling Shareholders are
sometimes referred to herein collectively as the "Sellers." The Selling
Shareholders also propose to sell at the Underwriters' option an aggregate of up
to 562,500 additional shares of the Company's Common Stock (the "Option Shares")
as set forth below.
As the Representatives, you have advised the Company and the Selling
Shareholders (a) that you are authorized to enter into this Agreement on behalf
of the several Underwriters, and (b) that the several Underwriters are willing,
acting severally and not jointly, to purchase the numbers of Firm Shares set
forth opposite their respective names in Schedule I, plus their pro
<PAGE>
rata portion of the Option Shares if you elect to exercise the over-allotment
option in whole or in part for the accounts of the several Underwriters. The
Firm Shares and the Option Shares (to the extent the aforementioned option is
exercised) are herein collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SHAREHOLDERS.
(a) The Company represents and warrants to each of the Underwriters as
follows:
(i) A registration statement on Form S-1 (File No. 333-3364) with
respect to the Shares has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the Rules and Regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder and
has been filed with the Commission under the Act. Copies of such
registration statement, including any amendments thereto, the preliminary
prospectuses (meeting the requirements of the Rules and Regulations)
contained therein and the exhibits, financial statements and schedules, as
finally amended and revised, have heretofore been delivered by the Company
to you. Such registration statement, together with any registration
statement filed by the Company pursuant to Rule 462(b) of the Act, herein
referred to as the "Registration Statement," which shall be deemed to
include all information omitted therefrom in reliance upon Rule 430A and
contained in the Prospectus referred to below, has become effective under
the Act and no post-effective amendment to the Registration Statement has
been filed as of the date of this Agreement. "Prospectus" means (a) the
form of prospectus first filed by the Company with the Commission pursuant
to Rule 424(b) or (b) if no such filing is required, the last preliminary
prospectus included in the Registration Statement filed by the Company
prior to the time it becomes effective or filed pursuant to Rule 424(a)
under the Act that is delivered by the Company to the Underwriters for
delivery to purchasers of the Shares, together with the term sheet or
abbreviated term sheet filed with the Commission pursuant to Rule 424(b)(7)
under the Act. Each preliminary prospectus included in the Registration
Statement prior to the time it becomes effective is herein referred to as a
"Preliminary Prospectus." Any reference herein to the Prospectus, unless
the context otherwise requires, shall be deemed to refer to and include any
supplements or amendments thereto filed with
- 2 -
<PAGE>
the Commission after the date of filing of the Prospectus under Rules
424(b) or 430A, and prior to the termination of the offering of the Shares
by the Underwriters.
(ii) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Iowa, with
corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement. There are no
subsidiaries, direct or indirect, of the Company. The Company is duly
qualified to transact business in all jurisdictions in which the conduct of
its business requires such qualification, except where the failure to so
qualify would not have a material adverse effect on the business or
condition (financial or otherwise) of the Company.
(iii) This Agreement has been duly authorized, executed and delivered
by the Company and constitutes a valid and binding agreement of the Company
enforceable in accordance with its terms, except that with respect to the
indemnification provisions contained in Section 8 of this Agreement the
enforceability of such provisions may be limited by state or federal
securities laws and principles of public policy and except that the
enforceability of this Agreement may be limited by bankruptcy, insolvency
or similar laws affecting the enforcement of creditors' rights generally
and principles of equity.
(iv) The outstanding shares of Common Stock of the Company, including
all shares to be sold by the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable; the
portion of the Shares to be issued and sold by the Company have been duly
authorized and when issued and paid for as contemplated herein will be
validly issued, fully paid and non-assessable; and no preemptive rights of
shareholders exist with respect to any of the Shares or the issue and sale
thereof. Neither the filing of the Registration Statement nor the offering
or sale of the Shares as contemplated by this Agreement gives rise to any
rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock; except that the
Company may register shares of Common Stock which are subject to the
options issued under the Company's 1996 Equity Compensation Plan.
(v) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct. All of the Shares conform to the
description thereof contained in the Registration Statement. The form of
certificates for the Shares conforms to the corporate law of the
jurisdiction of the Company's incorporation.
- 3 -
<PAGE>
(vi) The Commission has not issued an order preventing or suspending
the use of any Preliminary Prospectus or Prospectus relating to the
proposed offering of the Shares nor to the knowledge of the Company
instituted proceedings for that purpose. The Registration Statement
contains, and any Preliminary Prospectus and the Prospectus and any
amendments or supplements thereto will contain, all statements which are
required to be stated therein by, and will conform to the requirements of,
the Act and the Rules and Regulations. The Registration Statement and any
amendment thereto do not contain, and will not contain, any untrue
statement of a material fact and do not omit, and will not omit, to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus and any amendments and
supplements thereto do not contain, and will not contain, any untrue
statement of material fact; and do not omit, and will not omit, to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or omitted
from the Registration Statement or the Prospectus, or any such amendment or
supplement, in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of any Underwriter through the
Representatives specifically for use in the preparation thereof.
(vii) The financial statements of the Company, together with related
notes and schedules as set forth in the Registration Statement, present
fairly the financial position and the results of operations and cash flows
of the Company, at the indicated dates and for the indicated periods. Such
financial statements and related schedules have been prepared in accordance
with generally accepted accounting principles, consistently applied
throughout the periods involved, and all adjustments necessary for a fair
presentation of results for such periods have been made. The summary
financial and statistical data included in the Registration Statement
present fairly the information shown therein and such data have been
compiled on a basis consistent with the financial statements presented
therein and the books and records of the Company.
(viii) Deloitte & Touche LLP, who have audited certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and
the Rules and Regulations.
- 4 -
<PAGE>
(ix) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company before any court
or administrative agency or otherwise which if determined adversely to the
Company would result in any material adverse change in the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company or prevent the
consummation of the transactions contemplated hereby, except as set forth
in the Registration Statement.
(x) The Company has good and marketable title to all of the properties
and assets reflected in the financial statements (or as described in the
Registration Statement) hereinabove described, subject to no lien,
mortgage, pledge, charge or encumbrance of any kind except those reflected
in such financial statements (or as described in the Registration
Statement) or which are not material in amount. The Company occupies its
leased properties under valid and binding leases conforming in all material
respects to the description thereof set forth in the Registration
Statement.
(xi) The Company has filed all Federal, State, local and foreign
income tax returns which have been required to be filed and have paid all
taxes indicated by said returns and all assessments received by it to the
extent that such taxes have become due. All tax liabilities have been
adequately provided for in the financial statements of the Company.
(xii) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there has
not been any material adverse change in or affecting the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise), or prospects of the Company, whether or not
occurring in the ordinary course of business, and there has not been any
material transaction entered into or any material transaction that is
probable of being entered into by the Company, other than transactions in
the ordinary course of business and changes and transactions described in
the Registration Statement, as it may be amended or supplemented. The
Company has no material contingent obligations which are not disclosed in
the Company's financial statements which are included in the Registration
Statement or which are not otherwise described in the Registration
Statement.
(xiii) The Company is not in violation of or in default under its
Articles of Incorporation (as amended to date) or Bylaws or under any
agreement, lease, contract, indenture or other instrument or obligation to
which it is a
- 5 -
<PAGE>
party or by which it, or any of its properties, is bound and which default
is of material significance in respect of the condition, financial or
otherwise, of the Company or the business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of the
Company. The execution and delivery of this Agreement and the consummation
of the transactions herein contemplated and the fulfillment of the terms
hereof will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed
of trust or other agreement or instrument to which the Company is a party,
or of the Articles of Incorporation (as amended to date) or Bylaws of the
Company or any order, rule or regulation applicable to the Company of any
court or of any regulatory body or administrative agency or other
governmental body having jurisdiction over the Company.
(xiv) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions
herein contemplated (except such additional steps as may be required by the
Commission, the National Association of Securities Dealers, Inc. (the
"NASD") or such additional steps as may be necessary to qualify the Shares
for public offering by the Underwriters under state securities or Blue Sky
laws) has been obtained or made and is in full force and effect.
(xv) The Company holds all material licenses, certificates, permits
and authorizations from governmental authorities, including without
limitation the Federal Communications Commission, which are necessary to
the conduct of its business.
(xvi) The Company owns or possesses the licenses or other rights to
use all service marks, service mark applications, trade names, copyrights,
manufacturing processes, formulae, trade secrets, patents, patent
applications, trademarks, trademark applications, and know-how or other
information (collectively, "Intellectual Property") described in the
Prospectus as owned or used by it or which are necessary to the conduct of
its business as described in the Prospectus, except as disclosed in the
Prospectus. To the knowledge of the Company after due inquiry (A) none of
the Intellectual Property rights owned or licensed by the Company are
unenforceable or invalid, and (B) there is no infringement of or conflict
with the rights or claims of others with respect to any of the Company's
products or Intellectual Property except as disclosed in the
- 6 -
<PAGE>
Prospectus. Except as a result of the license of its Intellectual Property
in the ordinary course of business, the Company is not aware of the
granting of any Intellectual Property rights to third parties or the filing
of patent applications by third parties or any other rights of third
parties to any of the Company's Intellectual Property except as disclosed
in the Prospectus. The Company is not aware of any ongoing infringement of
any of the Company's Intellectual Property rights by any third party except
as disclosed in the Prospectus.
(xvii) Neither the Company, nor to the Company's best knowledge, any
of its affiliates, has taken or may take, directly or indirectly, any
action designed to cause or result in, or which has constituted or which
might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the
sale or resale of the Shares.
(xviii) The Company is not, and after giving effect to the issuance of
the Shares hereunder will not be, an "investment company" within the
meaning of such term under the Investment Company Act of 1940, as amended,
and the rules and regulations of the Commission thereunder (the "1940
Act").
(xix) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(xx) The Company carries, or is covered by, insurance in such amounts
and covering such risks as is adequate for the conduct of its business and
the value of its properties and as is customary for companies engaged in
similar industries.
(xxi) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any
- 7 -
<PAGE>
"pension plan" (as defined in ERISA) for which the Company would have any
liability; the Company has not incurred and does not expect to incur
liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the
Internal Revenue Code of 1986, as amended, including the regulations and
published interpretations thereunder (the "Code"); and each "pension plan"
for which the Company would have any lability that is intended to be
qualified under Section 401(a) of the Code is so qualified in all material
respects and nothing has occurred, whether by action or by failure to act,
which would cause the loss of such qualification.
(xxii) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-
198, An Act Relating to Disclosure of doing Business with Cuba.
(xxiii) Except as disclosed in the Registration Statement and except
as would not individually or in the aggregate have a material adverse
effect on the business of the Company, (A) the Company is in compliance
with all applicable Environmental Laws, (B) the Company has all permits,
authorizations and approvals required under any applicable Environmental
Laws and is in compliance in all material respects with their requirements,
(C) there are no pending or, to the Company's knowledge, threatened
Environmental Claims against the Company, and (D) there are no
circumstances with respect to any property or operations of the Company
that could reasonably be anticipated to form the basis of an Environmental
Claim against the Company. "Environmental Law" means any United States (or
other applicable jurisdiction's federal, state, local or municipal statute
law, rule, regulation, ordinance, code, or policy, relating to the
environment, health, safety or any chemical, material or substance,
exposure to which is prohibited, limited or regulated by any governmental
authority. "Environmental Claims" means any and all administrative,
regulatory or judicial actions, suits, demands, demand letters, claims,
liens, notice of noncompliance or violation, investigations or proceedings
relating in any way to any Environmental Law.
(xxiv) Except as disclosed in the Prospectus, there are no material
legal, governmental, regulatory or administrative proceedings pending or
threatened to which the Company is or would be a party or to which any of
its property is or would be subject, and, to the knowledge of the Company,
no such proceedings are contemplated.
- 8 -
<PAGE>
(xxv) The Common Stock has been approved for designation upon
notification of issuance on the Nasdaq National Market, and the Company has
taken no action designed to, or likely to have the effect of, delisting the
Common Stock from the Nasdaq National Market, nor has the Company received
any notification that the Commission or the NASD is contemplating such
delisting.
(b) Each of the Selling Shareholders jointly and severally represents and
warrants as follows:
(i) Such Selling Shareholder now has and at the Closing Date and the
Option Closing Date, as the case may be (as such dates are hereinafter
defined), such Selling Shareholder will have good and valid title to the
Firm Shares and the Option Shares to be sold by such Selling Shareholder,
free and clear of any liens, encumbrances, equities and claims, and full
right, power and authority to effect the sale and delivery of such Firm
Shares and Option Shares; and upon the delivery of, against payment for,
such Firm Shares and Option Shares pursuant to this Agreement, the
Underwriters will acquire good and valid title thereto, free and clear of
any liens, encumbrances, equities and claims.
(ii) Such Selling Shareholder has full right, power and authority to
execute and deliver this Agreement and the Irrevocable Power of Attorney
and Custody Agreement, dated April 22, 1996 by and among John K. Hanson,
Luise V. Hanson, Loren A. Swenson, Richard H. Leet, II and the Company (the
"Custody Agreement"), and to perform its obligations under such Agreements,
and each of this Agreement and the Custody Agreement constitutes the valid
and binding agreement of such Selling Shareholder enforceable against such
Selling Shareholder in accordance with its terms, except that with respect
to the indemnification provisions of this Agreement and the Custody
Agreement, the enforceability of such provisions may be limited by state or
federal securities laws and principles of public policy and except that the
enforceability of such Agreements may be limited by bankruptcy, insolvency,
moratorium or similar laws affecting the enforcement of creditors' rights
generally and to general equitable principles. The execution and delivery
of this Agreement and the Custody Agreement and the consummation by such
Selling Shareholder of the transactions herein and therein contemplated and
the fulfillment by such Selling Shareholder of the terms hereof will not
require any consent, approval, authorization, or other order of any court,
regulatory body, administrative agency or other governmental body (except
as may be required under the Act, state securities laws or Blue Sky laws)
and will not result in a breach of any of the
- 9 -
<PAGE>
terms and provisions of, or constitute a default under, any indenture,
mortgage, deed of trust or other agreement or instrument to which such
Selling Shareholder is a party, or of any order, rule or regulation
applicable to such Selling Shareholder of any court or of any regulatory
body or administrative agency or other governmental body having
jurisdiction.
(iii) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to, or which has constituted,
or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of the Common Stock of the
Company and, other than as permitted by the Act, the Selling Shareholder
will not distribute any prospectus or other offering material in connection
with the offering of the Shares.
(iv) Without having undertaken to determine independently the accuracy
or completeness of either the representations and warranties of the Company
contained herein or the information contained in the Registration
Statement, (A) such Selling Shareholder has no reason to believe that the
representations and warranties of the Company contained in this Section 1
are not true and correct; (B) such Selling Shareholder is familiar with the
Registration Statement and has no knowledge of any material fact, condition
or information not disclosed in the Registration Statement which has
adversely affected or may adversely affect the business of the Company; and
(C) the sale of the Firm Shares and the Option Shares by such Selling
Shareholder pursuant hereto is not prompted by any material information
concerning the Company which is not set forth in the Registration
Statement. The information pertaining to such Selling Shareholder under the
caption "Principal and Selling Shareholders" in the Prospectus is complete
and accurate in all material respects.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
(a) On the basis of the representations, warranties and covenants herein
contained, and subject to the conditions herein set forth, the Sellers agree to
sell to the Underwriters and each Underwriter agrees, severally and not jointly,
to purchase, at a price of $_____ per share, the number of Firm Shares set forth
opposite the name of each Underwriter in Schedule I hereof, subject to
adjustments in accordance with Section 9 hereof. The number of Firm Shares to
be purchased by each Underwriter from each Seller shall be as nearly as
practicable in the same proportion to the total number of Firm Shares being sold
by each Seller as the number of Firm Shares being purchased by each Underwriter
bears to the total number of
- 10 -
<PAGE>
Firm Shares to be sold hereunder. The obligations of the Company and of each of
the Selling Shareholders shall be several and not joint.
(b) Certificates in negotiable form for the total number of Shares to be
sold hereunder by the Selling Shareholders have been placed in custody with the
Company as custodian (the "Custodian") pursuant to the Custody Agreement
executed by the Selling Shareholders for delivery of all Firm Shares and any
Option Shares to be sold hereunder by the Selling Shareholders. Each of the
Selling Shareholders specifically agrees that the Firm Shares and any Option
Shares represented by the certificates held in custody for such Selling
Shareholder under the Custody Agreement are subject to the interests of the
Underwriters hereunder, that the arrangements made by such Selling Shareholder
for such custody are to that extent irrevocable, and that the obligations of
such Selling Shareholder hereunder shall not be terminable by any act or deed of
such Selling Shareholder (or by any other person, firm or corporation including
the Company, the Custodian or the Underwriters) or by operation of law
(including the death of such Selling Shareholder) or by the occurrence of any
other event or events, except as set forth in the Custody Agreement. If any
such event should occur prior to the delivery to the Underwriters of the Firm
Shares or the Option Shares hereunder, certificates for the Firm Shares or the
Option Shares, as the case may be, shall be delivered by the Custodian in
accordance with the terms and conditions of this Agreement as if such event has
not occurred. The Custodian is authorized to receive and acknowledge receipt of
the proceeds of sale of the Shares held by it against delivery of such Shares.
(c) Payment for the Firm Shares to be sold hereunder is to be made in New
York Clearing House funds by certified or bank cashier's checks drawn to the
order of the Company for the shares to be sold by it and in accordance with the
instructions of the Custodian for the shares to be sold by the Selling
Shareholders, in each case against delivery of certificates therefor to the
Representatives for the several accounts of the Underwriters. Such payment and
delivery are to be made at the offices of Alex. Brown & Sons Incorporated, 135
East Baltimore Street, Baltimore, Maryland, at 10:00 a.m., Baltimore time, on
the third business day after the date of this Agreement or at such other time
and date not later than five business days thereafter as you and the Company
shall agree upon, such time and date being herein referred to as the "Closing
Date." (As used herein, "business day" means a day on which the New York Stock
Exchange is open for trading and on which banks in New York are open for
business and not permitted by law or executive order to be closed.) The
certificates for the Firm Shares will be delivered in such denominations and in
such registrations as the Representatives request in writing not later than the
second full business day prior to the Closing Date, and will be made
- 11 -
<PAGE>
available for inspection by the Representatives at least one business day prior
to the Closing Date.
(d) In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Selling
Shareholders listed on Schedule III hereto hereby grant an option to the several
Underwriters to purchase the Option Shares at the price per share as set forth
in the first paragraph of this Section 2. The maximum number of Option Shares
to be sold by each Selling Shareholder is set forth opposite his or her name on
Schedule III hereto. To the extent the Underwriters exercise the option granted
hereby, such Option Shares shall be purchased from each of the Selling
Shareholders in accordance with Schedule III hereto. The option granted hereby
may be exercised in whole or in part, but only once, by giving written notice
(i) at any time before the Closing Date or (ii) thereafter within 30 days after
the date of this Agreement, by you, as Representatives of the several
Underwriters, to the Company, the Attorney-in-Fact, and the Custodian setting
forth the number of Option Shares as to which the several Underwriters are
exercising the option, the names and denominations in which the Option Shares to
be registered and the time and date at which such certificates are to be
delivered. The time and date at which certificates for Option Shares are to be
delivered shall be determined by the Representatives but shall not be earlier
than three nor later than 10 full business days after the exercise of such
option, nor in any event prior to the Closing Date (such time and date being
herein referred to as the "Option Closing Date"). If the date of exercise of
the option is three or more days before the Closing Date, the notice of exercise
shall set the Closing Date as the Option Closing Date. The number of Option
Shares to be purchased by each Underwriter shall be in the same proportion to
the total number of Option Shares being purchased as the number of Firm Shares
being purchased by such Underwriter bears to the total number of Firm Shares,
adjusted by you in such manner as to avoid fractional shares. The option with
respect to the Option Shares granted hereunder may be exercised only to cover
over-allotments in the sale of the Firm Shares by the Underwriters. You, as
Representatives of the several Underwriters, may cancel such option at any time
prior to its expiration by giving written notice of such cancellation to the
Company and the Attorney-in-Fact. To the extent, if any, that the option is
exercised, payment for the Option Shares shall be made on the Option Closing
Date in New York Clearing House funds by certified or bank cashier's check drawn
in accordance with the instructions of the Custodian for the Option Shares to be
sold by the Selling Shareholders against delivery of certificates therefor at
the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street,
Baltimore, Maryland.
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(e) If on the Closing Date or Option Closing Date, as the case may be, any
Selling Shareholder fails to sell the Firm Shares or Option Shares which such
Selling Shareholder has agreed to sell on such date as set forth in Schedule II
and/or Schedule III hereto, the Company agrees that it will sell or arrange for
the sale of that number of shares of Common Stock to the Underwriters which
represents Firm Shares or the Option Shares which such Selling Shareholder has
failed to so sell, as set forth in Schedule II and/or Schedule III hereto, or
such lesser number as may be requested by the Representatives.
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it advisable to
do so. The Firm Shares are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. The Representatives may from
time to time thereafter change the public offering price and other selling
terms. To the extent, if at all, that any Option Shares are purchased pursuant
to Section 2 hereof, the Underwriters will offer them to the public on the
foregoing terms.
It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with a Master
Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. COVENANTS OF THE COMPANY AND THE SELLING SHAREHOLDERS.
(a) The Company covenants and agrees with the several Underwriters that:
(i) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule
430A of the Rules and Regulations is followed, to prepare and timely file
with the Commission under Rule 424(b) of the Rules and Regulations a
Prospectus or a term sheet or abbreviated term sheet in a form approved by
the Representatives containing information previously omitted at the time
of effectiveness of the Registration Statement in reliance on Rule 430A of
the Rules and Regulations and (B) not file any amendment to the
Registration Statement or supplement to the Prospectus of which the
Representatives shall not previously have been advised and furnished with a
copy or to which the Representatives shall have reasonably objected in
writing or which is not in compliance with the Rules and Regulations.
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(ii) The Company will advise the Representatives promptly (A) when the
Registration Statement or any post-effective amendment thereto shall have
become effective, (B) of receipt of any comments from the Commission, (C)
of any request of the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information, and (D) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of
the Prospectus or of the institution of any proceedings for that purpose.
The Company will use its best efforts to prevent the issuance of any such
stop order preventing or suspending the use of the Prospectus and to obtain
as soon as possible the lifting thereof, if issued.
(iii) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of
such jurisdictions as the Representatives may reasonably have designated in
writing and will make such applications, file such documents, and furnish
such information as may be reasonably required for that purpose, provided
the Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction where it
is not now so qualified or required to file such a consent. The Company
will, from time to time, prepare and file such statements, reports and
other documents as are or may be required to continue such qualifications
in effect for so long a period as the Representatives may reasonably
request for distribution of the Shares.
(iv) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period
when delivery of a Prospectus is required under the Act, as many copies of
the Prospectus in final form, or as thereafter amended or supplemented, as
the Representatives may reasonably request. The Company will deliver to the
Representatives at or before the Closing Date, three signed copies of the
Registration Statement and all amendments thereto including all exhibits
filed therewith, and will deliver to the Representatives such number of
copies of the Registration Statement (including such number of copies of
the exhibits filed therewith that may reasonably be requested), and of all
amendments thereto, as the Representatives may reasonably request.
(v) The Company will comply with the Act and the Rules and Regulations
so as to permit the completion of the distribution of the Shares as
contemplated in this Agreement
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and the Prospectus. If during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer, any event shall occur
as a result of which, in the judgment of the Company or in the reasonable
opinion of the Underwriters, it becomes necessary to amend or supplement
the Prospectus in order to make the statements therein, in the light of the
circumstances existing at the time the Prospectus is delivered to a
purchaser, not misleading, or, if it is necessary at any time to amend or
supplement the Prospectus to comply with the Act and the Rules and
Regulations, the Company promptly will prepare and file with the Commission
an appropriate amendment to the Registration Statement or supplement to the
Prospectus so that the Prospectus as so amended or supplemented will not,
in the light of the circumstances when it is so delivered, be misleading,
or so that the Prospectus will comply with the Act and the Rules and
Regulations.
(vi) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later
than 15 months after the effective date of the Registration Statement, an
earnings statement (which need not be audited) in reasonable detail,
covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement, which earnings statement
shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of
the Rules and Regulations and will advise you in writing when such
statement has been so made available.
(vii) The Company will, for a period of five years from the Closing
Date, deliver to the Representatives copies of annual reports and copies of
all other documents, reports and information furnished by the Company to
its shareholders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or
the Securities Exchange Act of 1934, as amended.
(viii) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other securities convertible into
or exchangeable or exercisable for shares of Common Stock or derivative of
Common Stock (or agreement for such) will be made for a period of 180 days
after the date of this Agreement, directly or indirectly, by the Company
otherwise than hereunder or with the prior written consent of Alex. Brown &
Sons Incorporated, except pursuant to the Company's 1996 Equity
Compensation Plan.
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<PAGE>
(ix) The Company will use its best efforts to list, subject to notice
of issuance, the Shares on the Nasdaq National Market.
(x) The Company has caused each executive officer, director and
shareholder of the Company to furnish to you, on or prior to the date of
this Agreement, a letter or letters, in form and substance satisfactory to
the Underwriters, pursuant to which each such person shall agree not to
offer, sell, sell short or otherwise dispose of any shares of Common Stock
of the Company or other capital stock of the Company, or any other
securities convertible, exchangeable or exercisable for Common Stock or any
derivative of Common Stock owned by such person or request the registration
for the offer or sale of any of the foregoing (or as to which such person
has the right to direct the disposition of) for a period 180 days after the
date of this Agreement, directly or indirectly, except with the prior
written consent of Alex. Brown & Sons Incorporated ("Lock-up Agreements").
(xi) The Company shall apply the net proceeds of its sale of the
Shares as set forth in the Prospectus and shall file such reports with the
Commission with respect to the sale of the Shares and the application of
the proceeds therefrom as may be required in accordance with Rule 463 under
the Act.
(xii) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as
would require the Company to register as an investment company under the
1940 Act.
(xiii) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for the
Common Stock.
(xiv) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price
of any securities of the Company.
(xv) The Company has not distributed and, prior to the later to occur
of (i) the Closing Date and (ii) completion of the distribution of the
Shares, will not distribute any offering material in connection with the
offering and sale of the Shares other than the Registration Statement, and
Preliminary Prospectus, the Prospectus or other materials, if any,
permitted by the Act.
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<PAGE>
(b) Each of the Selling Shareholders covenants and agrees with the several
Underwriters that:
(i) No offering, sale, short sale or other disposition of any shares
of Common Stock of the Company or other capital stock of the Company or
other securities convertible, exchangeable or exercisable for Common Stock
or derivative of Common Stock owned by such Selling Shareholder or request
for the registration for the offer or sale of any of the foregoing (or as
to which such Selling Shareholder has the right to direct the disposition
of) will be made for a period of 180 days after the date this Agreement,
directly or indirectly, by such Selling Shareholder otherwise than
hereunder or with the prior written consent of Alex. Brown & Sons
Incorporated. Notwithstanding the foregoing, each Selling Shareholder may
transfer any or all of such securities (i) by gift, will or intestacy or
(ii) by transfer to an affiliate (as such term is defined in Rule 405
promulgated under the Act) or affiliates of such Selling Shareholder,
provided, however, that in any such case it shall be a condition to the
transfer that the transferee execute an agreement stating that the
transferee is receiving and holding such securities subject to the
foregoing restrictions and that there shall be no further transfer of such
securities except in accordance therewith.
(ii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act
of 1983 with respect to the transactions herein contemplated, each of the
Selling Shareholders agrees to deliver to you prior to or at the Closing
Date a properly completed and executed United States Treasury Department
Form W-9 (or other applicable form or statement specified by Treasury
Department regulations in lieu thereof).
(iii) Such Selling Shareholder will not take, directly or indirectly,
any action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any securities of the Company.
5. COSTS AND EXPENSES.
The Company and the Selling Shareholders will pay all costs, expenses and
fees incident to the performance of the obligations of the Sellers under this
Agreement in proportion to the number of Firm Shares to be sold by the Company,
on the one hand, and the Selling Shareholders, on the other hand, including,
without limiting the generality of the foregoing, the following: accounting fees
of the Company; the fees and disbursements of
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counsel for the Company and the Selling Shareholders; the cost of printing and
delivering to, or as requested by, the Underwriters copies of the Registration
Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the Master
Agreement Among Underwriters, the Underwriters' Selling Memorandum, the
Underwriters' Invitation Letter, the Listing Application, the Blue Sky Survey
and any supplements or amendments thereto; the filing fees of the Commission;
the filing fees and expenses (including legal fees and disbursements) incident
to securing any required review by the NASD of the terms of the sale of the
Shares; the Listing Fee of the Nasdaq National Market; and the expenses,
including the fees and disbursements of counsel for the Underwriters, incurred
in connection with the qualification of the Shares under State securities or
Blue Sky laws. Any transfer taxes imposed on the sale of the Shares to the
several Underwriters will be paid by the Sellers pro rata. The Sellers shall
not, however, be required to pay for any of the Underwriters' expenses (other
than those related to qualification under NASD regulations and State securities
or Blue Sky laws) except that, if this Agreement shall not be consummated
because the conditions in Section 6 hereof are not satisfied, or because this
Agreement is terminated by the Representatives pursuant to Section 11 hereof, or
by reason of any failure, refusal or inability on the part of the Company or the
Selling Shareholders to perform any undertaking or satisfy any condition of this
Agreement or to comply with any of the terms hereof on their part to be
performed, unless such failure to satisfy said condition or to comply with said
terms be due to the default or omission of any Underwriter, then the Company
shall reimburse the several Underwriters for reasonable out-of-pocket expenses,
including fees and disbursements of counsel, reasonably incurred in connection
with investigating, marketing and proposing to market the Shares or in
contemplation of performing their obligations hereunder; but the Company and the
Selling Shareholders shall not in any event be liable to any of the several
Underwriters for damages on account of loss of anticipated profits from the sale
by them of the Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm Shares on
the Closing Date and the Option Shares, if any, on the Option Closing Date are
subject to the accuracy, as of the Closing Date or the Option Closing Date, as
the case may be, of the representations and warranties of the Company and the
Selling Shareholders contained herein, and to the performance by the Company and
the Selling Shareholders of their covenants and obligations hereunder and to the
following additional conditions:
(a) The Registration Statement and all post-effective amendments thereto
shall have become effective and any and all filings required by Rule 424 and/or
Rule 430A of the Rules and
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<PAGE>
Regulations shall have been made, and any request of the Commission for
additional information (to be included in the Registration Statement or
otherwise) shall have been disclosed to the Representatives and complied with to
their reasonable satisfaction. No stop order suspending the effectiveness of
the Registration Statement, as amended from time to time, shall have been issued
and no proceedings for that purpose shall have been taken or, to the knowledge
of the Company or the Selling Shareholders, shall be contemplated by the
Commission and no injunction, restraining order, or order of any nature by a
federal or state court of competent jurisdiction shall have been issued as of
the Closing Date which would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinions of Blackwell Sanders
Matheny Weary & Lombardi L.C., counsel for the Company and special counsel for
the Selling Shareholders, dated the Closing Date or the Option Closing Date, as
the case may be, addressed to the Underwriters (and stating that it may be
relied upon by counsel to the Underwriters to the extent specified in Section
6(c) below) to the effect that:
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Iowa, with
corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement; the Company is
duly qualified to transact business in Tennessee, New York, California,
Illinois, Michigan and Texas.
(ii) The Company has authorized and outstanding capital stock as set
forth under the caption "Capitalization" in the Prospectus; the authorized
shares of the Company's Common Stock have been duly authorized; the
outstanding shares of the Company's Common Stock, including the Shares to
be sold by the Selling Shareholders, have been duly authorized and validly
issued and are fully paid and non-assessable; all of the Shares conform in
all material respects to the description thereof contained in the
Prospectus; the certificates for the Shares, assuming they are in the form
filed with the Commission, are in due and proper form; the shares of Common
Stock, including the Option Shares, if any, to be sold by the Company
pursuant to this Agreement have been duly authorized and will be validly
issued, fully paid and non-assessable when issued and paid for as
contemplated by this Agreement; and no statutory preemptive rights of
shareholders exist under Iowa law and no preemptive rights of shareholders
exist under any other agreement or contract filed as an exhibit to the
Registration Statement.
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<PAGE>
(iii) The Registration Statement has become effective under the Act
and, to the best of the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending or
threatened under the Act.
(iv) The statements in the Prospectus under the captions "Business -
Intellectual Property and Proprietary Rights," "Management - 1996 Equity
Compensation Plan", "Certain Transactions", "Description of Capital Stock"
and "Shares Eligible for Future Sale" in the Prospectus and Items 14 and 15
of Part II of the Registration Statement, insofar as such statements
constitute a summary of documents referred to therein or matters of law,
fairly summarize in all material respects the information called for with
respect to such documents and matters.
(v) Each contract and document filed as an exhibit to the Registration
Statement and summarized in the Registration Statement or the Prospectus is
fairly summarized in all material respects.
(vi) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company except as set forth
in the Prospectus.
(vii) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
violate or result in a breach of any of the terms or provisions of, or
constitute a default under, the Articles of Incorporation or Bylaws of the
Company, or any agreement or instrument filed as an exhibit to the
Registration Statement.
(viii) This Agreement has been duly authorized, executed and delivered
by the Company.
(ix) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and
delivery of this Agreement and the consummation of the transactions herein
contemplated (other than as may be required by the NASD or as required by
State securities and Blue Sky laws as to which such counsel need express no
opinion) except such as have been obtained or made.
(x) The Company is not, and will not become, as a result of the
consummation of the transactions contemplated by this Agreement, and
application of the net proceeds therefrom as described in the Prospectus,
required to register as an investment company under the 1940 Act.
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(xi) This Agreement has been duly authorized, executed and delivered
on behalf of each of the Selling Shareholders.
(xii) Each Selling Shareholder has any approval required by law
(other than as required by State securities and Blue Sky laws as to which
such counsel need express no opinion), to sell, assign, transfer and
deliver the portion of the Shares to be sold by such Selling Shareholder.
(xiii) Immediately prior to the consummation of the transactions
described in the Underwriting Agreement, each Selling Shareholder was the
sole registered owner of the Shares being sold by each Selling Shareholder.
Upon purchase of the Shares pursuant to this Agreement and registration of
such Shares in your name in the stock records of the Company, you will,
assuming you have purchased such Shares for value in good faith and without
notice of any adverse claim, have acquired all the rights of each Selling
Shareholder and such Shares free of any adverse claim, any lien in favor of
the Company and any restrictions on transfer imposed by the Company.
In rendering such opinion, Blackwell Sanders Matheny Weary & Lombardi L.C.
may rely as to matters governed by the laws of states other than the Iowa
Business Corporation Act, the Delaware General Corporation Law or Federal laws
on local counsel in such jurisdictions, provided that in each case Blackwell
Sanders Matheny Weary & Lombardi L.C. shall state that they believe that they
and the Underwriters are justified in relying on such other counsel. In
addition to the matters set forth above, such opinion shall also include a
statement to the effect that nothing has come to the attention of such counsel
which leads them to believe that (i) the Registration Statement, or any
amendment thereto, as of the time it became effective under the Act (but after
giving effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) and as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Prospectus, or any supplement
thereto, on the date it was filed pursuant to the Rules and Regulations and as
of the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements, in the light of the circumstances
under which they are made, not misleading (except that such counsel need express
no view as to financial statements, schedules and other financial and
statistical information included therein), (iii) the Registration Statement, all
Preliminary Prospectuses, the Prospectus and each amendment
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<PAGE>
or supplement thereto fail to comply as to form in all material respects with
the requirements of the Act and the applicable Rules and Regulations thereunder
(except that such counsel need express no opinion as to the financial
statements, schedules and other financial and statistical information included
therein) and (iv) any contracts or documents required to be filed as exhibits to
the Registration Statement or described in the Registration Statement or the
Prospectus are not so filed or described as required. With respect to such
statement, Blackwell Sanders Matheny Weary & Lombardi L.C. may state that their
belief is based upon the procedures set forth therein, but is without
independent check and verification.
(c) The Representatives shall have received from Dow, Lohnes & Albertson,
counsel for the Underwriters, an opinion dated the Closing Date or the Option
Closing Date, as the case may be, substantially to the effect of certain of the
opinions set forth in subparagraphs (ii), (iv), (v) and (xi) of Paragraph (b) of
this Section 6. In rendering such opinion Dow, Lohnes & Albertson may rely as
to all matters governed other than by the Delaware General Corporation Law or
federal laws on the opinion of counsel referred to in Paragraph (b) of this
Section 6. In addition to the matters set forth above, such opinion shall also
include a statement to the effect that nothing has come to the attention of such
counsel which leads them to believe that (i) the Registration Statement, or any
amendment thereto, as of the time it became effective under the Act (but after
giving effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) and as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Prospectus, or any supplement
thereto, on the date it was filed pursuant to the Rules and Regulations and as
of the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements, in the light of the circumstances
under which they are made, not misleading (except that such counsel need express
no view as to financial statements, schedules and other financial and
statistical information included therein). With respect to such statement, Dow,
Lohnes & Albertson may state that their belief is based upon the procedures set
forth therein, but is without independent check and verification.
(d) The Representatives shall have received at or prior to the Closing Date
from Dow, Lohnes & Albertson a memorandum or summary, in form and substance
satisfactory to the Representatives, with respect to the qualification for
offering and sale by the Underwriters of the Shares under the State securities
or Blue Sky laws of such jurisdictions as the Representatives may reasonably
have designated to the Company.
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<PAGE>
(e) You shall have received, on each of the date hereof, the Closing Date
and the Option Closing Date, as the case may be, a letter dated the date hereof,
the Closing Date or the Option Closing Date, as the case may be, in form and
substance satisfactory to you, of Deloitte & Touche LLP confirming that they are
independent public accountants within the meaning of the Act and the applicable
published Rules and Regulations thereunder and stating that in their opinion the
financial statements and schedules examined by them and included in the
Registration Statement comply in form in all material respects with the
applicable accounting requirements of the Act and the related published Rules
and Regulations; and containing such other statements and information as is
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial and statistical
information contained in the Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of the
Chief Executive Officer and the Chief Financial Officer of the Company to the
effect that, as of the Closing Date or the Option Closing Date, as the case may
be, each of them severally represents on behalf of the Company as follows:
(i) The Registration Statement has become effective under the Act and
no stop order suspending the effectiveness of the Registration Statement
has been issued, and no proceedings for such purpose have been taken or
are, to his or her knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company contained in
Section 1 hereof are true and correct as if made at and as of the Closing
Date or the Option Closing Date, as the case may be, and the Company has
complied with all the conditions on its part to be performed or satisfied
as of such Closing Date or Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules 424 or
430A under the Act have been made;
(iv) He or she has carefully examined the Registration Statement and
the Prospectus and, in his or her opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration
Statement were true and correct, such Registration Statement and Prospectus
did not omit to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading, and since
the
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effective date of the Registration Statement, no event has occurred which
should have been set forth in a supplement to or an amendment of the
Prospectus which has not been so set forth in such supplement or amendment;
(v) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, there has not been any material
adverse change in or affecting the condition, financial or otherwise, of
the Company or the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of the
Company, whether or not arising in the ordinary course of business; and
(vi) He or she does not know of any litigation instituted or
threatened against the Company of a character required to be disclosed in
the Registration Statement which is not so disclosed; he or she does not
know of any contract required to be filed as an exhibit to the Registration
Statement which is not so filed.
(g) The Company and the Selling Shareholders shall have furnished to the
Representatives such further certificates and documents confirming the
representations and warranties, covenants and conditions contained herein and
related matters as the Representatives may reasonably have requested.
(h) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on the Nasdaq National Market.
(i) The Lockup Agreements described in Section 4(a)(x) shall be in full
force and effect.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects satisfactory to the Representatives and to Dow, Lohnes & Albertson,
counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company and the Selling Shareholders of such
termination in writing or by telegram at or prior to the Closing Date or the
Option Closing Date, as the case may be. In such event, the Selling
Shareholders, the Company and the Underwriters shall not be under any obligation
to each other (except to the extent provided in Sections 5 and 8 hereof).
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7. CONDITIONS OF THE OBLIGATIONS OF THE SELLERS.
The obligations of the Sellers to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. INDEMNIFICATION.
(a) The Company and the Selling Shareholders, jointly and severally, agree
to indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of the Act, against any losses,
claims, damages or liabilities to which such Underwriter or any such controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or alleged omission to state in the Registration Statement
or any amendment thereto a material fact required to be stated therein or
necessary to make the statements therein not misleading, and the omission or
alleged omission to state in any Preliminary Prospectus or the Prospectus or any
supplement thereto a material fact necessary in order to make the statements, in
the light of the circumstances under which they are made, not misleading; and
will reimburse each Underwriter and each such controlling person upon demand for
any legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating or defending any such loss,
claim, damage or liability, action or proceeding; provided, however, that the
Company and the Selling Shareholders will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement, or omission or alleged
omission made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or such amendment or supplement, in reliance upon and in conformity
with written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof; provided,
further, however, that the indemnity agreement provided in this Section 8(a)
with respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any losses, claims, damages,
liabilities or actions based upon any untrue statement or alleged untrue
statement of a material fact or omission or alleged omission to therein a
material fact purchased Shares, if a copy of the Prospectus in which such untrue
statement or
- 25 -
<PAGE>
alleged untrue statement or omission or alleged omission was corrected had not
been sent or given to such person within the time required by the Act and the
Regulations. In no event, however, shall the liability of any Selling
Shareholder for indemnification under this Section 8(a) exceed the lesser of (i)
the proceeds received by such Selling Shareholder from the Underwriters in the
offering or (ii) the proportion of such losses, claims, damages or liabilities
equal to the proportion of the total number of Shares sold hereunder which is
being sold by such Selling Shareholder. This indemnity agreement will be in
addition to any liability which the Company or the Selling Shareholders may
otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement, the Selling Shareholders, and each person, if
any, who controls the Company or the Selling Shareholders within the meaning of
the Act, against any losses, claims, damages or liabilities to which the Company
or any such director, officer, Selling Shareholder or controlling person may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) arise out
of or are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the
omission or alleged omission to state in the Registration Statement or any
amendment thereto a material fact required to be stated therein or necessary to
make the statements therein not misleading, and the omission or alleged omission
to state in any Preliminary Prospectus or the Prospectus or any supplement
thereto a material fact necessary in order to make the statements, in the light
of the circumstances under which they are made, not misleading; and will
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer, Selling Shareholder or controlling person in connection
with investigating or defending any such loss, claim, damage, liability, action
or proceeding; provided, however, that each Underwriter will be liable in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental investigation) shall
be instituted involving any person in respect of which indemnity may be sought
pursuant to this Section
- 26 -
<PAGE>
8, such person (the "indemnified party") shall promptly notify the person
against whom such indemnity may be sought (the "indemnifying party") in writing.
No indemnification provided for in Section 8(a) or (b) shall be available to any
party who shall fail to give notice as provided in this Section 8(c) if the
party to whom notice was not given was unaware of the proceeding to which such
notice would have related and was materially prejudiced by the failure to give
such notice, but the failure to give such notice shall not relieve the
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of the
provisions of Section 8(a) or (b). In case any such proceeding shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party and shall pay as incurred the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own counsel
at its own expense. Notwithstanding the foregoing, the indemnifying party shall
pay as incurred (or within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them or (iii) the
indemnifying party shall have failed to assume the defense and employ counsel
acceptable to the indemnified party within a reasonable period of time after
notice of commencement of the action. It is understood that the indemnifying
party shall not, in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant to
Section 8(a) and by the Company and the Selling Shareholders in the case of
parties indemnified pursuant to Sections 8(b). The indemnifying party shall not
be liable for any settlement of any proceeding effected without its written
consent but if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party from
and against any loss or liability by reason of such settlement or judgment. In
addition, the indemnifying party will not, without the prior written consent of
the indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or
- 27 -
<PAGE>
potential party to such claim, action or proceeding) unless such settlement,
compromise or consent includes an unconditional release of each indemnified
party from all liability arising out of such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is unavailable to
or insufficient to hold harmless an indemnified party under Section 8(a) or (b)
above in respect of any losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) referred to therein, then each indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company and the Selling Shareholders on
the one hand and the Underwriters on the other from the offering of the Shares.
If, however, the allocation provided by the immediately preceding sentence is
not permitted by applicable law, then each indemnifying party shall contribute
to such amount paid or payable by such indemnified party in such proportion as
is appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Shareholders on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Shareholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Shareholders bear to
the total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or the Selling Shareholders on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this Section 8(d)
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
8(d). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof)
- 28 -
<PAGE>
referred to above in this Section 8(d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Shares purchased by such Underwriter, and (ii) no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation, and (iii) each Selling Shareholder shall not
be required to contribute any amount in excess of the lesser of (A) that
proportion of the total of such losses, claims, damages or liabilities
indemnified or contributed against equal to the proportion of the total Shares
sold hereunder which is being sold by such Selling Shareholder, or (B) the
proceeds received by such Selling Shareholder from the Underwriters in the
offering. The Underwriters' obligations in this Section 8(d) to contribute are
several in proportion to their respective underwriting obligations and not
joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
- 29 -
<PAGE>
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case may be, any
Underwriter shall fail to purchase and pay for the portion of the Shares which
such Underwriter has agreed to purchase and pay for on such date (otherwise than
by reason of any default on the part of the Company or the Selling
Shareholders), you, as Representatives of the Underwriters, shall use your
reasonable efforts to procure within 36 hours thereafter one or more of the
other Underwriters, or any others, to purchase from the Company and the Selling
Shareholders such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such 36
hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company and the
Selling Shareholders or you as the Representatives of the Underwriters will have
the right, by written notice given within the next 36-hour period to the parties
to this Agreement, to terminate this Agreement without liability on the part of
the non-defaulting Underwriters or of the Company or of the Selling Shareholders
except to the extent provided in Section 8 hereof. In the event of a default by
any Underwriter or Underwriters, as set forth in this Section 9, the Closing
Date or Option Closing Date, as the case may be, may be postponed for such
period, not exceeding seven days, as you, as Representatives, may determine in
order that the required changes in the Registration Statement or in the
Prospectus or in any other documents or arrangements may be effected. The term
"Underwriter" includes any person substituted for a defaulting Underwriter. Any
action taken under this Section 9 shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
10. NOTICES.
All communications hereunder shall be in writing and, except as otherwise
provided herein, will be mailed, delivered,
- 30 -
<PAGE>
telecopied or telegraphed and confirmed as follows: if to the Underwriters, to
Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland
21202, Attention: Jeffrey S. Amling, with a copy to Alex. Brown & Sons
Incorporated, 135 East Baltimore, Maryland 21202, Attention: General Counsel
and to Edward J. O'Connell, Esq., Dow, Lohnes & Albertson, 1200 New Hampshire
Avenue, Washington, D.C. 20036; if to the Company or the Selling Shareholders,
to Cycle-Sat, Inc., 119 John K. Hanson Dr., Forest City, Iowa 50436-0309,
Attention: Chief Executive Officer with a copy to James M. Ash, Esq., Blackwell
Sanders Matheny Weary & Lombardi L.C., Two Pershing Square, 2300 Main Street,
Suite 1100, Kansas City, Missouri 64108.
11. TERMINATION.
This Agreement may be terminated by you by notice to the Company and the
Selling Shareholders as follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on
the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or any
development involving a prospective material change in or affecting the
condition, financial or otherwise, of the Company or the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company, whether or not arising in the ordinary
course of business, (ii) any outbreak or escalation of hostilities or
declaration of war or national emergency or other national or international
calamity or crisis or change in economic or political conditions if the effect
of such outbreak, escalation, declaration, emergency, calamity, crisis or change
on the financial markets of the United States would, in your reasonable
judgment, make it impracticable to market the Shares or to enforce contracts for
the sale of the Shares, or (iii) suspension of trading in securities generally
on the New York Stock Exchange, the American Stock Exchange or the Nasdaq
National Market or limitation on prices (other than limitations on hours or
numbers of days of trading) for securities on any such exchange, (iv) the
enactment, publication, decree or other promulgation of any statute, regulation,
rule or order of any court or other governmental authority which in your opinion
materially and adversely affects or may materially and adversely affect the
business or operations of the Company, (v) declaration of a banking moratorium
by United States or New York State authorities, (vi) the suspension of trading
of the Company's common stock by the Commission on the Nasdaq National Market or
- 31 -
<PAGE>
(vii) the taking of any action by any governmental body or agency in respect of
its monetary or fiscal affairs which in your reasonable opinion has a material
adverse effect on the securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and the Selling Shareholders and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person will
have any right or obligation hereunder. No purchaser of any of the Shares from
any Underwriter shall be deemed a successor or assign merely because of such
purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company, the Selling Shareholders and the Underwriters acknowledge and
agree that the only information furnished or to be furnished by any Underwriter
to the Company for inclusion in any Prospectus or the Registration Statement
consists of the information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), legends required
by Item 502(d) of Regulation S-K under the Act and the information under the
caption "Underwriting" in the Prospectus.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements contained in
this Agreement and the representations, warranties and covenants in this
Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Shares under
this Agreement.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Maryland.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding
- 32 -
<PAGE>
agreement among the Selling Shareholders, the Company and the several
Underwriters in accordance with its terms.
Any person executing and delivering this Agreement as Attorney-in-Fact for
the Selling Shareholders represents by so doing that he has been duly appointed
as Attorney-in-Fact by such Selling Shareholders pursuant to a validly existing
and binding Power of Attorney which authorizes such Attorney-in-Fact to take
such action.
Very truly yours,
CYCLE-SAT, INC.
By:
---------------------------------
President and Chief Executive
Officer
Selling Shareholders listed on Schedule II
By:
---------------------------------
Attorney-in-Fact
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written
ALEX. BROWN & SONS INCORPORATED
WHEAT, FIRST SECURITIES, INC.
As Representatives of the several
Underwriters listed on Schedule I
By: Alex. Brown & Sons Incorporated
By:________________________________
Authorized Officer
- 33 -
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriter to be Purchased
----------- ---------------------
<S> <C>
Alex. Brown & Sons Incorporated
Wheat, First Securities, Inc.
---------
Total 3,750,000
</TABLE>
<PAGE>
SCHEDULE II
SCHEDULE OF SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
Number of Firm Shares
Selling Shareholder to be Sold
------------------- ---------------------
<S> <C>
John K. Hanson 730,000
Luise V. Hanson 20,000
-------
Total 750,000
</TABLE>
<PAGE>
SCHEDULE III
SCHEDULE OF OPTION SHARES
<TABLE>
<CAPTION>
Maximum Number Percentage of
of Option Shares Total Number of
Name of Seller to be Sold* Option Shares
- -------------- ---------------- ---------------
<S> <C> <C>
John K. Hanson 430,932 77%
Luise V. Hanson 131,568 23%
------- ---
Total 562,500 100%
</TABLE>
*To the extent that the Underwriters exercise their option to purchase any
of the Option Shares, the first 430,932 of such Option Shares purchased by the
Underwriters shall be purchased from John K. Hanson, with any additional Option
Shares purchased by the Underwriters to be purchased from Luise V. Hanson.
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
Board of Directors and Stockholders
Cycle:Sat, Inc.
Forest City, Iowa
We consent to the use in this Registration Statement of Cycle:Sat, Inc. (the
Company) on Form S-1 of our report dated January 24, 1996 (April 10, 1996 as
to Note 12) related to the financial statements of Cycle:Sat, Inc. as of
August 27, 1994 and August 26, 1995 and for the three years ended August 28,
1993, August 27, 1994 and August 26, 1995; and of our report dated March 13,
1996 relating to the statements of operations and cash flows of Tape Film
Industries (formerly a division of MPO Videotronics, Inc.) for the three years
ended December 31, 1992, 1993 and 1994, appearing in the Prospectus, which is
a part of this Registration Statement, and to the references to us under the
headings "Selected Financial Data" and "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned
reports also included the financial statement schedule of Cycle:Sat, Inc.,
listed in Item 16(b). This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
May 28, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> AUG-26-1995 AUG-31-1996
<PERIOD-START> AUG-28-1994 AUG-27-1995
<PERIOD-END> AUG-26-1995 MAR-02-1996
<CASH> 372,535 228
<SECURITIES> 0 0
<RECEIVABLES> 6,114,498 6,391,441
<ALLOWANCES> (55,792) (204,589)
<INVENTORY> 81,216 78,861
<CURRENT-ASSETS> 6,700,729 6,557,946
<PP&E> 12,653,161 15,041,767
<DEPRECIATION> (8,828,894) (10,376,428)
<TOTAL-ASSETS> 20,771,603 20,886,103
<CURRENT-LIABILITIES> 10,001,493 10,612,076
<BONDS> 8,911,579 7,832,552
<COMMON> 69,856 69,856
0 0
0 0
<OTHER-SE> 1,658,331 2,220,780
<TOTAL-LIABILITY-AND-EQUITY> 20,771,603 20,886,103
<SALES> 0 0
<TOTAL-REVENUES> 24,627,890 15,750,406
<CGS> 0 0
<TOTAL-COSTS> 13,651,156 8,868,525
<OTHER-EXPENSES> 2,160,639 1,488,370
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 816,241 626,534
<INCOME-PRETAX> (212,501) 562,449
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (212,501) 562,449
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (212,501) 562,449
<EPS-PRIMARY> (0.03) 0.08
<EPS-DILUTED> (0.03) 0.08
</TABLE>
