<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: SEPTEMBER 30, 1996
COMMISSION FILE NO. 333-06121
CABLE-SAT SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
FLORIDA 65-0581474
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
2105 HAMILTON AVENUE, SUITE 140 SAN JOSE, CA 95125
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NO. (408) 879-6600
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK
REDEEMABLE STOCK PURCHASE WARRANTS
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or such shorter period that the Registrant was required to file such
reports); and, (2) has been subject to such filing requirements for the past 90
days.
Yes X No ___
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
State issuer's revenues for twelve months ended September 30, 1996: $0
The aggregate market value of the voting stock held by non-affiliates of
the Registrant based upon the average bid and asked prices of such stock, at
December 17, 1996 was $18,249,000.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. 4,972,000 shares of common
stock, as of December 17, 1996.
DOCUMENTS
INCORPORATED BY REFERENCE
Registration Statement on Form S-1, File Number 333-06121
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<PAGE> 2
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act
of 1934. All forward looking statements involve risks and uncertainties. Actual
results could differ materially from those discussed in the forward-looking
statements as a result of many factors including the Company's inability to
complete development of commercial versions of its products or failure of such
products to develop substantial sales volume, as well as the risk factors listed
in Registrant's Registration Statement on Form S-1, as well as factors discussed
in Management's Discussion and Analysis of Financial Condition and Results of
Operations.
PART I
ITEM 1. BUSINESS.
Cable-Sat Systems, Inc. (the "Company") is developing products to allow the
facsimile transmission of color images from computers equipped with the
Company's software programs.
Facsimile transmission, better known as "fax", has become a major means of
communication in today's business community. A fax machine can be found in
almost every organization and is a standard office tool.
Facsimile machines convert text or graphics into digital form that can be
electronically transmitted and received across telephone lines. When sending
images, fax machines operate as scanners, converting images into a series of
dots which are then digitally encoded. The digital signal is then converted to a
voiceband ("audio") signal for transmission over the telephone network. When
receiving images, the machines affix images to paper through a variety of means.
The image is converted to a series of dots (either by scanning, in the case of a
fax machine, or electronically, in the case of a computer). Many technologies
employed in facsimile imaging are similar to those used in computer printers and
photocopiers.
Individual personal computers can be utilized as fax machines by the
addition of special circuitry known as a modem with fax capabilities. This
allows the computer to send and receive faxes directly without utilizing a
free-standing fax machine. Using a computer as a fax machine requires that a
telephone line be available during fax transmission and receiving. A fax
received directly by a computer can be immediately viewed on screen or stored
for later viewing. If the computer is connected to printer, the fax transmission
can be printed.
The Company believes that the recent price reduction of color printers and
scanners and their commensurate sales increase will result in demand for color
fax capabilities so that the color images that are being utilized by computer
users can impact their facsimile transmissions.
A communications software program controls the exchange of information
between the computer and the remote computer or facsimile machine at the other
end of the phone line. Current communications software packages do not allow a
computer generated fax to be sent other than in black and white.
Such communications software operates in accordance with international
standards adopted by an international telecommunications standard-making
organization. Such standards assure that faxes can be sent and received all over
the world regardless of the fax machine manufacturer or publisher of the fax
software.
The Company believes that the demand for color fax capabilities will be
substantial for the following reasons:
1. The price of color printers is declining rapidly which the Company
believes will result in color printers being the standard printer used with
personal computers rather than a high priced luxury.
2. The price of color scanners is declining making them reasonably
available to users of personal computers.
3. The Windows 95 operating system has built-in color management
capabilities thereby making color easier to use in applications.
4. Newer computers are generally equipped with faster processors and
larger storage devices thereby making it more practical to work with
image-intensive applications.
2
<PAGE> 3
5. A boom in small office and work-at-home sector.
6. The surge in computer sales for home use.
The Company believes that the foregoing trends will result in a substantial
demand for color technology, including fax.
The Company's Color Fax Products
The Company's first product which is currently in internal testing is
called CHROMAFAX. It is a communications software program designed to allow
facsimile transmission of color images. It incorporates the new international
standard for color faxing established by the International Telecommunications
Union (ITU) and includes the Joint Photographic Experts Group (JPEG) standard
for image compression. It enables users to send and receive color faxes to and
from their personal computer.
To the Company's knowledge, CHROMAFAX will be the first commercially
available fax product that will be compliant with the international color fax
standard established in 1995 by the ITU. Compliance with the standard should
provide assurance that the product will be compatible with other
standards -- compliant fax applications and machines produced in the future,
regardless of manufacturer. This will give users a fax software package that
will work in both color and black and white.
A color page creates a very large raw data file when scanned into a color
fax program. File sizes of up to 10 Mb is not uncommon. To manage such files
within the computer's memory and to transmit them in a reasonable amount of
time, files of this size are usually compressed. The ITU color fax standard
specifies how a file is to be managed. This specification imposes certain
limitations on file management within the color fax product. The standard
requires the use of JPEG compression. This compression algorithm has a large
inherent structural overhead, and results in a file, depending upon the data
within the page, that would require 4 to 8 minutes to transmit using V.17 (14.4
kb/s) transmission protocols as specified within the ITU color fax standard.
Implementing this standard assures compatibility with all other standards-based
products that are issued in the future, whether by the Company or other vendors.
To make color faxing even more desirable, the Company's advanced version
which is in development will contain several transmission modes. In addition to
complying with the JPEG standard, CHROMAFAX will incorporate a proprietary
compression process. This compression process reduces the size of large color
files resulting in image file sizes that make transmission and storage more
efficient. When communicating with a remote CHROMAFAX system, the proprietary
compression process and fastest fax transmission protocols are automatically
utilized. The Company's compression process and the communications protocol are
more efficient and will result in faster transmission for a typical high
resolution (200 dpi), 24-bit, full-color page.
The CHROMAFAX version will use one of three modes, all transparent to the
user:
(1) ITU Color Standard. This enables operation with any fax color
machine or software that is compliant with the international standard;
(2) Company Proprietary. For fast color transmission that works with
only the Company fax software package; or
(3) Black and White. Compliant with the black and white faxes that
operate under the current international standards for black and white fax
operation.
CHROMAFAX includes a color scanner interface standard which allows a
variety of color scanners to be used for input. The software also supports
Windows-compatible color printers.
Research and Development
Since inception substantially all of the Company's activities related to
research and development, preparation for marketing, the recruitment of key
management and technical personnel, including outside consultants, and raising
capital to fund operations. Research and development activities were conducted
by the Company's employees and consultants. Research and development
expenditures were $200,734 in the period from inception (August 26, 1994) to
September 30, 1995 and $903,225 in the fiscal year ended September 30, 1996.
3
<PAGE> 4
Marketing and Distribution
The Company initially intends to market the CHROMAFAX to persons working at
home or in small office environments and computer hobbyists. The Company's
marketing strategy, as currently formulated, emphasizes the rapid introduction
of its CHROMAFAX software via all practical channels of distribution in order to
garner public awareness of the product and to encourage usage. The Company will
offer a version of the product to manufacturers of color printers, scanners,
computers, modems and other software applications to distribute with their
products. The Company will have a version of the product available for
downloading from the Internet and may market it directly by telephone sales.
In order to establish a large base of users, this initial marketing
strategy will entail distribution for little or no revenue to the Company. For
example, the Company will distribute a receive-only version of its program. In
many cases this version will be provided free of charge such as being
downloadable from the Internet. In other cases, it will be bundled with other
products such as color peripherals for limited cost, sometimes only the cost of
production and shipping. In addition, the Company will also package a limited
send module along with the receive-only version. It is anticipated that the send
module, however, will be usable only for a limited number of uses. If the user
desires to continue to use the product to send color faxes after the limited
usage has expired, a fee would be payable to the Company. The Company will
attempt to continually improve the product and introduce upgrades. Users would
be required to upgrade to obtain the latest version of the software.
The Company believes that this marketing strategy should result in reviews
in computer magazines, the business press and media highlighting new technology
and other media for computer users. The Company intends to undertake an
aggressive public relations campaign to obtain further publicity and public
awareness of the product.
Eventually the Company will attempt to expand its market for the product
into the retail environment through distribution to wholesalers and retailers.
The Company has not entered into any agreement with respect to the
inclusion of CHROMAFAX with any manufacturer's product or for wholesale or
retail distribution, and there can be no assurance that such distribution will
occur as projected or at all.
Manufacturing
The Company does not contemplate that it will directly manufacture any of
its color fax software products. It intends to contract with third parties to
copy and package the products. Although the Company has not entered into any
contracts with potential manufactures, it is aware of a significant number of
firms which have the capability of providing the services necessary to
manufacture the programs. It also may license to third parties the rights to
manufacture the products, either through direct licensing, OEM arrangements or
otherwise.
Patents; Proprietary Information
The Company has filed U.S. patent and/or copyright applications on certain
aspects of its technology and plans to file corresponding applications in key
industrial countries worldwide. In addition to general legal protection for its
technologies and products, the Company's strategy is designed to make it
difficult for competitors to assess the specifics of the Company's technology.
The Company also intends to gain additional protection for its technology and
products through the addition of improvement Patents and/or Copyrights.
To the extent the Company determines to keep certain aspects of its
technology as trade secrets rather than as patents, the Company intends to
protect these developments by programming techniques that make it more difficult
to reverse-engineer the Company's software.
4
<PAGE> 5
Competition
The markets that the Company intends to enter are characterized by intense
competition. Most successful software products are eventually subject to
competing products from other developers. The markets for the technology and
products being developed by the Company are characterized by rapid changes and
evolving industry standards often resulting in product obsolescence or short
product life cycles. As a result, certain companies may be developing
technologies or products of which the Company is unaware which may be
functionally similar, or superior, to some or all of those being developed by
the Company. Such companies may have substantially greater financial, technical,
personnel and other resources than the Company and have established reputations
for success in the development, licensing, sale and service of their products
and technology. Certain of these potential competitors dominate their industries
and have the financial resources necessary to enable them to withstand
substantial price competition or downturns in the market for fax products.
The ability of the Company to compete successfully will depend on its
ability to complete development and introduce to the marketplace in a timely and
cost-competitive manner the initial color fax products and technology, to
continually enhance and improve such products and technology, and to
successfully develop and market new products and technology. There can be no
assurance that the Company will be able to compete successfully, that its
competitors or future competitors will not develop technologies or products that
render the Company's products and technology obsolete or less marketable or that
the Company will be able to successfully enhance its proposed products or
technology or adapt them satisfactorily.
Employees
The Company currently has eight full-time employees, three of whom are in
management and administrative and four technical and one marketing. In addition,
certain management positions at the Company are held by individuals who are
employed by the Company using consulting contracts. These positions include the
Chairman of the Board and Chief Executive Officer, the Chief Financial Officer,
the Vice President of Marketing, and the Vice President of Research and
Development.
ITEM 2. PROPERTIES.
The Company has established its headquarters in San Jose, California.
Pursuant to the lease relating to such facility, the Company is obligated to
make monthly rental payments of $9,430. The lease is through September 1998. The
Company's facility is approximately 5,000 square feet.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED MATTERS.
The Company's Common Stock has been included for quotation on the OTC
Bulletin Board under the symbol CSSA since the Company's initial public offering
in September 1996. The following table sets forth the closing bid and closing
asked prices for the periods indicated as reported by National Quotation Bureau,
Inc. Such quotations represent prices between dealers, do not include retail
markup, markdown or commission, and do not represent actual transactions.
<TABLE>
<CAPTION>
BID ASKED
----- -----
<S> <C> <C>
September 27 - September 30, 1996............................ $6.00 $6.50
</TABLE>
At December 17, 1996 the Company had 855 holders of record and 4,972,000
shares of Common Stock outstanding.
5
<PAGE> 6
Dividend Policy
The Company has never paid cash dividends on its Common Stock. The Company
presently intends to retain all cash for use in the operation of the Company's
business and does not anticipate paying any dividends in the near future.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data for the period from inception (August
26, 1994) to September 30, 1995, the fiscal year ended September 30, 1996, and
the period from inception (August 26, 1994) to September 30, 1996 are qualified
by reference to, and should be read in conjunction with, the Company's Financial
Statements, the Notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained elsewhere herein. The
selected financial data have been derived from Company's audited financial
statements.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(AUGUST 26, 1994) YEAR ENDED (AUGUST 26, 1994)
TO SEPTEMBER 30, SEPTEMBER 30, TO SEPTEMBER 30,
1995 1996 1996
----------------- ------------- -----------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total operating costs and expenses................ $ 256,554 $ 2,204,249 $ 2,460,803
Loss from operations.............................. $ (256,554) $ (2,204,249) $(2,460,803)
Interest income................................... $ 1,789 $ 11,246 $ 13,035
Net loss.......................................... $ 254,765 $ 2,193,003 $ 2,447,768
Net loss applicable to common shareholders........ $ (254,765) $ (3,093,003) $(3,347,768)
Net loss per share applicable to common
shareholders.................................... $ (0.06) $ (0.76)
Shares used in computing net loss per share
applicable to common shareholders............... 4,101,833 4,044,708
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1995 1996
-------- ----------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets....................................................... $423,078 $5,705,106
Working capital...................................................... 380,142 4,941,100
Total assets......................................................... 488,394 5,959,105
Current liabilities.................................................. 42,936 764,006
Shareholders' equity................................................. 445,458 5,195,099
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the Financial Statements and notes thereto appearing elsewhere herein.
Overview
The Company was incorporated in the state of Florida on August 26, 1994,
but did not commence formal operations until April 1995. The Company's primary
activities since inception have been devoted to developing its initial color
facsimile products and related technologies, preparation for marketing, the
recruitment of key management and technical personnel, including outside
consultants, and raising capital to fund operations. The Company has been
unprofitable since inception and has not licensed or sold any of its products or
technologies. As a result, the financial statements are presented in accordance
with Statement of Financial Accounting Standards No. 7 (SFAS 7), "Accounting and
Reporting by Development Stage Enterprises".
For the period from inception (August 26, 1994) through September 30, 1996,
the Company incurred a cumulative net loss of approximately $2,448,000 and had
used $1,989,000 in cash for operating activities. The Company expects to
continue to incur losses through at least the fourth quarter of the year ended
6
<PAGE> 7
September 30, 1997, or until the Company is able to attain revenues from sales,
licensing or other arrangements sufficient to support its operations. Management
believes that current working capital of approximately $4,941,000 will be
sufficient to support the Company's planned activities through the end of fiscal
1997. The Company believes that to the extent existing resources and anticipated
revenues are insufficient to fund the Company's planned activities in fiscal
1997, additional debt or equity financing will be available from existing
investors and others. Based on the Company's current plans, it will be necessary
for the Company to raise additional debt or equity financing in the first
quarter of fiscal 1998.
Results of Operations
Period from inception (August 26, 1994) to September 30, 1995 compared with
the year ended September 30, 1996.
Research and Development
From inception through September 30, 1996, a substantial part of the
Company's activities related to research and development. The Company's research
and development expenses were approximately $201,000 and $903,000 for the period
from inception (August 26, 1994) to September 30, 1995 and the fiscal year ended
September 30, 1996, respectively. The increase in expenses in fiscal 1996 as
compared with the period from inception (August 26, 1994) to September 30, 1995,
is primarily related to costs associated with the addition of personnel,
increased use of consultants and temporary help, and increased supplies, all
incurred to support increased development and testing activities. The Company
expects research and development costs to continue to increase as the Company
continues to expand its research efforts.
Marketing
Marketing expenses were approximately $0 and $279,000 for the period from
inception (August 26, 1994) to September 30, 1995 and the fiscal year ended
September 30, 1996, respectively. Marketing expenses incurred during fiscal 1996
are primarily related to costs associated with staffing employees and
consultants to start the Company's marketing efforts and costs associated with
developing a marketing strategy and logo. Achieving significant market
acceptance and commercialization of the Company's initial color fax products
will require substantial marketing efforts and the expenditure of significant
funds to establish market awareness of the Company and the initial color fax
products. As such, the Company expects marketing expenses to increase
significantly in fiscal 1997.
General and Administrative
General and administrative expenses were approximately $56,000 and
$1,022,000 for the period from inception (August 26, 1994) to September 30, 1995
and the fiscal year ended September 30, 1996, respectively. The increase is due
primarily to increased administrative staffing to support growing operations and
increases in business development efforts. General and administrative expenses
are expected to continue to increase to support increased levels of operations
and to cover the costs of being a public company.
Taxes
The Company has had net losses since inception and has not provided for
federal or state taxes to date. For the period from inception (August 26, 1994)
to September 30, 1995 and the fiscal year ended September 30, 1996, the Company
had federal and state net operating loss carryforwards of approximately
$1,300,000 and $2,100,000, respectively. The net operating loss carryforwards
will expire beginning September 30, 2010, if not utilized. Utilization of the
net operating losses may be subject to a substantial annual limitation due to
the ownership change limitations provided by the Internal Revenue Code of 1986
and similar state provisions. The annual limitation may result in the expiration
of net operating loss carryforwards before utilization.
7
<PAGE> 8
Manufacturing, Distribution and Sales
As the Company's initial color fax products are completed and become
available to the market, the Company will begin to incur significant costs to
manufacture, distribute and sell its products. In addition, costs will be
incurred to provide technical support services to customers.
Liquidity and Capital Resources
Since inception, the Company has relied on sales of its equity securities
to fund its operations. Between May 1995 and May 1996 the Company received
approximately $1,952,000 in cash from sales of its equity securities. In
September 1996, the Company's initial public offering of common stock and
Redeemable Common Stock Purchase Warrants became effective. The Company received
net proceeds of approximately $5,387,614 from this initial public offering, less
$108,000 for advisory services to be provided over three years by the
Underwriter, Barron -- Chase Securities, Inc. The Company's outstanding
Redeemable Common Stock Purchase Warrants are exercisable at $6.00 per share and
could result in the receipt of up to an additional $6,900,000. However, there
can be no assurance that such warrants will be exercised and the Company cannot
redeem the warrants until September 25, 1997, without the prior consent of the
Underwriter. In addition, in connection with the Company's initial public
offering, the Company redeemed its preferred stock for a cash payment of
$450,000 and the issuance of 150,000 shares of common stock.
From inception (August 26, 1994) to September 30, 1996, the Company's cash
expenditures for operating activities were approximately $1,989,000. These cash
expenditures were approximately $327,000 from inception (August 26, 1994)
through September 30, 1995 and $1,662,000 for the fiscal year ended September
30, 1996 and differ from the Company's net loss in these periods principally due
to non-cash operating expenditures and an increase in accounts payable and
accrued liabilities. The Company expects its cash requirements to increase due
to expected increases in expenses related to further research and development of
its technologies and increased marketing, manufacturing, sales and distribution
and technical support expenses associated with the introduction of it's initial
color fax products to the market place. During this time, the Company plans to
hire additional employees and increase marketing and sales expenses to execute
its sales and marketing plans.
The Company believes that to the extent existing resources and anticipated
revenues are insufficient to fund the Company's planned activities in fiscal
1997, additional debt or equity financing will be available from existing
investors and others. Based on the Company's current plans, it will be necessary
for the Company to raise additional debt or equity financing in the first
quarter of fiscal 1998.
8
<PAGE> 9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CABLE-SAT SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION YEAR ENDED INCEPTION
(AUGUST 26, 1994) SEPTEMBER (AUGUST 26, 1994)
TO SEPTEMBER 30, 30, TO SEPTEMBER 30,
1995 1996 1996
----------------- ------------ -----------------
<S> <C> <C> <C>
OPERATING COSTS AND EXPENSES:
Research and development.................... $ 200,734 $ 903,225 $ 1,103,959
Marketing................................... -- 278,690 278,690
General and administrative.................. 55,820 1,022,334 1,078,154
----------- ----------- -----------
Total operating costs and expenses....... 256,554 2,204,249 2,460,803
----------- ----------- -----------
Loss from operations.......................... (256,554) (2,204,249) (2,460,803)
Interest income............................... 1,789 11,246 13,035
----------- ----------- -----------
Net loss............................ (254,765) (2,193,003) (2,447,768)
Less: Accretion on preferred stock............ -- (900,000) (900,000)
----------- ----------- -----------
Net loss applicable to common
shareholders............................. $(254,765) $ 3,093,003 $ 3,347,768
=========== =========== ===========
Net loss per share applicable to common
shareholders................................ $ (0.06) $ (0.76)
=========== ===========
Shares used in computing net loss per share
applicable to common shareholders........... 4,101,833 4,044,708
=========== ===========
</TABLE>
See accompanying notes.
9
<PAGE> 10
CABLE-SAT SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1995 1996
-------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash.............................................................. $314,078 $ 155,533
Notes receivable -- related parties............................... 109,000 --
Other receivable from underwriter in connection with the Company's
initial public offering........................................ -- 5,549,573
-------- -----------
Total current assets........................................... 423,078 5,705,106
Property and equipment
Office furniture.................................................. 19,329 17,785
Computer equipment................................................ 40,195 158,504
-------- -----------
59,524 176,289
Less accumulated depreciation..................................... 2,700 40,237
-------- -----------
Net property and equipment..................................... 56,824 136,052
Other assets........................................................ 8,492 117,947
-------- -----------
Total assets.............................................. $488,394 $ 5,959,105
======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.................................................. $ 42,936 $ 168,266
Accrued registration costs........................................ -- 55,052
Preferred stock redemption payable................................ -- 450,000
Other accrued liabilities......................................... -- 90,688
-------- -----------
Total current liabilities...................................... 42,936 764,006
Commitments
Redeemable preferred stock, par value $.001 per share:
no shares authorized in 1995 (150,000 shares in 1996) none issued
and outstanding................................................... -- --
Shareholders' equity
Common stock, par value $.001 per share: authorized 50,000,000
shares; Issued and outstanding 2,200,000 and 4,972,000 shares
at September 30, 1995 and 1996, respectively................... 2,200 4,972
Paid in capital................................................... 698,023 7,781,895
Deficit accumulated during the development stage.................. (254,765) (2,447,768)
Deferred compensation............................................. -- (144,000)
-------- -----------
Total shareholders' equity..................................... 445,458 5,195,099
-------- -----------
Total liabilities and shareholders' equity................ $488,394 $ 5,959,105
======== ==========
</TABLE>
See accompanying notes.
10
<PAGE> 11
CABLE-SAT SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK DURING THE TOTAL
------------------ PAID IN DEVELOPMENT DEFERRED SHAREHOLDERS'
SHARES AMOUNT CAPITAL STAGE COMPENSATION EQUITY
--------- ------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Sale of common stock for cash
May 1995 -- $0.001/share.......... 1,276,000 $1,276 $ (1,116) $ -- $ -- $ 160
May 1995 -- $0.65/share........... 374,000 374 199,689 -- -- 200,063
August 1995 -- $0.92/share........ 550,000 550 499,450 -- -- 500,000
Net loss from inception (August 26,
1994) to September 30, 1995....... -- -- -- (254,765) -- (254,765)
---------- ------ ---------- ----------- --------- ----------
Balance -- September 30, 1995....... 2,200,000 2,200 698,023 (254,765) -- 445,458
Sale of common stock for cash
January 1996 -- $1.00/share....... 120,000 120 119,880 -- -- 120,000
April 1996 -- $0.60/share......... 350,000 350 209,650 -- -- 210,000
May 1996 -- $2.50/share........... 372,000 372 900,658 -- -- 901,030
Common stock issued in exchange for
full recourse note
payable -- March
1996 -- $0.30/share............... 300,000 300 89,700 -- -- 90,000
Common stock exchanged for services
December 1995 -- $1.00/share...... 60,000 60 59,940 -- -- 60,000
April 1996 -- $0.60/share......... 50,000 50 29,950 -- -- 30,000
Exercise of common stock warrant in
exchange for cash and forgiveness
of loans -- March
1996 -- $0.30/share............... 320,000 320 95,680 -- -- 96,000
Accretion of preferred stock to
redemption value.................. -- -- (900,000) -- -- (900,000)
Common stock to be issued in October
1996 upon redemption of preferred
stock -- $6.00/share.............. 150,000 150 899,850 -- -- 900,000
Sale of common stock in initial
public offering for receivable
from underwriter for $6.00/share
in September 1996, net of issue
costs
of $1,056,146..................... 1,050,000 1,050 5,242,804 -- -- 5,243,854
Redeemable warrants issued in
initial public
offering -- $0.125/warrant........ -- -- 143,760 -- -- 143,760
Deferred compensation expense
related to stock options.......... -- -- 192,000 -- (192,000) --
Amortization of deferred
compensation...................... -- -- -- -- 48,000 48,000
Net loss for the year ended
September 30, 1996................ -- -- -- (2,193,003) -- (2,193,003)
---------- ------ ---------- ----------- --------- ----------
Balance -- September 30, 1996....... 4,972,000 $4,972 $7,781,895 $(2,447,768) $ (144,000) $ 5,195,099
========== ====== ========== =========== ========= ==========
</TABLE>
See accompanying notes.
11
<PAGE> 12
CABLE-SAT SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(AUGUST 26, 1994) YEAR ENDED (AUGUST 26, 1994)
TO SEPTEMBER 30, SEPTEMBER 30, TO SEPTEMBER 30,
1995 1996 1996
----------------- ------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss........................................ $(254,765) $ (2,193,003) $(2,447,768)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 2,815 40,352 43,167
Amortization of deferred compensation........ -- 48,000 48,000
Write-off of property and equipment.......... -- 29,126 29,126
Common stock exchanged for services.......... -- 90,000 90,000
Changes in operating assets and liabilities:
(Increase) decrease -- notes receivable...... (109,000) 109,000 --
(Increase) decrease -- other assets.......... (8,607) (1,455) (10,062)
Increase (decrease) -- payables and other
liabilities................................ 42,936 216,018 258,954
--------- ------------ -----------
Net cash used in operating activities... (326,621) (1,661,962) (1,988,583)
--------- ------------ -----------
Cash flows from investing activities
Purchase of property and equipment.............. (59,524) (148,707) (208,231)
--------- ------------ -----------
Net cash used in investing activities... (59,524) (148,707) (208,231)
--------- ------------ -----------
Cash flows from financing activities
Sale of common stock............................ 700,223 1,252,040 1,952,263
Initial public offering registration costs
paid......................................... -- (214,916) (214,916)
Loans from shareholder.......................... -- 75,000 75,000
Repayment of full recourse note payable......... -- 90,000 90,000
Sale of redeemable preferred stock.............. -- 450,000 450,000
--------- ------------ -----------
Net cash provided from financing
activities............................ 700,223 1,652,124 2,352,347
--------- ------------ -----------
Net increase (decrease) in cash......... 314,078 (158,545) 155,533
--------- ------------ -----------
Cash at beginning of period....................... -- 314,078 --
--------- ------------ -----------
at end of period............................. $ 314,078 $ 155,533 $ 155,533
========= ============ ===========
Supplemental schedule of noncash investing and
financing activities
Common stock to be issued in redemption of
preferred stock................................. $ -- $ 900,000 $ 900,000
Conversion of loans from related party to common
stock........................................... -- 75,000 75,000
Common stock and warrants issued in initial public
offering........................................ -- 5,387,614 5,387,614
Issuance of common stock in exchange for full
recourse note payable........................... -- 90,000 90,000
</TABLE>
See accompanying notes.
12
<PAGE> 13
CABLE-SAT SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. BUSINESS ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activities
Cable-Sat Systems, Inc. (the "Company") was incorporated in the state of
Florida on August 26, 1994, but did not commence formal operations until April
1995. It is engaged in the development of digital image coding and data
compression products which will enable the facsimile transmission of color
images from computers equipped with the Company's software programs.
Development Stage Company
The Company's primary activities since inception have been devoted to
developing its initial color facsimile products and related technologies,
preparation for marketing, the recruitment of key management and technical
personnel, including outside consultants, and raising capital to fund
operations. The Company has been unprofitable since inception and has not
licensed or sold any of its products or technologies. As a result, the financial
statements are presented in accordance with Statement of Financial Accounting
Standards No. 7 (SFAS 7), "Accounting and Reporting by Development Stage
Enterprises".
For the period from inception (August 26, 1994) through September 30, 1996,
the Company had a deficit accumulated during the development stage of
approximately $2,448,000 and had used $1,989,000 of cash for operating
activities. The Company expects to continue to incur losses through at least the
fourth quarter of the year ended September 30, 1997, or until the Company is
able to attain revenues from sales, licensing or other arrangements sufficient
to support its operations. Management believes that current working capital of
approximately $4,941,000 will be sufficient to support the Company's planned
activities through the end of fiscal 1997 and that to the extent existing
resources and anticipated revenues are insufficient to fund the Company's
planned activities in fiscal 1997, additional debt or equity financing will be
available from existing investors and others. Based on the Company's current
plans, it will be necessary for the Company to raise additional debt or equity
financing in the first quarter of fiscal 1998.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of short-term financial instruments that are
readily convertible into cash with original maturities of less than ninety days
from the date of acquisition. The carrying amount reported in the balance sheet
for cash and cash equivalents approximates fair value.
Other Assets
In connection with the Company's initial public offering that went
effective on September 25, 1996, the Company paid Barron-Chase Securities, Inc.
(the Underwriter) a $108,000 fee for certain financial advisory services to be
provided over the three years following the effective date of the offering. The
$108,000 is included in other assets and will be amortized on a straight-line
basis over the three year term of the agreement.
13
<PAGE> 14
CABLE-SAT SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment is recorded at cost. Depreciation and amortization
is provided on a straight-line basis over estimated useful lives or over the
life of the lease for equipment under capitalized leases, if shorter. Leasehold
improvements are amortized over the term of the lease or their estimated useful
life, whichever is shorter. The useful lives of property and equipment for
purposes of depreciation are:
<TABLE>
<S> <C>
Office Equipment.................................................... 5 years
Computers........................................................... 3 years
</TABLE>
Software development costs
The Company capitalizes software development costs upon achievement of
technological feasibility, subject to net realizable value consideration in
accordance with Statement of Financial Accounting Standards No. 86. The Company
has defined technological feasibility as completion of a working model. Such
capitalized costs are amortized upon product release on a straight-line basis
over the estimated useful life or the ratio of current revenue to the total of
current and anticipated future revenues, whichever results in the greater
amortization. No software development costs have been capitalized through
September 30, 1996.
Income Taxes
The Company accounts for income taxes in accordance with the provisions of
Financial Accounting Standards Board Statement No. 109 (SFAS 109), "Accounting
for Income Taxes". Under SFAS 109, the liability method is used for accounting
in income taxes.
Net Loss Per Share Attributable to Common Shareholders
Net loss applicable to common shareholders is computed using the weighted
average number of shares of common stock outstanding. Pursuant to the Securities
and Exchange Commission Staff Accounting Bulletins, common and common equivalent
shares issued at prices below the assumed public offering price during the
twelve months prior to the initial filing of the registration statement have
been included in the calculation as if they were outstanding for all periods
prior to the quarter in which the Company's initial public offering became
effective (using the treasury stock method and an initial public offering price
of $6.00 per common share). Redeemable preferred stock is not deemed to be a
common stock equivalent for purposes of calculating the net loss applicable to
common shareholders. Fully diluted net loss per share is not presented because
it is antidilutive.
Impact of Recently Issued Accounting Standards
In 1995, the Financial Accounting Standards Board released the Statement of
Financial Accounting Standard No. 121 (SFAS 121), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS 121
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. SFAS 121 is effective for fiscal years beginning
after December 15, 1995. Adoption of SFAS 121 is not expected to have a material
impact on the Company's financial position or results of operations.
The Company accounts for its stock option plans and its employee stock
purchase plan in accordance with provisions of the Accounting Principles Board's
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees". In October
1995, the Financial Accounting Standards Board released the Statement of
Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock Based
Compensation". SFAS 123 provides an alternative to APB 25 and is effective for
fiscal years beginning after December 15, 1995. The Company expects to continue
to account for its employee stock plans in accordance with the provisions of
14
<PAGE> 15
CABLE-SAT SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
APB 25. Accordingly, SFAS 123 is not expected to have any material impact on the
Company's financial position or results of operations.
Financial Presentation
Certain items in the period from inception (August 26, 1994) to September
1995, have been reclassified to conform to the fiscal 1996 presentation.
2. REDEEMABLE PREFERRED STOCK
The Company has authorized 150,000 shares of redeemable Series A Preferred
Stock. The Series A Preferred Stock is entitled to receive a cumulative cash
dividend of $0.21 per share on each anniversary from the date of issuance. No
dividends were payable at September 30, 1996.
In the event of the liquidation of the Company, holders of Series A
Preferred Stock have liquidation preference over holders of common stock of
$3.00 per share plus all accrued but unpaid dividends and one share of common
stock.
The Company is required to redeem all preferred shares outstanding out of
the net proceeds from any underwritten public offering or private placement of
the Company's common stock. The redemption price is $3.00 per share plus one
share of the Company's common stock per share of preferred stock. The Company's
initial public offering of common stock purchase warrants went effective
September 25, 1996, and the Company became irrevocably committed to redeem its
then outstanding preferred stock. The preferred stock was held by Call Now, Inc.
("Call Now"), a related party. The initial public offering closed on October 1,
1996, and the Company redeemed the preferred stock from Call Now. For purposes
of presentation in the accompanying financial statements, the cash redemption
amount of the preferred stock of $450,000 is classified as "Preferred stock
redemption payable" at September 30, 1996, and is included in current
liabilities. In addition, the 150,000 shares of common stock issuable upon
redemption of the preferred stock are included as outstanding common stock at
September 30, 1996, in the accompanying financial statements.
3. SHAREHOLDERS' EQUITY
Public Offering
During September 1996, the Company completed a public offering of 1,050,000
shares of common stock at $6.00 per share and 1,150,000 redeemable common stock
purchase warrants for $0.125 per warrant. The Company received net proceeds of
$5,387,614. In addition, as part of the initial public offering, the Company's
150,000 shares of Preferred Stock were redeemed at $3.00 per share plus one
share of the Company's common stock per share of preferred stock (see Note 2).
The initial public offering, a firm underwriting commitment, went effective
September 25, 1996. However, the proceeds from this offering were received by
the Company from the Underwriter on October 1, 1996, upon the closing.
Therefore, at September 30, 1996, proceeds from the sale of common stock and
redeemable common stock purchase warrants are classified as "Other receivable
from underwriter in connection with the Company's initial public offering", the
cash redemption amount of the Preferred Stock is classified as "Preferred stock
redemption payable" and the common stock issued to redeem the preferred stock is
included as outstanding common stock (see Note 2) in the accompanying financial
statements.
15
<PAGE> 16
CABLE-SAT SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Shares Issued in Exchange for Cash and Loan
In August 1995, in connection with the sale of 550,000 shares of common
stock to Call Now, the Company also sold a warrant to Call Now to purchase
320,000 shares of common stock at an exercise price of the then current fair
value of the common stock of $0.92 per share. In January 1996 and February 1996,
the Company received $75,000 in loans from Call Now. In March 1996, the Company
adjusted the warrant exercise price on the 320,000 shares from $0.92 per share
to the then current fair market value of $0.30 per share of Common Stock. The
option was then exercised by Call Now in exchange for forgiveness of the $75,000
in loans plus $21,000 in cash.
Shares Issued for Services
In December 1995, the Company issued 60,000 shares of common stock valued
at $60,000 in exchange for past services rendered to the Company. In addition,
in April 1996, the Company issued 50,000 shares of common stock valued at
$30,000 in exchange for past services rendered to the Company. The value
assigned to the shares was based on the Company's best estimate of fair market
value of the common stock at the time of issuance.
Common Stock Purchase Warrants
On September 25, 1996, in connection with the Company's initial public
offering, the Company issued 1,150,000 redeemable common stock purchase warrants
for $0.125 per share. The warrants are exercisable to purchase common stock
during the three year period from the effective date of the offering (September
25, 1996), at an exercise price of $6.00 per share. The Company may redeem the
warrants at a price of $0.25 per warrant by giving 30 days written notice to the
holders if the Company's common stock price equals or exceeds $12.00 per share
for 30 consecutive trading days. The warrants may not be redeemed in the first
year from the effective date without consent of the Underwriter.
Underwriter's Warrant and Underlying Warrant
At the closing of the initial public offering on October 1, 1996, for
nominal consideration, the Company issued to the Underwriter, 100,000 Common
Stock Underwriter Warrants ("Underwriter's Warrants") and 100,000 Warrant
Underwriter Warrants ("Underlying Warrants"). The Underwriter's Warrants are
exerciseable for a five year period and allow the holder to purchase one share
of common stock at a price of $9.00 per share. The exercise price of the
Underlying Warrants is $0.1875 per warrant. Each Underlying Warrant is
exercisable for a three year period to purchase one share of common stock at a
price of $9.00 per share. The Underwriter's Warrant and the Underlying Warrants
are subject to adjustment for certain events including mergers, stock dividends,
stock splits, and other events. The Underwriter's Warrants contains net issuance
provisions permitting the holders to elect to exercise the Underwriter's
Warrants in whole or in part and instruct the Company to withhold from the
securities issuable upon exercise, the number of securities, valued at the
current fair market value on the date of exercise, to pay the exercise price.
Stock Options
Employee and Consultant Stock Options
In February 1996, the Company's Board of Directors adopted an incentive
stock option plan. The plan allows for incentive stock options to be granted to
key employees. In addition, from time to time the Board of Directors may grant
options to consultants that are in addition to the options approved for key
employees under the incentive stock option plan. All options expire no more than
five years from the date of grant. The exercise price for all options shall not
be less than 100% of the fair market value of the stock subject to the
16
<PAGE> 17
CABLE-SAT SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
option on the date of grant as determined by the Board of Directors. All options
generally vest in increments over a period of three years from the date of
grant, with the first increment vesting after one year. Options may be granted
with different vesting terms from time to time The Board of Directors has
approved options to purchase up to 780,000 shares of common stock to be granted
to key employees under the incentive stock option plan and to consultants of the
Company.
At September 30, 1996, 180,000 options were exercisable by consultants to
the Company and no options were exercisable by employees under the incentive
stock option plan.
Stock option activity is summarized below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES -------------------------------------------
AVAILABLE NUMBER OF PRICE PER AGGREGATE
FOR GRANT SHARES SHARE PRICE
--------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Balance at September 30, 1995............. -- -- $ -- $ --
Shares Authorized....................... 780,000 -- -- --
Options Granted......................... (818,500) 818,500 $2.50 - $6.00 3,308,000
Options Cancelled....................... 250,000 (250,000) $ 6.00 (1,500,000)
-------- -------- ------------- -----------
Balance at September 30, 1996............. 211,500 568,500 $2.50 - $6.00 $ 1,808,000
======== ======== ============= ===========
</TABLE>
Other Stock Options
In February 1996, the Company's Board of Directors also approved the
issuance of stock options to purchase up to 150,000 shares of common stock at
$0.30 per share for key employees and consultants. These options are in addition
to the options that may be granted under the incentive stock option plan and to
consultants described above, and expire five years from the date of grant. As of
September 30, 1996, the Board of Directors had granted options to purchase
80,000 shares of common stock. Based on the difference between the option
exercise price and the fair value of the common stock on the date of grant, the
Company has recorded $192,000 of deferred compensation relating to these options
and is amortizing compensation expense over the two year vesting period. None of
these options were exercisable at September 30, 1996.
Common stock reserved for future issuance
Shares of common stock of the Company reserved for future issuance,
including shares reserved pertaining to the Underwriter's over-allotment and
Underwriter's Warrant and Underlying Warrant are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
Redeemable common stock purchase warrants............................... 1,150,000
Employee, consultant, and other stock options........................... 930,000
Underwriter's Warrants and Underlying Warrants.......................... 200,000
---------
2,280,000
=========
</TABLE>
4. INCOME TAXES
For the period from inception (August 26, 1994) to September 30, 1995 and
the year ended September 30, 1996, the Company had federal and state net
operating loss carryforwards of approximately $1,300,000 and $2,100,000,
respectively. The net operating loss carryforwards will expire beginning
September 30, 2010, if not utilized.
17
<PAGE> 18
CABLE-SAT SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Utilization of the net operating losses may be subject to a substantial
annual limitation due to the ownership change limitation provided by the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating loss carryforwards
before utilization.
Significant components of the Company's deferred tax assets and liabilities
for federal and state taxes as of September 30, 1996, are as follows:
<TABLE>
<S> <C>
Deferred Tax assets:
Net operating loss carryforwards....................................... $ 800,000
Other -- net........................................................... 60,000
---------
Total deferred tax assets.............................................. 860,000
Valuation allowance for deferred tax assets............................ (860,000)
---------
Net deferred tax assets.................................................. $ --
=========
</TABLE>
The net valuation allowance increased by $770,000 during fiscal 1996.
5. RELATED PARTY TRANSACTIONS
During May 1996, the Company forgave a loan for $89,000 to the Company's
former president. The total amount of forgiveness was recognized as compensation
expense by the Company.
During March 1996, the Company sold 300,000 shares of common stock at the
then current fair value of $0.30 per share to the Company's new Chairman and
Chief Executive Officer in exchange for a full recourse interest bearing note
payable amounting to $90,000. The loan was repaid in May 1996.
In January 1996 and February 1996, the Company received $75,000 in loans
from Call Now, Inc. In March 1996, Call Now exercised a repriced warrant to
purchase 320,000 shares at $0.30 per share by forgiving the $75,000 in loans
plus paying $21,000 in cash (see Note 3).
6. COMMITMENTS
The Company leases office space and office equipment. Rent expense was
approximately $13,360 and $65,152 for the period from inception (August 26,
1994) to September 30, 1995, and the year ended September 30, 1996, respectively
($78,512 for the period from inception (August 26, 1994) to September 30, 1996).
Future payments for operating leases at September 30, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------
<S> <C>
September 30, 1997................................................ $115,418
September 30, 1998................................................ 118,830
--------
$234,248
========
</TABLE>
18
<PAGE> 19
CABLE-SAT SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company is committed under employment and consulting agreements with
officers and others to make the following future payments:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------
<S> <C>
September 30, 1997................................................ $468,000
September 30, 1998................................................ 100,000
--------
$568,000
========
</TABLE>
19
<PAGE> 20
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Cable-Sat Systems, Inc.
We have audited the accompanying balance sheet of Cable-Sat Systems, Inc.
(a development stage company) as of September 30, 1996, and the related
statements of operations, shareholders' equity, and cash flows for the year then
ended, and for the period from inception (August 26, 1994) to September 30,
1996. 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. The financial statements as of September 30,
1995, and for the period from inception (August 26, 1994) to September 30, 1995,
were audited by other auditors whose report dated December 1, 1995, expressed an
unqualified opinion on those statements. The financial statements for the period
from inception (August 26, 1994) to September 30, 1995, include a net loss of
$254,765. Our opinion on the statements of operations, shareholders' equity, and
cash flows for the period from inception (August 26, 1994) to September 30,
1996, insofar as it relates to amounts for prior periods through September 30,
1995, is based solely on the report of other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Cable-Sat Systems, Inc. at September 30, 1996, and the
results of its operations and its cash flows for the year then ended and the
period from inception (August 26, 1994) to September 30, 1996, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
San Jose, California
December 27, 1996
20
<PAGE> 21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
Board of Directors
Cable-Sat Systems, Inc.
We have audited the accompanying balance sheet of Cable-Sat Systems, Inc.
(a development stage company) as of September 30, 1995 and the statement of
income and expenses, shareholders' equity and the statement of cash flows for
the year ended September 30, 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 audit.
We conducted our audit 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 also includes assessing the accounting principles used
and significant estimates by management, as well as evaluating the overall
financial statements presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cable-Sat Systems, Inc. (a
development stage company) as of September 30, 1995 and its income and expense
and cash flows for the year then ended in conformity with generally accepted
accounting principles.
GRANT SCHWARTZ ASSOCIATES, CPA'S
Boca Raton, Florida
December 1, 1995
21
<PAGE> 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Disclosure of change of accountants has been filed on Form 8-Ks dated
October 24, 1996 and November 5, 1996. There were no disagreements reported in
connection with such change of accountants.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------------- --- --------------------------------------
<S> <C> <C>
Abraham (Abe) Ostrovsky.................... 53 Chief Executive Officer and Chairman
Wil F. Zarecor............................. 51 Executive Vice President
Dirk Spiers................................ 38 Vice President -- Product Development
Shelley Harrison........................... 36 Vice President -- Marketing
Lisa E. D'Alencon.......................... 39 Chief Financial Officer
William M. Allen........................... 67 Director
Fred Chanowski............................. 45 Director
E. T. Kalinoski............................ 41 Director
Jeffrey Waxman............................. 50 Director
Peter A. Whealton.......................... 50 Director
Stanley A. Young........................... 69 Director
</TABLE>
Abraham (Abe) Ostrovsky, Chief Executive Officer and Chairman. Mr.
Ostrovsky was appointed as Chairman and Chief Executive Officer in February
1996. He has served as Chairman of JetForm Corporation, a public electronic form
software company, since 1993. He joined JetForm in 1991 as Chief Operating
Officer and was Chief Executive Officer from 1991 to 1995. Prior to joining
JetForm in 1991, Mr. Ostrovsky was concurrently the Senior Vice President of
Erskine House PLC, an office equipment dealership and the Chairman of Savin
Florida, a subsidiary of Erskine House from 1988 to 1990.
Wil F. Zarecor, Executive Vice President. Mr. Zarecor has been Executive
Vice President since September 1995. From September 1995 to September 1996, Mr.
Zarecor was the President and a director of the Company. From 1988 to September
1995 he was Director of Special Products for PanAmSat division of Alpha Lyracom,
Inc. Mr. Zarecor holds a BS in Mathematics from California State Fullerton.
Dirk Spiers is Vice President of Product Development at Cable-Sat Systems,
Inc. Prior to Cable-Sat, Mr. Spiers was a co-founder of Infragence, an Internet
consulting firm. Mr. Spiers is currently a Director of Infragence. Prior to
starting Infragence in 1995, Mr. Spiers served since 1987 as the president of
SMI Group, an international strategic marketing organization which services
information technology companies throughout the United Kingdom, Europe and the
United States. Before founding SMI Group in 1987, Mr. Spiers filled several
roles in Amsterdam's finance and commerce industry. Mr. Spiers is a frequent
speaker of marketing and technical topics at industry conferences such as the
Software Publishers Association Europe. He has served as a technology and
product development advisor for firms such as IBM and Novell.
Shelley Harrison has been a consultant to the Company since May 1996 and
Vice President-Marketing since December 1996. She has been a marketing
consultant with Launch Pad since 1994. From August 1992 to August 1994, she was
Vice President-Marketing of Visioneer (scanners) and Director of Marketing of
cc:Mail from August 1989 to August 1992.
Lisa D'Alencon is a financial executive with more than 17 years experience
in high technology and other industries. Ms. D'Alencon was the senior financial
executive of cc:Mail. She has held senior financial positions in private and
public companies including Price Waterhouse, Ernst & Young and Lotus Development
Corporation. Ms. D'Alencon is a Certified Public Accountant and holds a BS in
Business Administration from the University of California, Berkeley.
William M. Allen, Director. Mr. Allen, director since 1995, has been
President and director of Call Now, Inc. since June 1992. He has been managing
partner of Black Chip Stables from 1982 to date and President of
22
<PAGE> 23
Doric, Inc. from 1985 until its merger with the Call Now, Inc. in 1994. He has
served as President of Kamm Corporation from 1985 to date and President of Kamm
Life from 1985 to date. He was Chairman and CEO of Academy Insurance Group from
1975 to 1984.
Fred Chanowski has been a managing member of Alpha Ventures LLC, a venture
capital firm, since January 1996. Since 1991 he has been a self employed
consultant in the fields of telecommunications and computing equipment. He also
serves on the Board of Directors of Augment Systems, Inc. He became a director
in October 1996.
E. T. Kalinoski, Director. Mr. Kalinoski has been a director since 1995 and
served as President until September 1995. He has been a financial consultant
since 1986 with Southern Capital Consultants, a consulting firm, (1986-1991) and
MSH Capital, a consulting firm, since 1991.
Jeffrey Waxman has been a director since 1996. He has been President and
Chief Executive Officer of Secure Computing Corporation since October 1996. He
served as Executive Vice President of Novell Inc.'s Application Group from 1995
to 1996 and served as Chief Executive Officer of Service Soft Corp. from 1992 to
1995. He was Chief Executive Officer of Uniflex, Inc. from 1991 to 1992 and was
engaged as an independent consultant in 1992 and 1996.
Peter A. Whealton has been Chairman and Chief Executive Officer of Core
Business Technologies, an office products dealer, since 1983. He became a
director in October 1996.
Stanley A. Young has been active as a consultant and venture capital
investor for the past five years. He is President and Chairman of Young
Management Group, Inc., consultants. He also serves on the Board of Directors of
Jetform, Inc. and Andyne Computer, Inc. He became a director in October 1996.
Directors serve until the next annual meeting or until their successors are
elected and qualified. Officers serve at the discretion of the Board of
Directors.
Directors receive no compensation for their services.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth the total compensation paid to the Company's
chief executive officer for the last three completed fiscal years and each of
the other executive officers of the Company who received compensation of
$100,000 or more during any such year.
<TABLE>
<CAPTION>
TOTAL ANNUAL CASH COMPENSATION
---------------------------------
YEAR ENDED OTHER ANNUAL
NAME AND POSITION SEPTEMBER 30, SALARY BONUS COMPENSATION
- -------------------------------------------------- ------------- -------- ------- ------------
<S> <C> <C> <C> <C>
E. T. Kalinoski (1)............................... 1994 $ -- $ -- $ --
President 1995 17,000 -- --
Wil Zarecor (1)................................... 1994 -- -- --
President 1995 36,000 -- --
1996 144,000 -- --
Abe Ostrovsky..................................... 1996 120,000 90,000 4,176
Chairman
</TABLE>
- ---------------
(1) E.T. Kalinoski was President from August 26, 1994 until August 1, 1995 when
Wil Zarecor was elected President. Abe Ostrovsky became Chairman in March
1996.
23
<PAGE> 24
Employment and Consulting Agreements
Abe Ostrovsky's employment with the Company is pursuant to an Employment
Agreement dated March 1, 1996 with Ostrovsky Consulting, Inc., a corporation
organized to market the services of Mr. Ostrovsky. Pursuant to the agreement,
Mr. Ostrovsky will serve as Chairman and Chief Executive Officer through
February 28, 1998. The agreement provides for an initial salary of $240,000 per
year and an annual bonus as determined by the Company's Board of Directors.
Pursuant to the agreement, Mr. Ostrovsky purchased 300,000 shares of the
Company's common stock at $0.30 per share. Mr. Ostrovsky was later granted an
Incentive Stock Option for 180,000 shares at $2.50 per share. Pursuant to the
agreement, Mr. Ostrovsky was appointed as a director of the corporation and is
entitled to nominate two additional independent directors for the Board and
shall be entitled to approve one of the other directors.
Wil F. Zarecor served as President pursuant to a two year employment
agreement which terminates on August 30, 1997. Such agreement provides for a
base salary of $144,000 per year.
Information Concerning Stock Options
The following table sets forth grants of stock options to the executive
officers named in the Summary Compensation Table during the fiscal year ended
September 30, 1996.
<TABLE>
<CAPTION>
STOCK OPTION GRANTS IN FISCAL YEAR ENDED SEPTEMBER 30, 1996
----------------------------------------------------------------------
PERCENT OF
TOTAL OPTIONS
GRANTED TO
NO. OF ALL EMPLOYEES EXERCISE EXPIRATION
NAME SHARES IN FISCAL YEAR PRICE DATE 5%(1) 10%(1)
- ---------------------------------- ------- -------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Abe Ostrovsky..................... 180,000 21.9% $ 2.50 May 2001 $574,326 $724,730
Wil Zarecor....................... 20,000 2.4% $ 2.50 May 2001 63,814 80,525
</TABLE>
- ---------------
(1) Potential realizable value is based on an assumption that the market price
of the stock appreciates at the stated rate, compounded annually, from the
date of grant until the end of the 5-year term of the option. These values
are calculated based on requirements promulgated by the Securities and
Exchange Commission and to do not reflect the Company's estimate or
projection of future stock price. Actual gains, if any, on stock option
exercises will be dependent on the future performance of the Common Stock
The following table sets forth the number of stock options held by the
executive officers named in the Summary Compensation Table as of September 30,
1996 fiscal year as well as fiscal year end value of unexercised "in-the-money"
options held which represents the positive difference between the exercise price
and the market price at fiscal year end. No such executive exercised any options
during the fiscal year.
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED VALUE OF
OPTIONS UNEXERCISED
AT FISCAL YEAR IN-THE-MONEY OPTION
END AT FISCAL YEAR END
----------------- -------------------
NAME VESTED UNVESTED VESTED UNVESTED
------------------------------------------------ ------- ------- -------- --------
<S> <C> <C> <C> <C>
Abe Ostrovsky................................... 180,000 -- $630,000 --
Wil Zarecor..................................... -- 20,000 -- $ 70,000
</TABLE>
24
<PAGE> 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of December 17, 1996, the beneficial
ownership of the Company's Common Stock by (i) the only persons who own of
record or are known to own, beneficially, more than 5% of the Company's Common
Stock; (ii) each director and each executive officer of the Company named in the
Summary Compensation Table; and (iii) all directors and officers as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENT
NAME AND ADDRESS SHARES OF CLASS
---------------------------------------------------------------- --------- --------
<S> <C> <C>
Call Now, Inc.(2)
P.O.Box 531399
Miami Shores, FL 33153........................................ 296,562 5.9%
William M. Allen(2)............................................. 674,205 13.6%
Abe Ostrovsky(3)................................................ 480,000 9.7%
E. T. Kalinoski(4).............................................. 420,000 8.4%
Wil Zarecor(5).................................................. 255,000 5.1%
Fred Chanowski.................................................. 20,000 *
Stanley A. Young................................................ 89,412 *
Peter A. Whealton............................................... 3,000 *
Jeffrey Waxman.................................................. -- 0%
Directors and officers as a group (11 persons).................. 1,941,617 39.1%
</TABLE>
- ---------------
(1) Based on 4,972,000 shares outstanding.
(2) Represents 296,562 shares owned by Call Now, Inc. of which Mr. Allen is an
affiliate and 377,643 shares owned directly and owned by his spouse.
(3) Includes 180,000 shares which may be acquired pursuant to outstanding stock
options.
(4) Includes 320,000 shares owned by Dave Olson, a relative.
(5) Includes 20,000 shares which may be acquired pursuant to a stock option.
* Less than 1%
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On June 1, 1995 the Company loaned $89,000 to E. T. Kalinoski, a founder
and director of the Company. Such loan, which was repayable January 12, 1997,
was forgiven in May 1996 and Mr. Kalinoski recognized $89,000 in compensation
income as a result of such forgiveness. In addition, Mr. Kalinoski had an
agreement with the Company under which he was paid $7,000 per month for
executive services (including serving as president from April 1995 to September
1995) and received a final payment of $30,000 in October 1996.
On June 1, 1995 the Company loaned $10,000 to John Douglas, a shareholder
and director of the Company. This loan was forgiven on January 12, 1996 and Mr.
Douglas recognized $10,000 in compensation income as a result. On January 16,
1996 the Company sold Mr. Douglas 120,000 shares of its common stock for
$120,000 which was considered the fair market value on such date.
In January 1996, Call Now, Inc. loaned the Company $50,000 for sixty (60)
days with interest at 8%. Such proceeds were used for working capital. In
February 1996, Call Now, Inc. loaned the Company $25,000 for 30 days. Such
proceeds were used for working capital.
In March 1996, Call Now, Inc. purchased 320,000 shares of Common Stock for
$96,000 ($0.30 per share), for payment including forgiveness of the principal
and accrued interest on the $50,000 loan and forgiveness of the $25,000 loan
with the balance in cash. The exercise price of a warrant purchased in August
1995 was reduced from $0.92 per share to $0.30 per share and was exercised in
this transaction.
In March 1996 Call Now, Inc. purchased 150,000 shares of the Company's
Preferred Stock for $3.00 per share. These shares were redeemed at the closing
of the Company's initial public offering for $3.00 per share plus one share of
the Company's common stock per share.
During March 1996, the Company sold 300,000 shares of common stock to the
Company's new Chairman and CEO in exchange for a full recourse interest bearing
note payable amounting to $90,000. The loan was repaid in May 1996.
25
<PAGE> 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report.
(1) Financial Statements
The following financial statements of the Registrant and Reports of
Ernst & Young LLP, Independent Auditors and Grant-Scwartz
Associates, CPA's, Independent Auditors are included herewith:
(i) Statements of Operations for the period from inception (August
26, 1994) to September 30, 1995, the year ended September 30,
1996, and the period from inception (August 26, 1994) to
September 30, 1996.
(ii) Balance Sheets as of September 30, 1995 and 1996.
(iii) Statements of Shareholder's Equity for the period from
inception (August 26, 1994) to September 30, 1995 and for the
year ended September 30, 1996.
(iv) Statements of Cash Flows for the period from inception (August
26, 1994) to September 30, 1995, the year ended September 30,
1996, and the period from inception (August 26, 1994) to
September 30, 1996.
(v) Notes to Financial Statements.
(vi) Report of Ernst & Young LLP, Independent Auditors.
(vii) Report of Grant-Schwartz Associates, CPA's, Independent
Auditors.
(2) Financial Statement Schedules -- None.
(3) Exhibits
The following exhibits are incorporated by this reference to Registrant's
Registration Statement on Form S-1, File No. 333-06121:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- ---------------------------------------------------------------------------------
<S> <C>
1 (a) Underwriting Agreement
3 (a) Amended and Restated Articles of Incorporation of the Registrant
3 (b) Bylaws of the Registrant
4.1 Form Warrant Certificate
4.2 Form of Common Stock Certificate
10.1 Financial Advisory Agreement
10.2 Merger and Acquisition Agreement
10.3 Warrant Agreement
10.4 Underwriter's Warrant Agreement
10.5 Incentive Stock Option Plan
10.5(a) Employment Agreement -- Ostrovsky Consulting, Inc.
10.5(b) Employment Agreement -- Wil F. Zarecor
10.5(c) Employment Agreement -- John L. Douglas
10.5(d) Employment Agreement -- Glenn Crepps
</TABLE>
The following exhibits are filed herewith:
<TABLE>
<S> <C>
11.1 Computation of net loss per share
23.1 Consent of Independent Certified Public Accountant
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K -- The Company filed reports on Form 8-K on October
24, 1996 and November 5, 1996 reporting change in accountants.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CABLE-SAT SYSTEMS, INC.
By: /s/ ABE OSTROVSKY
------------------------------------
Abe Ostrovsky, Chairman
December 23, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------ ------------------
<C> <S> <C>
/s/ ABE OSTROVSKY Chairman (Principal Executive December 23, 1996
- ------------------------------------------ Officer) and Director
Abe Ostrovsky
/s/ LISA D'ALENCON Chief Financial Officer December 23, 1996
- ------------------------------------------ (Principal Financial
Lisa D'Alencon Officer)
/s/ Director December , 1996
- ------------------------------------------
William M. Allen
/s/ Director December , 1996
- ------------------------------------------
E. T. Kalinoski
/s/ FRED CHANOWSKI Director December 23, 1996
- ------------------------------------------
Fred Chanowski
/s/ STANLEY A. YOUNG Director December 23, 1996
- ------------------------------------------
Stanley A. Young
/s/ PETER A. WHEALTON Director December 23, 1996
- ------------------------------------------
Peter A. Whealton
/s/ JEFFREY WAXMAN Director December 23, 1996
- ------------------------------------------
Jeffrey Waxman
</TABLE>
27
<PAGE> 1
EXHIBIT 11.1
CABLE-SAT SYSTEMS, INC.
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(AUGUST 26, 1994) YEAR ENDED
TO SEPTEMBER 30, SEPTEMBER 30,
1995 1996
--------------------- ---------------
<S> <C> <C>
PRIMARY
Weighted average number of common shares outstanding
during the period........................................ 1,833,333 3,181,667
Incremental common shares attributable to the application
of SAB 64 and 83......................................... 2,268,500 863,041
--------- -----------
Shares used in computing net loss per share applicable to
common shareholders...................................... 4,101,833 4,044,708
========= ===========
Net loss................................................... $(254,765) $(2,193,003)
Less: Accretion on preferred stock......................... -- (900,000)
--------- -----------
Net loss applicable to common shareholders................. $(254,765) $(3,093,003)
========= ===========
Net loss per share applicable to common shareholders....... $(0.06) $(0.76)
FULLY DILUTED
Weighted average number of common shares outstanding
during the period........................................ 3,181,667
Incremental common shares attributable to the application
of SAB 64 and 83......................................... 863,041
Impact on weighted average of common shares to be issued
upon redemption of preferred stock....................... 75,000
-----------
Total shares outstanding for purposes of computing fully
diluted
net loss per share....................................... 4,119,708
===========
Net loss................................................... $(2,193,003)
===========
Net loss per fully diluted share........................... $(0.53)
</TABLE>
Fully diluted earnings per share is not presented because its effects are
anti-dilutive.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
As Independent Public Accountants, we consent to the use of our report dated
December 1, 1995 to all references to our firm included in or made a part of the
Form 10-K of Cable Sat Systems, Inc.
/s/ Grant-Schwartz Associates, CPA's
Grant-Schwartz Associates, CPA's
Boca Raton, Florida
December 24, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 155,533
<SECURITIES> 0
<RECEIVABLES> 5,549,573
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,705,106
<PP&E> 176,289
<DEPRECIATION> 40,237
<TOTAL-ASSETS> 5,959,105
<CURRENT-LIABILITIES> 764,006
<BONDS> 0
0
0
<COMMON> 4,972
<OTHER-SE> 7,781,895
<TOTAL-LIABILITY-AND-EQUITY> 5,959,105
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,204,249
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,193,003)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,193,003)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,193,003)
<EPS-PRIMARY> (0.76)
<EPS-DILUTED> (0.76)
</TABLE>
