<PAGE> 1
Filed Pursuant to Rule 424 (B)(3)
Registration No. 333-06121
PROSPECTUS
CABLE-SAT SYSTEMS, INC.
1,000,000 SHARES OF COMMON STOCK
1,000,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Cable-Sat Systems, Inc. (the "Company") is offering hereby 1,000,000 shares
of its Common Stock, $.001 par value per share (the "Common Stock") and
1,000,000 Redeemable Common Stock Purchase Warrants (the "Warrants"). The Common
Stock and the Warrants (collectively, the "Securities") are separately
transferable at any time after the date of this Prospectus (the "Effective
Date"). Each Warrant entitles the registered holder thereof to purchase, at any
time during the period commencing on the Effective Date, one share of Common
Stock at a price of $6.00 per share, subject to adjustment under certain
circumstances, through September 25, 1999. The Warrants offered hereby are not
exercisable unless, at the time of exercise, the Company has a current
prospectus covering the shares of Common Stock issuable upon exercise of the
Warrants and such shares have been registered, qualified or deemed to be exempt
under the securities laws of the states of residence of the exercising holders
of the Warrants. Commencing after the Effective Date, the Warrants are subject
to redemption by the Company at $.25 per Warrant on 30 days' prior written
notice if the closing bid price for the Company's Common Stock, as reported on
the OTC Bulletin Board, The NASDAQ SmallCap Market ("NASDAQ"), or the last sale
price as reported on a national or regional securities exchange, as applicable,
for 30 consecutive trading days ending within 10 days of the notice of
redemption of the Warrants, averages at least $12.00. The Company is required to
maintain an effective registration statement with respect to the Common Stock
underlying the Warrants prior to redemption of the Warrants. The Warrants may
not be redeemed during the first year from the effective date without the
written consent of Barron Chase Securities, Inc. (the "Underwriter"). The
Registration Statement, of which this Prospectus is a part, also includes
1,368,562 shares of Common Stock (the "Selling Stockholders Shares") for resale
by certain of its stockholders (the "Selling Stockholders") and distribution of
723,438 shares of Common Stock by Call Now, Inc. as a dividend to its
stockholders of record as of March 12, 1996 (the "Distribution"). The Selling
Stockholders may not sell any of the Selling Stockholders' Shares for 12 months
after the date of this Prospectus. Call Now, Inc. has agreed not to make the
Distribution until six months from the date of this Prospectus. None of these
2,092,000 shares are being underwritten by the Underwriter and the Company will
not receive any of the proceeds from the Distribution or sale of the Selling
Stockholders Shares. See "Selling Stockholders" and "The Distribution".
Prior to this Offering, there has been no public market for the Common Stock
or the Warrants. It is anticipated that the Common Stock and the Warrants will
trade on the over-the-counter market on the OTC Bulletin Board under the symbols
"CSSA" and "CSSAW" respectively. There is no assurance that an active trading
market in the Company's Common Stock or Warrants will develop. The offering
price of the Common Stock and Warrants, as well as the exercise price and other
terms of the Warrants have been determined by negotiation between the Company
and the Underwriter and bear no relationship to the Company's asset value, net
worth or other established criteria of value. See "RISK FACTORS" and
"UNDERWRITING."
In the event any officers or directors of the Company purchase securities in
the offering, they have indicated that they will hold such securities for
investment purposes and not for resale.
------------------------
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS OF THE SECURITIES OFFERED HEREBY.
------------------------
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 TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................................................... $6.00 $.60 $5.40
- -------------------------------------------------------------------------------------------------------------------
Per Warrant..................................................... $.125 $.0125 $.1125
- -------------------------------------------------------------------------------------------------------------------
Total (3)....................................................... $6,125,000 $612,500 $5,512,500
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include additional underwriting compensation to be received in the
form of (i) a non-accountable expense allowance of $183,750, ($211,312.50 if
the Underwriter's over-allotment option is exercised in full); (ii)
Underwriter Warrants to purchase up to 100,000 shares of Common Stock at
$9.00 per Share (150% of the initial offering price) and 100,000 Underlying
Warrants at $.1875 per warrant exercisable over a period of five years and
three years, respectively, commencing on the Effective Date (the
"Underwriter's Warrants"); and (iii) a financial advisory agreement for the
Underwriter to act as an investment banker for the Company for a period of
three years at a fee of $108,000, payable at the closing of the Offering. In
addition, the Company has agreed to indemnify the Underwriter against
certain civil liabilities, including liabilities under the Securities Act of
1933. See "Underwriting."
(2) Before deducting expenses of this Offering payable by the Company, estimated
at $310,212 including the Underwriter's non-accountable expense allowance.
(3) The Company has granted to the Underwriter an option, exercisable within
thirty (30) days after the effective date of this Offering, to purchase up
to 150,000 additional shares of Common Stock and 150,000 additional Warrants
on the same terms and conditions as set forth above to cover over-
allotments, if any (the "Over-allotment Option"). If all such additional
Securities are purchased, the Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Company will be increased to $7,043,750,
$704,375 and $6,339,375, respectively. See "Underwriting."
(LOGO) BARRON CHASE SECURITIES
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 25, 1996
<PAGE> 2
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND THE WARRANTS AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Securities are being offered on a firm commitment basis, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to the approval of certain legal matters by counsel and certain other
conditions. It is expected that delivery of certificates representing the
Securities will be made at the offices of Barron Chase Securities, Inc., 7700 W
Camino Real, Suite 200, Boca Raton, Florida 33433-5541, on or about October 1,
1996.
To the date hereof, the Company has not been required to file, and has not
filed, periodic reports with the Securities and Exchange Commission. Following
consummation of this Offering, the Company intends to furnish to its
stockholders annual reports containing financial statements audited and reported
on by independent auditors and may provide quarterly reports containing
unaudited financial information for each of the first three quarters of each
fiscal year.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and the financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise indicated, information
in this Prospectus, including share and per share data, assumes no exercise of
(i) the Underwriter's Over-allotment Option and (ii) the Warrants.
THE COMPANY
The Company, a development stage company organized in August 1994, is
developing products to allow the facsimile transmission of color images from
computers equipped with the Company's software programs. Such color facsimiles
can then be viewed on the receiving computer's screen, stored and printed on a
color printer. Recipients equipped with black and white electronic fax software
or a black and white fax machine can still receive faxes sent via the software;
the faxes will simply appear in black and white. There are millions of computers
equipped with appropriate fax modems or boards, but such computers lack software
programs which will enable them to send and receive color fax images. The
Company believes that the recent price reductions of color peripherals will
result in substantial demand for the ability to transmit and receive color
facsimiles. The Company's initial color fax software product, not yet named but
being developed under the working name CHROMAFAX, is in the final stages of
development at this time. The Company expects to begin internal testing of the
finished product in September 1996 and release it for third party testing in
October 1996, with product release in the fourth quarter of 1996. Color images
contain very large quantities of data requiring a considerable amount of a
computer's data storage resources and resulting in a long transmission time. In
order to fax color images over standard phone lines in a short amount of time,
the data must be compressed. The International Telecommunications Union (ITU)
has recently recommended a standard for color image facsimile transmission (the
"International Standard"). The standard allows all machines meeting the standard
to communicate with each other. The Company believes that the success of
facsimile transmission today is primarily due to the ability of International
Standard-compliant machines to communicate with each other regardless of
manufacturer and that any system which requires non-standard-compliant software
to be on the sending and receiving machines will not achieve widespread success.
The Company's color fax software will incorporate the new International Standard
for color faxing. Use of the International Standard is anticipated to result in
transmission times of 4-8 minutes per typical page. The Company's second color
fax product with the working name, CHROMAFAX PLUS, which is currently in
development, in addition to complying with the International Standard for
faxing, will contain the Company's proprietary processes which will enable large
quantities of color picture data to be reduced by a significant factor,
resulting in significantly reduced file sizes and thereby making color fax
transmission and storage more efficient. When communicating with other computers
equipped with CHROMAFAX PLUS software, the Company's proprietary process will be
used. The Company anticipates that with its proprietary process CHROMAFAX PLUS
software will be more efficient than the International Standard and projects a
transmission time under 2 minutes for a typical page. The advanced features of
the CHROMAFAX PLUS product, compression and color correction, require additional
development efforts. The compression feature is currently being optimized to
reduce its complexity and increase its speed. The color correction feature is
still being written.
The Company's color facsimile software products integrate new and existing
components into a system that the Company believes will provide competitively
priced, color facsimile capabilities. The Company is not aware of any competing
color fax products in distribution or under development which comply with the
International Standard but assumes that others, including software and hardware
companies, are working on International Standard-compliant color fax products.
See "Business of the Company -- Competition". However, there currently exists
products which allow the transmission of color images between computers. The
procedure of transmitting the image is generically known as "Binary File
Transfer" (BFT). Some companies provide BFT capabilities claiming to use
facsimile format, however, these programs are not International
Standard-compliant. Examples of such products are View Office Power Suite by Max
Vision, Color Link by Laser Today International and Hot Fax also by Laser Today
International. Although these products are advertised as providing color faxing,
the products use proprietary formats for the file transfer and, therefore,
require that their particular software be installed both at the sending and
receiving computer. Since
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they do not comply with the recommended standard from the International
Telecommunications Union, they are not able to communicate with other
International Standard-compliant facsimile machines or computers using
International Standard-compliant programs. Of course, since these other programs
are proprietary and do not adhere to any standard, especially to the proposed
International Standard, they also do not communicate with each other. Even if
non-International Standard-compliant products could communicate with each other,
as a matter of coincidence, there would be no assurance, lacking adherence to a
standard, that future versions of the products would retain the communications
capability.
The Company has not sold or licensed any of its products or technologies.
The Company's prospects must be considered in light of the risks associated with
the establishment of a new business in the evolving computer industry, as well
as further risks encountered in the shift from development to commercialization
of new products based on innovative technology. There can be no assurance that
the Company will be able to generate revenues or achieve profitable operations.
See "Risk Factors," "Business" and "Financial Statements."
The Company was incorporated under the laws of Florida on August 26, 1994.
The Company's corporate offices are located at 2105 Hamilton Avenue, Suite 140,
San Jose, California 95125. The Company's telephone number is (408) 879-6600.
SECURITIES OFFERED
The Offering............... 1,000,000 shares of Common Stock and 1,000,000
Warrants to purchase 1,000,000 shares of Common
Stock. See "Description of Securities" and
"Underwriting."
Offering price............. $6.00 per share of Common Stock and $.125 per
Warrant.
Common Stock outstanding:
Prior to the Offering...... 3,772,000 shares of Common Stock
After the Offering(1)...... 4,922,000 shares of Common Stock
Warrants outstanding after
the Offering(2)............ 1,000,000 warrants
Exercise price of Warrants
offered hereby........... $6.00 per share, subject to adjustment in certain
circumstances. See, "Description of
Securities -- Redeemable Warrants".
Exercise period of Warrants
offered hereby........... The three year period from the effective date
hereof.
Redemption of Warrants..... Redeemable by the Company at any time after the
date hereof on not less than 30 days prior
written notice to the holders of the Warrants,
provided the average closing bid quotation of the
Common Stock as reported on the OTC Bulletin
Board or NASDAQ Stock Market, if traded thereon,
or if not traded thereon, the average closing
sale price of the Common Stock if listed on a
national securities exchange (or other reporting
system that provides last sale prices), has been
at least $12.00 for a period of 30 consecutive
trading days ending within 10 days prior to the
date on which the Company gives notice of
redemption. The Warrants may not be redeemed
during the first year from the effective date
without the written consent of Barron Chase
Securities, Inc. The Warrants will be exercisable
until the close of business on the day
immediately preceding the date fixed for
redemption. See "Description of Securities
Redeemable Warrants." The Company is required to
maintain an effective registration statement with
respect to the Common Stock underlying the
Warrants prior to redemption of the Warrants.
Use of Proceeds............ The net proceeds to the Company, aggregating
approximately $5,202,288, will be applied to
redeem Preferred Stock for $450,000 and for
research and development; marketing; the purchase
of equip-
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ment and inventory; and the balance for working
capital and general corporate purposes. See "Use
of Proceeds."
Risk Factors............... The securities offered hereby involve a high degree
of risk and substantial immediate dilution to new
investors. Only investors who can bear the risk
of their entire investment should invest. See
"Risk Factors" and "Dilution".
OTC Bulletin Board(3)
symbols.................. CSSA -- Common Stock
CSSAW -- Warrants
- ---------------
(1) Includes 1,000,000 shares of Common Stock offered hereby and 150,000 shares
of Common Stock issuable upon redemption of the Company's outstanding
Preferred Stock. Excludes (i) 1,000,000 shares of Common Stock reserved for
issuance upon exercise of the Warrants; (ii) an aggregate of 200,000 shares
of Common Stock reserved for issuance upon exercise of the Underwriter's
Warrants and the warrants included therein; (iii) 150,000 shares of Common
Stock issuable upon exercise of the Underwriter's Over-allotment Option; and
(iv) 458,000 shares reserved for issuance upon exercise of other outstanding
options. See "Management -- Employment Agreements," "Certain Transactions,"
"Description of Securities" and "Underwriting."
(2) Includes (i) 1,000,000 Warrants offered hereby. Excludes (i) 100,000
Underwriter's Warrants to be issued to the Underwriter upon closing of the
Offering; and (ii) 150,000 Warrants issuable upon exercise of the
Underwriter's Over-allotment Option.
(3) The OTC Bulletin Board is an electronic quotation and trading system for
over-the-counter securities. Inclusion of these securities on the OTC
Bulletin Board does not imply that an established public trading market will
develop therefor or, if developed, that such market will be sustained. See
"Risk Factors -- No Assurance of Public Market; Determination of Public
Offering Price; Lack of Liquidity; Possible Volatility of Market Price of
Common Stock and Warrants."
SUMMARY FINANCIAL INFORMATION
The summary financial data set forth below is derived from and should be
read in conjunction with the financial statements, including the notes thereto,
appearing elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA OF CABLE-SAT SYSTEMS, INC., A DEVELOPMENT STAGE
COMPANY:
<TABLE>
<CAPTION>
FROM INCEPTION
(AUGUST 26, 1994)
THROUGH JUNE 30, 1996
----------------------
(UNAUDITED)
<S> <C>
Revenues (interest income)............................................... $ 8,674
Net loss................................................................. $ (1,579,275)
Net loss per common share(1)............................................. $ (0.83)
Weighted average number of shares(1)..................................... 1,907,724
</TABLE>
BALANCE SHEET DATA OF CABLE-SAT SYSTEMS, INC., A DEVELOPMENT STAGE COMPANY:
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------
PRO FORMA
ACTUAL ADJUSTED(2)
----------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Working capital.................................................. $ 918,117 $ 5,670,405
Total assets..................................................... $ 1,138,508 $ 5,890,796
Total liabilities................................................ $ 96,530 $ 96,530
Deficit accumulated during the development stage................. $(1,579,275) $(1,579,275)
Stockholders' equity............................................. $ 1,041,978 $ 5,794,266
</TABLE>
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(1) The net loss per common share has been computed in accordance with the
Securities and Exchange Commission Staff Accounting Bulletin No. 64 ("SAB
64"). SAB 64 requires the net loss per common share to be computed based on
the weighted average number of shares of common stock outstanding, increased
for certain shares or stock options, including shares of Common Stock to be
issued upon redemption of the Preferred Stock, issued within one year or in
contemplation of the Company's filing of its registration statement, and
that such shares be treated as if outstanding for all periods presented.
(2) Gives effect to the sale of the Common Stock and Warrants offered hereby and
the application of a portion of the estimated net proceeds therefrom to
redeem the Preferred Stock. See "Use of Proceeds."
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RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk, including, but not limited to, the risk factors described below. Each
prospective investor should carefully consider the following risk factors before
making an investment decision.
Development Stage Company; Absence of Operating History. The Company was
incorporated in August 1994 and is in the development stage. Accordingly, the
Company has no significant operating history upon which an evaluation of the
Company's prospects can be made. Since inception, the Company has been engaged
primarily in the design and development of CHROMAFAX and CHROMAFAX PLUS (the
"Initial Color Fax Products") and related technology, the recruitment of key
management and technical personnel and raising capital to fund its operations.
The Company has produced technology prototypes of its initial color fax software
program, currently called CHROMAFAX, and is in the process of developing its
advanced color fax software product, currently called CHROMAFAX PLUS. It has not
licensed or sold any of its products or technologies. The Company's viability,
profitability and growth depend upon successful completion of the development
and commercialization of these products. There can be no assurance that any of
the Company's technologies or products will be successfully developed or
commercialized. The prospects for the Company's success must be considered in
light of the risks, expenses and difficulties often encountered in the
establishment of a new business in a continually evolving industry subject to
rapid technological and price changes, and characterized by an increasing number
of market competitors. The risks, expenses and difficulties often encountered in
a shift from the research and development of prototype products to the
commercialization of new products based on innovative technology must also be
considered. See "Business." As a result of the foregoing considerations the
Common Stock and Warrants were not approved for listing on the NASDAQ SmallCap
Market.
No Revenues; Accumulated Deficit; Anticipated Future Losses. To date, the
Company has had no operating revenue and does not anticipate any operating
revenue until such time as its relevant technology and one or more of its
Initial Color Fax Products are completely developed, manufactured in commercial
quantities and available for commercial distribution, none of which can be
assured. There can be no assurance that the Company's technology and products,
if developed and manufactured, will be able to compete successfully in the
marketplace and/or generate significant revenue. The Company anticipates
incurring significant costs in connection with the development of its
technologies and proposed Initial Color Fax Products and there is no assurance
that the Company will achieve sufficient revenues to offset anticipated
operating costs. As of June 30, 1996, the Company's deficit accumulated during
the developmental stage was $1,579,275. Further, the Company anticipates
continuing losses until its Initial Color Fax Products generate substantial
revenues, which cannot be assured. Included in such losses are research and
development expenses, marketing costs, production costs, and general and
administrative expenses. See "Summary Financial Information."
Significant Capital Requirements; Dependence on Offering Proceeds; Need for
Additional Financing. The Company's capital requirements in connection with its
development activities have been and will continue to be significant. The
Company has been dependent upon the proceeds of sales of its securities to
private investors to fund its initial development activities. The Company
anticipates that the proceeds of this offering will be sufficient to satisfy its
contemplated cash requirements for at least 12 months following the consummation
of this offering. After such time, the completion of the Company's development
activities relating to its Initial Color Fax Products and the commencement of
marketing and distribution activities in connection with such products may
require continued funding in excess of the proceeds of this offering or any
funds otherwise currently available to the Company. The Company has no current
arrangements with respect to sources of additional financing and there is no
assurance that other additional financing will be available to the Company in
the future on commercially reasonable terms, or at all. The inability to obtain
additional financing, when needed, would have a material adverse effect on the
Company, including possibly requiring the Company to curtail or cease
operations. To the extent that any future financing involves the sale of the
Company's equity securities, the Company's then existing stockholders, including
investors in this offering,
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could be substantially diluted. See "Management's Discussion and Analysis of
Financial Condition and Plan of Operations."
New Concept; Uncertainty of Market Acceptance; Lack of Marketing
Experience. The Initial Color Fax Products currently being developed by the
Company utilize new concepts and designs in image compression and processing.
The Company's prospects for success will therefore depend on its ability to
successfully license and sell its products to key manufacturers and distributors
who may be inhibited from doing business with the Company because of their
commitment to their own technologies and products. As a result, demand and
market acceptance for the Company's technologies and proposed products is
subject to a high level of uncertainty. The Company currently has limited
financial, personnel and other resources to undertake the extensive marketing
activities that will be necessary to market its technology and products once
their development is completed. There is no assurance that any of the Company's
potential customers will enter into any arrangements with the Company. There is
no assurance that the Company will be able to formalize any marketing
arrangements or that its marketing efforts will be successful. See
"Business -- Sales and Marketing" and "Business -- Research and Development."
Dependent on Hardware Manufacturers for Initial Product Distribution. The
Company intends to rely in part on the manufacturers of personal computers, fax
modems, color printers and scanners for initial distribution of its Initial
Color Fax Products as a software package included with such hardware purchase.
The Company is therefore dependent upon such firms to distribute its products.
To date, the Company does not have any agreements with any manufacturers to
distribute its color fax products. The failure of such manufacturers to
distribute copies of the Company's Initial Color Fax Products with their
products would have a material adverse effect on the Company's ability to market
its Initial Color Fax Products. See "Business of the Company -- Marketing and
Distribution."
Uncertainty of Product and Technology Development; Need for Product
Testing; Technological Factors. The Company has not completed development of any
of the Company's proposed Initial Color Fax Products in commercially salable
form. Technologies and proposed products being developed by the Company are in
various stages of development. Product development efforts are subject to all of
the risks inherent in the development of new technology and products (including
unanticipated delays, expenses, technical problems or difficulties, as well as
the possible insufficiency of funding to complete development). There can be no
assurance as to when, or whether, such developments will be successfully
completed. See "Business of the Company -- The Company's Color Fax Products."
Competition; Product Obsolescence. 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. These companies may have substantially greater financial,
technical, personnel and other resources than the Company and may have
established reputations for success in developing, licensing and sales of their
products. The ability of the Company to compete will depend on its ability to
complete development and introduce to the marketplace in a timely and
cost-competitive manner its proposed products and technology, to continually
enhance and improve such products and technology, to adapt its proposed products
to be compatible with specific products manufactured by others, and to
successfully develop and market new products and technology. There is 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. See "Business of the
Company -- Competition."
Dependence on Key Personnel. The success of the Company will be largely
dependent on its ability to hire and retain qualified executive, scientific and
marketing personnel. There is no assurance that the Company will be able to hire
or retain such necessary personnel. The Company has employment contracts with
several of its key personnel, including Abe Ostrovsky and John Douglas and
carries key man insurance on their lives in the amount of $1 million each. See
"Management."
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Protection of Proprietary Information. Competitors in both the United
States and foreign countries, many of which have substantially greater resources
and have made substantial investments in competing technologies, may have
applied for or obtained, or may in the future apply for and obtain, patents that
will prevent, limit or otherwise interfere with the Company's ability to make
and sell its products. The Company has not conducted an independent review of
patents issued to third parties. In addition, because of the developmental stage
of the Company, claims that the Company's products infringe on the proprietary
rights of others are more likely to be asserted after commencement of commercial
sales incorporating the Company's technology. There can be no assurance that
other third parties will not assert infringement claims against the Company or
that such claims will not be successful. The Company intends to apply for
patents but no such patent applications have been filed as of the date of this
Prospectus. There can also be no assurance that competitors will not infringe
the Company's patents if any such patents are granted to the Company in the
future. Defense and prosecution of patent suits, even if successful, are both
costly and time consuming. An adverse outcome in the defense of a patent suit
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease selling its products.
The Company will apply for copyrights relating to certain of its proposed
Initial Color Fax Products and will also apply for patent protection. There is
no assurance that any patents will be obtained. If obtained, there is no
assurance that any patents or copyrights will afford the Company commercially
significant protection of its technologies or that the Company will have
adequate resources to enforce its patents and copyrights. The Company also
intends to seek foreign patent and copyright protection. With respect to foreign
patents and copyrights, the laws of other countries may differ significantly
from those of the United States as to the patentability of the Company's
products or technology. Moreover, the degree of protection afforded by foreign
patents or copyrights may be different from that in the United States. Patent
applications in the United States are maintained in secrecy until patents issue,
and since publication of discoveries in the scientific or patent literature
tends to lag behind actual discoveries by several months, the Company cannot be
certain that it will be the first creator of inventions covered by any patent
applications it makes or the first to file patent applications on such
inventions.
The Company also relies on unpatented proprietary technology, and there can
be no assurance that others may not independently develop the same or similar
technology or otherwise obtain access to the Company's unpatented technology. To
protect its trade secrets and other proprietary information, the Company
requires employees, consultants, advisors and collaborators to enter into
confidentiality agreements. There can be no assurance that these agreements will
provide meaningful protection for the Company's trade secrets, know-how or other
proprietary information in the event of any unauthorized use, misappropriation
or disclosure of such trade secrets, know-how or other proprietary information.
If the Company is unable to maintain the proprietary nature of its technologies,
the Company could be adversely affected. See "Business -- Patents; Proprietary
Information."
In the desktop computer application market today, patents and copyrights
cannot give substantial protection against competitors determined to introduce
competing products since it is likely that such competitors will be able to
develop similar technology which does not infringe on the Company's proprietary
technology.
Control by Management. Upon consummation of the Offering, the directors
and officers of the Company will beneficially own 2,048,273 shares of Common
Stock, or approximately 42% of the Company's then outstanding shares of Common
Stock and have the right to acquire 230,000 additional shares pursuant to
outstanding options. Such directors and officers would in all likelihood be in a
position to control the election of the Company's directors and thereby select
the management, and direct the policies, of the Company. See "Management,"
"Principal Stockholders" and "Description of Securities."
No Dividends. The Company has paid no cash dividends to date. Payment of
dividends on the Common Stock is within the discretion of the Board of Directors
and will depend upon the Company's earnings, its capital requirements and
financial condition, and other relevant factors. The Company does not currently
intend to declare any dividends on its Common Stock in the foreseeable future.
Currently, the Company plans
8
<PAGE> 9
to retain any earnings it receives for development of its business operations.
See "Summary Financial Information."
Redemption of Preferred Stock from Proceeds of Offering; Benefit to
Stockholder. $450,000 of the proceeds of this offering will be used to redeem
150,000 shares outstanding Preferred Stock from Call Now, Inc. and, accordingly,
such funds will not be available to fund future growth. Such Preferred Stock is
redeemable at $3.00 per share plus 1 share of the Company's Common Stock per
share. The Preferred Stock accrues dividends at $.21 per share on each
anniversary of its issuance. Accordingly, upon redemption of such Preferred
Stock from the proceeds herein no dividend will have accrued since the Preferred
Stock was issued in March 1996. See "Use of Proceeds."
Benefit to Selling Stockholders. The Selling Stockholders acquired their
shares at prices significantly below the price of the shares offered herein:
Call Now, Inc. was an early venture capital investor which purchased shares in
August 1995 for $.91 per share and in March 1996 at $.30 per share. Nineteen of
the Selling Stockholders were venture capital investors who purchased 372,000
shares in May 1996 for $2.50 per share. Eight of the Selling Stockholders
purchased 350,000 shares for $.60 per share in April 1996. One Selling
Stockholder received 50,000 shares for services valued at $30,000 in April 1996
and Abe Ostrovsky, the Company's Chairman, is a Selling Stockholder of 300,000
shares which were purchased in February 1996 for $.30 per share. Accordingly,
the Selling Stockholders will receive substantial profits if they are able to
sell their shares at the offering price herein. Mr. Ostrovsky will continue to
hold an option to acquire 180,000 shares for $2.50 per share.
Dilution. Investors purchasing shares of Common Stock in the Offering will
incur immediate and substantial dilution in the net tangible book value per
share of the Common Stock from the initial public offering price as compared to
the increase in net tangible book value per share that will accrue to existing
stockholders. Such dilution is estimated to be $4.86 per share (or approximately
81%). See "Dilution".
Shares Eligible for Future Sale; Registration Rights. Upon the
consummation of this offering, the Company will have 4,922,000 shares of Common
Stock outstanding, assuming no exercise of the Warrants or outstanding options.
All of the Company's presently issued and outstanding shares of Common Stock are
deemed to be "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act ("Rule 144") and may, in certain
circumstances, be sold without registration pursuant to such rule. All of such
"restricted" shares will become eligible for sale under Rule 144 beginning in
April 1997 (subject to certain recurring three-month volume limitations
prescribed by Rule 144). The possibility that substantial amounts of Common
Stock may be sold in the public market may adversely affect prevailing market
prices for the Common Stock and the Warrants and could impair the Company's
ability in the future to raise additional capital through the sale of its equity
securities. See "Principal Stockholders", "Underwriting", "Selling Stockholders"
and "The Distribution".
No Assurance of Public Market; Determination of Public Offering Price; Lack
of Liquidity; Possible Volatility of Market Price of Common Stock and
Warrants. Prior to this offering, there has been no public trading market for
the shares of Common Stock or the Warrants. Consequently, the initial offering
price of the Common Stock and the Warrants and the exercise price of the
Warrants have been determined by negotiations between the Company and the
Underwriter and do not necessarily reflect the Company's book value or other
established criteria of valuation. There can be no assurance that a regular
trading market for either the Common Stock or the Warrants will develop after
this offering or that, if developed, it will be sustained. Any trading will
likely be conducted in the over-the-counter market with prices reported in the
OTC Bulletin Board, an electronic quotation and trading system for
over-the-counter securities. Any market for the Common Stock and Warrants will
likely be less well developed than if trading were to be conducted on NASDAQ or
an exchange, which may adversely affect liquidity of these securities. In
addition, the market price of the securities of development-stage companies in
high-technology industries has been highly volatile. In addition, the market
prices for securities of many emerging companies have experienced wide
fluctuations not necessarily related to the operating performance of such
companies. Factors such as the Company's operating results, announcements by the
Company of licensing of distribution contracts, orders for its products
9
<PAGE> 10
and announcements by the Company or its competitors concerning technological
innovations, new products or systems may have a significant impact on the market
price of the Company's securities. See "Underwriting."
Necessity of Future Registration of Warrants and State Blue Sky
Registration; Exercise of Warrants. The Warrants will trade separately upon the
closing of the Offering. Although the Warrants will not knowingly be sold to
purchasers in jurisdictions in which the Warrants are not registered or
otherwise knowingly be sold to purchasers in jurisdictions in which the Warrants
are not registered or otherwise qualified for sale or exempt, purchasers may buy
Warrants in the after-market or may move to jurisdictions in which the Warrants
and the Common Stock underlying the Warrants are not so registered or qualified
or exempt. In this event, the Company would be unable lawfully to issue Common
Stock to those persons desiring to exercise their Warrants (and the Warrants
will not be exercisable by those persons) unless and until the Warrants and the
underlying Common Stock are registered or qualified for sale in jurisdictions in
which such purchasers reside or an exemption from such registration or
qualification requirements exists in such jurisdictions. There can be no
assurance that the Company will be able to effect any required registration or
qualification.
The Warrants offered hereby will not be exercisable unless the Company
maintains a current registration statement on file with the Commission either by
filing post-effective amendments to the Registration Statement of which this
Prospectus is a part or by filing a new registration statement with respect to
the exercise of such Warrants. The Company has agreed to use its best efforts to
file and maintain, so long as the Warrants offered hereby are exercisable, a
current registration statement with the Commission relating to such Warrants and
the shares of Common Stock underlying such Warrants. However, there can be no
assurance that it will do so or that such Warrants or such underlying Common
Stock will be or continue to be so registered.
The value of the Warrants could be adversely affected if a then current
prospectus covering the Common Stock issuable upon exercise of the Warrants is
not available pursuant to an effective registration statement or if such Common
Stock is not registered or qualified for sale or exempt from registration or
qualification in the jurisdictions in which the holders of Warrants reside. See
"Description of Securities -- Redeemable Warrants."
Adverse Effect of Redemption of Warrants. The Warrants are subject to
redemption by the Company at a price of $.25 per Warrant at any time, on at
least 30 days prior written notice, if the average closing bid quotation of the
Common Stock as reported on the OTC Bulletin Board or the NASDAQ Stock Market,
if traded thereon, or if not traded thereon, the average closing sale price of
the Common Stock if listed on a national securities exchange (or other reporting
system that provides last sale prices), has been at least 200% of the then
current exercise price of the Warrants (initially, $12.00 per share), for a
period of 30 consecutive trading days ending on the 10th day prior to the date
on which the Company gives notice of redemption. If the Company gives such
notice of redemption, holders of the Warrants will lose their rights to exercise
the Warrants after the date fixed therein for their redemption. Upon the receipt
of a notice of redemption of the Warrants, the holders thereof would be required
to (i) exercise the warrants and pay the exercise price at a time when it may
disadvantageous for them to do so, (ii) sell the Warrants at the then market
price, if any, when they might otherwise wish to hold the Warrants or (iii)
accept the redemption price, which is likely to be substantially less than the
market value of the Warrants at the time of redemption. The Warrants may not be
redeemed during the first year from the effective date without the written
consent of Barron Chase Securities, Inc., or at any time that a current
registration statement is not in effect. See "Description of
Securities -- Redeemable Warrants."
Anti-Takeover Statutes. Florida has enacted legislation which prohibits a
publicly-held Florida corporation from engaging in a "business combination" with
an "interested stockholder" for a period of three years after the date of the
transaction in which the person became an "interested stockholder," unless the
business combination is approved in a prescribed manner. Subject to certain
exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns (or within the prior three years did own) 15% or
more of a corporation's voting stock. A "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
"interested stockholder." See "Description of Securities -- Anti-Takeover
Provisions of Florida Law."
10
<PAGE> 11
Tax Loss Carryforwards. At June 30, 1996 the Company had available unused
net operating loss carryforwards ("NOLs") aggregating approximately $1,579,275
to offset future taxable income. Under Section 382 of the Internal Revenue Code
of 1986, as amended (the "Code"), utilization of prior NOLs is limited after an
ownership change, as defined in such Section 382, to an amount equal to the
value of the loss corporation's outstanding stock immediately before the date of
the ownership change, multiplied by the federal long-term tax-exempt rate in
effect during the month that the ownership change occurred. Upon the
consummation of this offering, the Company may be subject to limitations on the
use of its NOLs as provided under Section 382. Accordingly, there can be no
assurance that a significant amount of the Company's existing NOLs will be
available to the Company following the Offering. In the event that the Company
achieves profitability, as to which there can be no assurance, such limitation
would have the effect of increasing the Company's tax liability and reducing the
net income and available cash resources of the Company in the future. See
"Financial Statements."
Risk of Low-Priced Securities.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. Commission regulations generally
define a penny stock to be an equity security that has a market price of less
than $5.00 per share, subject to certain exceptions. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith.
In addition, if the Company's securities do not meet the exceptions to the
penny stock regulations cited above, trading in the Company's securities would
be covered by Rule 15g-9 promulgated under the Exchange Act for non-NASDAQ and
non-national securities exchange listed securities. Under such rule,
broker/dealers who recommend such securities to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale. Securities also are exempt from this rule if the
market price is at least $5.00 per share.
The Company believes that its Common Stock and Warrants will initially be
exempt from such penny stock regulations upon closing of the underwritten
offering herein by virtue of its net tangible assets being in excess of
$5,000,000.
If the Company's securities become subject to the regulations applicable to
penny stocks, the market liquidity for the Company's securities could be
adversely affected. In such event, the regulations on penny stocks could limit
the ability of broker/dealers to sell the Company's securities and thus the
ability of purchasers of the Company's securities to sell their securities in
the secondary market.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock and
Warrants offered hereby are estimated to be $5,202,288. The Company anticipates
that these proceeds will be used as follows:
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE OF
APPLICATION OF PROCEEDS DOLLAR AMOUNT NET PROCEEDS
------------------------------------------------------------ ------------- -------------
<S> <C> <C>
Research and development(1)................................. $ 1,400,000 26.9%
Redemption of preferred stock(2)............................ 450,000 8.7
Marketing(3)................................................ 2,600,000 50.0
Purchase of equipment and inventory(4)...................... 200,000 3.8
Working capital and general corporate purposes(5)........... 552,288 10.6
------------- ------
Total............................................. $ 5,202,288 100.0%
=========== ==========
</TABLE>
- ---------------
(1) Includes estimated costs to continue the development of the CHROMAFAX and
CHROMAFAX PLUS. See "Management's Discussion and Analysis of Financial
Condition" and "Plan of Operation."
11
<PAGE> 12
(2) Represents the redemption of Preferred Stock issued to Call Now, Inc. in
February 1996 for $450,000. The Company used the net proceeds from the sale
of such stock to pay for research and product development and operating
expenses. See Note 2 and 6 of Notes to Financial Statements.
(3) Includes estimated expenses associated with participation in trade shows,
business travel, advertising in trade magazines, the preparation of sales
presentations and brochures and market research and related payroll
expenses of marketing personnel and consultants. See "Business -- Marketing
and Distribution."
(4) Includes the estimated costs associated with the purchase of equipment and
the purchase of inventories of the CHROMAFAX and CHROMAFAX PLUS. The
Company has no commitments to date for the purchase of any inventory. See
"Plan of Operation."
(5) Includes anticipated payment of the salaries of the Company's current
personnel. The remainder will be used for working capital and general
corporate purposes.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations, that the proceeds of this offering will be
sufficient to satisfy the Company's contemplated cash requirements for at least
12 months following the consummation of this offering. In the event the
Company's plans change or its assumptions change or prove to be inaccurate or
the proceeds of this offering prove to be insufficient to fund operations (due
to unanticipated expenses, delays, problems or otherwise), the Company may find
it necessary or advisable to reallocate some of the proceeds within the
above-described categories or to use portions thereof for other purposes and
could be required to seek additional financing sooner than currently
anticipated. See "Plan of Operation."
Proceeds not immediately required for the purposes described above will be
invested principally in government securities and/or short-term certificates of
deposit.
DILUTION
As of June 30, 1996, the net tangible book value of the Company was
$849,049 or approximately $.23 per share of Common Stock. After giving effect to
the sale of the 1,000,000 shares of Common Stock and 1,000,000 Warrants being
offered hereby (less underwriting discounts and commissions, estimated expenses
of this offering and redemption of Preferred Stock), the adjusted net tangible
book value of the Company as of June 30, 1996, would have been approximately
$5,601,337, or $1.14 per share, representing an immediate increase in net
tangible book value of $.91 per share of Common Stock to existing stockholders
and an immediate dilution of $4.86 per share (81%) to new investors. The
following table illustrates this dilution to new investors on a per share basis:
<TABLE>
<S> <C>
Public offering price........................................................ $6.00
Net tangible book value before Offering...................................... .23
-----
Increase attributable to new investors..................................... .91
-----
Adjusted net tangible book value after Offering.............................. 1.14
-----
Dilution to new investors.................................................... $4.86
=====
</TABLE>
The above table assumes no exercise of outstanding stock options and
warrants. As of the date of this Prospectus, there are outstanding stock options
and warrants to purchase an aggregate of 566,200 shares of Common Stock having
exercise prices of $.10 per share to $2.75 per share. To the extent that stock
options or warrants are exercised at prices below the public offering price per
share, there will be further dilution to new investors. See "Risk Factors,"
"Plan of Operation," "Certain Transactions," "Description of Securities" and
"Underwriting."
12
<PAGE> 13
The following table sets forth with respect to existing common stockholders
and new investors in this offering, a comparison of the number of shares of
Common Stock acquired from the Company, the percentage of ownership of such
shares, the total consideration paid, the percentage of total consideration paid
and the average price per share.
<TABLE>
<CAPTION>
SHARES TOTAL
------------------- -----------------------
PURCHASED CONSIDERATION
NUMBER NUMBER PERCENT AMOUNT PERCENT CONSIDERATION
- -------------------------------------------- --------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................... 3,772,000 79% $ 2,147,253 26% $ .57
New investors............................... 1,000,000 21% 6,000,000 74% $6.00
--------- ------- ------------- -------
Total............................. 4,772,000 100% $ 8,147,253 100%
</TABLE>
The above tables assume no exercise of the Underwriter's Over-allotment
Option. If such option is exercised in full, the new investors will have paid
$6,900,000 for 1,150,000 shares of Common Stock, representing approximately 76%
of the total consideration for 23% of the total number of shares of Common Stock
outstanding.
13
<PAGE> 14
CAPITALIZATION
The following table sets forth capitalization of the Company as of June 30,
1996 and as adjusted to reflect the sale of the 1,000,000 shares offered hereby
and the application of the net proceeds.
CABLE-SAT SYSTEMS, INC.
(A DEVELOPMENT-STAGE COMPANY)
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Shareholder's Equity:
Preferred Stock, Par Value $.001, Authorized issued and
Outstanding 150,000 Shares............................. $ 450,000 $ -0-
Common Stock, Par Value $.001 Per Share; Authorized
50,000,000 Shares; Issued and Outstanding 3,772,000
Shares; 4,922,000 Shares to be Outstanding as
Adjusted............................................... 3,772 4,922
Paid-in Capital............................................. 2,143,481 7,344,619
Deficit Accumulated During Development Stage................ (1,579,275) (1,579,275)
Outstanding Stock Option.................................... 24,000 24,000
----------- -----------
Total Stockholders' Equity........................ $ 1,041,978 $ 5,794,266
========== ==========
Total Capitalization........................................ $ 2,621,253 $ 7,373,611
</TABLE>
The as adjusted capitalization gives effect to the redemption of the Series
A Preferred Stock, including the issuance of 150,000 shares of common stock in
connection with such redemption, sale of 1,000,000 shares of common stock in the
underwritten offering herein.
14
<PAGE> 15
SELECTED FINANCIAL DATA
The following selected financial data 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 Plan of Operations" contained elsewhere in this Prospectus. The selected
financial data for each of the two years ended September 30, 1995 and 1994 are
derived from Company's audited financial statements, and the selected financial
data for the nine-month periods ended June 30, 1996 and 1995 are derived from
the Company's unaudited financial statements.
CABLE-SAT SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30, YEARS ENDED
(UNAUDITED) SEPTEMBER 30,
----------------------- -------------------
1996 1995 1995 1994
---------- ---------- ---------- ------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................ $ -0- $ -0- $ -0- $ -0-
General and administrative expenses................. 658,416 40,044 256,554 -0-
Income (loss) from operations....................... (1,331,396) (77,555) (256,554) -0-
Other income (expense).............................. 6,885 -0- 1,789 -0-
Income (loss) before income taxes................... (1,324,510) (77,555) (254,765) -0-
Provision for income taxes.......................... -0- -0- -0- -0-
Net income (loss)................................... (1,324,510) (77,555) (254,765) -0-
Earnings (loss) per share........................... (0.46) (0.05) (.12) -0-
Weighted average shares outstanding................. 2,878,222 1,650,000 2,200,000 -0-
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1996 SEPTEMBER 30,
(UNAUDITED) 1995
------------ -------------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets................................................... $1,014,646 $ 425,319
Working capital.................................................. 918,117 382,383
Total assets..................................................... 1,138,508 488,394
Current liabilities.............................................. 96,530 42,936
Stockholders' equity (deficit)................................... 1,041,978 445,458
</TABLE>
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND PLAN OF OPERATIONS
GENERAL
Since inception of its organizational activities in April 1995, the
Company, a development stage company, has been engaged primarily in the design
and development of its Initial Color Fax Products and related technology, the
recruitment of key management and technical personnel, including outside
consultants, researching the patentability of its products and technology and
raising capital to fund its operations. The Company has produced prototypes of
the CHROMAFAX computer program, but not the CHROMAFAX PLUS. It has not licensed
or sold any of its products or technologies. The Company requires the proceeds
of this offering to continue to develop its Initial Products and (in the event
the Company is able to successfully complete certain additional research and
development, prototypes and product testing relating thereto) to commence the
commercialization of the Initial Color Fax Products.
As of June 30, 1996, the Company had an accumulated deficit of $1,579,275.
Significant additional losses have been incurred since such date. The Company
will continue to have a high level of operating expenses and will be required to
make significant expenditures in connection with its research and development
activities and the production and marketing of its proposed products and
technologies following the consummation of this offering. Although the Company
anticipates deriving some revenue from the sale of its CHROMAFAX and CHROMAFAX
PLUS computer programs within the next 12 months, no assurance can be given that
these products will be successfully developed, tested and brought to market
during such period, and the Company has projected its expenses based on the
assumption that it will receive no revenues from the sale of its products during
the 12 months after the conclusion of this offering. Even if revenues are
produced from the sale of such Initial Color Fax Products, the Company expects
to continue to incur substantial losses for at least the next 12 months, and
thereafter until the Company is able to attain revenues from sales, licensing or
other arrangements sufficient to support its operations, which cannot be
assured.
RESEARCH AND DEVELOPMENT
From inception though June 30, 1996, a substantial part of the Company's
activities related to research and development. During the 12 months following
the Offering, the Company intends to spend approximately $1,400,000 on research
and development. In the event the Company is able to generate revenues from
sales of its Initial Color Fax Products during such 12-month period, it
anticipates it will increase its expenditures for research and development.
MARKETING AND DISTRIBUTION
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. The Company anticipates spending
$2,250,000 over the 12 months following the Offering to develop and implement a
formal marketing, advertising and public relations program. The Company
initially intends to market the Initial Color Fax Products through manufacturers
of personal computers, fax modems, scanners and color printers. It also may
license to third parties the rights to manufacture the products, either through
direct licensing, OEM arrangements or otherwise. See "Business Manufacturing."
The Company does not currently have a sales force to implement the sale
and/or licensing of its products or related technology. The Company has
determined that it will need to employ an internal sales staff of at least four
people by December 31, 1996. See "Business -- Marketing and Distribution."
MANUFACTURING
The Company does not contemplate that it will directly manufacture any of
its products. It intends to contract with third parties to manufacture its
proposed Initial Color Fax Products. The Company has not
16
<PAGE> 17
made any manufacturing arrangements for such products. However, the Company
believes that there are a large number of firms equipped to copy and package the
Initial Color Fax Products.
EMPLOYEES
The Company currently has eight employees and four consultants. Depending
on its level of business activity, the Company expects to hire additional
employees in the next 12 months, including marketing and sales personnel, and
has allocated $1,215,000 of the proceeds of this offering for the recruitment
and related payroll expenses for approximately 9 additional employees over the
next 12-month period.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has relied for all of its funding
(approximately $2,568,000 in cash) on private sales of its equity securities.
The Company intends to use $450,000 of the proceeds of this offering to redeem
Preferred Stock issued to Call Now, Inc. in connection with such financings.
The Company's plan of operation over the 12 months following the
consummation of this offering focuses primarily on the continued design,
development and patent and/or copyright protection of its proposed products and
in particular, the production of prototypes, testing and the marketing of the
CHROMAFAX and CHROMAFAX PLUS. The Company anticipates, based on its current
proposed plans and assumptions relating to its operations, that the proceeds of
this offering will be sufficient to satisfy the contemplated cash requirements
of the Company for at least 12 months following the consummation of this
offering. In the event that the Company's plans change or its assumptions prove
to be inaccurate or the proceeds of this offering prove to be insufficient to
fund operations (due to unanticipated expenses, delays, problems, or otherwise),
the Company would be required to seek additional funding sooner than
anticipated. Depending upon the Company's progress in the development of its
products and technology, their acceptance by third parties, and the state of the
capital markets, the Company may also determine that it is advisable to raise
additional equity capital, possibly within the next 12 months. In addition, in
the event that the Company receives a larger than anticipated number of initial
purchase orders upon introduction of its Initial Color Fax Products, it may
require resources substantially greater than the proceeds of this offering or
than are otherwise available to the Company. In such event the Company may be
required to raise additional capital. The Company has no current arrangements
with respect to, or sources of, any such capital, and there can be no assurance
that such additional capital will be available to the Company when needed, on
commercially reasonable terms or at all. The inability of the Company to obtain
additional capital would have a material adverse effect on the Company and could
cause the Company to be unable to implement its business strategy, to postpone
or cancel the development of certain of its proposed products, or to otherwise
significantly curtail or cease its operations. Additional equity financing may
involve substantial dilution to the interests of the Company's then existing
stockholders.
The Company's future performance will be subject to a number of business
factors, including those beyond the Company's control, such as economic
downturns and evolving industry needs and preferences and the availability of
competing products, as well as the ability of the Company to successfully market
its products and technology and to effectively monitor and control its costs.
There can be no assurance that the Company will be able to successfully
implement a marketing strategy, generate significant revenues or ever achieve
profitable operations. In addition, because the Company has had only limited
operations to date, there can be no assurance that its estimates will prove to
be accurate or that unforeseen events will not occur.
FISCAL YEAR ENDED SEPTEMBER 30, 1995
The Company began its operations in April 1995 at which time it received
its initial venture capital funding. Initial operations were geared towards
establishing its business operations in San Jose, California, hiring its initial
staff, primarily computer software developers, and undertaking development of
its initial color fax software products. Accordingly, primary expenses were
research and development expenses consisting of salaries and benefits.
17
<PAGE> 18
NINE MONTHS ENDED JUNE 30, 1996
Research and Development continued to be the major expense at $539,650. The
Company expanded the scope of its operations adding additional equipment and
administrative personnel. Marketing expenses increased as the Company's initial
product comes closer to anticipated introduction into the marketplace. As a
result the travel expense required by founders of the Company diminished
substantially. Depreciation increased as a result of new equipment acquisitions
and full nine-months of depreciation recorded on existing equipment. Rent
increase is reflective of nine months of rent. Wage increase is a result of the
addition of administrative personnel.
RECENT FINANCING
In April 1996 the Company sold 350,000 shares of Common Stock at $.60 per
share to private investors and issued 50,000 shares for services valued at
$30,000.
In May 1996 the Company completed a private placement of 372,000 shares of
its Common Stock at $2.50 per share to certain accredited investors. The Company
received cash proceeds of approximately $901,000 after expenses.
18
<PAGE> 19
BUSINESS OF THE COMPANY
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
freestanding 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.
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 technology testing is
currently internally 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.
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<PAGE> 20
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, providing 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.
The Company believes that the success of facsimile transmission today is
primarily due to the ability of International Standards-compliant machines to
communicate with each other regardless of manufacturer and that any system which
requires non-standard-compliant software to be on the sending and receiving
machines will not achieve widespread success.
A color page creates a very large raw data file when scanned into a color
fax program. A file size of 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
will 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 any other vendor.
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, this second version, currently internally
called CHROMAFAX PLUS (PLUS) will incorporate a proprietary compression process.
This compression process reduces large color files by a significant factor
resulting in image file sizes that make transmission and storage more efficient.
When communicating with a remote PLUS-equipped system, the proprietary
compression process and V.34 (28.8 kb/s) transmission protocols are
automatically utilized. The Company's compression process and the communications
protocol are more efficient and will result in faster transmission, estimated at
2 minutes for a typical high resolution (300 dpi), 24-bit, full-color page.
The PLUS version will use one of three modes, all transparent to the user:
(1) ITU Standard. This enables operation with any fax machine or
software (black and white or color) that is compliant with the
international standard;
(2) Company Proprietary. For fast 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.
In addition to the proprietary compression process, the Company expects to
implement a color calibration/correction process within PLUS for accurate color
reproduction of the original document at varied resolutions. The Company
believes that successful integration of color correction, compression and
communications technologies is required to make color fax software products
popular. The Company is investigating potential patents for parts of the
process.
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.
CHROMAFAX is in final development. The coding is either complete or near
completion for all parts of the product. The graphical user interface has been
specified and is in coding. Current schedule calls for alpha testing (internal
testing of the finished product) in September 1996 with beta testing thirty days
later, and first customer ship during the fourth quarter of 1996. The exact date
of first customer ship will depend on the results of beta testing (testing by
selected third party users) necessary product adjustments will be made to
correct minor defects or to make the product easier to use and understand based
upon input from beta testers. The "PLUS" version of the product will be an
extension of the basic product and will include a more
20
<PAGE> 21
sophisticated compression engine as well as color correction. The basic design
for the compression engine has been finished. This basic design is undergoing a
procedure called code optimization. This procedure generally results in a
reduced number of lines of code as well as faster execution of the code. The
color correction software is in the coding process with encouraging initial
results. The Company expects to apply for patents related to data compression
and color correction. As of the date hereof, neither the basic nor the "PRO"
version of the products have been publicly announced although the products have
been discussed with several potential OEM and other distribution partners and
the product will continue to be discussed and shown to other potential business
partners in the hardware, software, and distribution areas. The product has also
been discussed with some industry experts and analysts from consulting
organizations.
The following diagram illustrates the color faxing process from start to
finish.
[CHART]
THE COMPANY'S OTHER POTENTIAL PRODUCTS
The Company is considering investigation, research and development
activities with respect to several other products relating to digital
compression. These activities may give rise to additional products which may be
commercialized by the Company. However, there can be no assurance that its
efforts will result in marketable products or products which can be produced at
commercially acceptable costs.
RESEARCH AND DEVELOPMENT
From inception through June 30, 1996, substantially all of the Company's
activities related to research and development. The Company's research and
development expenses for the fiscal year ended September 30,
21
<PAGE> 22
1995 and the nine months ended June 30, 1996 were $191,931 and $539,650,
respectively. Such research and development activities were conducted by the
Company's employees and consultants. Over the next twelve months the Company
intends to spend approximately $1,400,000 of the proceeds from the recent
financings and this Offering on research and development, primarily to complete
the development of CHROMAFAX and to complete the development of CHROMAFAX PLUS
into commercial products. The Company believes that such goal is likely to be
accomplished based upon the current status of development of these products.
However, there can be no assurance that the Company will successfully be able to
complete such development efforts. See, "Risk Factors -- Uncertainty of Product
and Technology Development; Need for Product Testing; Technological Factors."
The Company has not conducted an independent review of domestic or foreign
patents issued to third parties to determine if the Company's technology may
infringe upon patents owned by others. See "Risk Factors -- Protection of
Proprietary Information."
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 possible channels of distribution in order to
garner public awareness of the product and to encourage usage. The Company will
offer the product to manufacturers of color printers, scanners, computers,
modems and other software applications to distribute with their products. The
Company will have 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 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 will result in reviews in
computer magazines, television shows 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.
The Company does not currently have a sales force to implement the sale
and/or licensing of its products or related technology. The Company has
determined that it will need to employ an internal sales staff of at least four
people by December 31, 1996.
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 manufacturers, 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
22
<PAGE> 23
to third parties the rights to manufacture the products, either through direct
licensing, OEM arrangements or otherwise.
PATENTS; PROPRIETARY INFORMATION
To the extent practicable, the Company intends to file U.S. patent and/or
copyright applications on certain aspects of its technology and 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.
The Company has not conducted an independent review of patents issued to
third parties to determine if the Company's technology may infringe upon patents
owned by others. Accordingly, there can be no assurance that other parties will
not assert infringement claims against the Company. The litigation of any such
claim would likely involve considerable expense and management time. In
addition, if any such claim were successful, the Company could be required to
pay monetary damages and may be required to either refrain from distributing the
infringing product or obtain a license from the party asserting the claim, which
license may not be available, and if so, on reasonable terms. See "Risk
Factors -- Protection of Proprietary Information".
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.
The Company believes that due to the rapid pace of technological innovation
in software applications, the Company's ability to establish and maintain a
position of leadership in color fax software will depend more upon the skills of
its development personnel than upon any legal protections afforded its products.
COMPETITION
There currently exists products which allow the transmission of color
images between computers. The procedure of transmitting the image is generically
known as "Binary File Transfer" (BFT). Examples of such products are View Office
Power Suite by Max Vision, Color Link by Laser Today International and Hot Fax
also by Laser Today International. Although these products are advertised as
providing color faxing, the products use proprietary formats (rather than the
International Standard) for the file transfer and, therefore, require that their
particular software be installed both at the sending and receiving computer.
Since they do not comply with the recommended International Standard from the
International Telecommunications Union, they are not able to communicate with
other standard-compliant facsimile machines or computers using standard
compliant programs. Of course, since these other programs are proprietary and do
not adhere to any standard, especially to the proposed International Standard,
they also do not communicate with each other. Even if non-standard-compliant
products could communicate with each other, as a matter of coincidence, there
would be no assurance, lacking adherence to a standard, that future versions of
the products would retain the communications capability.
The Company believes that the success of facsimile transmission today is
primarily due to the ability of International Standards-compliant machines to
communicate with each other regardless of manufacturer and that any system which
requires non-standard-compliant software to be on the sending and receiving
machines will not achieve widespread success.
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, the Company assumes that certain companies are
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
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<PAGE> 24
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, 2 of whom are in
management, 1 administrative and 5 technical.
FACILITIES
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 $4,660. The lease is through June 3, 1998. The
Company's facility is approximately 2,511 square feet.
The Company is negotiating to enter into a two-year operating lease for
additional office space of approximately 2,331 square feet. The Company will be
obligated to make monthly rental payments of $6,906 under a new combined lease.
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<PAGE> 25
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
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 President and Director(1)
Benjamin T. Maltby..................... 46 Secretary and Treasurer
William M. Allen....................... 67 Director
E. T. Kalinoski........................ 41 Director
John L. Douglas........................ 55 Director(1)
Fred Chanowski......................... 45 Director Nominee(1)
Stanley A. Young....................... 69 Director Nominee(1)
Peter A. Whealton...................... 50 Director Nominee(1)
</TABLE>
- ---------------
(1) The term of Wil F. Zarecor and John L. Douglas as directors of the Company
will end at the closing of the offering herein and Fred Chanowski, Stanley
A. Young and Peter A. Whealton will become directors at that time.
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, PRESIDENT AND DIRECTOR. Mr. Zarecor has been President and
a director since September 1995. 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.
BENJAMIN T. MALTBY, SECRETARY AND TREASURER. Mr. Maltby has been Secretary
and Treasurer since 1995. He also serves as Controller of Call Now, Inc., a
public long distance telephone company, since 1995. From 1990 to 1992 he was
Chief Financial Officer of College Housing of America. From 1992 to 1994 he was
President of Omegatel.
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 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. In May 1995 Call Now, Inc. made a subordinated loan to the Underwriter
which matures in March 1997.
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.
JOHN L. DOUGLAS, DIRECTOR. Mr. Douglas has been a director and chief
scientist since 1995. From 1992 to 1995 he was a self-employed computer analyst.
From 1988 to 1992 he was employed as a computer analyst for C-Cube Microsystems,
a public computer chip company. He holds a BS in Mathematics from Cal Poly, and
an MS in Applied Mathematics from the University of Santa Clara.
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.
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<PAGE> 26
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.
Peter A. Whealton has been Chairman and Chief Executive Officer of Core
Business Technologies, an office products dealer, since 1983.
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.
Executive Compensation
The Company did not pay any executive officers or key employees total
compensation in excess of $100,000 per year in either of the Company's two
fiscal years from inception (August 26, 1994) to September 30, 1994 or the
fiscal year ended September 30, 1995. There were no retirement, bonus, profit
sharing or other compensation payments during such periods.
SUMMARY EXECUTIVE COMPENSATION TABLE
The following table sets forth the total compensation paid to the Company's
chief executive officer for the last two completed fiscal years. No other
officer received compensation of $100,000 or more during any such year.
<TABLE>
<CAPTION>
TOTAL ANNUAL CASH
COMPENSATION
-------------------------
YEAR ENDED
NAME AND POSITION SEPTEMBER 30, AMOUNT
- --------------------------------------------------------------------- ------------- -------
<S> <C> <C>
E.T. Kalinoski....................................................... 1994 -0-
-- President from August 26, 1994 until August 1, 1995 $17,000
1995/Consultant(1)
Wil Zarecor.......................................................... 1994 -0-
-- President(1)(2) 1995 $36,000
</TABLE>
- ---------------
(1) E.T. Kalinoski was President until August 1, 1995 when Wil Zarecor was
elected President. Abe Ostrovsky became Chairman in February 1996.
(2) Wil Zarecor received an incentive stock option for 20,000 shares exercisable
at $2.50 per share in May 1996.
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 $.30 per share. Mr. Ostrovsky was 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 serves 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.
John L. Douglas serves as senior scientist pursuant to a two year
employment agreement which terminates on May 30, 1997. Such agreement provides
for a base salary of $120,000 per year.
Glenn Crepps serves as director of software development pursuant to a two
year employment agreement which terminates on May 30, 1997. Such agreement
provides for a base salary of $100,000 per year.
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<PAGE> 27
Stock Option Plan
On April 4, 1996, the Board of Directors adopted, and the stockholders of
the Company have approved, the Company's Stock Option Plan (the "Stock Option
Plan" or the "Plan"). The Plan provides for the granting of options on up to an
aggregate of 780,000 shares of Common Stock.
The Plan provides for the granting to eligible participants of options to
purchase Common Stock that qualify as "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") ("ISO"). ISOs are sometimes collectively referred to as "Options."
Employees of the Company are eligible to participate in the Plan. The Plan is
administered by the Board of Directors or a Committee appointed by the Board of
Directors, which determines the persons who are to receive Options, the terms
and number of shares subject to each Option.
ISOs may not be granted at a purchase price less than the fair market value
of the Common Stock on the date of the grant (or, for an Option granted to a
person holding more than 10% of the Company's voting stock, at less than 110% of
fair market value). Aside from the maximum number of shares of Common Stock
reserved under the Plan, there is no minimum or maximum number of shares that
may be subject to Options. However, the aggregate fair market value of the stock
subject to ISOs granted to any optionee that are exercisable for the first time
by an optionee during any calendar year may not exceed $100,000. ISOs generally
expire three months after the optionee is no longer an employee of the Company.
Options may not be transferred other than by will or the laws of descent and
distribution, and during the lifetime of an optionee may be exercised only by
the optionee. The term of each Option, which is fixed by the Board of Directors
at the time of grant, may not exceed five years from the date the option is
granted.
As of May 29, 1996, the Company had granted options for 458,000 shares with
an exercise price of $2.50 per share. As of May 29, 1996, 180,000 of such
granted options were vested and exercisable. Options were granted to directors
and officers as follows:
<TABLE>
<S> <C>
Abe Ostrovsky................................................ 180,000 shares @ $2.50
John Douglas................................................. 30,000 shares @ $2.50
Wil Zarecor.................................................. 20,000 shares @ $2.50
</TABLE>
In addition, two employees have received stock options for 40,000 shares
each exercisable at $.10 per share which are not ISO options.
CERTAIN TRANSACTIONS
In connection with the organization of the Company in April 1995, the
Company issued shares of its Common Stock at $.001 per share to the following
persons:
<TABLE>
<S> <C>
Dave Olsen................................................................. 320,000
Wil F. Zarecor............................................................. 235,000
Robert D. Widergren........................................................ 230,000
John L. Douglas............................................................ 100,000
Glenn Crepps............................................................... 100,000
E. T. Kalinoski............................................................ 100,000
Ed Martin.................................................................. 61,000
Patrick Kalinoski.......................................................... 60,000
Michael G. Widergren....................................................... 50,000
John McCracken............................................................. 30,000
Charles Gerber............................................................. 25,000
Benjamin T. Maltby......................................................... 20,000
Landis McHaffey............................................................ 5,000
</TABLE>
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
27
<PAGE> 28
$89,000 in compensation income as a result of such forgiveness, In addition, Mr.
Kalinoski has 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) until May 1996 and will receive a final payment of $30,000 one
month after closing of this offering.
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 August 1995 the Company sold 540,000 shares of its Common Stock to Call
Now, Inc. for $496,800 and an option to acquire 320,000 shares for $.92 per
share for a warrant price of $3,200. In September 1995 the number of shares
issued to Call Now, Inc. was adjusted to 550,000 due to additional shares issued
to other shareholders. William M. Allen, President of Call Now, Inc., was then
elected to the Board of Directors of the Company.
In January 1996 Call Now, Inc. lent the Company $50,000 for sixty (60) days
with interest at 8%. Such proceeds were used for working capital.
In March 1996 Call Now, Inc. purchased 320,000 shares of Common Stock for
$96,000 ($.30 per share), including the principal and accrued interest on the
foregoing loan with the balance in cash. The exercise price of the warrant
purchased in August 1995 was reduced to $.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 will be redeemed at the
closing of this offering for $3.00 per share plus one share of the Company's
common stock per share. Such Preferred Stock accrues a cumulative dividend of
$.21 per share annually on the anniversary of its issuance with the first such
dividend accruing in March 1997.
During May 1996 the Board of Directors approved and the Company paid a
bonus of $90,000 to Abe Ostrovsky, Chairman and Chief Executive Officer.
The Company believes that all transactions with officers, directors and
shareholders were made on terms no less favorable to the Company than those
available from unaffiliated parties. The Company will have all transactions with
affiliates approved by a majority of disinterested directors.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the date of this Prospectus, 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 executive officer of the Company; and (iii)
all directors and officers as a group adjusted to reflect the sale of shares
offered herein, but do not reflect any shares issuable on the exercise of
Warrants, the Underwriters' Over-Allotment Option and other outstanding options.
<TABLE>
<CAPTION>
NUMBER OF PERCENT BEFORE PERCENT AFTER
NAME AND ADDRESS SHARES OFFERING(1) OFFERING(2)
- -------------------------------------------------------- --------- -------------- -------------
<S> <C> <C> <C>
Call Now, Inc.(3)....................................... 870,000 23 % 6 %
P.O.Box 531399
Miami Shores, FL 33153
William M. Allen(4)..................................... 870,000 23 13.7
Abe Ostrovsky (5)....................................... 480,000 12.7 9.8
E. T. Kalinoski (6)..................................... 420,000 11.1 8.5
Wil Zarecor............................................. 235,000 6.2 4.8
Robert Widergren........................................ 230,000 6.1 4.7
John Douglas............................................ 220,000 5.8 4.5
Benjamin T. Maltby...................................... 20,000 * *
Officers and Directors as a group (5 persons)........... 2,245,000 59.5% 41.6%
</TABLE>
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<PAGE> 29
- ---------------
* Less than 1%
(1) Based on 3,772,000 shares outstanding.
(2) Based on 4,922,000 shares to be outstanding, including 150,000 shares to be
issued to Call Now, Inc. in connection with the redemption of the Company's
Preferred Stock.
(3) Does not include 150,000 shares of Preferred Stock which will be redeemed
for $450,000 and 150,000 shares of Common Stock upon closing of this
offering. Includes 723,438 shares of Common Stock being distributed by Call
Now, Inc. as a dividend to its stockholders of record as of March 12, 1996.
See "The Distribution."
(4) Represents shares owned by Call Now, Inc. of which Mr. Allen is an
affiliate. Mr. Allen and his spouse will receive 377,643 of such shares as
a dividend from Call Now, Inc. See "The Distribution".
(5) Includes 180,000 shares which may be acquired pursuant to outstanding stock
options.
(6) Includes 320,000 shares owned by Dave Olson, a relative.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock with
$.001 par value. The holders of the Common Stock are entitled to one vote per
each share held and have the sole right and power to vote on all matters on
which a vote of stockholders is taken. Voting rights are non-cumulative. The
holders of shares of Common Stock are entitled to receive dividends when, as and
if declared by the Board of Directors, out of funds legally available therefore
and to share pro-rata in any distribution to stockholders. The Company
anticipates that any earnings will be retained for use in its business for the
foreseeable future. Upon liquidation, dissolution, or winding up of the Company,
the holders of the Common Stock are entitled to receive the net assets held by
the Company after distributions to the holders of the Preferred Stock. The
holders of Common Stock do not have any preemptive right to subscribe for or
purchase any shares of any class of stock. The outstanding shares of Common
Stock and the shares offered hereby will not be subject to further call or
redemption and will be fully paid and non-assessable.
REDEEMABLE STOCK PURCHASE WARRANTS
Each Redeemable Stock Purchase Warrant will entitle the registered holder
to purchase one share of the Company's Common Stock for $6.00. The exercise
prices of the Warrants and the number of shares issuable upon exercise of such
Warrants will be subject to adjustment to protect against dilution in the event
of stock dividends, stock splits, combinations, subdivisions and
reclassification. Warrants may be exercised by payment of the exercise price in
United States funds by cash or certified or bank check. No fractional shares of
Common Stock will be issued in connection with the exercise of Warrants.
Warrants may not be exercised unless a registration statement pursuant to the
Securities Act, as amended, covering the underlying shares of Common Stock is
current and such shares have been qualified, or there is an exemption from
qualification requirements under the securities laws of the state of residence
of the holder of the Warrants. In the event that there is no such registration
statement or exemption from registration, the holder will not be able to
exercise the Warrants.
The Company may redeem the Warrants at a price of $.25 per Warrant by
giving not less than 30 days prior written notice to the record holders if the
average closing bid price of the Common Stock as reported on the OTC Bulletin
Board or on NASDAQ or the last trade price of the Common Stock (if the Common
Stock is then traded on a national securities exchange) equals or exceeds $12.00
for the 30 consecutive trading days ending on the 10th day prior to the date on
which the notice of redemption is given. In the event the Company notifies
record holders of its intent to redeem any Warrants, the record holders may
exercise same at any time prior to the close of business on the day immediately
preceding the date fixed for redemption provided that there is a registration
statement in effect or there is an exemption from such registration. The
Warrants may not be redeemed during the first year from the effective date
without the written consent of Barron Chase Securities, Inc.
29
<PAGE> 30
Unless extended by the Company at its discretion, the Warrants will expire
at 3:00 p.m. Eastern time on September 25, 1999, the third anniversary of the
date of this Prospectus. In the event a holder of Warrants fails to exercise the
Warrants prior to their expiration, the Warrants will expire and the holder
thereof will have no further rights with respect to the Warrants.
The Warrants may be exercised upon surrender of the Warrant certificate on
or prior to the expiration date at the offices of the warrant agent, with the
exercise form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
certified check or bank draft payable to the Company) to the warrant agent for
the number of Warrants being exercised. The Warrant Holders do not have the
rights or privileges of holders of Common Stock.
No Warrant will be exercisable unless at the time of exercise the Company
has filed a current registration statement with the Commission covering the
shares of Common Stock issuable upon exercise of such Warrant and such shares
have been registered or qualified or deemed to be exempt from registration or
qualification under the securities laws of the state of residence of the holder
of such Warrant. The Company will use its best efforts to have all such shares
so registered or qualified on or before the exercise date and to maintain a
current prospectus relating thereto until the expiration of the Warrants,
subject to the terms of the Warrant Agreement. While it is the Company's
intention to do so, there can be no assurance that it will be able to do so.
DIVIDENDS
To date, the Company has not declared or paid any dividends on its Common
Stock. The payment by the Company of dividends, if any, is within the discretion
of the Board of Directors and will depend on the Company's earnings, if any, its
capital requirements and financial condition, as well as other relevant factors.
The Board of Directors does not intend to declare any dividends in the
foreseeable future, but instead intends to retain earnings for use in the
Company's business operations.
TRANSFER AGENT AND WARRANT AGENT
The transfer agent for the Common Stock and the Warrant Agent for the
Warrants is American Stock Transfer & Trust Company, New York, NY.
REPORTS TO STOCKHOLDERS
The Company intends to file an application with the Securities and Exchange
Commission to register its Common Stock under the provisions of Section 12(g) of
the Exchange Act and has agreed with the Underwriter that it will use its best
efforts to continue to maintain such registration. Such registration will
require the Company to comply with periodic reporting, proxy solicitation and
certain other requirements of the Exchange Act.
CERTAIN PROVISIONS OF FLORIDA LAW
The Company is subject to several anti-takeover provisions under Florida
law that apply to a public corporation organized under Florida law, unless the
corporation has elected to opt out of those provisions in its articles of
incorporation or bylaws. The Company has not elected to opt out of those
provisions. The Common Stock of the Company is subject to the "affiliated
transactions" and "control-share acquisition" provisions of the Florida Business
Corporation Act. These provisions require, subject to certain exceptions, that
an "affiliated transaction" be approved by the holders of two-thirds of the
voting shares other than those beneficially owned by an "interest shareholder"
or by a majority of disinterested directors and that voting rights be conferred
on "control shares" acquired in specified control share acquisitions only to the
extent conferred by resolution approved by the stockholders, excluding holders
of shares defined as "interested shares."
30
<PAGE> 31
LIMITED LIABILITY AND INDEMNIFICATION
The Articles of Incorporation of the Company provides that, to the fullest
extent permitted by applicable law, as amended from time to time, the Company
will indemnify its officers, directors, employees and agents incurred in
connection with the Company's affairs against liabilities, damages, settlements
and expenses (including attorneys' fees). This indemnification includes the
right to advancement of expenses when allowed pursuant to applicable law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have 4,922,000
shares of Common Stock outstanding, assuming no exercise of the Warrants or
other outstanding options and warrants. Subject to the contractual restrictions
described below, 3,092,000 of these shares, including all 1,000,000 of the
shares being offered hereby and the 2,092,000 shares of Common Stock being
registered by the Company concurrently with this offering (the Selling
Stockholders Shares and the Distribution shares) will be freely tradeable
without restriction or further registration under the Securities Act, except for
any shares purchased by an "affiliate" of the Company (in general, a person who
has a control relationship with the Company), which shares will be subject to
the resale limitations, described below, of Rule 144 promulgated under the
Securities Act. The remaining 1,830,000 shares (the "Restricted Shares") are
deemed to be "restricted securities," as that term is defined under Rule 144, in
that such shares were issued and sold by the Company in private transactions not
involving a public offering and, as such, may only be sold pursuant to an
effective registration under the Securities Act, in compliance with the
exemption provisions of Rule 144 or pursuant to another exemption under the
Securities Act. Such "restricted" shares will become eligible for sale under
Rule 144 beginning in April 1997. See "Selling Stockholders" and "The
Distribution".
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated with an affiliate), who has
owned restricted shares of Common Stock beneficially for at least two years is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class or, if the common stock is quoted on NASDAQ, the average weekly
trading volume during the four calendar weeks preceding the sale. A person who
has not been an affiliate of the Company for at least three months immediately
preceding the sale and who has beneficially owned shares of Common Stock for at
least three years is entitled to sell such shares under Rule 144 without regard
to any of the limitations described above.
Company stockholders beneficially owning 1,368,562 of the "restricted"
shares of Common Stock referred to above may not sell or otherwise dispose of
any of their shares for a period of 12 months from the date of this Prospectus.
See "Underwriting", "Selling Stockholders" and "The Distribution".
Prior to this offering, there has been no market for the Common Stock and
no prediction can be made as to the effect, if any, that public sales of shares
of Common Stock or the availability of such shares for sale will have on the
market prices of the Common Stock and the Warrants prevailing from time to time.
Nevertheless, the possibility that substantial amounts of Common Stock may be
sold in the public market may adversely affect prevailing market prices for the
Common Stock and the Warrants and could impair the Company's ability in the
future to raise additional capital through the sale of its equity securities.
31
<PAGE> 32
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, Barron
Chase Securities, Inc. (the "Underwriter") has agreed to purchase from the
Company an aggregate of 1,000,000 Shares of Common Stock ("Shares") and
1,000,000 Warrants (collectively the "Securities") at the public offering price
less the underwriting discount set forth on the cover page of this Prospectus.
The Securities are offered by the Underwriter subject to prior sale, when, as
and if delivered to and accepted by the Underwriter and subject to approval of
certain legal matters by counsel and certain other conditions. The Underwriter
is committed to purchase all Securities offered by this Prospectus, if any are
purchased.
The Company has been advised that the Underwriter proposes to offer the
Securities to the public at the offering price set forth on the cover page of
this Prospectus. The Underwriter may offer the Securities through certain
selected dealers who are members of the National Association of Securities
Dealers, Inc. ("NASD"), and who agree to sell the Securities in conformity with
the NASD Rules of Conduct. The Underwriter may allow a concession to such
selected dealers, however, such concession shall not exceed the amount of the
underwriting discount that the Underwriter is to receive.
The Company has granted options to the Underwriter, exercisable for 30 days
from the date of this Prospectus, to purchase up to an additional 150,000 Shares
and an additional 150,000 Warrants at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus (the "Over-
Allotment Option"). The Underwriters may exercise this option solely to cover
over-allotments in the sale of the Securities being offered by this Prospectus.
Officers and directors of the Company may introduce the Underwriter to
persons to consider this offering. Officers and directors of the Company may
purchase Securities either through the Underwriter or through participating
dealers. In this connection, officers and directors will not receive any
commissions or any other compensation.
The Company has agreed to pay the Underwriter a commission of ten percent
(10%) of the gross proceeds of the offering (the "Underwriting Discount"),
including the gross proceeds from the sale of the Over-Allotment Option, if
exercised. In addition, the Company has agreed to pay to the Underwriter a non-
accountable expense allowance of three percent (3%) of the gross proceeds of
this Offering, including proceeds from any Securities purchased pursuant to the
Over-Allotment Option. The Underwriter's expenses in excess of the
non-accountable expense allowance will be paid by the Underwriter. To the extent
that the expenses of the Underwriter are less than the amount of the
non-accountable expense allowance received, such excess shall be deemed to be
additional compensation to the Underwriter.
The Underwriter has advised the Company that the Underwriter does not
expect sales to discretionary accounts to be in excess of 5% of the Common Stock
and Warrants offered in the underwritten offering.
The Company has agreed to engage the Underwriter as a financial advisor for
a period of three (3) years from the consummation of this Offering, at a fee of
$108,000, all of which is payable to the Underwriter on the closing date.
Pursuant to the terms of a financial advisory agreement, the Underwriter has
agreed to provide, at the Company's request, advice to the Company concerning
potential merger and acquisition and financing proposals, whether by public
financing or otherwise.
Prior to the Public Offering, there has been no public market for the
shares of Common Stock or Warrants of the Company. Consequently, the initial
public offering price for the Securities, and the terms of the Warrants
(including the exercise price of the Warrants), have been determined by
negotiation between the Company and the Underwriter. Among the factors
considered in determining the public offering price were the history of, and the
prospects for, the Company's business, an assessment of the Company's
management, its past and present operations, the Company's development and the
general condition of the securities market at the time of the offering. The
initial public offering price does not necessarily bear any relationship to the
Company's assets, book value, earnings or other established criterion of value.
Such price is subject to change as a result of market conditions and other
factors, and no assurance can be given that a public market for the Shares
and/or Warrants will develop after the close of the Public Offering, or if a
public
32
<PAGE> 33
market in fact develops, that such public market will be sustained, or that the
Shares and/or Warrants can be resold at any time at the public offering or any
other price. See "Risk Factors."
At the closing of the Public Offering, the Company will issue to the
Underwriter and/or persons related to the Underwriter, for nominal
consideration, Common Stock Underwriter Warrants and Warrant Underwriter
Warrants (the "Underwriter's Warrants") to purchase up to 100,000 Shares and
100,000 Warrants ("Underlying Warrants"). The Underwriter's Warrants will be
exercisable for a five year period commencing on the date of this Prospectus.
The initial exercise price of each Common Stock Underwriter Warrant shall be
$9.00 per share (150% of the public offering price). The initial exercise price
of each Warrant Underwriter Warrant shall be $.1875 per Underlying Warrant (150%
of the public offering price). Each Underlying Warrant will be exercisable for a
three (3) year period commencing on the date of this Prospectus to purchase one
share of Common Stock at an exercise price of $9.00 per share of Common Stock.
The Underwriter's Warrants will not be transferable for one year from the date
of this Prospectus, except (i) to officers of the Underwriter, and members of
the selling group and officers and partners thereof; (ii) by will; or (iii) by
operation of law.
The Underwriter's Warrants contain provisions providing for appropriate
adjustment in the event of any merger, consolidation, recapitalization,
reclassification, stock dividend, stock split or similar transaction. The
Underwriter's Warrants contain net issuance provisions permitting the holders
thereof 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, a
number of securities, valued at the current fair market value on the date of
exercise, to pay the exercise price. Such net exercise provision has the effect
of requiring the Company to issue shares of Common Stock without a corresponding
increase in capital. A net exercise of the Underwriter's Warrants will have the
same dilutive effect on the interests of the Company's shareholders as will a
cash exercise. The Underwriter's Warrants do not entitle the holders thereof to
any rights as a shareholder of the Company until such Underwriter's Warrants are
exercised and shares of Common Stock are purchased thereunder.
The Underwriter's Warrants and the securities issuable thereunder may not
be offered for sale except in compliance with the applicable provisions of the
Securities Act of 1933. The Company has agreed that if it shall cause a
post-effective amendment, a new registration statement, or similar offering
document to be filed with the Commission, the holders shall have the right, for
seven years from the date of this Prospectus, to include in such registration
statement or offering statement the Underwriter's Warrants and/or the securities
issuable upon their exercise at no expense to the holders. Additionally, the
Company has agreed that, upon request by the holders of 50% or more of the
Underwriter's Warrants and Registrable Securities during the period commencing
one year from the date of this Prospectus and expiring four years thereafter,
the Company will, under certain circumstances, register the Underwriter's
Warrants and/or any of the securities issuable upon their exercise.
The Company has also agreed that if the Company participates in any merger,
consolidation or other such transactions which the Underwriter has brought to
the Company during a period of five years after the closing of this offering,
and which is consummated after the closing of this offering (including an
acquisition of assets or stock for which it pays, in whole or in part, with
Shares or other securities), or if the Company retains the services of the
Underwriter in connection with any merger, consolidation or other such
transaction, then the Company will pay for the Underwriter's services an amount
equal to 5% of up to one million dollars of value paid or received in the
transaction, 4% of the next million dollars of such value, 3% of the next
million dollars of such value, 2% of the next million dollars of such value and
1% of the next million dollars and of all such value above $4,000,000.
The Company has agreed to indemnify the Underwriter against any costs or
liabilities incurred by the Underwriter by reasons of misstatements or omissions
to state material facts in connection with the statements made in the
Registration Statement and the Prospectus. The Underwriter has in turn agreed to
indemnify the Company against any liabilities by reason of misstatements or
omissions to state material facts in connection with the statements made in the
Prospectus, based on information relating to the Underwriters and furnished in
writing by the Underwriter. To the extent that this section may purport to
provide exculpation from possible
33
<PAGE> 34
liabilities arising from the federal securities laws, in the opinion of the
Commission, such indemnification is contrary to public policy and therefore
unenforceable.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
SELLING STOCKHOLDERS
The Registration Statement of which this Prospectus forms a part includes
1,368,562 shares of Common Stock (the "Selling Stockholder Shares") for resale
by certain stockholders of the Company (the "Selling Stockholders"). The Selling
Stockholders may from time to time sell or otherwise dispose of such shares of
Common Stock on their own behalf at market prices then prevailing or otherwise
at prices then available. None of these shares are being sold in the offering
which is being underwritten by the Underwriter, and the Company will not receive
any of the proceeds from the sale of these Selling Stockholders' Shares. The
Company is paying substantially all of the expenses of registration of the
Selling Stockholders' Shares. Brokers' commissions, taxes and other selling
expenses are to be borne by the Selling Stockholders and are not expected to
exceed normal selling expenses. Sales of the Selling Stockholders' Shares will
be subject to the prospectus delivery requirements and other requirements of the
Securities Act. The Selling Stockholders may not sell any of the Selling
Stockholders' shares for twelve months from the date of this Prospectus.
THE DISTRIBUTION
BACKGROUND AND REASON FOR DISTRIBUTION
Call Now, Inc. acquired shares of the Company's common stock in 1995 and
1996. See "Certain Transactions". Call Now's Board of Directors declared a
dividend of 1 share of the Company's common stock for each 10 shares of Call Now
outstanding to Call Now's stockholders of record on March 12, 1996 (the "Record
Date"). As a result Call Now is distributing 723,438 shares of the Company's
common stock to Call Now's shareholders as of the Record Date. The Distribution
will provide the shareholders of Call Now, Inc. with a source of potential
profit in addition to their direct investment in Call Now. Call Now has agreed
not to make the Distribution until six months from the Date of this Prospectus.
LEGAL MATTERS
The validity of the securities offered hereby is being passed upon for the
Company by Joel Bernstein, 9701 Biscayne Boulevard, Miami, Florida. Mr.
Bernstein is the owner of 50,000 shares of the Company's Common Stock.
Certain legal matters will be passed upon for the Underwriter by David A.
Carter, P.A., 355 West Palmetto Park Road, Boca Raton, Florida 33432.
EXPERTS
The financial statements of Cable-Sat Systems, Inc. appearing in this
Prospectus and Registration Statement have been audited by Grant Schwartz
Associates, independent auditors, as set forth in their report thereon appearing
elsewhere herein and in the Registration Statement, and are included in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.
34
<PAGE> 35
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 under the Securities Act with respect to the
securities offered hereby. This Prospectus, filed as a part of the Registration
Statement, does not contain certain information set forth in or annexed as
exhibits to the Registration Statement, and reference is made to such exhibits
to the Registration Statement for the complete text thereof. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement and to the exhibits filed as
part thereof, which may be inspected at the office of the Commission without
charge, or copies thereof may be obtained therefrom upon payment of a fee
prescribed by the Commission.
35
<PAGE> 36
[This Page Intentionally Left Blank]
<PAGE> 37
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Balance Sheets as of September 30, 1995 and March 31, 1996 (audited).................. F-3
Statement of Shareholders' Equity for the years ended September 30, 1995 and six
months ended March 31, 1996 (audited)............................................... F-4
Statement of Income and Expenses from inception (August 26, 1994) to March 31, 1996,
for the year ended September 30, 1995 and the six months ended March 31, 1996
(audited)........................................................................... F-5
Statement of Cash Flows from inception (August 26, 1994) to March 31, 1996, for the
year ended September 30, 1995 and the six months ended March 31, 1996 (audited)..... F-6
Notes to Financial Statements......................................................... F-7
Balance Sheet as of June 30, 1996 (unaudited)......................................... F-10
Statement of Shareholders' Equity September 30, 1995 through June 30, 1996
(unaudited)......................................................................... F-11
Statement of Income and Expenses for the nine months ended June 30, 1995 and 1996
(unaudited)......................................................................... F-12
Statement of Cash Flows for the nine months ended June 30, 1995 and 1996
(unaudited)......................................................................... F-13
Notes to Financial Statements......................................................... F-14
</TABLE>
F-1
<PAGE> 38
GRANT-SCHWARTZ ASSOCIATES, CPA'S
40 SOUTHEAST 5TH STREET, SUITE 500
BOCA RATON, FL 33432
(407) 394-8977
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS
CABLE-SAT SYSTEMS, INC.
We have audited the accompanying balance sheet of Cable-Sat Systems,
formerly Cable-Sat Compression, Inc. (a development stage company) as of March
31, 1996 and September 30, 1995 and the related statements of income,
shareholders' equity and cash flows for the six months ended March 31, 1996 and
the year ended September 30, 1995 and from August 26, 1994 (date of inception)
to March 31, 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 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, formerly
Cable-Sat Compression, Inc. (a development stage company) as of March 31, 1996
and its income and cash flows for the six months then ended, and the year ended
September 30, 1995 and from August 26, 1994 (date of inception) to March 31,
1996, in conformity with generally accepted accounting principles.
GRANT-SCHWARTZ ASSOCIATES, CPA's
Boca Raton, Florida
May 31, 1996
F-2
<PAGE> 39
CABLE-SAT SYSTEMS, INC.
FORMERLY CABLE-SAT COMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1996 1995
---------- -------------
<S> <C> <C>
ASSETS
Current Assets
Cash............................................................... $ 380,523 $ 314,078
Notes receivable -- Related parties................................ 89,000 109,000
Receivables -- Other............................................... 4,462 2,241
Deferred Registration Costs........................................ 21,520 -0-
---------- -------------
Total Current Assets....................................... 495,505 425,319
---------- -------------
Fixed Assets
Office Furniture................................................... 21,353 19,329
Computer Equipment................................................. 65,876 40,195
---------- -------------
87,229 59,524
Less: Accumulated Depreciation..................................... 15,308 2,700
---------- -------------
Net Fixed Assets........................................... 71,921 56,824
---------- -------------
Other Assets
Organization Costs (Net of $228 and $115 Amortization)............. 1,493 1,606
Security Deposits.................................................. 4,645 4,645
---------- -------------
Total Other Assets......................................... 6,138 6,251
---------- -------------
Total Assets............................................... $ 573,564 $ 488,394
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable................................................... $ 2,011 $ 600
Due to Affiliate................................................... 1,520 -0-
Payroll Taxes Payable.............................................. 13,221 42,336
Wages Payable...................................................... 26,721 -0-
---------- -------------
Total Current Liabilities.................................. $ 43,473 $ 42,936
---------- -------------
Shareholders' Equity
Preferred Stock, Par Value $.001, Cumulative, Authorized Issued and
Outstanding 150,000 Shares...................................... $ 450,000 $ -0-
Common Stock, Par Value $.001 Per Share; Authorized 50,000,000
Shares; Issued and Outstanding 3,000,000 and 2,200,000 Shares... 3,000 2,200
Paid in Capital.................................................... 1,003,223 698,023
Deficit Accumulated During Development Stage....................... (836,132) (254,765)
Stock Subscription Receivable...................................... (90,000) -0-
---------- -------------
Total Shareholders' Equity................................. 530,091 445,458
---------- -------------
Total Liabilities and Shareholders' Equity................. $ 573,564 $ 488,394
========= ==========
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 40
CABLE-SAT SYSTEMS, INC.
FORMERLY CABLE-SAT COMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
MARCH 31, 1996
<TABLE>
<CAPTION>
ACCUMULATED
PREFERRED STOCK COMMON STOCK DURING
------------------ ------------------ PAID IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL
------- -------- --------- ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Sale of Common Stock
May 1995 --
$0.001/Share........ 0 $ 0 1,276,000 $1,276 $ (1,116) $ $ 160
May 1995 --
$0.65/Share......... 0 0 374,000 374 199,689 200,063
August 1995 --
$0.92/share......... 0 0 550,000 550 499,450 500,000
Loss for the Year Ended
September 30, 1995..... (254,765) (254,765)
------- -------- --------- ------ ---------- ----------- ---------
Balance -- September 30,
1995................... 0 0 2,200,000 2,200 698,023 (254,765) 445,458
Sale of Preferred Stock
March 1996 --
$3/Share............ 150,000 450,000 0 0 0 0 450,000
Sale of Common Stock
December 1995 --
$0.001/Share........ 0 0 60,000 60 (60) 0 0
January 1996 --
$1/Share............ 0 0 120,000 120 119,550 0 120,000
February 1996 --
$0.30/Share......... 0 0 300,000 300 89,700 0 90,000
March 1996 --
$0.30/Share......... 0 0 320,000 320 95,660 0 96,000
Subscription Receivable
May 1995............... (90,000)
Loss for the Six Months
ended March 31, 1996... (581,367) (581,367)
------- -------- --------- ------ ---------- ----------- ---------
Balance -- March 31,
1996................... 150,000 $450,000 3,000,000 $3,000 $1,003,223 $(836,132) $(530,091)
======= ======== ======== ====== ========= ========= =========
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 41
CABLE-SAT SYSTEMS, INC.
FORMERLY CABLE-SAT COMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF INCOME AND EXPENSES
MARCH 31, 1996
<TABLE>
<CAPTION>
FROM
AUGUST 26, 1994
SIX MONTHS YEAR (DATE OF
ENDED ENDED INCEPTION TO)
MARCH 31, 1996 SEPTEMBER 30, 1995 MARCH 31, 1996
-------------- ------------------- ----------------
<S> <C> <C> <C>
Sales............................................ $ -0- $ -0- $ -0-
Expenses
Consulting Fees................................ 35,000 17,000 52,000
Depreciation and Amortization.................. 12,721 2,815 15,536
Research and Development....................... 368,736 191,931 560,667
Travel......................................... 7,532 23,466 30,998
Rent Expense................................... 28,381 13,472 41,853
Wages.......................................... 119,500 -0- 119,500
Other Operating Expenses....................... 15,297 7,870 23,167
-------------- ------------------- ----------------
Total Expenses......................... 587,167 256,554 843,721
-------------- ------------------- ----------------
Operating Loss................................... (587,167) (256,554) (843,721)
-------------- ------------------- ----------------
Other Income (Expense)
Interest Income................................ 5,800 1,789 7,589
-------------- ------------------- ----------------
Net Loss....................................... $ (581,367) $(254,765) $ (836,132)
=========== ============== ============
Net Loss Per Share -- Primary.................... $ (.24) $ (.12) $ (.36)
=========== ============== ============
Net Loss Per Share -- Dilutive................... $ (.22) $ (.12) $ (.36)
=========== ============== ============
Weighted Average of Shares -- Primary............ 2,493,333 2,291,111
============
Weighted Average of Shares -- Dilutive........... 2,653,033 2,330,889
============
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 42
CABLE-SAT SYSTEMS, INC.
FORMERLY CABLE-SAT COMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
MARCH 31, 1996
<TABLE>
<CAPTION>
FROM
SIX MONTHS YEAR 8/26/94
ENDED ENDED (DATE OF
MARCH 31, SEPTEMBER 30, INCEPTION TO)
1996 1995 MARCH 31, 1996
---------- ------------- --------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Loss from Operations................................... $ (581,367) $(254,765) $ (836,132)
Depreciation and Amortization.......................... 12,721 2,815 15,536
(Increase) Decrease -- Receivables..................... 17,779 (111,241) (93,462)
Increase (Decrease) -- Payables........................ 537 42,936 43,473
---------- ------------- --------------
Net Cash Used in Operating Activities.......... (550,330) (320,255) (870,585)
---------- ------------- --------------
Cash Flows from Investing Activities
Purchase of Property and Equipment..................... (27,705) (59,524) (87,229)
Deposits and Other Assets.............................. -0- (6,366) (6,366)
---------- ------------- --------------
Net Cash Used in Investing Activities.......... (27,705) (65,890) (93,595)
---------- ------------- --------------
Cash Flows from Financing Activities
Sale of Preferred Stock................................ 450,000 -0- 450,000
Sale of Common Stock................................... 216,000 700,223 916,223
Increase -- Deferred Registration Costs................ (21,520) -0- (21,520)
---------- ------------- --------------
Net Cash Provided in Financing Activities...... 644,480 700,223 1,344,703
---------- ------------- --------------
Net Increase in Cash........................... 66,445 314,078 380,523
Cash -- Beginning...................................... 314,078 -0- -0-
---------- ------------- --------------
Cash -- Ending $ 380,523 $ 314,078 $ 380,523
========= ========== ===========
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 43
CABLE-SAT SYSTEMS, INC.
FORMERLY CABLE-SAT COMPRESSION, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 1 -- THE COMPANY
The Company was organized in the State of Florida on August 26, 1994. It is
engaged in the development of digital image coding and data compression
products.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
DEVELOPMENT STAGE COMPANY
The Company's primary operations since inception have been devoted to
developing digital image coding and data compression products. No significant
operating revenue has yet been generated. As a result, the financial statements
are presented in accordance with Statement of Financial Accounting Standards
(SFAS) No. 7, "Accounting and Reporting by Development Stage Enterprises."
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments in highly liquid debt
instruments with a maturity of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using
rates based upon the estimated useful lives of the assets.
ORGANIZATION COSTS
Organization costs have been capitalized and are being amortized over a
sixty month period.
DEFERRED REGISTRATION COSTS
Deferred registration costs, incurred in connection with a private
placement, will be deducted from the proceeds of such offering, if successful.
If the private placement is unsuccessful, the deferred costs will be charged to
operations.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
NET LOSS PER SHARE
Net loss per share has been computed in accordance with SAB 64 which
requires the net loss per common share be computed based on the weighted average
number of shares of common stock outstanding, increased for certain shares or
stock options, including shares of preferred stock, issued within one year or in
contemplation of the Company's filing of its registration statement, and that
such shares be treated as if outstanding for all periods presented.
PREFERRED STOCK
The preferred stock shall be entitled to receive a dividend of $.21 per
share on the twelfth month following its original issuance and then $.21 per
share each year.
F-7
<PAGE> 44
CABLE-SAT SYSTEMS, INC.
FORMERLY CABLE-SAT COMPRESSION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- CASH
<TABLE>
<CAPTION>
<S> <C>
Cash consists of:
Cash in Bank................................................. $ 58,883
Money Market Funds........................................... 321,640
--------
$380,523
========
</TABLE>
NOTE 4 -- PROPERTY AND EQUIPMENT
The useful lives of property and equipment for purposes of depreciation
are:
<TABLE>
<CAPTION>
<S> <C>
Office Equipment................................................. 7 years
Computers........................................................ 5 years
</TABLE>
NOTE 5 -- RELATED PARTY TRANSACTIONS
NOTES RECEIVABLE -- RELATED PARTIES
A shareholder of the company has been advanced funds. These advances are
evidenced by a promissory note bearing interest at the rate of 6% per annum and
were payable on September 1, 1995. The Company has extended the time for
payment. During May 1996, the Company forgave the indebtedness. The total amount
will be charged to operations in the period of forgiveness.
DUE TO AFFILIATES
A shareholder has advanced funds for certain costs relating to the private
placement memorandum.
NOTE 6 -- INCOME TAXES
The Company has available at March 31, 1996, unused operating loss carry
forwards which may provide future tax benefits expiring as follows:
<TABLE>
<CAPTION>
YEARS OF EXPIRATION
---------------------------------------------------------------
<S> <C>
2010...................................................... $254,765
2011...................................................... 581,367
--------
$836,132
========
</TABLE>
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
The company has entered into a three year operating lease for office space
with minimal annual rent of:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------------
<S> <C>
September 30, 1996.............................................. $20,038
September 30, 1997.............................................. 40,075
September 30, 1998.............................................. 26,715
-------
$86,828
=======
</TABLE>
Rent expense was $28,381 and $13,360 respectively.
The Company will pay $30,000 to a shareholder/director one month after the
completion of the proposed public offering referred to in Note 8.
F-8
<PAGE> 45
CABLE-SAT SYSTEMS, INC.
FORMERLY CABLE-SAT COMPRESSION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- SUBSEQUENT EVENTS
SALES TO PRIVATE INVESTORS
During April 1996, the Company issued 350,000 shares of its common stock
for cash of $210,000 and 50,000 shares for services valued at $30,000.
PRIVATE PLACEMENT
During May 1996, the Company completed a private placement of 372,000
shares of its common stock. The Company received net proceeds of $902,000.
PROPOSED PUBLIC OFFERING
The Company has entered into an agreement with an underwriter to sell
1,000,000 shares of its common stock and 1,000,000 redeemable common stock
purchase warrants. Under the terms of the agreement, the securities are being
offered on a firm commitment basis.
STOCK OPTION PLAN
On April 4, 1996, the Board of Directors adopted an incentive stock option
plan available for key employees. The plan provides for granting of options on
up to an aggregate of 780,000 shares of common stock at a price no less than
fair market value at the date of grant (as determined by the Board of
Directors). The options generally expire five years after date of grant and may
require a certain minimum employment period before they may be exercised. The
Board also granted options for 40,000 shares each to two employees which were
not under the plan. As a result, the Company will recognize compensation expense
as follows:
<TABLE>
<S> <C>
Six months ended September 30, 1996............................... $ 48,000
Year ended September 30, 1997..................................... 96,000
Year ended September 30, 1998..................................... 48,000
--------
Total................................................... $192,000
</TABLE>
Transactions involving the stock option plans are summarized as follows:
<TABLE>
<CAPTION>
INCENTIVE OTHER
PLAN OPTIONS
--------- ------
<S> <C> <C>
Shares under option:
Granted -- April 4, 1996...................... 458,000 80,000
Exercised..................................... -0- -0-
--------- ------
Options Available for Exercise................ 458,000 80,000
======== ======
Option Price Per Share............................. $ 2.50 $ .10
--------- ------
</TABLE>
None of the granted options and warrants have been exercised.
In October 1995, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" which permits either the recording of the estimated value of stock
based compensation over the applicable vesting period or disclosing the
unrecorded cost and the related effect on earnings per share in the Notes to the
Consolidated Financial Statements. The Company does not intend to adopt the new
standard at this time but compliance with the new requirements will be made for
the year ended September 30, 1997.
F-9
<PAGE> 46
CABLE-SAT SYSTEMS, INC.
FORMERLY CABLE-SAT COMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1996
-----------
<S> <C>
ASSETS
Current Assets
Cash.......................................................................... $ 823,125
Prepaid Expenses.............................................................. 4,660
Registration Costs............................................................ 186,862
----------
Total Current Assets.................................................. 1,014,646
----------
Fixed Assets
Office Furniture.............................................................. 11,185
Computer Equipment............................................................ 122,874
----------
134,059
Less Accumulated Depreciation................................................. 16,265
----------
Net Fixed Assets...................................................... 117,794
----------
Other Assets
Organization Costs (Net of $414 Amortization)................................. 1,422
Security Deposits............................................................. 4,645
----------
Total Other Assets.................................................... 6,067
----------
Total Assets.......................................................... $ 1,138,508
----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accrued Expenses Payable...................................................... $ 96,530
----------
Total Current Liabilities............................................. $ 96,530
----------
Shareholders' Equity
Preferred Stock, Par Value $.001, Authorized Issued and Outstanding 150,000
Shares..................................................................... $ 450,000
Common Stock, Par Value $.001 Per Share; Authorized 50,000,000 Shares; Issued
and Outstanding 3,772,000 Shares........................................... 3,772
Paid in Capital............................................................... 2,143,481
Deficit Accumulated During Development Stage.................................. (1,579,275)
Outstanding Stock Option...................................................... 24,000
----------
Total Shareholders' Equity............................................ 1,041,978
----------
Total Liabilities and Shareholders' Equity............................ $ 1,138,508
==========
</TABLE>
See Notes to Financial Statements
F-10
<PAGE> 47
CABLE-SAT SYSTEMS, INC.
FORMERLY CABLE-SAT COMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
JUNE 30, 1996
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK DURING
------------------ ------------------ PAID IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL
------- -------- --------- ------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE -- Sept. 30,
1996................ 0 $ 0 2,200,000 $2,200 $ 698,023 $ (254,765) $ 445,458
Sale of Preferred
Stock
March 1996 --
$3/Share......... 150,000 450,000 0 0 0 0 450,000
Sale of Common Stock
December 1996 --
$0.001/Share..... 0 0 60,000 60 (60) 0 0
January 1996 --
$1/Share......... 0 0 120,000 120 119,880 0 120,000
February 1996 --
$0.30/Share...... 0 0 300,000 300 89,700 0 90,000
Subscription
Receivable February
1996................ (90,000)
Sale of Common Stock
March 1996 --
$0.30/Share...... 0 0 320,000 320 95,680 0 96,000
Loss for the Six
Months Ended March
31,
1996................ (581,367) (581,367)
------- -------- --------- ------ ---------- ----------- ----------
BALANCE --
March 31, 1996...... 150,000 450,000 3,000,000 3,000 1,003,223 (836,132) 530,091
April 1996 --
$0.60/Share...... 0 0 350,000 350 209,650 0 210,000
April 1996 -- Shares
for Service
$0.60/Share...... 0 0 50,000 50 29,950 0 30,000
May 1996 --
$2.50/Share...... 0 0 372,000 372 900,658 0 901,030
Subscription
Receivable May
1996 --
Collected........... 90,000
Outstanding Stock
Options............. 24,000
Loss for the Three
Months Ended June
30, 1996............ (743,143) (743,143)
------- -------- --------- ------ ---------- ----------- ----------
BALANCE -- June 30,
1996................ 150,000 $450,000 3,772,000 $3,772 $2,143,481 $(1,579,275) $1,041,978
======= ======== ======== ====== ========= ========== =========
</TABLE>
See Notes to Financial Statements
F-11
<PAGE> 48
CABLE-SAT SYSTEMS, INC.
FORMERLY CABLE-SAT COMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF INCOME AND EXPENSES
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
1996 1995
----------- ----------
<S> <C> <C>
Sales.............................................................. $ 0 $ 0
Expenses
Research and Development......................................... 539,650 18,201
Marketing........................................................ 133,329 19,310
General and Administrative:
Consultant Fees............................................... 331,000 21,000
Wages and Employee Costs...................................... 139,519 0
Travel........................................................ 56,743 3,000
Rent Expense.................................................. 47,904 4,645
Legal and Accounting.......................................... 33,566 10,000
Other Operating Expenses...................................... 49,684 1,399
----------- ----------
Total Expenses........................................... 1,331,395 77,555
----------- ----------
Operating Loss..................................................... (1,331,395) (77,555)
----------- ----------
Other Income (Expense)
Interest Income.................................................. 6,885 0
----------- ----------
Net Loss......................................................... $(1,324,510) $ (77,555)
========== =========
Net Loss Per Share -- Primary...................................... $ (0.46) $ (0.05)
========== =========
Net Loss Per Share -- Dilutive..................................... $ (0.44) $ (0.05)
========== =========
Weighted Average of Shares -- Primary.............................. 2,878,222 1,650,000
========== =========
Weighted Average of Shares -- Dilutive............................. 2,984,689 1,650,000
========== =========
</TABLE>
See Notes to Financial Statements
F-12
<PAGE> 49
CABLE-SAT SYSTEMS, INC.
FORMERLY CABLE-SAT COMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
-----------------------
JUNE 30, JUNE 30,
1996 1995
----------- ---------
<S> <C> <C>
Cash Flows from Operating Activities
Loss From Operations............................................... $(1,324,510) $ (77,555)
Depreciation and Amortization...................................... 13,750 357
(Increase) Decrease -- Receivables................................. 111,241 (85,000)
Increase (Decrease) -- Payables.................................... 53,594 12,969
(Increase) Decrease -- Prepaid Expenses............................ (4,660) 0
----------- ---------
Net Cash Used in Operating Activities...................... (1,150,585) (149,229)
----------- ---------
Cash Flows from Investing Activities
Purchase of Property and Equipment................................. (74,535) (22,834)
Deposits and Other Assets.......................................... (6,366)
----------- ---------
Net Cash Used in Investing Activities...................... (74,535) (29,200)
----------- ---------
Cash Flows from Financing Activities
Sale of Preferred Stock............................................ 450,000 0
Sale of Common Stock............................................... 1,447,030 200,122
Outstanding Stock Options.......................................... 24,000 0
Increase -- Deferred Registration Costs............................ (186,882) 0
----------- ---------
Net Cash Provided from Financing Activities................ 1,734,168 200,122
----------- ---------
Net Increase (Decrease) in Cash............................ $ 509,047 $ 21,692
Cash -- Beginning.................................................. 314,078 0
----------- ---------
Cash -- Ending..................................................... $ 823,125 $ 21,692
========== =========
</TABLE>
See Notes to Financial Statements
F-13
<PAGE> 50
CABLE-SAT SYSTEMS, INC.
FORMERLY CABLE-SAT COMPRESSION, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
BASIS OF PRESENTATION
The accompanying financial statements reflect all adjustments which, in the
opinion of management, are necessary for a fair presentation of the financial
position and the results of operations for the interim period presented.
Certain financial information which is normally included in financial
statements prepared in accordance with generally accepted accounting principles,
but which is not required for interim reporting purposes has been condensed or
omitted. The accompanying financial statements should be read in conjunction
with the audited financial statements and notes thereto as of March 31, 1996
contained herein in the Company's Form S-1.
NOTE 1 -- EVENTS SUBSEQUENT TO MARCH 31, 1996 AUDITED FINANCIAL STATEMENTS WHICH
REQUIRE DISCLOSURE
SALES TO PRIVATE INVESTORS
During April 1996, the Company issued 350,000 shares of its common stock
for cash of $210,000 and 50,000 shares for services valued at $30,000.
PRIVATE PLACEMENT
During May 1996, the Company completed a private placement of 372,000
shares of its common stock. The Company received net proceeds of $901,000.
STOCK OPTION PLAN
On April 4, 1996, the Board of Directors adopted an incentive stock option
plan available for key employees. The plan provides for granting of options on
up to an aggregate of 780,000 shares of common stock at a price no less than
fair market value at the date of grant (as determined by the Board of
Directors). The options generally expire five years after date of grant and may
require a certain minimum employment period before they may be exercised. As of
June 30, 1996, 458,000 shares have been granted under this plan.
On April 4, 1996, the Board of Directors also granted options for 40,000
shares each to two individuals which were not under the Company's stock option
plan. As of June 30, 1996, the Company has recognized compensation expense of
$24,000 pursuant to APB Opinion No. 25 for these options.
NOTES RECEIVABLE -- RELATED PARTIES
During May 1996, the Company forgave indebtedness of $89,000 of a
shareholder of the Company. The total amount of forgiveness was recognized as
compensation expense by the Company.
BONUS
During May 1996, the Board of Directors approved a bonus of $90,000 for the
Company's Chief Executive Officer and Chairman. This amount was paid in the same
period.
F-14
<PAGE> 51
CABLE-SAT SYSTEMS, INC.
FORMERLY CABLE-SAT COMPRESSION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
COMMITMENTS AND CONTINGENCIES
The Company is negotiating to enter into a two year operating lease for
additional office space. The new minimal annual rent under the operating leases
will be:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------
<S> <C>
September 30, 1996........................................................ $ 16,196
September 30, 1997........................................................ 84,378
September 30, 1998........................................................ 7,408
--------
$107,982
</TABLE>
F-15
<PAGE> 52
[This Page Intentionally Left Blank]
<PAGE> 53
[This Page Intentionally Left Blank]
<PAGE> 54
[This Page Intentionally Left Blank]
<PAGE> 55
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON, REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS 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 AN
OFFER TO BUY ANY SECURITIES BY, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS UNLAWFUL. NEITHER 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 OR ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 11
Dilution.............................. 12
Capitalization........................ 14
Selected Financial Data............... 15
Management's Discussion and Analysis
of Financial Condition and Plan of
Operations.......................... 16
Recent Financing...................... 18
Business of the Company............... 19
Management............................ 25
Certain Transactions.................. 27
Principal Shareholders................ 28
Description of Securities............. 29
Shares Eligible for Future Sale....... 31
Underwriting.......................... 32
Selling Stockholders.................. 34
The Distribution...................... 34
Legal Matters......................... 34
Experts............................... 34
Available Information................. 35
Financial Statements.................. F-1
</TABLE>
UNTIL OCTOBER 21, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
CABLE-SAT SYSTEMS, INC.
1,000,000 SHARES
OF COMMON STOCK
1,000,000 REDEEMABLE WARRANTS
TO PURCHASE COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
(LOGO) BARRON CHASE SECURITIES
7700 W. CAMINO REAL
SUITE 200
BOCA RATON, FLORIDA 33433
(561) 347-1200
ATLANTA, GEORGIA
BEVERLY HILLS, CALIFORNIA
BOSTON, MASSACHUSETTS
CHICAGO, ILLINOIS
CLEARWATER, FLORIDA
DALLAS, TEXAS
DENVER, COLORADO
EAST BOCA RATON, FLORIDA
HOOPESTON, ILLINOIS
MIAMI, FLORIDA
MIDDLETOWN, NEW JERSEY
MINNEAPOLIS, MINNESOTA
OKLAHOMA CITY, OKLAHOMA
PHOENIX, ARIZONA
SARASOTA, FLORIDA
TAMPA, FLORIDA
TULSA, OKLAHOMA
SEPTEMBER 25, 1996
- ------------------------------------------------------
- ------------------------------------------------------
