<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED: JUNE 30, 1997
COMMISSION FILE NO. 333-06121
COMPRESSENT CORPORATION
(FORMERLY CABLE-SAT SYSTEMS, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
FLORIDA 65-0581474
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
2105 HAMILTON AVENUE, SUITE 140, SAN JOSE, CA 95125
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NO. (408) 879-6600
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK
REDEEMABLE STOCK PURCHASE WARRANTS
------------------------
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the past 12 months (or such shorter
period that the Registrant was required to file such reports); and, (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ___
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. 5,036,752 shares of common
stock, as of July 30, 1997.
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COMPRESSENT CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Statements of Operations -- three and nine months ended June 30,
1996 and 1997, and for the period from inception (August 26, 1994) to June
30, 1997................................................................... 3
Condensed Balance Sheets -- September 30, 1996 and June 30, 1997........... 4
Condensed Statements of Cash Flows -- nine months ended June 30, 1996 and
1997, and for the period from inception (August 26, 1994) to June 30,
1997....................................................................... 5
Notes to Condensed Financial Statements.................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................... 13
Item 6. Exhibits and Reports on Form 8-K........................................... 13
SIGNATURES................................................................. 15
</TABLE>
2
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ITEM 1. FINANCIAL STATEMENTS.
COMPRESSENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS ENDED NINE MONTHS ENDED INCEPTION
----------------------- ------------------------- (AUGUST 26, 1994) TO
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1997 1996 1997 1997
--------- ----------- ----------- ----------- --------------------
<S> <C> <C> <C> <C> <C>
Operating costs and expenses:
Research and development... $ 211,977 $ 292,016 $ 527,649 $ 1,015,347 $ 2,119,306
Sales and marketing........ 79,070 273,126 121,329 1,111,530 1,390,220
General and
administrative.......... 462,665 591,612 753,394 1,526,957 2,605,111
--------- ----------- ----------- ----------- -----------
Total operating costs
and expenses.......... 753,712 1,156,754 1,402,372 3,653,834 6,114,637
--------- ----------- ----------- ----------- -----------
Loss from operations......... (753,712) (1,156,754) (1,402,372) (3,653,834) (6,114,637)
Interest income/expense.... 750 41,143 6,550 156,884 169,919
--------- ----------- ----------- ----------- -----------
Net loss........... (752,962) (1,115,611) (1,395,822) (3,496,950) (5,944,718)
Less: Accretion on preferred
stock...................... -- -- -- -- (900,000)
--------- ----------- ----------- ----------- -----------
Net loss applicable to
common shareholders..... $(752,962) $(1,115,611) $(1,395,822) $(3,496,950) $ (6,844,718)
========= =========== =========== =========== ===========
Net loss per share applicable
to common shareholders..... $ (0.18) $ (0.22) $ (0.34) (0.70)
========= =========== =========== ===========
Shares used in computing net
loss per share applicable
to common shareholders..... 4,117,833 5,032,349 4,108,944 4,994,685
========= =========== =========== ===========
</TABLE>
See accompanying notes
3
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COMPRESSENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996(1) 1997
------------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents....................................... $ 155,533 $ 1,459,383
Short-term investments.......................................... -- 2,256,156
Other receivable from underwriter in connection with IPO........ 5,549,573 --
Other current assets............................................ -- 137,140
----------- -----------
Total current assets.................................... 5,705,106 3,852,679
Property and equipment, net....................................... 136,052 207,919
----------- -----------
Other assets
Capitalized software............................................ -- 194,381
Other assets.................................................... 117,947 103,571
----------- -----------
Total other assets...................................... 117,947 297,952
----------- -----------
Total assets............................................ $ 5,959,105 $ 4,358,550
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Note payable to bank............................................ $ -- $ 1,250,000
Accounts payable................................................ 168,266 451,723
Other accrued liabilities....................................... 90,688 59,888
Accrued registration costs...................................... 55,052 --
Preferred stock redemption payable.............................. 450,000 --
----------- -----------
Total current liabilities............................... 764,006 1,761,611
Shareholders' equity
Capital Stock................................................... 7,786,867 8,613,657
Deficit accumulated during development stage.................... (2,447,768) (5,944,718)
Deferred compensation........................................... (144,000) (72,000)
----------- -----------
Total shareholders' equity.............................. 5,195,099 2,596,939
----------- -----------
Total liabilities and shareholders' equity.............. $ 5,959,105 $ 4,358,550
=========== ===========
</TABLE>
- ---------------
(1) Derived from audited financial statements included in the Company's Annual
Report on Form 10-K for the year ended September 30, 1996.
See accompanying notes
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COMPRESSENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS ENDED INCEPTION
------------------------- (AUGUST 26, 1994)
JUNE 30, JUNE 30, TO JUNE 30,
1996 1997 1997
----------- ----------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used in operating activities...... $(1,257,692) $(3,044,565) $(5,033,148)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short term investments................. -- (4,853,727) (4,853,727)
Sale of short term investments..................... -- 2,597,571 2,597,571
Purchase of property and equipment................. (100,292) (133,514) (341,745)
----------- ----------- -----------
Net cash used in investing activities...... (100,292) (2,389,670) (2,597,901)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock............................... 1,252,031 -- 1,952,263
Receipt of proceeds from underwriter............... -- 5,549,573 5,549,573
IPO registration costs paid........................ -- -- (214,916)
Proceeds from issuance of note payable to bank..... -- 1,250,000 1,250,000
Loan from shareholder.............................. 75,000 -- 75,000
Repayment of full course note payable.............. 90,000 -- 90,000
Sale of redeemable preferred stock................. 450,000 -- 450,000
Redemption of preferred stock...................... -- (450,000) (450,000)
Conversion of redeemable stock warrant............. -- 388,512 388,512
----------- ----------- -----------
Net cash provided from financing
activities............................... 1,867,031 6,738,085 9,090,432
----------- ----------- -----------
Net increase in cash....................... 509,047 1,303,850 1,459,383
----------- ----------- -----------
CASH AT BEGINNING OF PERIOD.......................... 314,078 155,533 --
----------- ----------- -----------
CASH AT END OF PERIOD................................ $ 823,125 $ 1,459,383 $ 1,459,383
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Common stock to be issued in redemption of preferred
stock.............................................. $ -- $ -- $ 900,000
Conversion of loan and advance from shareholder to
common stock....................................... 75,000 -- 75,000
Issuance of common stock in exchange for full
recourse note payable.............................. 90,000 -- 90,000
</TABLE>
See accompanying notes
5
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COMPRESSENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. BUSINESS ACTIVITIES AND BASIS OF PRESENTATION
Business
Compressent Corporation (the "Company") was incorporated in the state of
Florida on August 26, 1994, but did not commence formal operations until April
1995. It is engaged in the development of digital image coding and data
compression products which will enable the facsimile transmission of color
images from computers equipped with the Company's software programs.
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Management recommends that
these interim financial statements be read in conjunction with the audited
financial statements and notes thereto included in the Company's 1996 Report on
Form 10-K filed with the SEC. The results of operations for the nine months
ended June 30, 1997, are not necessarily indicative of the results that may be
expected for the year ended September 30, 1997.
Future Financing
For the period from inception (August 26, 1994) through June 30, 1997, the
Company has incurred a cumulative net loss of approximately $5,945,000 and had
used $5,033,000 in cash for operating activities. The Company expects to
continue to incur losses through the end of fiscal 1997 or until the Company is
able to attain revenues from sales, licensing or other arrangements sufficient
to support its operations. Management believes that current working capital of
approximately $2,091,000 will be sufficient to support the Company's planned
activities through the end of fiscal 1997. Based upon the Company's current
plans, management anticipates that it will be necessary for the Company to raise
additional debt or equity financing by the first quarter of fiscal 1998 and
believes that such financing will be available. However, there can be no
assurance as to the terms and conditions of any such financing and no certainty
that funds would be available when needed.
Net Loss Per Share Attributable to Common Shareholders
Net loss per share attributable to common shareholders for the three months
and nine months ended June 30, 1997 is computed using the weighted average
number of shares of common stock outstanding during the quarter. Net loss per
share attributable to common shareholders for the three months and nine months
ended June 30, 1996, is computed using the weighted average number of shares of
common stock outstanding during the quarter. Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common shares and common
equivalent shares issued by the Company at prices below the public offering
price during the twelve month period prior to the initial filing of the
registration statement have been included in the calculation (using the treasury
stock method and an initial public offering price of $6.00 per share) as if they
were outstanding for all periods prior to the quarter in which the Company's
initial public offering became effective. Fully diluted net loss per share is
not presented because it is anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share", which is required to be adopted on December 31,
1997. At that time, the Company will be required to
6
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COMPRESSENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The impact of
Statement 128 on the calculation of primary earnings per share and fully diluted
earnings per share for the quarters ended June 30, 1997 and June 30, 1996 is not
expected to be material.
Cash, Cash Equivalents and Short-Term Investments
Cash equivalents consist of short-term financial instruments that are
readily convertible into cash with original maturities of less than ninety days
from the date of acquisition. The carrying amount reported in the balance sheet
for cash and cash equivalents approximates fair value.
Notes Payable
During June 1997, the Company borrowed $1,250,000 from a bank payable in
thirty (30) days, at an interest rate of 6.6% per annum. The loan is secured by
a time deposit. The Company has the option to renew the loan for additional
periods with the interest rate adjusted to reflect the then current money market
rates.
2. SHAREHOLDERS' EQUITY
Common Stock Purchase Warrants
On September 25, 1996, in connection with the Company's initial public
offering, the Company issued 1,150,000 redeemable common stock purchase warrants
for $0.125 per share. The warrants are exerciseable to purchase common stock
during the three year period from the effective date of the offering (September
25, 1996), at an exercise price of $6.00 per share. For the nine months ended
June 30,1997, redeemable stock purchase warrants to purchase 64,752 shares of
common stock were exercised for $388,512. As of June 30, 1997, there were
1,085,248 warrants outstanding.
Stock Option
The Company accounts for stock options granted to outside service providers
in accordance with Statement of Financial Accounting Standard No. 123 (SFAS
123), "Accounting for Stock Based Compensation", utilizing the fair value
method. In December 1996, the Company's Board of Directors approved the issuance
of stock options to certain outside service providers to purchase up to 145,000
shares of the Company's common stock at an exercise price of $7.013 per share.
The exercise price was calculated at 110% of the fair market value on the date
of grant of $6.375 per share. The options vest one-half in year one and one-half
in year two, and expire three years from the date of grant. Pursuant to the
provisions of SFAS 123, the fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
assumptions: risk free interest rate of approximately 6%; no dividend yield;
volatility factor of .5; and a weighted-average expected life of the options of
approximately 1.5 years. The fair market value of these options was estimated to
be approximately $216,000 and will be recognized as compensation expense over
the vesting period. Compensation expense relating to these options for the three
and nine months ended June 30, 1997 was approximately $37,600 and $87,800
respectively.
In December 1996, in connection with a preliminary agreement between the
Company and a distributor, Set 1 Communications, NSW, Australia ("Set 1") (see
Note 3), the Company granted Set 1 a stock option to purchase up to 248,600
shares of the Company's common stock at the then fair market value of $6.375 per
share. The option vested immediately and expires two years from the date of
grant. Pursuant to the provisions
7
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COMPRESSENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
of SFAS 123, the fair value for this option was estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions: risk
free interest rate of approximately 6%; no dividend yield; volatility factor of
.5; and a weighted-average expected life of the option of 1 year. The Company
recorded the entire estimated fair value of this option of approximately
$351,000 as sales and marketing expense in the three months ended December 31,
1996.
3. SOFTWARE CAPITALIZATION
Software Development Costs
The Company capitalizes software development costs upon achievement of
technological feasibility, subject to net realizable value consideration in
accordance with Statement of Financial Accounting Standards No. 86 (SFAS 86),
"Accounting for Costs of Computer Software to be Sold, Leased or Otherwise
Marketed". Based on the Company's development process, technological feasibility
is achieved upon completion of a working model. Accordingly, all expenses
incurred prior to completion of a working model are expensed. Capitalized costs
are amortized upon product release on a straightline basis over the estimated
useful life or the ratio of current revenue to the total current and anticipated
future revenues, whichever results in the greater amortization. During March
1997, the Company released the first working model of its facsimile software and
began capitalizing software development costs pursuant to SFAS 86. A total of
approximately $194,500 in software development costs have been capitalized
through June 30, 1997, including $162,501 during the three months ended June 30,
1997.
4. DISTRIBUTION AGREEMENT
In January 1997, based on the preliminary agreement reached in December
1996, the Company finalized a five-year agreement with Set 1 (see Note 2), to
distribute a "light" version of the Company's CHROMAFAX software with modems
developed and marketed worldwide by Set 1. The "light" version is a version of
CHROMAFAX with selected functionality. The agreement between the companies
stipulates that Compressent will provide technology, support and basic
documentation to Set 1. The agreement provides Set 1 with exclusivity for the
"light" version bundled with modems based upon minimum shipments per year. The
agreement further allows Set 1 to non-exclusively market the retail version of
the product through its own channels and distribution partners. As part of the
agreement signed with Set 1, the Company granted a stock option to Set 1 to
purchase up to 248,600 shares of common stock (see Note 2).
5. LEGAL
On February 14, 1997, the Company instituted a lawsuit in Santa Clara
County Superior Court against former consultants and a company they had formed
known as Color Communication Corporation. The lawsuit asserts claims for breach
of contract, breach of confidence, unfair competition and unjust enrichment,
alleging that the former consultants misappropriated the Company's confidential
information. On April 30, 1997, the Superior Court prohibited the defendants
from using the Company's confidential information in any products, literature or
advertising. In addition, the Superior Court issued a preliminary injunction
barring the former consultants and Color Communications Corporation from
advertising, marketing, selling or otherwise distributing any facsimile or color
imaging software product for a period of nine months beginning April 21, 1997.
The defendants have twice sought emergency appellate relief to set aside the
injunction and were twice denied it. They have now filed notice of their intent
to appeal, but the injunction would remain in effect during the appeal. A total
of approximately $165,200 in legal expenses have been incurred in connection
with this lawsuit through June 30, 1997, including $88,400 during the three
months ended June 30, 1997.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Exchange Act of 1933 and Section 21E of the
Securities Act of 1934. All forward-looking statements involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of many factors including the
Company's inability to complete development of commercial versions of its
products, delays in product development or failure of such products to develop
substantial sales volume. (See "Factors That May Affect Future Operating
Results")
Overview
The Company was incorporated in the state of Florida on August 26, 1994,
but did not commence formal operations until April 1995. The Company's primary
activities since inception have been devoted to designing and developing its
initial color facsimile products and related technologies, preparation for
marketing, the recruitment of key management and technical personnel, including
outside consultants, and raising capital to fund operations. The Company has
been unprofitable since inception and has not licensed or sold any of its
products or technologies. As a result, the financial statements are presented in
accordance with Statement of Financial Accounting Standards No. 7 (SFAS 7),
"Accounting and Reporting by Development Stage Enterprises."
Results of Operations
Three and Nine Months Ended June 30, 1996 and 1997.
Research and Development
From inception through June 30, 1997, a substantial part of the Company's
activities related to research and development. Research and development
expenses were approximately $292,000 and $1,015,000 for the three months and
nine months ended June 30,1997, respectively, compared to $212,000 and $528,000,
respectively in the corresponding periods in fiscal 1996. The increase is
primarily due to increased staffing and consultants, and increased supplies and
associated costs related to increased development and testing activities of the
software functions and features. The Company believes that significant
investments in product development are required to remain competitive. As a
consequence the Company intends to incur increased product development
expenditures in the future. During March, 1997 the Company began capitalizing
software development costs pursuant to SFAS 86. A total of approximately
$194,500 in software development costs have been capitalized through June 30,
1997, including $162,501 during the three months ended June 30, 1997.
Sales and Marketing
Sales and marketing expenses were approximately $273,000 and $1,112,000 for
the three months and nine months ended June 30, 1997, respectively, compared to
$79,000 and $121,000, respectively in the corresponding periods in fiscal 1996.
The increase is primarily due to costs associated with staffing employees and
consultants, participation in trade shows and other events, and the costs
associated with developing a marketing strategy and logo. In addition, in
December 1996, the Company granted a stock option to Set 1 Communications, NSW,
Australia ("Set 1"), to purchase up to 248,600 shares of the Company's common
stock. The option was granted in connection with a preliminary agreement between
the Company and Set 1 and has an exercise price equal to the fair value of the
Company's common stock on the date of grant of $6.375 per share. The option
vested immediately and expires two years from the date of grant. Pursuant to the
provision of SFAS 123, the fair value of the option was estimated to be $351,000
as of the date of grant using a Black-Scholes option pricing model. During
December 1996, the Company recorded the estimated fair value of this option as
sales and marketing expense.
Achieving significant market acceptance and commercialization of the
Company's initial color fax products will require substantial marketing efforts
and the expenditure of significant funds to establish market awareness of the
Company and the initial color fax products. As such, the Company expects
significant sales
9
<PAGE> 10
and marketing expenses in future periods as it continues to pursue an aggressive
brand building strategy in fiscal 1997.
In January 1997, the Company finalized a five-year agreement with Set 1 to
distribute a "light" version of the Company's CHROMAFAX software with modems
developed and marketed worldwide by Set 1. The "light" version is a version of
CHROMAFAX with selected functionality. The agreement between the companies
stipulates that Compressent will provide technology, support and basic
documentation to Set 1. The agreement provides Set 1 with exclusivity for the
"light" version bundled with modems based upon minimum shipments per year. The
agreement further allows Set 1 to non-exclusively market the retail version of
the product through its own channels and distribution partners.
General and Administrative
General and administrative expenses consist primarily of compensation and
fees for professional services. General and administrative expenses were
approximately $592,000 and $1,527,000 for the three months and nine months ended
June 30, 1997, respectively, compared to $463,000 and $753,000, respectively in
the corresponding periods in fiscal 1996. The increase in general and
administrative expenses was primarily attributable to increased staffing, fees
for professional services, legal expenses in connection with the lawsuit against
Color Communications Corporation and the costs associated with the Company being
public. General and administrative expenses are expected to continue to increase
to support growing operations and increases in business development efforts, and
the continued expenses incurred as a public company.
Interest Income
Interest income was approximately $41,000 and $157,000 for the three months
and nine months ended June 30, 1997, respectively, compared to $750 and $6,600,
respectively in the corresponding periods in fiscal 1996. Interest income is
primarily derived from the investment of the Company's proceeds from its initial
public offering of common stock that closed on October 1, 1996.
Liquidity and Capital Resources
The Company had approximately $3,716,000 in cash, cash equivalents and
short-term investments at June 30, 1997. The Company has primarily financed its
operations through the private and public sale of equity securities and proceeds
from notes payable. During June 1997, the Company borrowed $1,250,000 from a
bank payable in thirty (30) days, at an interest rate of 6.6% per annum. The
loan is secured by a time deposit. The Company has the option to renew the loan
for additional periods with the interest rate adjusted to reflect the then
current money market rates. The Company's cash expenditures for operating
activities were approximately $1,033,000 and $3,045,000 for the three months and
nine months ended June 30, 1997, respectively, compared to $708,000 and
$1,258,000, respectively in the corresponding periods in fiscal 1996, and differ
from the Company's net loss in these periods principally due to non-cash
operating expenditures and an increase in accounts payable and accrued
liabilities. The Company expects its cash requirements to increase due to
expected increases in expenses related to further research and development of
its technologies and increased marketing, manufacturing, sales and distribution
and technical support expenses associated with the introduction of its initial
color fax products to the market place and increased administrative expenses
associated with fees for professional services, legal expenses in connection
with the lawsuit with Color Communication Corporation and the costs associated
with the Company being public. The Company plans to hire additional employees
and increase marketing and sales expenses to execute its sales and marketing
plans.
Based upon the Company's current plans, management anticipates that it will
be necessary for the Company to raise additional debt or equity financing by the
first quarter of fiscal 1998 and believes that such financing will be available.
However, there can be no assurance as to the terms and conditions of any such
financing.
10
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Factors That May Affect Future Operating Results
Development Stage Company; Absence of Operating History. The Company has
been engaged primarily in the design and development of CHROMAFAX and CHROMAFAX
LITE (the "Initial Color Fax Products") and related technology. The Company has
produced a version of its initial color fax software product, currently called
CHROMAFAX LITE, and is in the process of developing its "retail" version,
currently called CHROMAFAX. 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 or timely developed or commercialized. The
risks, expenses and difficulties often encountered in a shift from the research
and development of products to the commercialization of new products based on
innovative technology must also be considered. 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.
No Revenues; Anticipated Future Losses. To date, the Company has had no
operating revenue and does not anticipate any operating revenue until one or
more of its Initial Color Fax Products are completely developed, manufactured in
commercial quantities and are available for commercial distribution. The Company
anticipates incurring significant costs in connection with the development of
its technologies and 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, 1997, the Company's deficit accumulated during the
developmental stage was approximately $5,945,000. Further, the Company
anticipates it will have a loss in its fiscal year ended September 30, 1997, and
that losses will continue until the Company's Initial Color Fax Products
generate substantial revenues.
Need for Additional Financing. The Company has expended and will continue
to expend substantial funds to complete the research, development and marketing
and distribution activities of its products. The Company has been dependent on
the sales of its securities to fund its development activities. Based upon the
Company's current plans, management anticipates that it will be necessary for
the Company to raise additional debt or equity financing by the first quarter of
fiscal 1998 and believes that such financing will be available. However, there
can be no assurance as to the terms and conditions of any such financing and no
certainty that funds would be available when needed. The inability to obtain
additional financing, when needed, would be likely to curtail the Company's
sales and marketing and product development efforts and would be likely to have
a material adverse effect on the Company. To the extent that any future
financing involves the sale of the Company's equity securities, the Company's
then existing stockholders could be substantially diluted.
Limited Sales and Marketing Experience. The Company will seek to market and
sell its products, if successfully developed, through key manufacturers and
distributors. Such companies could 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 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 color fax products. In addition,
many factors could affect the success of the Company's distribution agreement
with Set 1 and other OEM's. These include Set 1's and other OEM's performance
and marketing efforts, competitive factors, market acceptance and the timing and
success of the Company's efforts in completing agreements with other OEM
partners.
Rapid Technological Change. Technologies and proposed products being
developed by the Company are in various stages of development. Product
development efforts are subject to 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
development projects will be successfully completed. The markets for the
technology and products being developed by the Company are characterized by
rapid changes and evolving
11
<PAGE> 12
industry standards often resulting in product obsolescence or short product life
cycles. The Company's operating results will depend upon 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.
Substantial Competition. Other 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, technical, personnel and other
resources than the Company and may have established reputations for success in
developing, licensing and sales of their products. 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.
Dependence Upon Qualified and 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 attract or retain such necessary personnel, particularly in light of
the currently high demand for software engineers and other personnel in Silicon
Valley. The loss of key personnel or the failure to recruit additional personnel
could have a material adverse effect on the Company's business.
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 has applied for six (6)
patents and is in the process of applying for additional patents. 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 is in the process of applying for copyrights relating to
certain of its proposed Initial Color Fax Products and is also applying 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. Furthermore, 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.
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
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<PAGE> 13
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.
Efforts to enforce the Company's proprietary rights, even if successful,
can be expensive. For example, in June 1997, the Company successfully obtained
an injunction against a company which had misappropriated the Company's trade
secrets. Legal fees and costs associated with enforcing the Company's rights in
such action are in excess of $165,000 to date, and there is no assurance that
such costs won't increase in the future or will be covered by insurance.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 14, 1997, the Company instituted a lawsuit in Santa Clara
County Superior Court against former consultants and a company they had formed
known as Color Communication Corporation. The lawsuit asserts claims for breach
of contract, breach of confidence, unfair competition and unjust enrichment,
alleging that the former consultants misappropriated the Company's confidential
information. On April 30, 1997, the Superior Court prohibited the defendants
from using the Company's confidential information in any products, literature or
advertising. In addition, the Superior Court issued a preliminary injunction
barring the former consultants and Color Communications Corporation from
advertising, marketing, selling or otherwise distributing any facsimile or color
imaging software product for a period of nine months beginning April 21, 1997.
The defendants have twice sought emergency appellate relief to set aside the
injunction and were twice denied it. They have now filed notice of their intent
to appeal, but the injunction would remain in effect during the appeal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are incorporated by reference to Registrant's
Registration Statement on Form S-1, File No. 333-06121:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------------------------------------------------------------------------
<S> <C>
3(a) Amended and Restated Articles of Incorporation of the Registrant
3(b) Bylaws of the Registrant
4.1 Form of Warrant Certificate
4.2 Form of Common Stock Certificate
10.1 Financial Advisory Agreement
10.2 Merger and Acquisition Agreement
10.3 Warrant Agreement
10.4 Underwriter's Warrant Agreement
10.5 Incentive Stock Option Plan
10.5(a) Employment Agreement -- Ostrovsky Consulting, Inc.
10.5(b) Employment Agreement -- Wil. F. Zarecor
10.5(c) Employment Agreement -- John L. Douglas
10.5(d) Employment Agreement -- Glenn Crepps
</TABLE>
13
<PAGE> 14
The following exhibits are filed herewith:
<TABLE>
<S> <C>
11.1 Computation of net loss per share
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
(1) The Company filed a Form 8-K dated May 5, 1997, to disclose the
change of the Company's name from Cable-Sat Systems, Inc., to
Compressent Corporation.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Compressent Corporation
Date: August 5, 1997 By: /s/ Lisa E. D'Alencon
------------------------------------
Lisa E. D'Alencon
Chief Financial Officer
Secretary
Signing on behalf of the registrant
and as principal financial officer
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------ ----------------------------------------------------------------------------------
<C> <S>
11.1 Computation of net loss per share
27 Financial Data Schedule
</TABLE>
16
<PAGE> 1
EXHIBIT 11.1
COMPRESSENT CORPORATION
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
3 MONTHS ENDED 9 MONTHS ENDED
------------------------ -------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1997 1996 1997
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PRIMARY
Weighted average number of common shares
outstanding during the period............ 4,117,833 5,032,349 4,108,944 4,994,685
Incremental common shares attributable to
the application of SAB 64 and 83......... -- -- -- --
---------- ----------- ----------- -----------
Shares used in computing net loss per share
applicable to common shareholders........ 4,117,833 5,032,349 4,108,944 4,994,685
========== =========== =========== ===========
Net loss................................... $ (752,962) $(1,115,611) $(1,395,822) $(3,496,950)
Less: Accretion on preferred stock......... -- -- -- --
---------- ----------- ----------- -----------
Net loss applicable to common
shareholders............................. $ (752,962) $(1,115,611) $(1,395,822) $(3,496,950)
========== =========== =========== ===========
Net loss per share applicable to common
shareholders............................. $ (0.18) $ (0.22) $ (0.34) $ (0.70)
========== =========== =========== ===========
FULLY DILUTED
Weighted average number of common shares
outstanding during the period............ 4,117,833 5,032,349 4,108,944 4,994,685
Incremental common shares attributable to
the application of SAB 64 and 83......... -- -- -- --
---------- ----------- ----------- -----------
Shares used in computing net loss per share
applicable to common shareholders........ 4,117,833 5,032,349 4,108,944 4,994,685
========== =========== =========== ===========
Net loss................................... $ (752,962) $(1,115,611) $(1,395,822) $(3,496,950)
Less: Accretion on preferred stock......... -- -- -- --
---------- ----------- ----------- -----------
Net loss applicable to common
shareholders............................. $ (752,962) $(1,115,611) $(1,395,822) $(3,496,950)
========== =========== =========== ===========
Net loss per fully diluted share........... $ (0.18) $ (0.22) $ (0.34) $ (0.70)
========== =========== =========== ===========
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1997
<PERIOD-START> OCT-01-1995 OCT-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1997
<CASH> 823,125 1,459,383
<SECURITIES> 0 2,256,156
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,014,646 3,852,679
<PP&E> 137,164 309,802
<DEPRECIATION> (29,246) (101,883)
<TOTAL-ASSETS> 1,127,210 4,358,550
<CURRENT-LIABILITIES> 96,530 1,761,611
<BONDS> 0 0
0 0
0 0
<COMMON> 3,772 5,037
<OTHER-SE> 1,026,908 2,591,902
<TOTAL-LIABILITY-AND-EQUITY> 1,127,210 4,358,550
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 1,402,372 3,653,834
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (1,395,822) (3,496,950)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,395,822) (3,496,950)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,395,822) (3,496,950)
<EPS-PRIMARY> (0.34) (0.70)
<EPS-DILUTED> (0.34) (0.70)
</TABLE>
