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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended September 30, 1996.
OR
[ ] Transition Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File No.: 1-5270
SOFTNET SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New York 11-1817252
-------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
717 Forest Avenue, Lake Forest, Illinois 60045
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 266-8150
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par American Stock Exchange
value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark 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 preceding 12 months (or for 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at December 30, 1996 was approximately $26.2 million.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 30, 1996
- -------------------------------------- -----------------------------------
Common stock, $.01 per share par value 6,564,455
Documents Incorporated by Reference:
Proxy Statement for Annual Meeting of Shareholders to be held on March
4, 1997 (Part III)
PART I
Item 1. Business
Overview
SoftNet Systems, Inc. (the "Company") is engaged in the business of developing,
marketing, installing and servicing electronic information and document
management systems that allow customers to electronically request and
electronically receive information. The Company operates through three segments:
document management, telecommunications and Internet services.
The document management segment designs, develops, manufactures and integrates
comprehensive, non-paper based systems and components that enable the Company to
deliver to its customers cost-effective solutions for storage, indexing and/or
distribution of high-volume computer generated or entered information. These
systems, which include both hardware and software products, are based on
industry standard client-server architecture providing flexibility to connect to
a wide variety of information systems. The hardware manufactured by the Company
includes a family of computer output microfilm ("COM") printers. The Company's
software principally captures data and information from a variety of sources,
intelligently indexes the data and outputs the information to a variety of
storage media including optical disk, magnetic disk and tape, CD-ROM, microfilm
and microfiche. The image source and storage media are transparent to the system
user.
The telecommunications segment provides communication solutions through the
design, implementation, maintenance and integration of voice, data and video
communication equipment and service. The telecommunications segment operates
throughout the Midwest with offices in Chicago, Illinois, Kansas City, Missouri
and Milwaukee, Wisconsin. The Company's telecommunications products include
telephone systems and call processing systems (including call centers, voice
messaging, interactive voice response ("IVR") and computer telephone integration
("CTI")). These products are manufactured by third parties. Additionally, the
Company develops software for IVR and CTI applications, sells and installs local
and long distance network services, provides maintenance services for existing
customers and provides cabling and data communications. The telecommunications
segment markets its products and services principally to customers with 25 or
more telephones located in the Midwest.
The Internet services segment, which solely targets business customers, provides
Internet access, web and database development, and Internet training. Internet
services are provided by the Company's wholly owned subsidiary, MediaCity World,
Inc. ("MCW"), a San Francisco Bay area Internet Service Provider which was
acquired in June 1996. The Company's products and services include both dial-up
and dedicated Internet access, web site and database development, and Internet
training for Internet browser users and web site developers. Additionally, MCW
is an agent for sales of local telephone company data services in conjunction
with the sale of Internet access. The Company maintains Points of Presence
("POPs") in nine (9) locations in the San Francisco Bay Area and Reno, Nevada.
The Company's strategy includes the selling of products and services that, when
taken together with a customer's existing computer resources and
telecommunications systems, can consolidate all information within an enterprise
into a common, electronically accessible information warehouse, regardless of
geographic diversity.
The Company was incorporated in New York in December 1956. Its principal
executive office is located at 717 Forest Avenue, Lake Forest, Illinois 60045
and its telephone number is (847) 266-8150. As used herein, the defined term
"Company" shall mean SoftNet Systems, Inc., together with its four wholly-owned
operating subsidiaries, Kansas Communications, Inc. ("KCI"), Communicate Direct,
Inc. ("CDI") (d/b/a SoftNet Business Solutions, Inc. ("SBS"), Micrographic
Technology Corporation ("MTC") and MCW, unless the context otherwise indicates.
KCI and SBS comprise the Company's telecommunications segment, MTC comprises the
document management segment and MCW comprises the Internet segment.
Industry Segments
Financial information relating to industry segments of the Company for the three
years ended September 30, 1996, 1995, and 1994 is set forth in Note 16 to the
Consolidated Financial Statements included herewith.
Market Overview
Document Management Segment
The volume of information being generated and processed by the private and
public sectors is growing rapidly. Currently, the Company estimates that 90% of
information is generated and stored using paper, a format which (a) causes
delays, (b) requires significant space and personnel for document storage, (c)
results in lost, damaged and/or mis-filed documents, (d) requires support for
dual document management systems, one for paper and one for electronic
documents, and (e) generally allows only one concurrent user of a document. As a
result, the focus in the imaging industry has been on developing and expanding
non-paper based storage and retrieval technologies.
Historically and currently, the impediments to a higher utilization rate for
non-paper based storage include:
Lack of widespread personal computing technology and acceptance.
Lack of network capabilities to connect employees within the office and
in remote locations with the storage and retrieval technologies.
Lack of "seamless" retrieval technology allowing the user to retrieve a
stored document from the desktop personal computer rather than trying
to determine on what storage media the document was stored and then
retrieving it through the specific retrieval process associated with
that media.
High cost of electronic storage devices.
There is growing interest in non-paper based storage as a result of increased
computer competency created by the personal computer revolution, proliferation
of personal computers, growth of networks connecting those computers to data
repositories and declining cost of storage. Businesses typically utilize several
different non-paper based storage technologies simultaneously. Demand for a
particular technology is driven by cost, speed of retrieval, ongoing feasibility
of retrieval technology and longevity requirements of the documents. The optimal
mix of these attributes changes according to the frequency of information usage
and the urgency of its retrieval. At the early stage of a document's life when
the document is in high usage, a high-cost, but fast-access technology is
appropriate. In later stages, it is more appropriate for the data to be
transferred for archiving to a low-cost technologically independent media such
as COM.
COM converts digital information directly from a computer or magnetic tape to an
analog format which then can be stored on microfilm or microfiche. COM was
initially developed as an information management system that would reduce the
cost and increase the speed of computer output by "printing" computer generated
data on microfilm or microfiche instead of paper. Compared to paper, COM has a
number of benefits. COM recorders can print reports substantially faster than
high speed printers and multiple copies can be made easily and economically on
high-speed duplicators. The effective speed of MTC's COM printer is up to 600
data pages of output per minute. By contrast, today's high speed page printers
average between 200 and 300 data pages per minute. In addition, a COM recorder
can print a 670 page report on a single 4" X 6" microfiche. In addition,
microfilm is accepted as evidence in a court of law since the image cannot be
altered and microfilm offers the capability of storing a document for over 100
years as compared to the electronic technology alternatives (e.g. CD-ROM
and magnetic tape), which become obsolete at 3-5 year intervals. The fact that
COM can be read by the human eye makes it the safer choice for storage of
documents which must outlive the 3-5 year technological obsolescence cycle
associated with electronic storage products.
Telecommunications Segment
The Company believes that the telecommunications industry is becoming
increasingly complex and that, as a result, businesses are seeking to narrow
their vendor base to those suppliers who offer a broad range of products and
services and can manage the complexity of the new technology. Trends in the
industry include:
Growth of New Communication Products and Markets. A variety of new communication
technologies have emerged over the past several years which enhance the
capabilities of the traditional telephone system. A variety of manufacturers
have introduced new products including call centers, automated attendants,
interactive voice response ("IVR") units, video conferencing systems and voice
messaging products.
Increased Use of "Unified Messaging" Systems. Over the past several years,
multiple forms of messaging, including voice mail, E-mail and facsimile, have
proliferated in the office environment. All of these forms of messaging have
emerged as independent technologies, generally requiring their own dedicated
hardware and their own communication protocols. As a result, office workers
generally are required to manually retrieve a facsimile, pick up a telephone to
listen to voice mail and log on to a computer to retrieve E-mail. To improve the
efficiency of managing information, businesses are seeking ways to unify access
to disparate forms of messaging. This includes providing workers access to their
messages regardless of whether they are on-site or at a remote location.
Computer telephone integration ("CTI") is providing an interface for managing
different message types from either a desktop personal computer or a telephone.
While there are numerous manufacturers of CTI hardware and software equipment,
the manufactured systems need to be "customized" for an individual business.
Increasing Role of Independent Vendors. Through new technologies, the private
branch exchange ("PBX") is being utilized as a multimedia "backbone" for
transporting voice and data over network services. As a result, businesses are
requiring increasingly complex telecommunications systems. The Company believes
that it will be more cost-effective for these companies to contract the
management of their communication systems to third parties. The Company also
believes that the role of independent vendors such as itself will increase over
time. As a result of its independence from any manufacturer, the Company has the
ability to select those products which provide the best technological solution
to its customers. This independence also provides the Company with the
flexibility to take advantage of new technologies and products as they become
available without large investments in research and development and the risk of
inventory obsolescence and technological incompatibility.
Internet Services Segment
The Company believes that the Internet services segment will provide added value
to its existing customer base while better positioning the Company as a
solutions provider. The Internet services segment is focused solely on business
customers which represents the fastest growing and most profitable sector of the
Internet market. Due to the complexity of the Internet and rate at which new
development platforms are being introduced, MCW will continue to position itself
as a full service provider of Internet solutions.
Industry Trends
The Company believes that its core businesses are rapidly merging. To improve
the efficiency of managing information, businesses are seeking ways to unify
access to disparate forms of messaging. For example, unified messaging, call
processing and imaging message platforms from companies such as Octel/VMX,
Applied Voice Technologies and Wang have recently integrated with the E-mail
applications of Microsoft Windows 95, creating a single file management system
for voice, fax, E-mail and imaging messages. Similarly, imaging vendors are
utilizing telecommunications and Internet technology to distribute large volumes
of data from centralized data centers to remote offices and customer sites.
Technological developments such as high speed Integrated Services Digital
Network ("ISDN"), Frame Relay, and Asyncronous Transfer Modes ("ATM")
transmission lines have made the distribution of data utilizing
telecommunications and Internet technology cost effective.
Another trend is the blending of telecommunications and imaging applications
found in customer service call centers. Typically, these applications are very
transaction oriented. Customer Service agents must be able to access various
types of data instantly in order to service inquiries. Data are usually found on
written business forms for invoices and purchase orders, optical servers for
publications and specifications, fax servers for both inbound and outbound
requests, E-mail and the Internet. Additionally, workflow applications, along
with computer telephone integration products, which provide the electronic
routing mechanism to manage all forms of data, must be integrated with the
various types of document retrieval and storage methods to allow the customer
service call center to efficiently access such data.
Currently, middle market customers' applications are addressed by multiple
vendors such as Novell re-sellers for local area network ("LAN") implementation,
telephone vendors for PBX and key systems, and consultants for image enabling,
Internet, or call center applications. The Company believes that with its
current resources and expertise in document management, telecommunications and
Internet services, it is well positioned to address this emerging integration
market as a single source provider.
Products and Services
Document Management Segment
COM Systems. The Company believes it is a leading manufacturer of COM systems,
offering a complete line of COM recorders, processors, duplicators and related
software. The Company manufactures three different sophisticated COM printers
under the System 6800 line of products, all of which have a complete set of
features, including wet or dry processing technology, cut fiche capabilities,
medium to high speed, stand-alone or integrated film processors and duplicators,
all under PC control utilizing electronic forms. The System 6800 series provides
an architectural platform designed to permit easy integration of information and
image management systems, including the capability to add both magnetic and
optical disk file storage subsystems for use in future document and image
processing applications. A key factor differentiating the Company's product is
its PC based client-server architecture which gives the System 6800 line of
products the ability to operate within the traditional direct connect
environment or, alternatively, become part of any client-server facility using
LAN/WAN communications. This last feature allows both central and remote users,
of virtually any application, to output information to microfiche regardless of
their location. COM systems contributed approximately 29% to document management
segment revenue in fiscal year 1996.
Information Distribution System. The Company's Information Distribution System
is a family of product options designed to automate the computer output
production process and expand the total product offering to include electronic
subsystems like optical disk and CD-ROM. This architecture combines the
client-server platform, Microsoft Windows operating environment and Novell LAN
to allow the user to transport any information to the print or storage media of
their choice, enhancing the productivity of their computer output and storage
operation. The following product options comprise the Company's Information
Distribution System:
Information Distribution System Executive. The Information Distribution
System Executive ("IDSEXEC") software product allows for the collection
of data streams generated from a variety of sources including
mainframes, LAN's and image processing platforms. The IDSEXEC has the
capability to intelligently search for incoming information from these
different sources, aggregate that information into a document and then
store that document on the most applicable media based on the intended
length of storage and the retrievability requirements. The IDSEXEC also
can intelligently index source information for convenient and timely
retrieval regardless of the storage media. Historically, if a user
wanted information contained on a computer tape stored on CD-ROM,
microfilm and paper, then the computer tape had to be duplicated two
times (a total of three copies available) and then three separate
application systems were utilized to store the information on the three
different media. With the Company's IDSEXEC, only one computer tape is
necessary, because the software allows the information to be output to
the three desired storage media simultaneously. With the IDSEXEC, it is
also possible to reorder images submitted in one sequence to any other
logical ordering sequence specified by the user. The Company believes
that it is the only company that possesses intelligent indexing
technology.
Page Handler. A software product which stores a "mirror image" of the
document on any of the supported IDSEXEC storage media. The software is
able to understand a wide variety of print languages.
Complete Organization of Every Document ("COED"). A software/hardware
product which records any documents within the IDSEXEC production
process on any supported electronic storage device. The system provides
software user tools which facilitate the retrieval of stored documents
for viewing, printing, faxing or exporting.
Microfilm and Media Supplies: The Company offers a complete line of original and
duplicate microfilm and chemicals for use in its COM printer and duplicator
systems. The sale of microfilm and media supplies provides the Company with a
continuing stream of cash flow and acts as a supplement to its hardware sales,
which provides a less consistent stream of cash flow due to its high dollar
value, long sales cycle and capital equipment nature. Media sales also provide
the opportunity to establish continuity of relationships between the Company and
its installed customer base. Maintaining these relationships is important since
numerous hardware sales of replacement pieces or upgrades of technology are made
to these customers. The Company acquires a significant portion of its microfilm
and media supplies from Eastman Kodak and sells them on a drop-ship basis.
Microfilm and media supplies sales contributed approximately 37% to document
management segment's revenue in fiscal 1996.
Maintenance and Spare Parts: The Company supplies spare parts for maintenance on
its installed COM equipment user base. Maintenance on the Company's user base is
sub-contracted to a third party maintenance organization, for which the Company
receives a monthly royalty. Revenue from maintenance and spare parts contributed
approximately 10% and 8%, respectively, to the document management segment's
revenue in fiscal 1996.
RAPID. The document management segment currently has under-development its RAPID
Archiving Peripheral for Images and Documents ("RAPID TM") product. RAPID TM
will provide high-speed conversion of digitally-stored documents and images to
low-cost, human-readable media. RAPID TM will enable imaging and Computer Output
to Laser Disk ("COLD") systems a low-cost, no-migration archiving alternative to
bulging digital repositories by off-loading Write Once Read Never ("WORN")
information to film. RAPID's software will organize documents and reports into
file folders for meaningful, rapid retrieval. RAPID is scheduled to be completed
in the second quarter of fiscal 1997 and will require an additional investment
by the Company of $500,000 to complete.
Telecommunications Segment
The telecommunications segment generates revenue primarily from the initial sale
of third party products, "moves, adds, changes" and by providing services and
maintenance.
Initial Product Sales
Telephone Systems. The Company provides PBX and key/hybrid telephone systems for
its customers. A PBX, which is generally utilized for customers with 100 phones
or larger with growth up to thousands of phones, is handled by the F9600
manufactured by Fujitsu Business Communications Systems, Inc. ("Fujitsu") and
the Definity manufactured by Lucent Technologies, Inc. The smaller systems
handle customers from 10 phones up to 200 phones. In this area, the Company
markets the Integrated Digital System from Executone and Northern Telecom
Norstar. Prices for telephone systems range from $3,000 for a small key system
to over $1 million for a large, complex PBX system.
Call Processing. Call processing is a general term used for many new
applications to enhance the operation of existing telecommunication systems.
These areas are as follows:
Call Centers. A call center enhances the telephone system's ability to
handle large volumes of inbound or outbound calls and is used by
businesses for customer service, reservations centers and other large
order entry type operations. The Company offers call center products
from Fujitsu and Executone.
Voice Messaging. Voice mail is one of the more common products
encountered by the general public. This technology enables voice
communications to be sent, stored and retrieved from any touch-tone
telephone. The Company offers voice mail systems from Octel, AVT and
Executone.
Interactive Voice Response. This product was one of the first to
integrate the use of the telephone system with a computer system. This
technology allows a caller to access a computer database to retrieve or
input information via a touchtone telephone. IVR units allow callers to
access bank account information, obtain airline reservation information
and many other applications. The Company markets IVR units from
Syntellect and AVT.
Computer Telephone Integration. The combination of the computer and telephone
has led to a new group of products entitled CTI. The Company maintains a staff
of programmers who have developed customized CTI applications for their
customers. In addition, the Company has entered into an agreement with Answer
Soft to market its line of CTI based products, and is evaluating several other
CTI products for distribution.
Revenue from initial product sales contributed approximately 53%, 64% and 38% to
revenue for the telecommunications segment in fiscal 1996, 1995, and 1994,
respectively.
Moves, Adds and Changes
Moves, adds and changes consist of moving telephones to new user locations,
adding telephones or expansion cards in a telephone system and changing system
and user features. Moves, adds and changes contributed approximately 26%, 14%
and 27% of total telecommunications segment revenue in fiscal 1996, 1995, and
1994, respectively.
Service and maintenance
Customer Service. The Company maintains a strong customer service focus which
helps generate recurring revenue from its existing customer relationships. This
revenue takes the form of maintenance contracts, service calls, upgrades to
existing systems and new systems for new locations.
Cabling. Cabling is the process of installing the physical connection that
connects telephones and computers. The Company provides cabling for a variety of
applications, including coax and fiber for voice, data and LAN applications. The
Company provides Building Industry Consulting Service International ("BICSI")
trained engineers to design cable networks for its customers. The Company is an
authorized distributor of AT&T's Systimax Cabling System. In addition to
providing the design and hardware for the cabling system, the Company also
provides installation labor for customers.
Data Communications. The Company is a Novell Gold and Microsoft Advance Server
certified reseller and the Company's primary focus on data network integration
has been to its existing customers. The Company has distribution agreements with
several strategic partners such as Compaq, Novell, Hewlett-Packard and AST
Research.
Sales of services and maintenance contributed approximately 15%, 17% and 24% of
total telecommunication segment revenue in fiscal 1996, 1995, and 1994,
respectively.
Internet Services Segment
The Internet service segment provides Internet access, develops World Wide Web
pages, resells related hardware and software and provides Internet training. The
Company is a value added re-seller for Pacific Bell, an authorized re-seller for
Ascend Communications and a Microsoft Solutions Provider. MCW products and
services are summarized as follows:
Internet Access. Dial-Up Accounts provide Internet access on an as needed basis
and generate $9.95 to $24.95 per customer per month depending on the number of
included hours and mega-bytes of storage used by the subscriber. Dedicated
access enables direct, high-speed continuous connection of an organization's LAN
to the Internet via MCI's Internet backbone at speeds of 56 kbps (frame relay)
to 1.45 mbps (point-to-point). Monthly service charges range from $125 to $1,250
depending on the speed of service offered.
The Company offers other services to its customers including co-location of
Internet servers, corporate e-mail, e-mail robots for mass marketing and FTP
sites used in technical support applications for file transactions.
Web Development. The Company's web services include web development and hosting
for its Internet customers. Targeted at middle market customers, MCW is a full
service provider that allows its customers to develop and maintain dynamic web
sites for both internal Intranet and external Internet applications. Monthly
charges for web hostings range from $50 to $2,500 per month depending on
band-width requirements, number of inquiries (hits) per month and scripting and
database requirements. One-time charges for web site development range from $195
to $25,000 depending on the customer's needs.
Internet Training. The Company provides Internet training to corporate
customers. Courses range from Introductions to the Internet, a variety of HTML
programming and advanced courses in CGI and JAVA scripting.
Revenue per course ranges from $149 to $699.
Sales and Marketing
Document Management Segment
The Company markets its document management products and services worldwide. In
the United States, the Company employs a direct sales force and outside of the
United States the Company uses a network of distributors.
Telecommunications Segment
The Company sells its telecommunications products and services throughout the
Midwest, with principal focus on the Chicago, Illinois metropolitan area,
Kansas, Missouri, and Wisconsin. The Company employs a direct sales force to
sell its telecommunications products and services.
Internet Services Segment
The Internet services segment sells its products and services primarily in the
San Francisco Bay area through a direct sales staff of four individuals and
twelve Internet design consultants/Web advertisers. The Company employs a
variety of selling techniques in order to reach targeted business customers
including telemarketing, direct mail and sales calls.
Customers
During fiscal 1996, one customer, NCR Corp., accounted for 13% of the Company's
consolidated revenue. No single customer of the Company accounted for more than
10% of the Company's consolidated revenue in fiscal 1995 or 1994.
Document Management Segment
The Company markets its products and services to two distinct customer groups:
(a) those customers with high-volume document, storage and retrieval needs, and
(b) those customers who desire to image enable existing business applications,
to facilitate rapid and efficient data storage and retrieval and to provide a
vehicle to electronically process data input (e.g. health claims processing,
lease administration, etc.).
For those customers who have high-volume data output, storage and retrieval
needs, the Company further defines its customers as service bureaus, end users
and authorized distributors. Service bureaus have capitalized on the recent
trend toward outsourcing. Customers of service bureaus generally do not have the
data output volumes that would justify dedicated COM and related systems.
Conversely, certain financial institutions, insurance companies and public
utilities do have the output volumes that would justify direct purchase of the
Company's products. Current end user customers include Fortune 500 companies and
other service providers.
The Company currently markets its image enabling technologies to the healthcare
claims processing industry and governmental agencies. These customers typically
process high volumes of input data and have a variety of storage and retrieval
requirements. The Company's ability to blend current technologies allows the
customization of imaging applications that can meet a customer's storage and
retrieval needs.
During fiscal 1996, foreign sales of the document management segment represented
13% of the Company's consolidated revenue. Foreign sales made principally to
Germany, the United Kingdom, and Canada, represented 39%, 18%, and 15%,
respectively, of total foreign sales of the Company.
Telecommunications Segment
The Company markets its products and services principally to customers with 25
or more telephones and those customers with complex, expanding voice and data
management needs. The Company focuses on those customers who do not have
significant infrastructure to support their telecommunications needs, but
instead, seek to outsource this function. The Company strives to provide
outstanding customer service and support long after the initial sale, and sees
it as critical to being able to expand the product and service offerings to its
customers. The Company maintains a highly trained force of service technicians,
design engineers, communications consultants and project coordinators who
provide on-site and remote service and support. As of September 30, 1996, the
Company had approximately 3,000 customers in its telecommunications segment.
During fiscal years 1996, 1995 and 1994, no single customer in the
telecommunications segment accounted for more than 10% of the consolidated
Company revenue.
The Internet Services Segment
The Internet services segment focuses exclusively on business customers with 10
to 100 employees. As of September 30, 1996 the Internet services segment had
approximately 1,600 users on its network.
Competition
Document Management Segment
The document management industry is highly competitive and rapidly evolving. The
Company competes on the basis of breadth of offering different document
management solutions, cost, flexibility and customer service. The Company
competes with Anacomp, Eastman Kodak, InSci and Mobius, among others. These
competitors have longer operating histories and significantly greater financial,
technical, marketing, and other resources, as well as greater name recognition,
than the Company.
Telecommunications Segment
The telecommunications industry is highly competitive and rapidly evolving. The
Company competes on the basis of customer service, flexibility and breadth of
offering different technological products and solutions. The Company competes
with Lucent Technologies, Inc., Northern Telecom, Siemens, and the Regional Bell
Operating Companies ("RBOCs") in the telecommunicating business. These
competitors have longer operating histories and significantly greater financial,
technical, marketing, and other resources, as well as greater name recognition,
than the Company. In addition, the Regional Bell Operating Companies are
currently subject to a variety of government regulations limiting the
manufacture, marketing and sale of certain products and services in the
telecommunications market which restrictions, if eliminated or lessened, could
adversely impact the Company's business.
Internet Services Segment
The Internet services market is highly competitive and rapidly evolving,
especially with the introduction of flat rate monthly service and offerings by
the major carriers (e.g. MCI, Sprint and AT&T). In addition to the major
carriers, the Internet services segment competes with a number of local,
regional and national Internet service providers (e.g. PSINet, Uunet, Netcom).
The Internet services segment competes on the basis of being a single point of
contact for all Internet related solutions. Additionally, the Internet services
segment provides its customers with quality connections by not oversubscribing
its network with consumer traffic.
Raw Materials
Document Management Segment
Raw materials for COM Systems consist of purchased parts from third party
vendors. The Company believes that it can source purchased parts from a variety
of vendors and that no one single vendor possesses a critical component that
can't be purchased elsewhere.
The document management segment purchases a significant amount of its microfilm
and media supplies from Eastman Kodak. The Company believes it has a strong
partnership with Eastman Kodak; however, alternative supplies are available in
the event of an interruption in the vendor relationship.
The document management segment purchases all of its products pursuant to
purchase orders and has no long-term purchase commitments.
Telecommunications Segment
The telecommunications segment purchases all of the equipment and software that
it markets and installs from third party vendors. The majority of the products
sold by the segment are purchased from Fujitsu Business Communication Systems,
Inc. and Executone Information Systems. Other parts and components necessary for
installation and service are purchased from a variety of sources and, the
Company believes, are readily available from alternative sources. The
telecommunications segment purchases all of its products pursuant to purchase
orders and has no long-term purchase commitments.
Internet Services Segment
The Internet services segment connects customers to the Internet using a high
speed MCI DS3 circuit. Customers connect to the Company's network using fiber
and copper facilities of PacBell, Metropolitan Fiber, and Cable and Wireless.
The availability of circuits is dependent on the capacity of MCI's central
office, the physical locations of copper and fiber optic cable from Pac Bell,
Metropolitan Fiber and other customer demand. Recent changes in the
telecommunications law has allowed more companies to compete in local markets
for connectivity. The Company believes that connectivity will be available from
a variety of sources.
Seasonality
The Company believes that none of its segments are subject to seasonal
fluctuations.
Backlog
Document Management Segment
As of September 30, 1996, the document management segment had signed customer
contracts of $3.4 million, all of which are expected to be delivered in fiscal
1997. The segment had approximately $1.0 million in signed contracts at
September 30, 1995, all of which were delivered during fiscal 1996.
Telecommunications Segment
As of September 30, 1996, the telecommunications segment had signed customer
contracts for $4.8 million, all of which are expected to be delivered in fiscal
1997. The segment had approximately $1.5 million of signed contracts at
September 30, 1995, all of which were delivered during fiscal 1996.
Internet Services Segment
The backlog of the Internet services segment was insignificant as of September
30, 1996.
Research and Development
Document Management Segment
The Company believes that the development of new products and solutions is
critical for the future growth of the document management segment. During fiscal
1996, the Company spent approximately $1.1 million on development efforts.
Equally critical, however, is the collective knowledge and experience of the
Company's management and personnel to develop and market new solutions in the
document management market place.
Telecommunications and Internet Services Segments
The telecommunications and Internet services segments are not engaged in any
substantial research and development.
Employees
As of September 30, 1996, the Company and its subsidiaries had 209 full-time
employees and four part-time employees. The Company also utilizes contracted
labor to assist in its production process.
Item 2. Properties
The Company leases an aggregate of approximately 126,000 square feet of office,
warehouse and manufacturing space. The document management segment leases space
in Mountain View, California and Lincolnshire, Illinois. The Telecommunications
segment leases space in Lenexa, Kansas; Wichita, Kansas; Columbia, Missouri;
Milwaukee, Wisconsin; Chicago, Illinois and Buffalo Grove, Illinois. The
Internet services segment leases space in Mountain View, California. The
corporate office is located in Lake Forest, Illinois. Currently, approximately
44,000 square feet are sub-let to third parties.
Item 3. Legal Proceedings
The Company has no material pending litigation.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Common Stock of the Company is principally traded on the American Stock
Exchange ("AMEX"). The high and low sales prices for the stock reported on AMEX
for each quarterly period during the past two fiscal years were as follows:
Quarter Ending High Low
---------------------------------- ------ -------
1995
December 31, 1994 $ 7-3/4 $ 6-1/8
March 31, 1995 7-1/2 6-1/8
June 30, 1995 7-7/8 5-7/8
September 30, 1995 15-7/8 7-3/4
1996
December 31, 1995 14-3/8 9-1/4
March 31, 1996 10-7/8 8
June 30, 1996 9-3/8 6-13/16
September 30, 1996 8 5-7/16
There were approximately 416 record holders of the Company's Common Stock as of
December 30, 1996. The closing price for the Company's Common Stock on December
30, 1996 was $4-9/16. The Company paid no dividends during the period October 1,
1993 to September 30, 1996. The Company does not intend to pay dividends on its
Common Stock in the foreseeable future.
Item 6. Selected Financial Data
The following table sets forth for the periods selected consolidated financial
and operating data for the Company. The statement of operations and balance
sheet data have been derived from the Company's consolidated financial
statements. The selected consolidated financial data should be read in
conjuction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes thereto included elsewhere in this report.
Fiscal years ended September 30,
1992 1993 1994 1995(b) 1996(c)
(In thousands, except per share data)
Statement of Operations Data (a):
Net sales $ 7,569 $ 9,408 $ 9,629 $ 21,252 $ 41,387
Cost of sales 5,702 6,612 6,532 15,137 27,137
------------ ------------ ------------ ------------ ----------
Gross profit 1,867 2,796 3,097 6,115 14,250
------------ ------------ ------------ ------------ ----------
Operating expenses:
Selling, engineering and
general and administrative 2,213 3,106 3,234 7,136 14,316
Amortization of goodwill and
transaction costs 8 - 152 451 1,280
Write-off of acquired in-process
un-proven technology - - - 5,000 -
Cost associated with change in
products and other - - - - 2,834
Acquisition costs and other - - - 1,318 -
------------ ------------ ------------ ------------ ----------
Total operating expenses 2,221 3,106 3,386 13,905 18,430
------------ ------------ ------------ ------------ ----------
Loss from continuing operations (354) (310) (289) (7,790) (4,180)
Interest expense (40) (56) (615) (650) (1,597)
Gain on sale of available-for-sale
securities - - - - 5,689
Other income (expense) 58 72 (31) (28) 52
------------ ------------ ------------ ------------ ----------
Loss from continuing operations
before income taxes and
extraordinary items (336) (294) (935) (8,468) (36)
Provision (benefit) for income taxes (50) 187 378 124 -
============ ============ ============ ============ ==========
Net loss before discontinued operations
and extraordinary items $ (286) $ (481) $ (1,313) $ (8,592) $ (36)
============ ============ ============ ============ ==========
Primary loss per share from
continuing operations $ (0.08) $ (0.14) $ (0.35) $ (1.97) $
(0.01)
============ ============ ============ ============ ==========
Weighted average shares outstanding 3,537 3,555 3,802 4,353 5,818
============ ============ ============ ============ ==========
Item 6. Selected Financial Data, Continued
Balance Sheet Data (a): September 30
1992 1993 1994 1995 1996
- ---------------------------------------------------- ------------ ------------ ------------- -----------
(In thousands)
Working capital $ 618 $ 1,344 $ (798) $ 3,488 $ 1,713
Total assets 2,758 3,175 5,646 35,396 25,586
Long-term debt, net of current portion 33 197 123 12,434 10,598
Shareholders' equity 1,515 1,384 2,436 11,685 3,793
Cash dividends paid - - - - -
(a) Restated to reflect the acquisition of Kansas Communications, Inc.
("KCI") on September 15, 1995, accounted for as a pooling of interests.
(b) Includes the results of operations of Communicate Direct, Inc. ("CDI")
and Micrographic Technology Corporation ("MTC") since their
acquisitions on October 28, 1994 and September 15, 1995, respectively.
(c) Includes the results of operations of the Milwaukee operations of
Executone Information Systems, Inc. and MediaCity World, Inc. since
their acquisitions on December 29, 1995 and June 21, 1996,
respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company took a number of strategic steps during fiscal 1996 that had a
significant impact on the results of operations.
In June 1996, CDI signed an agreement with Inacom Corporation and Lucent
Technologies, Inc. ("Lucent") to become the only distributor of Lucent
Technology's Definity PBX products in the Chicago, IL metropolitan area other
than Inacom and Lucent. In connection with the change in product line, CDI
repositioned its operations to focus on higher-end, technology driven companies.
In connection with this distribution agreement and the repositioning of its
operations, the Company incurred one-time charges of $1.3 million for severance,
asset write-downs and other.
In addition to the change in product line, CDI sold its non-application oriented
interconnect business to Next Call, Inc. ("Next Call") for a $600,000 ten year
note receivable. In connection with the sale, CDI agreed to lend Next Call up to
$1.0 million to fund operating losses, as defined, for the first twelve months
of operations. The loan agreement required CDI to make advances to Next Call on
a monthly basis to cover operating cash short falls. Next Call was required to
repay such advances when it became profitable on a cumulative basis. After the
first twelve months, any amount still outstanding on such advances was to be
forgiven. Subsequent to year-end, Next Call ceased operations. CDI advanced Next
Call $195,000 to fund operating losses which has been included in the loss on
sale of business.
As a result of the sale to Next Call and the uncertainty resulting from Next
Call's subsequent shut down, the Company incurred a $6.1 million extraordinary
charge in fiscal 1996. The components of the extraordinary charge include the
write-off of goodwill which arose from the initial purchase of CDI in October
1994; deferred acquisition costs associated with the purchase of CDI; reserve
for the note receivable from Next Call; severance payments; inventory
write-downs; write-offs of leasehold improvements; warranty reserve and other.
The Company recorded $5.0 million of the one-time charges in the third quarter
of fiscal 1996 and the remaining $1.1 million in the fourth quarter of fiscal
1996. As a result of these write-offs, future amortization expense for goodwill
and deferred acquisition costs was reduced on a pretax basis by approximately
$535,000 annually. The loss resulting from the disposition of certain assets and
the assumption of certain liabilities of CDI, within a two year period following
a pooling of interests has been classified as an extraordinary item as required
by generally accepted accounting principles. This disposition of CDI was not
contemplated at the time of the pooling with KCI.
Subsequent to year-end, CDI sold its operations that support its Fujitsu
maintenance base in the Chicago metropolitan area to a new company formed by
John I. Jellinek, the Company's former president and chief executive officer,
and Phillip Kenny, a former SoftNet director. The buyer acquired certain assets
in exchange for a $209,000 promissory note and the assumption of trade payables
of at least $624,000. In addition, at the closing the buyer paid off $438,000 of
existing Company bank debt and entered into a sub-lease of CDI's facility in
Buffalo Grove, Illinois. At the closing, the buyer merged with Telcom Midwest,
LLC., and Messrs. Jellinek and Kenny and the other two shareholders of the
merged company personally guaranteed obligations arising out of the promissory
note, the sub-lease arrangement and the trade payables. The personal guarantees
of the promissory note are several. The personal guarantees of the sub-lease are
limited to $400,000 and are on a joint and several basis. The personal
guarantees of trade payables are on a joint and several basis but are limited to
Messrs. Jellinek and Kenny. Concurrent with this transaction, Messrs. Jellinek
and Kenny resigned from the Company's board. The transaction was approved by the
disinterested members of the Company's board.
The interconnect businesses sold by CDI in June 1996 and subsequent to year end
sustained significant losses since the acquisition of CDI in October 1994
In June 1996, the Company acquired the exclusive worldwide manufacturing rights
to IMNET Systems, Inc.'s MegaSAR Microfilm Jukebox and completed and amended its
obligations under a previous agreement. In addition to becoming the exclusive
manufacturer of the MegaSAR for IMNET, the Company will further integrate the
device into its current product offering. The Company issued a $2.9 million note
for prepaid license fees, software inventory, the manufacturing rights, and
certain other payables. Approximately $2.5 million was paid on this note during
the fourth quarter of fiscal 1996. The Company has a receivable from IMNET of
$176,000.
The transaction was approved by the disinterested members of the Company's
board. Following the transaction, John J. McDonough and John I. Jellinek
resigned from IMNET's board and James Gordon, a director of IMNET, resigned from
the Company's board.
During the fourth quarter of fiscal 1996, the Company decided to integrate the
IMNET microfilm retrieval software with another software developer's product,
which the Company was already distributing. The integrated product will require
less IMNET software than previously assumed. As a result, the Company recorded a
one-time charge of $1.5 million to write-off software inventory. Since the
acquisition of the manufacturing rights from IMNET, the transfer of all of the
technical and manufacturing know-how has been delayed due to technical
difficulties. The Company is currently negotiating with IMNET to either complete
the transfer or seek an alternative solution.
On December 29, 1995, the Company acquired the Milwaukee operations of Executone
Information Systems, Inc. ("Executone-Milwaukee"), in a business combination
accounted for as a purchase. Executone-Milwaukee sells and services
telecommunications and voice processing systems. The purchase price of
approximately $1.9 million consisted of $100,000 of cash and a note payable for
$1.8 million. The note was paid in February, 1996. The operations of
Executone-Milwaukee have been included in the results of the Company since
December 29, 1995. As a result of the acquisition, the Company recorded costs in
excess of fair value of net assets acquired of $1.8 million, an amount which is
being amortized on a straight-line basis over twenty years.
In June 1996, the Company acquired MCW in a business combination accounted for
as a purchase. MCW is an Internet Service Provider with operations principally
in the San Francisco Bay Area, CA. and Reno, NV. The purchase price consisted of
200,000 shares of the Company's common stock valued at $5.11 per share. The
Company recorded costs in excess of fair value of net assets acquired of $1.2
million, which will be amortized on a straight line basis over three years. The
Company plans to focus in the near term on building and increasing its
subscriber base, which will require it to increase significantly its expenses
for marketing, network infrastructure and POP's, and may adversely impact
short-term operating results.
The Company expects to focus on building and increasing its customer base in
each of its markets, but in particular, to develop a customer profile that is
more closely aligned with the Company's overall product strategy. This effort,
as well as the introduction of the new products, some of which the Company will
develop internally, will require substantial investment in new sales personnel
and retraining of current technical personnel, which the Company believes may
have an adverse effect on short-term operating results.
Although the Company has organized itself into three operating units, comparison
to prior years by industry segments would not be meaningful as a majority of the
document management segment was acquired in late fiscal 1995 and only
contributed fifteen days of operating results to fiscal 1995.
Results of operations for the twelve months ended September 30, 1996 compared to
1995
For the fiscal year ended September 30, 1996 net sales increased by $20.1
million (or 95%) to $41.4 million compared to $21.3 million for the same period
in 1995. The increase in sales was principally a result of the acquisitions of
MTC in September, 1995 and the Milwaukee, WI operations of Executone Information
Systems, Inc. ("Executone-Milwaukee") in December 1995. The Company's
acquisition of MTC and Executone-Milwaukee added approximately $19.4 million in
net sales in the fiscal year ended September 30, 1996. Sales from the Company's
telecommunications segment, exclusive of revenue increases attributed to the
acquisition of Executone-Milwaukee, declined slightly due to the erosion of
operations in the Chicago metropolitan area.
For the fiscal year ended September 30, 1996, gross profit increased $8.2
million (or 133%) to $14.3 million from $6.1 million for the same period in
1995. For the fiscal year, gross profit as a percentage of sales increased from
28.8% in 1995 to 34.4% in 1996. The percentage increase relates primarily to
inclusion of MTC's results for the fiscal year ended September 30, 1996 and the
increased profitability for sales in the document management segment. During the
fiscal year ended September 30, 1996, in order to conform with industry
practices, the Company classified certain expenses as costs of sales which under
prior presentations would have been classified as general and administrative
expenses. Consistent with this presentation, the Company has reclassified
certain general and administrative expenses as cost of sales for the fiscal year
ended September 30, 1995.
Selling, engineering, general and administrative expenses increased $7.2 million
(or 101%) to $14.3 million for the fiscal year ended September 30, 1996 from
$7.1 million for the same period in 1995, largely as a result of the inclusion
of MTC's results for the period ended September 30, 1996 ($4.9 million), the
increase in sales and marketing activities in the telecommunications segment
($960,000) and the increased administrative expenses associated with expanded
operations ($800,000). Amortization of goodwill and transaction costs increased
$829,000 to $1.3 million for the fiscal year ended September 30, 1996, compared
to $451,000 for the fiscal year ended September 30, 1995, primarily as a result
of the acquisition of MTC in September 1995, and the amortization of deferred
acquisition costs resulting from the acquisitions of MTC and CDI.
In the fourth quarter of fiscal 1995, the Company incurred one-time charges for
the write-off of unproven in-process technology acquired in connection with the
acquisition of MTC ($5.0 million), certain transaction costs related to the
merger with KCI ($648,000) and other costs resulting from the write-off of
certain leasehold improvements and other restructuring activities.
During the fiscal year ended September 30, 1996, the Company signed an agreement
with Inacom Corporation and Lucent to distribute Lucent's Definity PBX product
in the Chicago, Illinois Metropolitan area. As a result, CDI repositioned its
Chicago operations and incurred one-time charges of $1.3 million for severance
payments, asset write downs and other costs. Also during the fourth quarter of
fiscal 1996, the Company decided to integrate the IMNET microfilm retrieval
software with another software developer's product, which the Company was
already distributing. The integrated product will require less IMNET software
than previously anticipated. As a result, the Company recorded a one-time charge
of $1.5 million to write off software inventory.
Interest expense increased $948,000 (or 146%) to $1.6 million for the fiscal
year ended September 30, 1996 from $650,000 in the fiscal year ended September
30, 1995. Interest expense increased as a result of increased debt outstanding
during fiscal 1996, compared to fiscal 1995. The increase in outstanding
indebtedness was principally a result of acquisition debt and borrowings to fund
working capital.
During the fiscal year ended September 30, 1996 the Company realized a gain of
$5.7 million from the sale of its investment in IMNET Systems, Inc.
The Company's provision for income taxes relates exclusively to the operations
of KCI, for tax liabilities incurred prior to the merger with the Company. No
provision for income taxes was made for fiscal 1996, as a result of net
operating losses. A provision for income taxes of $124,000 was recorded for
fiscal 1995. At September 30, 1996 the Company had a tax net operating loss
carry forward of approximately $7.9 million, which begins to expire in 1999.
Given the Company's history of operating losses, a valuation allowance of $4.2
million has been provided in the Company's consolidated financial statements
For the fiscal year ended September 30, 1996, net loss before discontinued
operations and extraordinary items decreased $8.6 million to $36,000 and loss
per share of common stock before discontinued operations and extraordinary items
decreased $1.96 to $.01, compared to the same period in 1995. Weighted average
outstanding shares increased by 1.5 million or 33.7% from 4.4 million in fiscal
1995 to 5.8 million in fiscal 1996 mainly due to the issuance of shares for
acquisitions and the conversion of certain convertible subordinated notes.
During fiscal 1996, CDI sold its non-application oriented interconnect business
located in the Chicago, IL metropolitan area. As a result the Company incurred a
$6.1 million extraordinary charge for the write-off of goodwill which arose from
the initial purchase of CDI in October 1994, deferred acquisition costs
associated with the purchase of CDI, inventory write-downs, warranty reserves
and other.
Results of operations for the twelve months ended September 30, 1995 compared to
1994
For the fiscal year ended September 30, 1995, net sales increased by $11.6
million (or 121%) to $21.3 million from $9.6 million for the same period in1994.
The increase in sales was principally a result of the acquisition of CDI on
October 31, 1994 and the acquisition of MTC on September 15, 1995. The Company's
acquisition of CDI and MTC added approximately $10.8 million in net sales in
1995.
For the fiscal year ended September 30, 1995, gross profit increased $3.0
million or 97% to $6.1 million from $3.1 million for the same period in 1994, as
a result of higher net sales. For the year, gross profit as a percentage of
sales decreased from 32.2% in 1994 to 28.8% in 1995. The percentage decrease
relates primarily to inclusion of CDI's results since November 1, 1994, the date
of acquisition. Generally, CDI's sales mix includes more initial sales to new
customers, which are usually at lower gross margins. Conversely, KCI's sales mix
includes more sales of higher margin products and services to existing
customers.
Selling, general and administrative expenses increased $3.9 million or 121% to
$7.1 million in fiscal 1995 from $3.2 million in fiscal 1994, largely as a
result of the inclusion of CDI's results since November 1994 ($2.6 million), the
increase in sales and marketing activities in the document management segment
($285,000) and the increase of the corporate staff to accommodate the
acquisitions of KCI and MTC ($248,000). Amortization of goodwill and deferred
transaction costs increased primarily as a result of the inclusion of CDI's
results since November 1994. Also in the fourth quarter of fiscal 1995, the
Company incurred one-time charges for the write off of unproven in-process
technology acquired in connection with the acquisition of MTC ($5.0 million),
certain transaction costs related to the merger with KCI ($648,000) and other
costs resulting from the write-off of certain leasehold improvements and other
restructuring activities.
Interest expense increased $35,000 or 5.6% to $650,000 in fiscal 1995 from
$615,000 in fiscal 1994. Interest expense in 1994 included non-cash amortization
of senior note discounts of $514,000. Overall cash interest expense increased as
a result of increased borrowing during 1995 and the inclusion of CDI's results
since November 1994.
The Company's provision for income taxes relates exclusively to the operation of
KCI, for tax liabilities incurred prior to the merger with the Company. The
provision for income taxes decreased $253,000 or 67.0% to $124,000 in fiscal
1995 from $377,000 in fiscal 1994 as a result of lower taxable income for KCI
during the twelve months ended September 30, 1995 compared to the same period in
fiscal 1994. At September 30, 1995, the Company had a tax net operating loss
carry forward of $11.0 million, which begins to expire in 1999. Given the
Company's history of operating losses, a valuation allowance of $2.7 million has
been provided in the Company's consolidated financial statements.
For fiscal 1995, the net loss from continuing operations increased $7.3 million.
If the unusual and non-recurring charges are excluded, the loss from continuing
operations increased $961,000. The loss per share of common stock from
continuing operations increased $1.62 from fiscal 1994. If the unusual and
non-recurring charges are excluded, the loss per share from continuing
operations increased $.17 per share, or 49%.
Utilization Management Association, Inc. ("UMA") was disposed of in November
1995. The Company recorded a loss of $644,000 or $.15 per share for the sale of
UMA.
Net sales from discontinued operations for fiscal 1995 were $860,000, an
increase of $165,000, or 23.7%, from net sales from discontinued operations of
$695,000 in fiscal 1994. The loss from the operations of UMA was $419,000 for
fiscal 1995, an increase of $304,000 from fiscal 1994. The increase was
primarily a result of higher operating costs in anticipation of higher sales
growth. The loss per share for the operations of UMA was $.10 for fiscal 1995
compared to $.03 for fiscal 1994.
The net loss per share increased $1.84 from $.38 in fiscal 1994 to $2.22 in
fiscal 1995 as a result of the items discussed previously. Weighted average
outstanding shares increased by 551,000 or 14.5% from 3.8 million in fiscal 1994
to 4.4 million in fiscal 1995 mainly due to the issuance of shares for
acquisitions and the sale of shares of the Company's common stock in a private
placement transaction.
Liquidity and Capital Resources
At September 30, 1996, the Company's current ratio was 1.16 to 1 with working
capital of $1.7 million. This compares with a current ratio of 1.30 to 1 and
working capital of $3.3 million at September 30, 1995.
During fiscal 1996, the Company sold its entire holdings in IMNET for net
proceeds of $7.7 million. Accordingly, the Company recorded a gain on sale of
securities of $5.7 million.
For the fiscal year ended September 30, 1996, cash flows used by operating
activities were $4.4 million, compared to $4.7 for the fiscal year ended
September 30, 1995. Cash flows generated by investing activities increased $6.2
million to $3.1 million for fiscal 1996 compared to a use of $3.1 million in
fiscal 1995 mainly as a result of the sale of marketable securities in fiscal
1996 and decreased acquisition activities. Cash flows provided by financing
activities decreased $6.7 million to $1.2 million in fiscal 1996 from $7.9
million in fiscal 1995 primarily as a result of fewer acquisitions in fiscal
1996.
Beginning in the fourth quarter of fiscal 1996, the Company commenced a number
of cost cutting activities aimed at improving cash flows. The most significant
of these activities of the telecommunications segment included the sale of the
operations that supported the Fujitsu maintenance base in the Chicago
metropolitan area. As a result of the sale, the Company sublet approximately
14,000 square feet of space in Buffalo Grove, Illinois, which will reduce annual
fixed rent expense by approximately $108,000, paid off $438,000 of existing bank
debt, had trade payables of at least $624,000 assumed by the buyer and had the
employment obligations for 19 employees taken over. The Company will continue to
evaluate each of its business operations and determine where excess costs can be
eliminated or contained.
During fiscal 1996, the Company increased its line of credit borrowing capacity
with its lender to $9.5 million. In addition, subsequent to year end the Company
received a temporary increase in its borrowing ability whereby the Company will
be able to borrow $1.0 million in excess of its available assets (as defined).
The temporary increase terminates on January 31, 1997.
The Company expects to be able to finance its working capital requirements and
capital expenditures from its operating income, and existing line-of-credit
facilities for the fiscal year ended September 30, 1997.
Effect of New Accounting Pronouncements
Reference is made to note 2 of the Notes to Consolidated Financial Statements
included elsewhere in this Form 10-K.
Item 8. Financial Statements and Supplementary Data
SoftNet Systems, Inc. and Subsidiaries
Index to Consolidated Financial Statements
September 30, 1996
Page
Report of Independent Accountants
Consolidated Statements of Operations
for the Years Ended September 30, 1996, 1995 and 1994
Consolidated Balance Sheets as of September 30, 1996 and 1995
Consolidated Statements of Shareholders' Equity
for the Years ended September 30, 1996, 1995 and 1994
Consolidated Statement of Cash Flows
for the Years Ended September 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of SoftNet Systems, Inc.:
We have audited the consolidated financial statements of SoftNet Systems, Inc.
and Subsidiaries as listed in the preceding index to the consolidated financial
statements. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SoftNet Systems,
Inc and Subsidiaries as of September 30, 1996 and 1995 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standard No. 115, " Accounting for
Certain Investments in Debt and Equity Securities" in 1995.
COOPERS & LYBRAND L.L.P.
January 14, 1997
Chicago, Illinois
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 1996, 1995 and 1994
(In thousands, except per share data)
1996 1995 1994
------------- ------------- ------------
Net sales $ 41,387 $ 21,252 $ 9,629
Cost of sales 27,137 15,137 6,532
------------- ------------- ------------
Gross profit 14,250 6,115 3,097
------------- ------------- ------------
Operating expenses:
Selling 5,274 2,662 976
Engineering 1,820 60 -
General and administrative 7,222 4,414 2,258
Amortization of goodwill
and transaction costs 1,280 451 152
Costs associated with change
in product lines and other 2,834 - -
Write off of acquired in process
un-proven technology - 5,000 -
Acquisition costs and other - 1,318 -
------------- ------------- ------------
Total operating expenses 18,430 13,905 3,386
------------- ------------- ------------
Loss from continuing operations (4,180) (7,790) (289)
Interest expense (1,597) (650) (615)
Gain on available-for-sale securities 5,689 - -
Other income (expense) 52 (28) (31)
------------- ------------- ------------
Loss from continuing operations
before income taxes and
extraordinary item (36) (8,468) (935)
Provision for income taxes - 124 378
------------- ------------- ------------
Loss from continuing operations
before extraordinary item (36) (8,592) (1,313)
------------- ------------- ------------
Discontinued operations:
Loss from operations - (420) (115)
Loss on disposal - (644) -
------------- ------------- ------------
Loss before extraordinary item (36) (9,656) (1,428)
------------- ------------- ------------
Extraordinary item -
Loss on sale of business (6,061) - -
------------- ------------- ------------
Net loss $ (6,097) $ (9,656) $ (1,428)
============= ============= ============
Loss per share:
Continuing operations $ (0.01) $ (1.97) $ (0.35)
Discontinued operations - (0.10) (0.03)
Loss on disposal - (0.15) -
Extraordinary item (1.04) - -
------------- ------------- ------------
Net loss $ (1.05) $ (2.22) $ (0.38)
============= ============= ============
Weighted average shares
outstanding 5,819 4,353 3,802
============= ============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 30, 1996 and 1995
(In thousands, except share data)
1996 1995
---------------- ----------------
ASSETS
Current assets:
Cash $ 426 $ 573
Available-for-sale securities - 2,575
Receivables, net 6,074 6,128
Inventories 5,904 4,862
Prepaid expenses 340 357
---------------- ----------------
Total current assets 12,744 14,495
Property and equipment, net 2,314 2,568
Available-for-sale securities 4 7,157
Costs in excess of fair value
of net assets acquired, net 8,101 9,908
Other assets 2,423 1,268
---------------- ----------------
$25,586 $35,396
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 8,672 $ 7,733
Current portion of long term debt 744 1,598
Current portion of capital leases 187 190
Deferred revenue 1,428 1,032
Net liabilities of business
disposed of in 1996 - 454
---------------- ----------------
Total current liabilities 11,031 11,007
---------------- ----------------
Long term debt, net of current portion 10,598 12,434
---------------- ----------------
Capital Lease obligation,
net of current portion 164 270
---------------- ----------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.10 par value,
4 million shares authorized,
none outstanding - -
Common stock, $.01 par value,
25 million shares authorized,
6,540,065 and 5,547,033 shares
outstanding, respectively 65 55
Capital in excess of par value 33,517 27,584
Accumulated deficit (29,789) (23,692)
Unrealized appreciation
of available-for-sale
securities - 7,738
---------------- ----------------
Total shareholders' equity 3,793 11,685
---------------- ----------------
$25,586 $35,396
================ ================
The accompanying notes are an integral part of the consolidated financial
statements.
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended September 30, 1996, 1995 and 1994
(In thousands)
UNREALIZED
APPRECIATION
CAPITAL IN OF AVAILABLE-
COMMON STOCK EXCESS OF FOR-SALE ACCUMULATED
SHARES AMOUNT PAR VALUE SECURITIES DEFICIT
---------- ----------- ------------ ----------- -----------
Balance, October 1, 1993 3,606 $ 36 $ 13,957 - $ (12,608)
Common stock issued for
investment in securities 196 2 733 - -
Common stock issued for
finder's fee relating to
UMA acquisition 3 - 17 - -
Settlement of related party
receivable - - 850 - -
Value assigned to warrants
issued with Senior Notes
payable - - 471 - -
Sale of common stock 88 1 388 - -
Exercise of warrants 10 - 18 - -
Net loss - - - - (1,428)
---------- ----------- ------------ ----------- -----------
Balance, September 30, 1994 3,903 39 16,434 - (14,036)
Sale of common stock,
net of issuance costs 200 2 708 - -
Value assigned to options
and warrants issued
with the extension of
of Senior Notes payable - - 66 - -
Exercise of warrants 100 1 187 - -
connection with acquisitions,
net of issuance costs 1,143 11 7,533 - -
Conversion of long-term
debt 201 2 1,628 - -
Settlement of related party
receivable - - 1,028 - -
Change in unrealized
appreciation of available-
for-sale securities - - - 7,738 -
Net loss - - - - (9,656)
---------- ----------- ------------ ----------- -----------
Balance, September 30, 1995 5,547 55 27,584 7,738 (23,692)
Exercise of warrants 12 - 21 - -
Settlements of related party
receivable - - 815 - -
Conversion of convertible
subordinated notes 781 8 4,077 - -
Common stock issued in connection
with acquisitions, net of
acquisition costs 200 2 1,020 - -
Change in unrealized appreciatio
of available-for-sale securities - - - (7,738) -
Net loss - - - - (6,097)
---------- ----------- ------------ ----------- -----------
Balance, September 30, 1996 6,540 $ 65 $ 33,517 $ - (29,789)
========== =========== ============ =========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 1996, 1995 and 1994
(In thousands)
---------------------------------------------
1996 1995 1994
------------- ------------- -------------
Cash flows from operating activities:
Net loss $ (6,097) $ (9,655) $ (1,428)
Adjustments to reconcile net loss to net cash used by
operating activities:
Write-off of acquired in-process un-proven technology - 5,000 -
Depreciation and amortization 1,997 822 163
Acquisition costs - 648 -
Net change of liabilities of discontinued operations - 586 -
(Gain) loss on the disposal of property and equipment (3) 393 -
Gain on sale of available-for-sale securities (5,689) - -
Deferred income taxes - (12) (8)
Debt discount and deferred financing amortization 95 87 514
Provision for bad debts 155 67 -
Loss on sale of business 6,061 - -
Changes in operating assets and liabilities, net of
effect of purchase transactions and disposal
of discontinued operations:
Receivables (741) (1,208) (232)
Inventories (1,756) (1,707) (79)
Prepaid expenses 3 160 (319)
Accounts payable and accrued expenses 1,365 (46) 860
Deferred revenue 207 196 (44)
------------- ------------- -------------
Net cash used in operating activities (4,403) (4,669) (573)
------------- ------------- -------------
Cash flows from investing activities:
Net cash paid in connection with acquisitions (2,055) (2,562) (26)
Purchase of prepaid software licenses (1,000) - -
Purchase of property and equipment (973) (1,418) (173)
Additions to capitalized product design (462) - -
Settlement of remaining obligations to owners of
discontinued operations (117) - -
Proceeds from sale of investment securities 7,678 1,027 -
Purchase of investment securities - - (463)
Increase in other assets - (134) -
Proceeds from the sale of property and equipment 28 31 -
------------- ------------- -------------
Net cash provided (used) by investing activities 3,099 (3,056) (662)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of deferred
financing costs - 4,131 920
Repayment of long-term debt (178) (979) (550)
Borrowings under revolving credit note 12,802 6,904 -
Payments under revolving credit note (11,923) (1,684) -
Proceeds from settlement of related party receivable 815 - 850
Repayment of prior revolving credit facility - (1,208) -
Proceeds from the sale of available-for-sale securities - 720 389
Payment for put obligation (200) - -
Proceeds from the exercise of warrants 22 169 18
Capitalized lease obligations paid (181) (202) (102)
------------- ------------- -------------
Net cash provided by financing activities 1,157 7,851 1,525
------------- ------------- -------------
Net increase (decrease) in cash (147) 126 290
Cash, beginning of period, net of cash of discontinued operations 573 447 198
------------- ------------- -------------
Cash, end of period $ 426 $ 573 $ 488
============= ============= =============
The accompanying notes are an integral part of the
consolidated financial statements.
SoftNet Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business and Basis for Presentation
SoftNet Systems, Inc. and Subsidiaries (the "Company") is engaged in the
business of developing, marketing, installing and servicing electronic
information and document management systems that allow customers to
electronically request and electronically receive information. The Company
operates through three segments: document management, telecommunications and
Internet services. The document management segment designs, develops,
manufactures and integrates comprehensive, non-paper based systems and
components that enable the Company to deliver to its customers cost-effective
solutions for the storage, indexing and/or distribution of high-volume computer
generated or entered information. The telecommunications segment sells and
services telephone and computer hardware manufactured by others to provide
communications solutions through the design, implementation, maintenance and
integration of voice, data and video communications equipment and services.
Additionally, the telecommunications segment sells and installs local and long
distance network services. The Internet services segment provides Internet
access, World Wide Web and database development and Internet training targeted
solely to business customers.
On September 15, 1995, a wholly-owned subsidiary of the Company merged with
Kansas Communications, Inc. ("KCI"), which was the surviving corporation in the
merger, pursuant to an Agreement and Plan of Reorganization dated March 24,
1995, by and between the Company and KCI (see Note 3). The transaction was
accounted for as a pooling of interests for financial reporting purposes and,
accordingly, the financial statements of the merged companies relating to all
periods presented have been restated and are presented on a combined basis. Upon
effectiveness of the merger, KCI changed its fiscal year end to September 30
from March 31. KCI's financial statements have been restated and are
consolidated for the same periods as the Company's fiscal year.
During 1995, the Company adopted a formal plan to dispose of Utilization
Management Association, Inc., a medical cost containment business. Accordingly,
the results of discontinued operations and the estimated loss on disposal
thereof have been reported separately from the continuing operations of the
Company for fiscal 1995 and 1994 (see Note 5).
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of SoftNet Systems,
Inc. ("SoftNet") and its subsidiaries ("Company"). All significant intercompany
accounts and transactions have been eliminated in preparation of the
consolidated financial statements.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables. Credit risk is minimized as
a result of the large number and diverse nature of the Company's customers. As
of September 30, 1996, the Company had no significant concentrations of credit
risk.
Significant Customer
For the fiscal year ended September 30, 1996, one customer, accounted for 13% of
the Company's consolidated revenue. No single customer of the Company accounted
for more than 10% of the Company's consolidated revenue in fiscal 1995 or 1994.
Inventories
Inventories are stated at the lower of cost or market and are comprised of
purchased component parts. Cost is determined using the first-in, first-out
method. The components of inventories as of September 30, 1996 and 1995 are as
follows (in thousands):
1996 1995
---- ----
Raw materials $ 3,154 $ 3,545
Work-in-process 853 410
Finished goods 1,897 907
----- -----
$ 5,904 $ 4,862
======== ========
Receivables
The Company has recorded an allowance for uncollectible accounts of $371,000 and
$67,000 at September 30, 1996 and 1995, respectively. No such allowance was
recorded at September 30, 1994.
Property and Equipment
Property and equipment are carried at cost less allowances for accumulated
depreciation. The cost of property and equipment held under capital leases is
equal to the lower of the net present value of the minimum lease payments or the
fair value of the leased property at the inception of the lease. Repairs and
maintenance are charged to expense as incurred.
Depreciation is computed by the straight-line method over the useful lives of
the related assets. The estimated useful lives range from three to five years
for equipment to seven years for property, principally office furniture.
Amortization of capital leases is included with depreciation expense.
Capitalized Software Costs
Certain costs of acquired software to be sold, leased, or otherwise marketed are
capitalized and amortized over the economic useful life of the related software
product, which is generally five years. Net unamortized capitalized software
costs, which resulted from the acquisition of Micrographic Technology
Corporation ("MTC"), are included in other non-current assets and were $792,000
and $991,000 at September 30, 1996 and 1995, respectively.
Prepaid Software License
During fiscal 1996, the Company acquired an exclusive worldwide manufacturing
right to certain microfilm retrieval technology in exchange for the pre-payment
of fees for 250 software licenses. Accordingly, the Company has recorded a
pre-paid license fee of $1.0 million in other non-current assets in the
accompanying consolidated balance sheets (see Note 14).
Investments in Equity Securities
In 1995, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 115 "Accounting for Certain Investments in Debt and Equity Securities." The
adoption of SFAS No. 115 resulted in an increase to shareholders' equity in the
fourth quarter of 1995 of $7.7 million upon the completion by IMNET Systems,
Inc. ("IMNET") of its initial public offering of common stock. Prior to this
offering, there had been no public market for this common stock. At September
30, 1995, the Company's investment in marketable equity securities has been
classified as available-for-sale and as a result is stated at fair value. During
fiscal 1996 the Company sold its entire holdings of IMNET and realized a gain of
$ 5.7 million.
Fair Value of Financial Instruments
The fair value of the Company's debt, current and long-term, is estimated to
approximate the carrying value of these liabilities based upon borrowing rates
currently available to the Company for borrowings with similar terms.
Costs in Excess of Fair Value of Net Assets Acquired
The excess of costs of acquired companies over the fair value of net assets
acquired (goodwill) is amortized on a straight-line basis over 10 to 20 years.
Amortization expense for fiscal 1996 and 1995 was $1.3 million and $471,000,
respectively. During fiscal 1996 the Company wrote-off $3.6 million of net
goodwill resulting from the sale of the non-application oriented interconnect
business in Chicago, IL (see Note 5). Accumulated amortization at September 30,
1996 and 1995 was $943,000 and $471,000, respectively.
The Company assesses the recoverability of unamortized goodwill by reviewing the
sufficiency of estimated future operating income and undiscounted cash flows of
the related entities to cover the amortization during the remaining amortization
period.
Revenue Recognition
Revenue from sales and installation of telephone systems, computer hardware and
peripheral telephone system products is recognized for contracts over $100,000
on the percentage of completion method and on the completed contract method for
all others, which does not differ materially from the percentage of completion
method. Revenue from maintenance contracts covering parts and labor on existing
systems is recognized on a monthly basis over the term of each contract.
Revenue from the document management segment is generated from four primary
sources, including product sales, installations, royalty and on-going
maintenance. Product sales and installation revenue are recognized upon
shipment, installation, or final customer acceptance, depending on specific
contract terms. Installation revenue is recognized on a percentage-of-completion
basis. Royalty revenue is recognized monthly based upon estimated maintenance
fees and is subject to verification against actual fees on a semi-annual basis.
Revenue from on-going maintenance is recognized as services are completed.
Revenue from the Internet services segment is generated from initial and
recurring monthly Internet access, World Wide Web and database development and
Internet training. Set-up fees for Internet access customers is recognized upon
completion of the service. Monthly access fees are recognized in the month of
service. World Wide Web development and Internet training revenue is recognized
upon completion of the service.
Research and Development
Research and development is principally incurred by the document management
segment. During fiscal 1996, the Company expended $1.1 million for research and
development
Income Taxes
Statement of Financial Accounting Standards No. 109 - Accounting for Income
Taxes, which revised certain financial accounting and reporting standards for
income taxes, was adopted by the Company effective October 1, 1993. The adoption
of Statement No. 109 did not have a material effect on the Company's financial
statements. In accordance with this financial accounting standard, the Company
recognizes the amount of taxes payable or refundable for the current year and
recognizes deferred tax liabilities and assets for the expected future tax
consequences of events and transactions that have been recognized in the
Company's financial statements or tax returns. The Company currently has
substantial net operating loss carryforwards. The Company has recorded a 100%
valuation allowance against net deferred tax assets due to uncertainty of their
ultimate realization.
Loss Per Share
Loss per share is based on the weighted average number of common shares
outstanding during the periods. Common stock equivalents (outstanding options
warrants and convertible securities) are not included in the computations of
loss per share since their effect is anti-dilutive.
Recently Issued Accounting Standards
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 123 - "Accounting for
Stock Based Compensation." Under the provisions of this statement, the fair
value of stock options issued may be determined by using an option-pricing model
that takes into account the stock price at the grant date, the exercise price,
the expected life of the option, the volatility of the underlying stock and the
expected dividends on it, and the risk-free interest rate over the expected life
of the option. The statement also provides for valuation of nonvested stock
(usually referred to as restricted stock) and employee stock purchase plans.
Valuation for stock issued under these various plans using the fair value based
method described above may result in compensation costs to the issuer at the
grant date and is recognized over the service period, which is usually the
vesting period. Reporting compensation for these plans under this statement is
optional. Companies choosing not to value stock options or similar equity
instruments under the fair value based method must provide pro forma disclosure
amounts that reflect the difference between compensation cost included in net
income and the related cost measured by the fair value based method defined in
SFAS No. 123, including tax effects, if any, that would have been recognized in
the income statement if the fair value based method had been used. Adoption of
this statement is required for transactions entered into in years that begin
after December 15, 1995.
The Company is in the process of reviewing the effects of this statement and has
not decided whether or not to adopt the preferable fair value based method of
accounting for stock-based compensation as it relates to the issuance of stock
options.
Reclassifications
Certain reclassifications have been made in the 1995 and 1994 financial
statements to conform with the 1996 presentation.
3. Merger
On September 15, 1995, a wholly-owned subsidiary of the Company merged into
Kansas Communications, Inc. ("KCI") pursuant to an Agreement and Plan of
Reorganization dated March 24, 1995, by and between the Company and KCI. The KCI
shareholders received 1.3 million shares of the Company's common stock in
exchange for all of the outstanding shares of KCI. The business combination was
accounted for as a pooling of interests and, accordingly, the operations of KCI
have been included with the results of the Company for all periods presented.
KCI is a Kansas City-based company which sells and services telephone systems,
third-party computer hardware and application oriented peripheral products such
as voice mail, automated attendant systems, interactive voice response (IVR) and
video conferencing systems.
The following are the net revenue from continuing operations and net income
(loss) of the separate companies for the periods preceding the merger (in
thousands):
SoftNet
Systems, Inc. KCI Combined
---------------- ---------- -------------
Nine months ended
June 30, 1995 (Unaudited):
Net sales $ 8,285 $ 7,564 $ 15,849
Net (loss) income (1,777) 272 (1,505)
Fiscal year ended
September 30, 1994:
Net sales 188 9,441 9,629
Net income (loss) $(1,763) $450 $(1,313)
In connection with the merger, the Company recorded transaction related charges
of $648,000 in fiscal 1995. The merger costs relate to expenses incurred to
consummate the transaction, including investment banking, legal and accounting
fees.
4. Acquisitions
Milwaukee Operations of Executone Management Systems, Inc.
On December 29, 1995, the Company acquired the Milwaukee operations of Executone
Information Systems, Inc. ("Executone-Milwaukee"), in a business combination
accounted for as a purchase. Executone-Milwaukee sells and services proprietary
voice processing systems. The purchase price of approximately $1.9 million
consisted of $100,000 of cash and a note payable for $1.8 million. The note was
paid in February 1996. The operations of Executone-Milwaukee have been included
in the results of the Company since December 29, 1995.
As a result of the acquisition, the Company recorded costs in excess of fair
value of net assets acquired of $1.8 million, an amount which is being amortized
on a straight-line basis over twenty years.
MediaCity World, Inc.
On June 21, 1996, the Company acquired MediaCity World, Inc. ("MCW"), in a
business combination accounted for as a purchase. MCW is an Internet Service
Provider with operations in the San Francisco Bay Area and Reno, Nevada. The
purchase price consisted of 200,000 shares of the Company's common stock valued
at $5.11 per share. The operations of MCW have been included in the results of
the Company since June 21, 1996.
As a result of the acquisition of MCW, the Company recorded costs in excess of
fair value of net assets acquired of $1.2 million, an amount which is being
amortized on a straight line basis over three years.
Communicate Direct, Inc.
On October 31, 1994, the Company acquired Communicate Direct, Inc. ("CDI") in a
business combination accounted for as a purchase. CDI is a Chicago-based company
which sells and services telephone systems, third-party computer hardware and
application oriented peripheral products such as voice mail, automated attendant
systems, interactive voice response ("IVR") and video conferencing systems. The
operations of CDI have been included with the results of the Company since
November 1, 1994.
The Company acquired all of the outstanding stock of CDI for $1.9 million, such
consideration consisting of 290,858 shares of the Company's Series A Convertible
Preferred Stock ("Preferred Shares") valued at $6.00 per share and cash. In
April 1995, the Preferred Shares were converted into common shares on a
one-for-one basis following the approval of the Company's shareholders. The
acquisition price has been adjusted for settlement of an earn-out agreement and
resolution of certain post-closing purchase adjustments. The cost in excess of
fair value of net assets acquired incurred in connection with the acquisition of
CDI of $4.2 million was originally to be amortized on a straight-line basis over
ten years. During fiscal 1996, the Company sold a significant portion of the CDI
business. As a result the Company wrote off the unamortized balance of the
goodwill which arose from the original acquisition (see Note 5).
Micrographic Technology Corporation
On September 15, 1995, the Company acquired Micrographic Technology Corporation
("MTC") pursuant to an Agreement and Plan of Reorganization dated March 24, 1995
in a business combination accounted for as a purchase. MTC is a designer,
developer, manufacturer and integrator of comprehensive, non-paper based systems
and components that enable MTC to deliver to its customers cost-effective
solutions for storage, indexing and/or distribution of high-volume output data
streams. The MTC shareholders' received 778,000 shares of the Company's common
stock valued at $6.95 per share, $1.1 million in cash and $2.8 million principal
amount of the Company's debentures. The operations of MTC have been included
with the results of the Company since September 16, 1995.
The cost in excess of fair value of net assets acquired incurred in connection
with the acquisition of MTC of $6.1 million is being amortized on a
straight-line basis over ten years. Additionally, in connection with the
acquisition of MTC, the Company incurred a one-time fourth quarter charge in
fiscal 1995 of $5.0 million for the write-off of acquired in-process unproven
technology.
The following unaudited pro forma summary presents information as if the
acquisitions accounted for as purchases had occurred at the beginning of each
fiscal year. The pro forma information is provided for informational purposes
only. It is based on historical information and does not necessarily reflect the
actual results that would have occurred nor is it necessarily indicative of
future results of operations of the combined enterprise (in thousands, except
per share data):
Years Ended
September 30
(unaudited)
----------------------------
1996 1995 1994
---- ---- ----
Net sales from continuing operations $42,270 $40,020 $36,280
Net loss from continuing operations (328) (9,175) (10,572)
Net loss per share $(0.05) $(2.02) $(2.03)
5. Divestitures
Utilization Management Associates, Inc.
During September 1995, the Company's Board of Directors approved a plan to
rescind its November 1993 acquisition of Utilization Management Associates, Inc.
("UMA"). The plan provided for the exchange of the Company's interest in UMA for
all common shares of the Company held by the former shareholders of UMA,
including related put options, and the cancellation of SoftNet stock options
held by the former shareholders of UMA.
Effective November 20, 1995, the plan was executed such that the Company paid
the former shareholders of UMA $200,000 in satisfaction of its common stock put
obligation and received in exchange 29,630 shares of SoftNet common stock. In
addition, the Company paid approximately $300,000 in cash and notes for the
termination of non-compete, employment, and earn-out agreements and an
irrevocable and unconditional release of the Company from any outstanding
obligations and liabilities to UMA or the shareholders of UMA.
In connection with the disposition, the Company recorded loss on disposal of
discontinued operations of $644,000, along with a loss from discontinued
operations of $419,000 and $115,000 for the years ended September 30, 1995 and
1994, respectively. Such amounts have not been adjusted for any income tax
effect given the Company's net operating loss carryfoward. At September 30,
1995, UMA represented approximately $116,000 and $53,000 of the Company's assets
and liabilities, respectively. For the years ended September 30, 1995 and 1994,
UMA contributed revenue of approximately $860,000 and $695,000, respectively, to
the consolidated revenues of the Company.
Communicate Direct, Inc.
In June 1996, CDI sold its non-application oriented interconnect business
located in the Chicago, IL metropolitan area to Next Call, Inc. ("Next Call")
for a $600,000 ten year note receivable. In connection with the sale, CDI agreed
to lend Next Call up to $1.0 million to fund operating losses, as defined, for
the first twelve months of operations. The loan agreement required CDI to
advance cash to Next Call on a monthly basis to cover operating cash short fall.
Next Call was required to repay such advances when it became profitable on a
cumulative basis. After the first twelve months, any amount still outstanding
from Next Call shall be forgiven. As of September 30, 1996, the Company had made
$189,000 in advances pursuant to this agreement. Subsequent to year-end, Next
Call ceased operations.
As a result of the sale to Next Call and the uncertainty resulting from Next
Call's subsequent shut down, the Company incurred an extraordinary charge of
$6.1 million for the loss on the sale of this business, including the write-off
of unamortized goodwill which resulted from the initial purchase of CDI in
October 1994, deferred acquisition costs associated with the purchase of CDI,
severance payments, inventory, leasehold improvements, the notes receivable from
Next Call and all amounts loaned to the buyer. The loss resulting from the
disposition of certain assets and the assumption of certain liabilities of CDI,
within a two year period following a pooling of interests has been classified as
an extraordinary item as required by generally accepted accounting principles.
This disposition of CDI was not contemplated at the time of the pooling with
KCI.
Subsequent to year-end, CDI sold its operations that support its Fujitsu
maintenance base in the Chicago metropolitan area to a new company formed by
John I. Jellinek, the Company's former president and chief executive officer,
and Phillip Kenny, a former SoftNet director. The buyer acquired certain assets
in exchange for a $209,000 promissory note and the assumption of trade payables
of at least $624,000. In addition, at the closing the buyer paid off $438,000 of
existing Company bank debt and entered into a sub-lease of CDI's facility in
Buffalo Grove, Illinois. At the closing, the buyer merged with Telcom Midwest,
LLC., and Messrs. Jellinek and Kenny and the other two shareholders of the
merged company personally guaranteed obligations arising out of the promissory
note, the sub-lease arrangement and the trade payables. The personal guarantees
of the promissory note are several. The personal guarantees of the sub-lease are
limited to $400,000 and are on a joint and several basis. The personal
guarantees of trade payables are on a joint and several basis but are limited to
Messrs. Jellinek and Kenny. Concurrent with this transaction, Messrs. Jellinek
and Kenny resigned from the Company's board.
6. Change in Products
In June, 1996, the Company signed an agreement to distribute Lucent
Technologies, Inc. products in the Chicago, IL metropolitan area. In connection
with this distribution agreement and the repositioning of its Chicago
operations, the Company incurred one-time charges of $1.3 million for severance
payments, asset write-downs and other.
Included in the fourth quarter 1996 results is a charge of $1.5 million for the
write-down of certain software inventory resulting from the Company's decision
to discontinue the distribution of certain imaging products in favor of others
(see Note 14).
7. Significant Fourth Quarter Events
Operating results in the fourth quarter of fiscal 1996 include the effects of
the following:
A. A $3.8 million gain on the sale of available-for-sale securities
(see notes 2 and 14).
B. A charge of $1.5 million related to the write-off of IMNET software
inventory (see notes 6 and 14).
C. An extraordinary charge of $1.1 million related to the sale of CDI's
non-application oriented interconnect business (see note 5).
8. Property and Equipment
Balances of major classes of fixed assets and allowances for depreciation at
September 30, 1996 and 1995 are as follows(in thousands):
1996 1995
---- ----
Leasehold improvements $227 $845
Furniture and fixtures 1,630 1,300
Vehicles 83 61
Equipment 1,644 1,094
----- -----
Total 3,584 3,300
Less allowance for depreciation (1,270) (732)
and amortization
------- ----
Property and equipment, net $2,314 $2,568
====== ======
9. Debt
Debt is summarized as follows (in thousands):
1996 1995
-------- ------
Revolving Credit Note with maximum borrowings of
$9.5 million, bearing interest, payable monthly, at
the bank's prime rate plus 1% (the bank's prime
rate being 8.25% at September 30, 1996). The note
matures on October 15, 1997 $6,099 $3,890
9% Convertible Debentures due September 2000,
interest payable quarterly, convertible into the
Company's common shares at $6.75 per share 2,856 2,856
9% Convertible Subordinated Notes due December
1998, interest payable quarterly, subordinated to
all other liabilities of the Company, convertible
into the Company's common shares at $5.00 per
share 75 2,189
6% Convertible Subordinated Debentures, due
February 2002 with semi-annual interest payments,
convertible into the Company's common stock at
$8.10 per share (subject to adjustment for anti-
dilution) 780 1,800
Bank loan dated November 20, 1995, bearing interest
at prime plus 1%, payable monthly, principal due
February 1, 1996 - 1,330
10% Convertible Subordinated Notes due October
1999, bearing interest, payable quarterly, at 10%
for the first two years only and no interest
thereafter, subordinated to all other liabilities
of the Company, convertible into the Company's
common shares at $4.10 per share 300 1,250
Promissory note due July 11, 1997, interest payable
at maturity accruing at prime 409 -
Promissory notes due each November 1996
and 1997 in equal payments, interest payable
in arrears on each principal due date accruing at 8.75% 200 -
Bank loan dated July 10, 1995, bearing interest at
prime plus 1%, principal and interest due in 60
monthly payments with final payment due July 2000 391 493
Bank loan dated April 13, 1995, bearing interest
at prime plus 1%, principal and interest due in 48
monthly installments with final payment due April
1999 85 113
Bank loan dated August 25, 1995, bearing interest
at prime plus 1%, principal and interest due in 36
monthly installments with final payment due August
1998 74 111
Other 73 -
--------- ---------
11,342 14,032
--------- ---------
Less current portion of debt (744) (1,598)
Total long-term debt $ 10,598 $ 12,434
========= =========
During fiscal 1996, the Company increased the maximum borrowings under its
revolving credit note $3.0 million to $9.5 million. The availability under the
revolving credit note is subject to revisions on a monthly basis based upon
available assets (as defined). Subsequent to year end, the Company received a
temporary increase in its borrowing ability whereby the Company will be able to
borrow $1.0 million in excess of available assets. The temporary increase
expires on January 31, 1997. The revolving credit note and the bank term loans
(issued from the same bank) are collateralized by substantially all of the
assets of the Company.
In connection with the issuance of the 10% Convertible Subordinated Notes, the
Company issued warrants to purchase 298,000 shares of the Company's common stock
exercisable for five years expiring in 1999 at an exercise price of $6.875 per
share.
During fiscal 1996, holders of 6%, 9% and 10% convertible subordinated notes
converted $4.1 million face amount of notes into 781,000 shares of the Company's
common stock. An additional $100,000 of 10% notes were converted into 24,000
shares of the Company's common stock after year end.
In October 1994, in order to extend the maturity of $745,000 of Senior
Subordinated notes, the Company issued warrants to purchase 89,000 shares of the
Company's common stock at prices ranging from $6.125 to $7.875 (market price at
the end of each month during the period the notes were extended). As of April 1,
1995, the $450,000 of notes were repaid and the remaining principal of $295,000
together with accrued interest thereon, was exchanged for the 9% Convertible
Subordinated Notes described above.
In connection with the acquisition of MTC, the Company issued $2.9 million of
its 9% Convertible Subordinated Debentures (the "MTC 9% Debentures") due
September 2000. The MTC 9% Debentures are subordinated to senior indebtedness of
the Company and are convertible after September 15, 1996, into the Company's
common stock at $6.75 per share. The MTC 9% Debentures may be prepaid by the
Company in whole or in part at 102% of face value through September 15, 1997,
and at face value thereafter.
Also in connection with the acquisition of MTC, the Company assumed $1.8 million
of 6% Convertible Subordinated Secured Debentures (the "Debentures") due
February 2002. The Debentures are convertible into the Company's common stock at
$8.10 per share. The Debentures are subject to redemption at the option of the
Company at face value, provided, however, that the Company issues common stock
purchase warrants to purchase the same number of shares as would have been
issuable if the Debentures were converted. During fiscal 1996, certain holders
of the debentures converted $1.0 million face amount Debentures into 126,000
shares of the Company's common stock.
Subsequent to year-end, the Company sold certain assets of its
telecommunications segment for cash, a note receivable and the assumption of
certain liabilities. The Company used the proceeds from the sale to retire
certain bank loans in the principal amount of $438,000 plus accrued interest
(see note 5).
Aggregate maturities of long-term debt for each of the next five fiscal years
are as follows (in thousands):
1997 $ 744
1998 6,380
1999 198
2000 3,240
2001 -
2002 780
10. Sale of Common Stock
On October 26, 1994, the Company sold 200,000 shares of its common stock in a
Regulation S offering at $4.00 per share. In connection with the sale of common
stock, the Company incurred fees of $90,000 and issued warrants to purchase
250,000 shares of its common stock exercisable for five years at an exercise
price of $6.875 per share (fair market value at the date of grant).
11. Capitalized Lease Obligations and Other Lease Commitments
The Company leases computer equipment and certain other office equipment under
leases which are capital in nature. The Company has net assets of $520,000 and
$320,000 under these capital leases as of September 30, 1996 and 1995,
respectively.
The Company has entered into operating leases for office space and manufacturing
facilities. These leases provide for minimum rents. These leases generally
include options to renew for additional periods. The Company's rent expense for
the years ended September 30, 1996, 1995 and 1994 was $755,000, $282,000 and
$100,000, respectively.
The aggregate amount of the lease payments under capital and operating leases
for each of the five fiscal years ending September 30 is as follows (in
thousands):
Capital Operating
leases leases
------------- --------------
1997 $227 $832
1998 111 569
1999 45 289
2000 23 250
2001 10 111
------------- --------------
Total minimum
lease payments 416 $2,051
==============
Amount representing
interest (65)
-------------
Present value of net
minimum payments 351
current portion (187)
-------------
Capital lease obligation $164
=============
Subsequent to year-end, the Company sublet its remaining obligation for leased
space in Buffalo Grove, Illinois. As a result, the Company has decreased its
minimum operating lease commitments by approximately $505,000 from 1997 through
2001.
12. Income Taxes
The Company's provision for income taxes in fiscal 1995 and 1994 relates
exclusively to the operations of KCI, for tax liabilities incurred by KCI prior
to the merger with the Company.
The components of the provision for income taxes are as follows for the fiscal
years ending September 30 (in thousands):
1996 1995 1994
---- ---- ----
Current
Federal $ - $ 113 $ 321
State - 23 64
----------- ------------- --------------
Total current - 136 385
----------- ------------- --------------
Deferred
Federal - (10) (7)
State - (2) (1)
----------- ------------- --------------
Total deferred - (12) (8)
=========== ============= ==============
$ - $ 124 $ 377
=========== ============= ==============
The types of temporary differences between the tax basis of assets and
liabilities and their financial reporting amounts that give rise to deferred
taxes at September 30 and the approximate tax effects are as follows (in
thousands):
1996 1995
------------------------- ---------------------
TEMPORARY TAX TEMPORARY TAX
DIFFERENCE EFFECT DIFFERENCE EFFECT
Securities received in settlement of
related party receivable $ - $ - $ 2,400 $ 816
Capital loss carryforward - - 722 245
Reserve for the write-off of
discontinued operations - - 544 185
Inventory and other operating reserves 1,240 422 387 132
Allowance for doubtful accounts 541 184 104 35
Reserve for note receivable 624 212 - -
Unpaid accruals 794 270 77 26
Reserve for lease termination 75 26 250 85
Deferred revenue 1,369 465 14 5
Other (9) (3) 72 24
Net operating loss carryforwards 7,854 2,670 10,990 3,737
------ ------
Total deferred tax asset 4,246 5,290
------
Unrealized appreciation of available-
for-sale securities - (7,738) (2,631)
------
Total deferred tax liabilities - (2,631)
------
Valuation allowance (4,246) (2,659)
------- ------
Net deferred tax asset $ - $ -
========== =========
A valuation allowance was recorded as a reduction to the deferred tax assets due
to the uncertainty of the ultimate realization of future benefits from such
deferred taxes.
Net operating loss carryforwards of approximately $7.9 million are available as
of September 30, 1996 to be applied against future taxable income. In addition,
net operating loss carryforwards of approximately $750,000 acquired in
connection with the acquisition of MTC are available to reduce recorded goodwill
when utilized. The net operating loss carryforwards expire between 1999 and 2009
and are subject to certain annual limitations as a result of the changes in
equity ownership.
13. Stock Options and Warrants
During fiscal 1995 the Company adopted the 1995 Long Term Incentive Plan (the
"1995 LTIP") whereby the Company, under the direction of the committee appointed
by the Board of Directors, can grant a variety of stock-based compensation
awards. The Company has reserved 600,000 shares for issuance under the plan.
Outstanding options and warrants to purchase shares of common stock at September
30, 1996, 1995 and 1994 were as follows (in thousands, except price per option
data):
Shares Price per option
------------- ----------------
Outstanding at September 30, 1993 383 $ 1.750
Granted 357 1.750-6.125
Canceled - -
Expired - -
Exercised (10) 1.750
-------------
Outstanding at September 30, 1994 730 1.750-6.125
Granted 924 1.750-8.500
Canceled (4) 4.0429
Expired - -
Exercised (100) 1.750
-------------
Outstanding at September 30, 1995 1,550 1.750-8.500
Granted 574 8.125-10.000
Canceled (542) 6.500-8.250
Expired - -
Exercised (13) 1.750
-------------
Outstanding at September 30, 1996 1,569 $ 1.750-$ 12.750
=============
Shares available under the Plan were 303,000 and 600,000 at September 30, 1996
and 1995, respectively. As of September 30, 1996, 1995 and 1994, there were 1.2
million, 1.3 million and 729,000 exercisable options, and warrants,
respectively.
During fiscal 1996, the Board of Directors elected to reduce the exercise price
on 117,000 options from $12.75 to $8.25 per share, the market price on the day
the board took such action. In addition, subsequent to year-end the Board of
Directors elected to reduce the exercise price on 297,000 options from $8.25 to
$4.94 per share, the market price on the day the board took such action.
During fiscal 1995, the Company granted, subject to shareholder approval,
150,000 options to its chairman at $6.50 per share when the market price was
$12.75 per share. Had the shareholders approved the option grant, the Company
would have recorded $1.1 million of compensation expense over the three year
vesting period. At the election of the Company's chairman, the options were
withdrawn from consideration by the shareholders and, therefore, never approved.
Accordingly, no compensation expense was recorded during fiscal 1996 related to
this grant.
Subsequent to year-end, the Board of Directors elected to increase the shared
reserved for the 1995 LTIP to 1.5 million shares. The increase in the shares
reserved is subject to shareholder approval.
14. Related Party Transactions
As of September 30, 1994, the Company was owed $4.2 million plus accrued
interest by Ozite Corporation (Ozite). A director of the Company and the former
Chairman of the Board held substantial interests in Ozite. Due to uncertainties
about collecting these funds, the receivable from Ozite was written off and
charged against earnings in 1991, and, accordingly no amount related to this
receivable is recorded on the Company's consolidated financial statements.
On July 26, 1995, Ozite shareholders approved a merger of Ozite with Pure Tech
with Pure Tech being the surviving corporation. As a condition of the merger,
Ozite was required to secure a general release from the Company and to surrender
certain securities in satisfaction of the amount owed to the Company. As a
result, the Company received 311,000 shares of Pure Tech common stock, 267,000
shares of Artra Group Incorporated (ARTRA) Common Stock and 932 shares of Artra
Preferred Stock. Subsequently, the Company sold all 311,000 shares of Pure Tech
for net proceeds of $1.0 million, which was recorded as a capital contribution
during fiscal 1995. During fiscal 1996, the remaining securities were sold for
net proceeds of $815,000, which was recorded as a capital contribution.
Subsequent to year-end, CDI sold its operations that support its Fujitsu
maintenance base in the Chicago metropolitan area to a new company formed by
John I. Jellinek, the Company's former president and chief executive officer,
and Phillip Kenny, a former SoftNet director. The buyer acquired certain assets
in exchange for a $209,000 promissory note and the assumption of trade payables
of at least $624,000. In addition, at the closing the buyer paid off $438,000 of
existing Company bank debt and entered into a sub-lease of CDI's facility in
Buffalo Grove, Illinois. At the closing, the buyer merged with Telcom Midwest,
LLC., and Messrs. Jellinek and Kenny and the other two shareholders of the
merged company personally guaranteed obligations arising out of the promissory
note, the sub-lease arrangement and the trade payables. The personal guarantees
of the promissory note are several. The personal guarantees of the sub-lease are
limited to $400,000 and are on a joint and several basis. The personal
guarantees of trade payables are on a joint and several basis but are limited to
Messrs. Jellinek and Kenny. Concurrent with this transaction, Messrs. Jellinek
and Kenny resigned from the Company's board. The transaction was approved by the
disinterested members of the Company's board.
In June 1996, the Company acquired the exclusive worldwide manufacturing rights
to IMNET MegaSAR Microfilm Jukebox and completed and amended its obligations
under a previous agreement. In addition to becoming the exclusive manufacturer
of the MegaSAR for IMNET, the Company will further integrate the device into its
current product offering. The Company issued a $2.9 million note for prepaid
license fees, software inventory, the manufacturing rights, and certain other
payables. Approximately $2.5 million was paid on this note during the fourth
quarter of fiscal 1996. The Company has a receivable from IMNET of $176,000.
During the fourth quarter of fiscal 1996, the Company decided to discontinue
distributing the IMNET microfilm retrieval software in favor of another software
developer's product. As a result, the Company recorded a one-time charge of $1.5
million to write off software inventory which is included under the caption
costs associated with change in product lines and other in the accompanying
consolidated statements of operations. Since the acquisition of the
manufacturing rights from IMNET, the Company has been unable to successfully
transfer all of the technical and manufacturing know-how. The Company is
currently negotiating with IMNET to either complete the transfer or seek an
alternative solution.
During fiscal 1996, the Company sold its entire holdings in IMNET for net
proceeds of $7.7 million. Accordingly, the Company recorded a gain on sale of
the securities of $5.7 million.
15. Supplemental Cash Flow Information
1996 1995 1994
--------- --------- ---------
(in thousands)
Cash paid during the year for :
Interest $1,730 $465 $69
Income taxes - 194 161
Non-cash investing and financing activities:
Common stock issued for acquisitions 1,020 7,931 -
Securities received in settlement
of $4,150,000 related party
receivable, at net realized value - 1,027 -
Convertible subordinated debt issued
for acquisitions - 2,856 -
Common stock issued for the conversion
of subordinated notes 4,077 1,630 -
Conversion of Senior Notes and accrued
interest to 9% Convertible Notes - 309 -
Equipment acquired by capital lease 89 332 50
16. Segment Information
The Company operates principally in three industry segments: document
management, telecommunications and Internet services. The Company's acquisition
of MTC in September, 1995, significantly broadened its operations in the
document management industry. Prior to the acquisition, the Company's document
management operations were immaterial, and accordingly, are not presented for
fiscal 1994. Although the Company acquired MCW, an Internet service provider, in
June of 1996, its revenue and results of operations in fiscal 1996 are
immaterial.
(In thousands)
As of and for the Years Ended September 30,
-------------------------------------------------------
1996 1995 1994
------------ ------------- --------------
Net Sales
Document Management $ 19,417 $ 1,112 $ -
Telecommunications 21,803 20,140 9,441
Other 167 - 188
------------ ------------- --------------
$ 41,387 $ 21,252 $ 9,629
============ ============= ==============
Loss from continuing
operations before income
taxes and extraordinary item
Document Management $ (227) (a) $ (6,325) (b) $ -
Telecommunications (1,812) (c) (1,116) (d) 827
Other 2,003 (e) (1,027) (1,762)
------------ ------------- --------------
$ (36) $ (8,468) $ (935)
============ ============= ==============
Identifiable Assets
Document Management $14,426 $11,262 $-
Telecommunications 8,706 11,911 2,846
Corporate 1,134 12,223 2,801
Other 1302 - -
------------ ------------- --------------
$ 25,586 $ 35,396 $ 5,647
============ ============= ==============
Depreciation and
Amortization Expense
Document Management $958 $139 $-
Telecommunications 623 628 84
Corporate 306 55 79
Other 110 - -
------------ ------------- --------------
$ 1,997 $ 822 $ 163
============ ============= ==============
Capital Expenditures
Document Management $ 614 $ 2 $ -
Telecommunications 242 1,084 98
Corporate 100 332 75
Other 17 - -
------------ ------------- --------------
$ 973 $ 1,418 $ 173
============ ============= ==============
(a) Includes $1.5 million charge for costs associated with change in
products
(b) Includes $5.0 million charge for the write-off of acquired in-process
unproven technology
(c) Includes $700,000 charge for costs associated with change in products
(d) Includes $472,000 of costs related to acquisitions
(e)Includes $5.7 million gain on sale of available-for-sale securities
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of Registrant
The information required by this Item is set forth in registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on March 4, 1997
under the caption "Election of Directors" and "Executive Officers of the
Company", which information is hereby incorporated herein by reference.
The information required by this Item is set forth in registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on March 4, 1997
under the caption "Compliance with Section 16(a) of the Exchange Act," which
information is hereby incorporated herein by reference.
Item 11. Executive Compensation
The information required by this Item is set forth in registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on March 4, 1997
under the caption "Executive Compensation" and under the caption "Board of
Directors", which information is hereby incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is set forth in registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on March 4, 1997
under the caption "Securities Beneficially Owned by Principal Shareholders and
Management", which information is hereby incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is set forth in registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on March 4, 1997
under the caption "Certain Relationships and Related Transactions", which
information is hereby incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
1. Financial Statements
See Index to Financial Statements and Financial Statement
Schedules on page __ of this report.
2. Financial Statement Schedules
Page
Included in Part IV of this Form 10-K are the following:
Report of Independent Accountants on Financial
Statement Schedule ___
Financial Statement Schedule for the Three Years
Ended September 30, 1996 ___
II - Valuation Accounts and Reserves ___
3. Exhibits
See Index to Exhibits on page __ of this report.
REPORTS ON FORMS 8-K.
No reports on Form 8-K were filed by the Company during the last
quarter of the fiscal year covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. SOFTNET SYSTEMS, INC.
SOFTNET SYSTEMS, INC.
By: /s/ John J. McDonough
John J. McDonough
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ John J. McDonough Chairman of the Board of January 13, 1997
John J. McDonough Directors, Chief Executive
Officer and Director
(Principal Executive Officer)
/s/ A.J.R. Oosthuizen President, Chief Operating January 13, 1997
A.J.R. Oosthuizen Officer and Director
/s/ Martin A. Koehler Vice President - Finance January 13, 1997
Martin A. Koehler (Principal Financial Officer
and Principal Accounting Officer)
/s/ Ian B. Aaron Director January 13, 1997
Ian B. Aaron
/s/ John G. Hamm Director January 13, 1997
John G. Hamm
/s/ Ronald I. Simon Director January 13, 1997
Ronald I. Simon
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of SoftNet Systems, Inc.
Our report on the consolidated fiancial statements of SoftNet Systems, Inc. and
Subsidiaries is included on page __ of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the index on page __ of this Form 10-K
In our opinion, the finacial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
represent fairly, in all material aspects, the information required to be
included therein.
COOPERS & LYBRAND, L.L.P.
Chicago, Illinois
January 14, 1997
Schedule II
Valuation and Qualifying Accounts
(in thousands)
Allowance for
Doubtful Accounts
Beginning Ending
Balance Expensed Deductions Balance
--------- -------- ---------- -------
10/01/95 $ 342 $ 347 $ 318 09/30/96 $ 371
10/01/94 64 321 43 09/30/95 342
10/01/93 59 5 - 09/30/94 64
INDEX TO EXHIBITS
Exhibits included herein:
EXHIBIT 2 Plan of Acquisition, Reorganization, Arrangement, Liquidation
or Succession
2.1 PURCHASE AGREEMENT dated as of December 31, 1995, by
and between EXECUTONE INFORMATION SYSTEMS, INC., a
Virginia corporation and Kansas Communications, Inc.
2.2 ASSET PURCHASE AGREEMENT dated as of the 17th day of
June, 1996, by and between Extreme Communications,
Inc., an Illinois corporation, Communicate Direct,
Inc., an Illinois corporation, and SoftNet Systems,
Inc., a New York corporation.
2.3 AGREEMENT FOR THE PURCHASE AND SALE OF CERTAIN OF
THE ASSETS OF COMMUNICATE DIRECT, INC. made as of
the 9th day of December, 1996, by and between NEWTEL
BUFFALO GROVE, INC., an Illinois corporation and
COMMUNICATE DIRECT, INC., an Illinois corporation
and a wholly-owned subsidiary of SoftNet Systems,
Inc., a New York Corporation
.
EXHIBIT 3 Articles of Incorporation and By-Laws
3.1 Amended and Restated Articles of Incorporation of
the Registrant as filed in the Department of State
of New York on April 4, 1996.
EXHIBIT 10 Material Contracts
10.1 EMPLOYMENT AGREEMENT , dated this 16th day of
October, 1996, by and between SOFTNET SYSTEMS, INC.,
a New York corporation , Kansas Communications,
Inc., a Kansas corporation, and DALE H. SIZEMORE,
JR.
10.2 MANUFACTURING AND DISTRIBUTION LICENSE AGREEMENT,
dated July 12, 1996 by and among IMNET Systems,
Inc., a Delaware corporation, having its principal
place of business in Atlanta, Georgia , SoftNet
Systems, Inc., a New York corporation, having its
principal place of business in Lake Forest, Illinois
and SoftNet's wholly-owned subsidiary, Micrographic
Technology Corporation, a Delaware corporation
having its principal place of business in Mountain
View, California.
10.3 LOAN MODIFICATION AGREEMENT made and entered into
this 14th day of March, 1996, by and between SOFTNET
SYSTEMS, INC., a New York Corporation, COMMUNICATE
DIRECT, INC., an Illinois Corporation , MICROGRAPHIC
TECHNOLOGY CORPORATION, a Delaware Corporation,
KANSAS COMMUNICATIONS, INC., a Kansas Corporation
and WEST SUBURBAN BANK.
10.4 LOAN MODIFICATION AGREEMENT (EXTENSION OF MATURITY
DATE) made and entered into this 15th day of
November, 1996, by and between SOFTNET SYSTEMS,
INC., a New York Corporation, COMMUNICATE DIRECT,
INC., an Illinois Corporation , MICROGRAPHIC
TECHNOLOGY CORPORATION, a Delaware Corporation ,
KANSAS COMMUNICATIONS, INC., a Kansas Corporation
and WEST SUBURBAN BANK.
10.5 LOAN MODIFICATION AGREEMENT (TEMPORARY INCREASE OF
BORROWING BASE LIMITATIONS) made and entered into
this 20th day of November, 1996, by and between
SOFTNET SYSTEMS, INC., a New York Corporation ,
COMMUNICATE DIRECT, INC., an Illinois Corporation ,
MICROGRAPHIC TECHNOLOGY CORPORATION, a Delaware
Corporation , KANSAS COMMUNICATIONS, INC., a Kansas
Corporation and WEST SUBURBAN BANK.
10.6 LOAN MODIFICATION AGREEMENT (MODIFICATION OF
BORROWING BASE DEFINITION) made and entered into
this 27th day of November, 1996, by and between
SOFTNET SYSTEMS, INC., a New York Corporation ,
COMMUNICATE DIRECT, INC., an Illinois Corporation,
MICROGRAPHIC TECHNOLOGY CORPORATION, a Delaware
Corporation, KANSAS COMMUNICATIONS, INC., a Kansas
Corporation and WEST SUBURBAN BANK.
EXHIBIT 21 Subsidiaries
EXHIBIT 27 Financial Data Schedule
Exhibits incorporated herein by reference:
EXHIBIT 2 Plan of Acquisition, Reorganization, Arrangement, Liquidation
or Succession
2.1 Agreement and Plan of Reorganization, dated October
28, 1994 by and among SoftNet Systems, Inc., CDI
Acquisition Corp., Communicate Direct, Inc., Marc
Zionts and Ian Aaron.(b)
2.2 Agreement and Plan of Reorganization dated March 24,
1995 among SoftNet Systems, Inc., KCI Acquisition
Corp., Kansas Communications, Inc., Sizemore
Enterprises and Gerald Tousey and Cleo Tousey
(attached as Appendix I to the Proxy
Statement/Prospectus included in the Registration
Statement on Form S-4, as amended, Registration
Number 33-95542). The registrant will furnish
supplementally a copy of all omitted Exhibits and
Schedules to Exhibit 2.2 upon the request of the
Commission. Incorporated by reference to Appendix I
to the Company's Registration Statement on Form S-4,
as amended, Registration No. 33-95542.
2.3 Agreement and Plan of Reorganization dated March 24,
1995 among SoftNet Systems, Inc., MTC Acquisition
Corp., and Micrographic Technology Corporation as
amended by Amendment No. 1 dated as of August 8,
1995 (attached as Appendix II to the Proxy
Statement/Prospectus included in the Registration
Statement on Form S-4, as amended, Registration
Number 33-95542). The registrant will furnish
supplementally a copy of all omitted Exhibits and
Schedules to Exhibit 2.3 upon the request of the
Commission. Incorporated by reference to Appendix II
to the Company's Registration Statement on Form S-4,
as amended, Registration No.
33-95542.
EXHIBIT 3 Articles of Incorporation and By-Laws
3.2 By-Laws of the Company included in Exhibit 3(b) to
the Company's Annual Report on Form 10-KSB for the
fiscal year ended September 30, 1993.
EXHIBIT 10 Material Contracts
10.1 Loan and Security Agreement, dated September 15,
1995, by and between West Suburban Bank and SoftNet
Systems, Inc. (a)
10.2 Revolving Credit Note, dated September 15, 1995, in
the original principal amount of $6,500,000 from
SoftNet Systems, in favor of West Suburban Bank (a)
10.3 SoftNet Systems, Inc. 1995 Long Term Incentive Plan.
(a)
10.4 SoftNet Systems, Inc. Stock Option Agreement
(Non-Plan) dated as of September 15, 1995 by and
between SoftNet Systems, Inc. and John J. McDonough.
(a)
10.5 SoftNet Systems, Inc. Stock Option Agreement
(Non-Plan) dated as of June 12, 1995 by and between
SoftNet Systems, Inc. and Martin A. Koehler. (a)
10.6 Registration Rights Agreement dated September 15,
1995 by and among R.C.W. Mauran, A.J.R. Oosthuizen
and SoftNet Systems, Inc. (a)
10.7 Employment Agreement dated September 15, 1995 by and
among A.J.R. Oosthuizen, SoftNet Systems, Inc. and
Micrographic Technology Corporation. (a)
10.8 SoftNet Systems, Inc. Employee Stock Option Plan for
employees of Micrographic Technology Corporation.
(a)
10.9 Form of SoftNet Systems, Inc. 9% Convertible
Subordinated Debentures due 2000. (a)
10.10 $660,000 principal amount of Micrographic Technology
Corporation 6% Convertible Subordinated Secured
Debentures due 2002 issued to R.C.W. Mauran. (a)
10.11 Escrow Agreement dated September 15, 1995 by and
among SoftNet Systems, Inc., R.C.W. Mauran, A.J.R.
Oosthuizen and Mellon Bank, N.A. (a)
10.12 Form of Stock Purchase Agreement executed by SoftNet
Systems, Inc. and U.S. 6-10 Small Company Series of
the DFA Investment Trust Company, U.S. 9-10 Small
Company Portfolio of DFA Investment Dimensions Group
Inc., DFA Group Trust-The 6-10 Subtrust, DFA Group
Trust-Small Company Subtrust. (a)
10.13 Employment Agreement, dated October 28, 1994, by and
between Communicate Direct, Inc. and Ian Aaron. (b)
10.14 Registration Rights Agreement, dated as of October
28, 1994, by and among SoftNet Systems, Inc., Marc
Zionts and Ian Aaron. (b)
10.15 Registration Rights Agreement, dated as of October
28, 1994, by and among SoftNet Systems, Inc.,
Forsythe/McArthur Associates, Inc., BWJ Partnership,
Willard Aaron and D&K Stores, Inc. (b)
10.16 Registration Rights Agreement, dated as of November
1, 1994, by and among SoftNet Systems, Inc., Michael
Cleary, Tim Reiland, Dave Prokupek, Christopher
Barnes and CGRM Limited Partnership I. (b)
10.17 Note and Warrant Purchase Agreement, dated as of
November 1, 1994, by and among SoftNet Systems,
Inc., Michael Cleary, Tim Reiland, Dave Prokupek,
Christopher Barnes and CGRM Limited Partnership I.
(b)
10.18 SoftNet Systems, Inc. 10% Convertible Subordinated
Note, dated November 1, 1999, in the original
principal amount of $150,000 from SoftNet Systems,
Inc. in favor of Michael Cleary, Tim Reiland, Dave
Prokupek, Christopher Barnes and CGRM Limited
Partnership I. (b)
10.19 SoftNet Systems, Inc. Common Stock Purchase Warrant
expiring October 31, 1999 held by Michael Cleary,
Tim Reiland, Dave Prokupek, Christopher Barnes and
CGRM Limited Partnership (b)
10.20 Note and Warrant Purchase Agreement, dated as of
October 28, 1994, by and between SoftNet Systems,
Inc. and D&K Stores, Inc. (b)
10.21 SoftNet Systems, Inc. 10% Convertible Subordinated
Note, dated October 26, 1994, in the original
principal amount of $200,000 from SoftNet Systems,
Inc. in favor of D&K Stores, Inc. (b)
10.22 SoftNet Systems, Inc. Common Stock Purchase Warrant
expiring October 27, 1999 held by D&K Stores, Inc.
(b)
10.23 Note and Warrant Purchase Agreement, dated as of
October 28, 1994, by and between SoftNet Systems,
Inc. and Willard Aaron. (b)
10.24 SoftNet Systems, Inc. 10% Convertible Subordinated
Note, dated October 26, 1994, in the original
principal amount of $100,000 from SoftNet Systems,
Inc. in favor of Willard Aaron. (b)
10.25 SoftNet Systems, Inc. Common Stock Purchase Warrant
expiring October 27, 1999 held by Willard Aaron. (b)
10.26 Note and Warrant Purchase Agreement, dated as of
October 28, 1994, by and between SoftNet Systems,
Inc. and BWJ Partnership. (b)
10.27 SoftNet Systems, Inc. 10% Convertible Subordinated
Note, dated October 26, 1994, in the original
principal amount of $100,000 from SoftNet Systems,
Inc. in favor of BWJ Partnership. (b)
10.28 SoftNet Systems, Inc. Common Stock Purchase Warrant
expiring October 27, 1994 held by BWJ Partnership.
(b)
10.29 Note and Warrant Purchase Agreement, dated as of
October 28, 1994, by and between SoftNet Systems,
Inc. and Forsythe/McArthur Associates, Inc. (b)
10.30 SoftNet Systems, Inc. 10% Convertible Subordinated
Note, dated October 26, 1994, in the original
principal amount of $500,000 from SoftNet Systems,
Inc. in favor of Forsythe/McArthur Associates, Inc.
(b)
10.31 SoftNet Systems, Inc. Common Stock Purchase Warrant
expiring October 27, 1999 held by Forsythe/McArthur
Associates, Inc. (b)
10.32 Note and Warrant Purchase Agreement, dated as of
November 1, 1994, by and between SoftNet Systems,
Inc. and Joseph Rich. (b)
10.33 SoftNet Systems, Inc. 10% Convertible Subordinated
Note, dated November 1, 1994, in the original
principal amount of $200,000 from SoftNet Systems,
Inc. in favor of Joseph Rich. (b)
10.34 SoftNet Systems, Inc. Common Stock Purchase Warrant
expiring October 31, 1999 held by Joseph Rich. (b)
10.35 SoftNet Systems, Inc. Subscription Agreement, dated
October 27, 1994, by and between SoftNet Systems,
Inc. and Compania Di Investimento Antillianna. (b)
10.36 Common Stock Purchase Warrant expiring October 27,
1999 held by Compania Di Investimento Antillianna.
(b)
10.37 Off Shore Securities Subscription Agreement, dated
October, 1994, by and between SoftNet Systems, Inc.
and Coutts & Co., A.G., acting in its capacity as
agent for non-U.S. persons. (b)
10.38 Employment Agreement dated September 15, 1995
between Dale H. Sizemore, Jr. and SoftNet Systems,
Inc. (a)
10.39 Form of SoftNet Systems, Inc. Common Stock Purchase
Warrant. (a)
10.40 Form of SoftNet Systems, Inc. Promissory Note. (a)
10.41 Form of SoftNet Systems, Inc. Note Extension
Agreement. (a)
10.42 Form of SoftNet Systems, Inc. Warrant to Purchase
Common Stock granted to holders of SoftNet Systems,
Inc. Promissory Notes. (a)
10.43 Form of 9% Convertible Subordinated Note. (c)
10.44 Stockholders Agreement dated March 24, 1995 among
SoftNet Systems, Inc., A.J.R. Oosthuizen and R.C.W.
Mauran. (c)
10.45 First Amendment dated September 15, 1995 to
Stockholders Agreement dated March 24, 1995 among
SoftNet Systems, Inc., A.J.R. Oosthuizen and R.C.W.
Mauran. (a)
10.46 Stock Exchange Agreement dated December 17, 1992
between SoftNet Systems, Inc. and Jelken Corp. (a)
10.47 Option to Purchase Shares of SoftNet Systems, Inc.
dated July 4, 1995, expiring July 31, 1997 granting
John I. Jellinek the right to acquire 200,000 shares
of SoftNet Systems, Inc. common stock. (a)
10.48 Form of Indenture between SoftNet Systems, Inc. and
U.S. Trust Company of California, as Trustee,
including Form of Note, relating to the 9%
Debentures. Incorporated by reference to Exhibit 4.2
to the Company's Registration Statement on Form S-4,
as amended, Registration No. 33-95542.
---------------------------
(a) Incorporated by reference to exhibits of equivalent
number to the Company's Annual Report on Form 10-KSB
for the fiscal year ended September 30, 1995.
(b) Incorporated by reference to exhibits of equivalent
number to the Company's Current Report on Form 8-K
dated October 31, 1994.
(c) Incorporated by reference to exhibits of equivalent
number to the Company's Registration Statement on
Form S-4, as amended, Registration No. 33-95542.