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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, 1997.
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)
520 Logue Avenue, Mountain View, California 94043
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 965-3700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
--------------------- ---------------------------
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 November 28, 1997 was approximately $46.4 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 November 28, 1997
- -------------------------------------- -----------------------------------
Common stock, $.01 per share par value 6,969,847
Documents Incorporated by Reference:
Proxy Statement for Annual Meeting of Shareholders to be held on February
26, 1998 (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's strategy includes the selling
of products and services that, when taken together with a customer's existing
computer, data and voice communication systems, can consolidate all information
within an enterprise into a common, electronically accessible information
warehouse, regardless of geographic diversity. The Company operates through
three segments: document management, telecommunications and Internet services.
The document management segment designs, develops, and manufactures electronic
and film based imaging products. This segment provides intelligent document
management solutions to its customers, utilizing cost-saving automation. All of
the Company's products, both hardware and software, 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 to Microfilm ("COM") printers. The
Company's software principally captures information from a variety of sources,
intelligently indexes the data and outputs it to a variety of storage media
including optical disk, magnetic disk and tape, CD-ROM, and 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 Midwestern United States with offices in Chicago, Illinois,
Kansas City and the greater metropolitan area, Columbia, Missouri, Wichita,
Kansas and Milwaukee, Wisconsin. The Company's telecommunications product
offerings include third party manufactured telephone systems and call processing
systems (including call centers, voice messaging, interactive voice response
("IVR") and computer telephone integration ("CTI")). Additionally, the Company
develops software for IVR and CTI applications, sells 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 primarily to customers with 25 or more telephones
located in the Midwest.
The Internet services segment provides Internet access as well as World Wide Web
and database development. It is also a provider of Internet services over the
cable television infrastructure to consumers and businesses. The segments
primary service offering, the ISP ChannelSM, allows small to middle market cable
and wireless cable operators to connect their subscribers to the Internet via
cable modems. For businesses, the segment offers services which provide a
platform for Internet and Intranet connectivity solutions and networked business
applications over both cable infrastructure and leased telecommunication lines.
By combining an Internet distributed architecture with cable and telephone
technology, MCW services provide a compelling platform for nationwide delivery
of network-based business applications.
The Company was incorporated in New York in December 1956. Its principal
executive office is located at 520 Logue Avenue, Mountain View, California 94043
and its telephone number is (650) 965-3700. 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 MediaCity World ("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.
2
Industry Segments
Financial information relating to industry segments of the Company for the three
years ended September 30, 1997, 1996, and 1995 is set forth in Note 16 to the
Consolidated Financial Statements included herewith.
Market Overview
Document Management Segment
The volume of information being generated throughout the world is growing
rapidly. Currently, the Company estimates that 90% of all information is stored
on paper, a format that:
(a) causes delays
(b) requires significant space and personnel for document storage
(c) results in lost, damaged, and/or misfiled documents
(d) requires support for dual document management systems (one for paper, one
for electronic documents)
(e) generally allows only one concurrent user of a document
Because of papers many impediments, there is growing interest in storing
records electronically. The focus of the imaging industry has been on developing
and expanding storage and retrieval technologies.
Businesses typically require several forms of media simultaneously to store
their information. Demand for a particular technology is driven by a number of
factors, including cost, speed of retrieval, ongoing feasibility of retrieval,
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. For example, a higher-cost, fast-access media may be more suitable
for a customer service oriented retrieval application. However, because less
than 2% of information is ever retrieved, transferring data to a low-cost,
technologically independent media often is more appropriate. Because document
management involves so many factors, businesses must consider the multimedia
approach for information storage.
The document management segment provides production workflow, enabling the
simultaneous creation of many forms of storage media to address the entire
document life cycle. Employing Windows/NT based client server software, the
Company delivers document storage and retrieval solutions to businesses with
complex needs. By combining proprietary and third party software with MTC's
hardware products, the company organizes documents, stages them, and creates the
appropriate media for each application. The Company believes it is currently the
only business providing a full range solution of this scope.
The Company's Film Based/Imaging systems, an alternative to paper and long-term
electronic storage, convert scanned or digital information directly from a
computer or magnetic tape to an analog format for archiving on microfilm or
microfiche. Benefits of Film Based Imaging include the following:
(a) Microfilm offers the capability to store documents for over 100 years. By
comparison, electronic technology alternatives generally become obsolete at
3-5 year intervals. Information then must be migrated or converted, and
reliability becomes questionable. Because it produces documents that are
human-readable, film based imaging is the safer choice for information
stored for an extended period.
(b) Microfilm is accepted as undisputed evidence in a court of law, because
images cannot be altered.
(c) Film Recorders generate multiple copies for distribution or disaster
recovery easily and economically utilizing high-speed duplicators.
(d) COM recorders consolidate information in ways paper cannot. For example, a
670 page report can be printed on a single 4" X 6" microfiche.
3
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 has emerged as a global communications
medium enabling millions of people to share information and conduct business
electronically. With readily available, low cost Internet access, consumers and
businesses are making increased use of the Internet via Web browsers, electronic
mail, corporate intranets, telecommuting, on-line advertising and electronic
commerce. Increased Internet use and the availability of powerful new tools for
the development and distribution of Internet content have led to a proliferation
of Internet-based services, such as advertising, on-line magazines, specialized
news feeds, interactive games and educational and entertainment applications.
The Internet has the potential to become a platform through which consumers and
businesses easily access rich multimedia information and entertainment, creating
new sources of revenue for advertisers, content providers and businesses. The
growth of Internet advertising and commerce depends, in part, on the ability of
advertisers and on-line merchants to deliver a compelling multimedia message to
attract viewers and potential customers. However, multimedia content and other
data-intensive applications will require high bandwidth. Underlying all of this
growth, therefore, will be the service industry's ability to deliver a
high-speed, low cost method for the consumer to access this increasing bandwidth
of information. Currently, the Company believes that cable based Internet
services and solutions best addresses the demands of this growing market. The
Company believes that MCW's latest turnkey service offering, the ISP Channel,
best allows the Company to expand into this market.
4
Products and Services
Document Management Segment
Information Distribution System. The Company's Information Distribution System
(IDS) is a family of products designed to automate the computer output
production process and expand the product offering to include electronic
subsystems such as optical disk and CD-ROM. The client-server architecture uses
a Microsoft Windows operating environment and Novell LAN. The IDS allows the
users to transport 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 (IDS EXEC). The IDS EXEC
software product moves input, management, execution and reporting
activities off the production floor and under a single point of
control, creating a streamlined and efficient operation. THE IDS EXEC
console becomes the control center for all computer output stations
that receive input data and house job resources, manage job priorities
and control production, or track job status and report job statistics.
The IDS EXEC also intelligently indexes source information for
convenient and timely retrieval regardless of the storage media.
Historically, if users wanted information on a computer tape
transferred to CD-ROM, microfilm and paper, the tape had to be
duplicated twice and then three separate application systems were
utilized to store the information on the various types of media. With
the Company's IDS EXEC, only one computer tape is necessary; the
software outputs information to the three desired storage media
simultaneously. IDS EXEC also makes it 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 this intelligent indexing technology.
Page Handler. Page Handler is a high-speed electronic page-print
interpreter that offers output device independence for AFP (IPDS) and
Xerox laser printer applications. Page Handler accepts native print
data, instructions (Formdef/Pagedef, JSL/JDL), and resources (fonts,
forms, images). It then assembles these inputs into logical pages.
Document Organizer. Document Organizer is a client/server based
bundling system that analyzes documents and organizes them down to the
page level for production. Working in conjunction with the IDS Spooler,
Document Organizer arranges large print applications as end point
documents according to customer needs of storage media.
Complete Organization of Every Document (COED). The COED System is a powerful
client/server package that offers access to a wide range of information by
combining Document Imaging, Computer Output to Laser Disc ("COLD"), and Workflow
into one integrated system. The system provides tools that facilitate the
retrieval of stored documents for viewing, printing, faxing, or exporting. COED
is fully configurable and allows integrators or end users to create applications
that match their business' operational requirements without programming. COED's
client/server architecture provides the scalability needed to allow users to
start with a cost effective solution and later integrate additional solutions as
required. The system's Microsoft Windows graphical environment provides familiar
"point and click" access to COED's various features. This system also conforms
to important standards such as ODBC, TWAIN, and OLE 2.0. This open architecture
provides a flexible system that integrates smoothly into different computing
environments. Total software sales, including the COED solution, contributed
approximately 7% to document management segment revenue in fiscal year 1997.
Computer Output to Microfilm (COM) Systems. The Company is a leading
manufacturer of COM systems, offering a complete line of recorders, processors,
duplicators, and related software. The Company manufactures various
sophisticated printers under the System 6800 line of products. These systems
include an extensive list of features, including wet or dry processing
technology, cut fiche capabilities, and medium to high speed, stand-alone or
integrated film processors and duplicators. The 6800 series provides an
architectural platform that permits easy integration of information and image
management systems, including the capability to add both magnetic and
5
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. This feature gives the System 6800 line
the ability either to operate within the traditional direct connect environment
or become part of any client- server facility using LAN/WAN communications. COM
Systems sale and lease revenues contributed approximately 34% to document
management segment revenue in fiscal year 1997.
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
continuous cash flow and acts as a supplement to its hardware sales, which
provide a less consistent influx due to high dollar value, a long sales cycle,
and capital equipment nature. Media sales also allow the Company to foster
relations with its installed customer base. Maintaining these relationships is
vital, because numerous hardware sales of replacement pieces or upgrades of
technology are made to media 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 approximatley
34% to document management segment's revenue in fiscal year 1997.
Maintenance and Spare Parts: The Company supplies spare parts for maintenance on
its installed COM equipment user base. Maintenance is sub-contracted to a third
party organization, for which the Company receives a monthly royalty. Revenue
from maintenance and spare parts contributed approximately 5% and 15%
respectively to document management segment revenue in fiscal year 1997.
RAPID. Rapid Archiving Peripheral for Images and Documents (RAPID(TM)) provides
high-speed conversion of digitally-stored documents and images to low-cost,
human-readable media. RAPID enables imaging and 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
can organize documents and reports into file folders for meaningful, rapid
retrieval. RAPID, currently under development, is scheduled for market release
in the second quarter of fiscal 1998.
Telecommunications Segment
The telecommunications segment generates revenue primarily through the sale of
third party vendor products through new installations of systems to either
existing or new customers, and providing customers with "moves, adds, changes",
service and maintenance to their existing systems.
Products offered to customers include telephone systems, call processing,
computer telephone integration, wide area networks, data communications, and
cabling.
Telephone Systems. The Company provides PBX and key/hybrid telephone
systems for its customers. A PBX, which is generally utilized for
customers with 100 or more phones ( including the growth of up to
thousands of phones), is handled by the F9600 manufactured by Fujitsu
Business Communications Systems, Inc. ("Fujitsu"). The smaller systems
handle customers with 10 to 200 phones. In this area, the Company markets
the Integrated Digital System from Executone and Northern Telecom. 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 resells call
center products from Fujitsu, Executone and Interactive
Intelligence.
6
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 resells 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 touch-tone telephone. IVR units
allow callers to access bank account information, obtain airline
reservation information and many other applications. The Company
markets IVR units from Edify 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.
Wide Area Networks. The Company provides wide area data communication
design, installation and maintenance services to organizations wishing to
exchange data with remote locations. These remote locations could be the
Internet, an Intranet, a remote office or a business partner. The company
resells products from Cisco Systems, Inc., Adtran, Inc., 3Com and Ascend
Communications.
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.
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.
Initial Product Sales
Revenue from initial product sales contributed approximately 61%, 53% and
64% to revenue for the telecommunications segment in fiscal 1997, 1996,
and 1995, 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 21%, 26% and 14% of total telecommunication segment revenue
in fiscal 1997, 1996, and 1995, respectively.
Service and maintenance
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. Sales of services
and maintenance contributed approximately 17%, 15% and 17% of total
telecommunication segment revenue in fiscal 1997, 1996, and 1995,
respectively.
7
Internet Services Segment
The Internet Services segment provides Business to Business services under the
MediaCity brand. The ISP Channel provides a no cost, turnkey data over cable
solution to independent cable and wireless cable operators. MediaCity core
services include Internet Access and Web Development. ISP Channel services
include broadband Internet access for residential, small office/home office
(SOHO) and commercial customers, IP telephony, collaborative services including
document and video conferencing and content delivery.
MediaCity Services
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 at
speeds ranging from 56Kbps - 1.54Mbps Frame Relay, 128Kbps ISDN,
1.54Mbps - 45Mbps Point-to-Point and 144Kbs - 6Mbps DSL. Monthly
service charges range from $125 to $8,000 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-robots for mass
marketing and FTP used in technical support applications for file
transfers.
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 web sites for both internal Internet and external
Internet applications. Monthly charges for web hostings range from $50
to $2,500 per month depending on band-width requirements, number of
inquires (hits) per month and scripting and database requirements.
One-time charges for web site development range $195 to $25,000
depending on the customer's needs.
ISP ChannelSM
Broadband Internet Access. ISP Channel provides broadband Internet
access to cable subscribers over the existing cable plant via an
Internal PC ISA Cable Modem Card, External Cable Modem tied to a
Network Interface Card or a Network Computer (NC) Set-top box. The
speed customers achieve range from 1Mbps to 27Mbps downstream. Two-way
cable plants allow for upstream speeds to reach 10Mbps while One- way
cable plants use an analog or ISDN line for telephone return. Monthly
service charges range from $49 for flat rate residential service to $99
- $299 for flat rate business service depending on the number of
computers connected.
Collaborative Computing. ISP Channel subscribers, as part of the basic
service offering, can utilize a local headend collaborative server for
video and document conferencing. Because the Server is local to the
broadband cable network, ISP Channel customers can experience full
motion 30 frames per second video quality.
IP Telephony. ISP Channel subscribers, as part of the basic service
offering, can utilize a local headend IP Telephony Gateway that allows
for toll quality voice services over the Internet at reduced local and
long distance charges. Each cable operator headend represents another
node on the ISP Channel's IP Telephony Network. While the technology
has been implemented as part of ISP Channel's basic offering, the final
price structure has yet to be determined.
Content. The ISP Channel has entered into a joint venture with Excite,
Inc. to provide co-branded ISP Channel/Excite content aggregation,
directory and search services. The co-branded content incorporates a
custom on-line presence for the cable affiliate including on-line cable
schedule, Pay per View and billing payment options. Personalization
allows for the subscriber to use the co-branded ISP Channel/Excite push
technology to create a customized default page incorporating the
subscribers interests including Local and National News, Weather,
Sports, Stock Portfolio, Horoscope, local City information or the
ability to choose from hundreds of other selections. Local and National
advertising generated by the Excite
8
relationship will yield additional advertising revenue opportunities
for ISP Channel and its affiliated cable operators.
Business to Business Internet Services. MCW also provides its MediaCity brand
core business solutions to its affiliated cable subscribers, allowing the cable
operator to share in business revenue from web development, web hosting and
Internet Access outside of the local cable plant.
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. 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
MediaCity (Northern California)
MediaCity utilizes an inside sales force for consumer and SOHO customers while
incorporating a direct sales staff and independent sales representatives
consisting of Internet design consultants and Advertising Agencies to address
the Business to Business market. The Company employs a variety of selling
techniques in order to reach targeted business customers including
telemarketing, direct mail and sales calls.
MediaCity (Reno, Nevada)
MediaCity has an exclusive agreement with the Reno Gazette Journal's (Gannett)
on-line presence NevadaNet to co-market Internet access. The relationship
provides NevadaNet with a percentage of the recurring revenue while providing
MediaCity with extensive free daily advertising in the Reno Gazette Journal.
Sales support is provided both locally and via a toll-free number.
ISP Channel (Nationwide)
Affiliate Sales. The ISP Channel employs seasoned cable executives as Regional
Directors of Affiliate Sales that call on the independent cable operators and
multiple system operators in their territory.
Subscriber Sales. Subscriber sales are handled nationally via a toll-free
customer service center. All marketing efforts are coordinated with the local
cable affiliate and include telemarketing, billing inserts, local cable video
spots and infomercials.
Customers
During fiscal 1997 and 1996, Marshall & Ilsley Corp. (1997) and NCR Corp.
(1996), accounted for 11% and 13%, respectively, 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.
Document Management Segment
The Company markets its products and services to two distinct customer groups:
(a) customers with high-volume document, storage and retrieval needs or
complex document life cycle issues
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(b) customers who desire to image-enable existing business applications, to
facilitate rapid and efficient data storage and retrieval, and to provide
a vehicle for electronically processing data input (e.g. health claims
processing, lease administration, etc.).
For those clients with high-volume data storage and retrieval needs, the Company
further defines its customers as service bureaus, end users, and authorized
distributors. The Company's service bureau customers capitalize on the recent
trend toward outsourcing. Clients of the service bureaus generally do not have
the data output volumes to justify dedicated COM and related systems.
Conversely, certain financial institutions, insurance companies, and public
utilities do have output volumes justifying the 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 to meet each customer's needs.
During fiscal 1997, foreign sales of the document management segment represented
12% of the Company's consolidated revenue. Foreign sales made principally to
Germany, France and England represented 28%, 12% and 10%, respectively, of total
foreign sales of the Company. Additionally, European maintenance contract
revenues attributed an additional 21% of the Company's total foreign sales.
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. The
Company views this continued customer service as critical to being able to
expand its 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, 1997, the Company had approximately 3,500 customers
in its telecommunications segment. During fiscal years 1997, 1996 and 1995, no
single customer in the telecommunications segment accounted for more than 10% of
consolidated company revenue.
The Internet Services Segment
The Company focuses it MediaCity brand services primarily on business customers
with 10 to 100 employees. As of September 30, 1997 the Internet services segment
had approximately 1900 customers.
The Company markets its ISP Channel services to the Independent Cable, Wireless
Cable and Multiple System Operators with cable systems that range in size from
1,000 to 50,000 subscribers. This market represents 3,986 systems and
approximately 25 million subscribers. The ISP Channel is sold as a "no cost"
turnkey Internet Solution based on a revenue sharing model. The revenue sharing
percentage can range from 25% to 50% based on system size and subscriber
penetration. As of September 30, 1997 the Company has seven signed ISP Channel
contracts, with terms ranging from 3 to 5 years. The operations of these seven
cable affiliates cover an approximate total of 305,000 homes. Of these potential
ISP Channel subscribers, 125,000 of these homes currently are cable operator
subscribers, while 180,000 of these homes have passed on basic cable services.
10
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 has a
number of direct competitors, including Anacomp and Mobius. These competitors
have longer operating histories, greater name recognition, and significantly
greater financial, technical, and marketing resources 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 Regional Bell
Operating Companies ("RBOCs") in the telecommunication 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 RBOC's are currently subject to a variety of
government regulations limiting the manufacture, marketing and sale of certain
products and services in the telecommunications market. If any of these
restrictions were to be eliminated or lessened, the Company's business could be
adversely effected.
Internet Services Segment
The markets for consumer and business Internet services are extremely
competitive, and the Company expects that competition will intensify in the
future. Some of the Company's direct competitors in the access markets are
ISP's, national long distance carriers and local exchange carriers, wireless
service providers, and Internet content aggregators. Many of these competitors
are offering (or may soon offer) technologies that will attempt to compete with
some or all of the Company's high-speed data service offerings. Several
competitors in this area are AT&T, BBN Corporation, Earthlink Network, Inc.,
Netcom On-Line Communications Services, Inc. , PSInet Inc. and WorldCom, Inc.
The Company also competes with other cable-based data services that are seeking
to contract with cable system operators to bring their services into geographic
areas not already covered by an exclusive relationship between the Company and
its cable affiliates. The Company's competitors in these cable-based services
market are those cable companies that have developed their own cable-based
services and market those services to unaffiliated cable system operators.
Several cable system operators, including TCI , Cox, Comcast, Time Warner Inc.
and the Continental Cablevision, have deployed high-speed Internet access
services over their existing local HFC networks. TCI, Cox and Comcast market
through @Home while Time Warner plans to market the Road Runner service through
Time Warner's own cable systems as well as to other cable system operators
nationwide. Many of the Company's competitors and potential competitors have
substantially greater financial, technical and marketing resources, larger
subscriber bases, longer operating histories, greater name recognition and more
established relationships with advertisers and content and application providers
than the Company. There can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competitive
pressures faced by the Company will not materially adversely affect the
Company's business, operating results or financial condition.
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
not be purchased elsewhere.
11
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 Company currently depends on a limited number of suppliers for certain key
technologies used to provide ISP Channel and MediaCity services. In particular,
the Company depends on 3Com/USR and COM21 for head end and cable modem
technology, Excite for content aggregation, Cisco Systems, Inc. for network
routing and switching hardware, and MCI for national Internet backbone services,
among others. Although the Company believes that there are alternative suppliers
for each of these technologies, it could take a significant period of time to
establish relationships with alternative suppliers. The loss of any of the
Company's relationships with these suppliers could have a material adverse
effect on the Company's business, operating results and financial condition.
Seasonality
The Company believes that none of its segments are subject to seasonal
fluctuations.
Backlog
Document Management Segment
As of September 30, 1997, the document management segment has signed customer
contracts of $1.4 million, all of which are expected to be delivered in fiscal
1998. The segment had approximately $3.4 million in signed contracts at
September 30, 1996, all of which were delivered during fiscal 1997.
Telecommunications Segment
As of September 30, 1997, the telecommunications segment has signed customer
contracts for $2.6 million, all of which are expected to be delivered in fiscal
1998. The segment had approximately $4.8 million of signed contracts at
September 30, 1996, all of which were delivered during fiscal 1997.
Internet Services Segment
As of September 30, 1997, the Internet services segment has seven, signed ISP
Channel contracts representing 125,000 cable subscribers and 180,000 homes
passed. All seven contracts are scheduled for implementation in fiscal 1998.
This segment represents an emerging technology and industry, and in turn had no
backlog of significance as of September 30, 1996.
12
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
1997, the Company spent approximately $1.8 million on development efforts.
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, 1997, the Company and its subsidiaries had 210 full-time
employees. The Company also utilizes contracted labor to assist in its
production process.
Item 2. Properties
The Company leases an aggregate of approximately 121,000 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 Mountain View, California. 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
13
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: SOF"). 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
------------------ ------ -----
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
1997
December 31, 1996 6 4-5/16
March 31, 1997 7-1/4 4-1/4
June 30, 1997 6-3/8 4-1/8
September 30, 1997 6-3/4 5-1/8
There were approximately 366 record holders of the stock as of November 28,
1997. The closing price for the stock on November 28, 1997 was $7-3/16. The
Company paid no dividends during the period October 1, 1994 to September 30,
1997. Other than restrictions that may be part of various debt instruments, the
Company does not have any legal restriction on paying dividends. However, the
Company does not intend to pay dividends on its Common Stock in the foreseeable
future.
Recent Sales of Unregistered Securities
On July 31, 1997 and August 15, 1997, the Company issued 250,000 shares of
common stock and 1,000 shares of common stock, respectively, to two separate
warrant holders, upon the exercise of outstanding warrants at an exercise price
of $1.75 per share ($439,250 in the aggregate). These shares were issued in a
nonpublic offering pursuant to transactions exempt under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act").
On December 20, 1996, the Company issued 10,000 shares of common stock to Cleary
Gull Reiland and McDevitt ("Cleary") in consideration for services rendered by
Cleary in the approximate amount of $44,000 in connection with certain
acquisitions made by the Company. These shares were issued in a nonpublic
offering pursuant to transactions exempt under Section 4(2) of the Securities
Act.
On November 15, 1996, the Company issued 24,390 shares of common stock pursuant
to the conversion of $100,000 of convertible debt by a single holder of the
Company's 10% convertible subordinated notes due October 31, 1999. These 10%
notes have a conversion price of $4.10. From February 24, 1997 through June 23,
1997, the Company issued 35,104 shares of common stock pursuant to the
conversion of $236,952 of convertible debt by four separate holders of the
Company's 9% convertible subordinated notes due September 15, 2000. These 9%
notes have a conversion price of $6.75. On August 15, 1997 the Company issued
10,000 shares of common stock pursuant to the conversion of $50,000 of
convertible debt by a single holder of the Company's 9% convertible subordinated
notes due December 31, 1998. These 9% notes have a conversion price of $5.00.
These shares are exempt under Section 3(a)(9) of the Securities Act.
14
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 audited by Coopers & Lybrand LLP. The selected consolidated financial
data should be read in conjuction with "Management's Discussions and Analysis of
Financial Conditions and Results of Operations" and the consolidated financial
statements and the notes thereto included elsewhere in this report.
Fiscal years ended September 30,
1997 1996(b) 1995(c) 1994 1993(c)
(In thousands, except per share data)
Statement of Operations Data (a):
Net sales $ 38,556 $ 41,387 $ 21,252 $ 9,629 $ 9,408
Cost of sales 23,608 27,137 15,137 6,532 6,612
--------- --------- --------- --------- ---------
Gross Profit 14,948 14,250 6,115 3,097 2,796
--------- --------- --------- --------- ---------
Operating expenses:
Selling, engineering and general
and administrative 12,475 14,316 7,136 3,234 3,106
Amortization of goodwill
and transaction costs 1,383 1,280 451 152 -
Write-off of acquired in-process
unproven technology - - 5,000 - -
Cost associated with change in
products and other 2,137 2,834 - - -
Acquisition costs and other - - 1,318 - -
--------- --------- --------- --------- ---------
Total operating expenses 15,995 18,430 13,905 3,386 3,106
--------- --------- --------- --------- ---------
Loss from operations (1,047) (4,180) (7,790) (289) (310)
Interest expense (1,194) (1,597) (650) (615) (56)
Gain on sale of
available-for-sale securities - 5,689 - - -
Other income (expense) 96 52 (28) (31) 72
--------- --------- --------- --------- ---------
Loss from continuing
operations before income taxes (2,145) (36) (8,468) (935) (294)
Provision for income taxes - - 124 378 187
--------- --------- --------- --------- ---------
Net loss before discontinued
operations and
extraordinary items $ (2,145) $ (36) $ (8,592) $ (1,313) $ (481)
========= ========= ========= ========= =========
Primary loss per share
from continuing operations $ (0.33) $ (0.01) $ (1.97) $ (0.35) $ (0.14)
========= ========= ========= ========= =========
Weighted average shares outstanding 6,627 5,818 4,353 3,802 3,555
Balance Sheet Data (a):
Working capital $ 1,301 $ 1,713 $ 3,488 $ (798) $ 1,344
Total assets 24,377 25,586 35,396 5,646 3,175
Long-term debt,
net of current portion 11,747 10,598 12,434 123 197
Shareholders' equity 2,028 3,793 11,685 2,436 1,384
- ---------------------
(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 the Milwaukee operations of
Executone Information Systems, Inc. and MediaCity World, Inc. since their
acquisitions on December 29, 1995 and June 21, 1996, respectively
(c) 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. In separate
transactions in the fourth quarter of fiscal 1996 and the first quarter
of fiscal 1997, the Company sold substantially all of the operations of
CDI.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations General
This Form 10-K contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, including, without limitation,
statements as the expectations, beliefs and future financial performance and
assumptions underlying the foregoing relating to the ability to meet working
capital requirements, capital expenditure and expected cash flow from
operations. When used in this document, the words "anticipate", "believe",
"estimate" and "expect" and similar expressions, are intended to identify
forward-looking statements. The actual results or outcomes could differ
materially from those discussed in the particular forward- looking statements.
The risks and uncertainties that may affect the operations, performance,
developments and results of the Company's business include, but may not be
limited to, the following: international, national and regional economic
conditions; market acceptance of the Company's products and services; the
Company's ability to provide integrated communication solutions for customers in
a dynamic industry, as well as competitive factors.
The Company's fiscal year ends September 30. "Fiscal 1997" refers to the twelve
months ended September 30, 1997 with similar references for other twelve month
periods ending September 30.
Pursuant to activities initiated in the fourth quarter of fiscal 1996, the
Company maintained its focus on improving its overall cash flow. Throughout
fiscal 1997, the Company implemented various cost cutting activities in each of
its three business segments. The Company believes that these activities have
allowed it to strengthen the operations in what the Company believes to be its
two mature segments, the telecommunication and document management segments, as
well as to better position what the Company believes to be its start-up segment,
the Internet services segment, for the future success and contribution of its
operations.
Execution of the Company's strategy of focusing on profit margins and
eliminating excess costs resulted in enhanced profit margins in both the
document management and the telecommunication segments. Industry experienced
management teams in both segments were able to significantly reduce overhead
expense by consolidating back-office administration and implementing various
other cost cutting activities.
The Internet services segment concentrated on expanding both its customer base,
as well as its product and service offerings. During fiscal 1997, the Internet
services segment announced its new, national Internet service offering, the ISP
Channel. The Company expects this segment to continue to increase its customer
base and market presence through its promotion of the ISP Channel. The Company
believes that significant market opportunities may exist for this business and
its current product and service offerings. These opportunities, however, may
require a capital investment in excess of the Company's current operating cash
flow and lines of credit. The Company also believes that the successful
launching of the ISP Channel may require substantial investment which could have
an adverse effect on short-term operating results.
Overall, the Company expects to continue its focus on increasing cash flow in
the business segments and expects to continue its investment towards increasing
its customer base in each of its markets. The Company also expects to continue
its investment in new product development. The Company also understands that
future product offerings may require substantial investment in new sales
personnel and retraining of current technical personnel, which the Company
believes may have an adverse effect on the short-term operating results.
Although the Company has organized itself into three segments, the only industry
segment comparison to prior years which would be meaningful is a comparison of
the document management and telecommunication segments for fiscal 1997 and
fiscal 1996. The Internet segment only contributed to consolidated operating
results for one quarter in fiscal 1996 and comparison for prior years would not
be meaningful. Similarly, the majority of the document management segment was
acquired in late fiscal 1995 and only contributed fifteen days of operating
results to fiscal 1995. Therefore any comparison for this segment to fiscal 1995
would also not be meaningful..
16
Results of operations for Fiscal 1997 compared to Fiscal 1996
Income
Net Gross Operating (loss) from
Segment Info (in thousands) sales profit expenses operations
Document management
Fiscal 1997 $20,329 $9,280 $8,714 $566
Fiscal 1996 19,417 8,042 8,162 (120)
Telecommunications
Fiscal 1997 17,219 5,545 4,804 741
Fiscal 1996 21,803 6,041 7,509 (1,468)
Corporate and other
Fiscal 1997 1,008 123 2,477 (2,354)
Fiscal 1996 167 167 2,759 (2,592)
Consolidated
Fiscal 1997 38,556 14,948 15,995 (1,047)
Fiscal 1996 41,387 14,250 18,430 (4,180)
For fiscal 1997, consolidated net sales decreased $2.8 million (7%) while profit
margins increased to 38.8% from 34.4%. The decrease in sales and increase in
profit margin is partially attributed to the disposal of a substantial portion
of the operations of CDI (telecommunications) in fiscal 1996. CDI's fiscal 1996
sales were $6.4 million, returning a gross profit margin of 10.8%. Operating
expenses decreased $2.4 million, primarily in the selling and general and
administrative expense categories, again, primarily due to the exclusion of CDI
from fiscal 1997.
Consolidated interest expense decreased $402,000 in fiscal 1997 due to lower
debt outstanding during fiscal 1997, mainly contributable to the conversion of
$4.5 million of convertible subordinated notes since June 1996.
Fiscal 1996 also included a gain of $5.7 million on the sale of IMNET Systems,
Inc. ("IMNET") shares held by the Company and a loss on the sale of CDI of $6.1
million. An additional extraordinary charge of $486,000 relating to the wrap-up
of CDI's operations was recorded in fiscal 1997.
No provision was made for income taxes for fiscal 1997 or fiscal 1996 as a
result of net operating losses. At September 30, 1997, the Company had a tax net
operating loss carryforward of $6.7 million, which begins to expire in 1999.
Given the Company's history of operating losses, a valuation allowance of $3.2
million has been provided in the Company's consolidated financial statements.
The Company had a net loss in fiscal 1997 of $2.6 million compared to a net loss
of $6.1 million in fiscal 1996.
Document Management Segment
For fiscal 1997, the document management operations recorded higher gross profit
margins (45.6% compared to 41.4% in fiscal 1996) on a 4.8% increase in net
sales. The improved profit margins were primarily the result of increased
productivity efficiencies in the manufacturing operation. A strong backlog and
steady, customer order driven, manufacturing schedules were the key to achieving
these efficiencies. The segment also introduced a competitive leasing
alternative for its customer base further enhancing the sales effort for the
operation's core products during the year.
Operating expenses increased 6.8% in fiscal 1997. Selling expenses increased
$74,000 (4.2%) and engineering expenses increased $346,000 (19.8%) reflecting
the continued effort to expand and improve the products offered to its
customers. General and administrative expenses decreased $350,000 (16.4%)
resulting from the overhead cost
17
cutting measures implemented. Also included in operating expenses were the two
following one-time write-offs, totaling $2.1 million.
During fiscal 1996, the Company acquired from IMNET an exclusive worldwide
manufacturing right to certain microfilm retrieval technology, in exchange for
the prepayment of non-refundable licensing fees of $1.0 million for 250 software
licenses. As of September 30, 1997, the transfer to the Company of the technical
and manufacturing know-how for this technology has continued to be delayed.
Despite the ongoing negotiations and cooperation between the parties, the
Company determined there was a potential risk in completing the transfer and
selling the product. As a result, the Company wrote-off the prepaid license fee
of $1.0 million in the fourth quarter of fiscal 1997.
Also, in the fourth quarter of 1997, the Company reevaluated the development and
timely offering of its RAPID(TM) (Rapid Archiving Peripheral for Images and
Documents) product. Market driven product enhancements and the resulting
technological setbacks delayed the estimated product offering date at least one
year to the second quarter of fiscal 1998. As a result, the Company has
written-off $1.1 million of capitalized product design costs associated with
this product.
Telecommunications Segment
Sales in the telecommunications segment in fiscal 1997 compared to fiscal 1996
decreased $4.6 million. The decrease is primarily due to the disposal of
substantially all of the operations of CDI (with revenues of $6.4 million for
fiscal 1996). This decrease in net sales was partially offset by an increase in
net sales of $1.8 million in the remaining operations of the telecommunication
segment for fiscal 1997. Profit margins increased to 32.2% from 27.7% due to the
elimination of the lower margin product offerings of the CDI operation.
Selling, engineering and general and administrative expenses decreased $1.8
million in fiscal 1997 as compared to fiscal 1996. The decrease resulted from
the disposition of CDI ($2.3 million in fiscal 1996) partially offset by
expenses related to the increase in sales for the remaining operations.
Results of operations for Fiscal 1996 compared to Fiscal 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 operation of Executone Information
Systems, Inc. in December, 1995. The Company's acquisition of MTC and the
Milwaukee operation of Executone added approximately $19.4 million in net sales
in the fiscal year ended September 30, 1996. Sales from the Company's
telecommunications segment 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 increase administrative expenses associated with expanded
operation ($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
18
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.
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 the 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.
During fiscal 1996, the Company sold its non-application oriented interconnect
business located in the Chicago, IL metropolitan area. As a result the Company
incurred a $6.1 million one-time charge for the write-off of goodwill, deferred
acquisition costs associated with the purchase of Communicate Direct, Inc. in
October, 1994, severance payments, inventory write-downs, warranty reserve and
other.
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. 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. The Company has a tax net operating loss carry forward of
approximately $7.7 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 decreased $3.2 million to $5.4 million and loss per share of common
stock before discontinued operations decreased $1.05 to $.83, 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.
Liquidity and Capital Resources
At September 30, 1997, the Company's current ratio was 1.12 to 1 with working
capital of $1.3 million. This compares with a current ratio of 1.16 to 1 and
working capital of $1.7 million at September 30, 1996.
For fiscal 1997, cash flows used in operating activities were $2.5 million,
compared to $4.4 million for fiscal 1996. The Company used $1.2 million in
investing activities during fiscal 1997, as compared to cash flows provided by
investing activities of $3.1 million in fiscal 1996. During fiscal 1996, the
Company realized net proceeds of $7.7 million on the sale of marketable
securities and investments of $2.1 million related to acquisition activities.
Neither of these two types of activities occurred in fiscal 1997. Cash flows
provided by financing activities increased $2.1 million to $3.3 million compared
to $1.2 million in fiscal 1996 primarily due to additional credit facilities
established with respect to certain lease arrangements the Company enters into
with its customers.
The Company extended the maturity of its revolving line of credit, which has a
maximum borrowing capacity of $9.5 million, through January 1999. During fiscal
1997, the Company also obtained an additional credit facility from the same
lender, whereby the Company can borrow up to $1.5 million against qualified
lease arrangements it enters into with its customers.
The Company expects to be able to finance its working capital requirements and
capital expenditures for its document management and telecommunications segments
from its operating income, and existing line-of-credit facilities for the fiscal
year ended September 30, 1998. However, the Company is currently considering
various product offering expansion plans with respect to its Internet segment,
for which it will need to pursue additional financing.
19
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
20
Item 8. Financial Statements and Supplementary Data
SoftNet Systems, Inc. and Subsidiaries
Index to Consolidated Financial Statements
September 30, 1997
Report of Independent Accountants
Consolidated Statements of Operations for the Years Ended September 30, 1997,
1996 and 1995
Consolidated Balance Sheets as of September 30, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the Years ended September
30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended September 30, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
21
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, 1997 and 1996 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1997 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.
/s/ Coopers & Lybrand L.L.P.
December 24, 1997
Chicago, Illinois
22
SoftNet Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended September 30, 1997, 1996 and 1995
(In thousands, except per share data)
1997 1996 1995
---------- --------- ---------
Net sales $ 38,556 $ 41,387 $ 21,252
Cost of sales 23,608 27,137 15,137
---------- --------- ---------
Gross profit 14,948 14,250 6,115
---------- --------- ---------
Operating expenses:
Selling 4,662 5,274 2,662
Engineering 2,305 1,820 60
General and administrative 5,508 7,222 4,414
Amortization of goodwill
and transaction costs 1,383 1,280 451
Costs associated with change
in product line and other 2,137 2,834 -
Write off of acquired in
process unproven technology - - 5,000
Acquisition costs and other - - 1,318
---------- --------- ---------
Total operating expenses 15,995 18,430 13,905
---------- --------- ---------
Loss from continuing operations (1,047) (4,180) (7,790)
Other income (expense):
Interest expense (1,194) (1,597) (650)
Gain on available-for-sale securities 5,689 -
Other income (expense) 96 52 (28)
---------- --------- ---------
Loss from continuing operations before
income taxes and extraordinary item (2,145) (36) (8,468)
Provision for income taxes - - 124
---------- --------- ---------
Loss from continuing operations before
extraordinary item (2,145) (36) (8,592)
Discontinued operations:
Loss from operations - - (420)
Loss on disposal - - (644)
---------- --------- ---------
Loss before extraordinary item (2,145) (36) (9,656)
Extraordinary item:
Loss on sale of business (486) (6,061) -
---------- --------- ---------
Net loss $ (2,631) $ (6,097) $ (9,656)
========== ========== =========
Loss per share:
Continuing operations $ (0.33) $ (0.01) $ (1.97)
Discontinued operations - - (0.10)
Loss on disposal - - (0.15)
Extraordinary item (0.07) (1.04) -
---------- --------- ---------
Net loss $ (0.40) $ (1.05) $ (2.22)
========== ========== =========
Weighted average shares outstanding 6,627 5,819 4,353
---------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
23
SoftNet Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
As of September 30, 1997 and 1996
(In thousands, except share data)
1997 1996
-------- --------
ASSETS
Current assets:
Cash $ 37 $ 426
Accounts receivable, net 6,983 6,074
Inventories 4,310 5,904
Prepaid expenses 473 340
-------- --------
Total current assets 11,803 12,744
Property and equipment, net 1,637 2,314
Costs in excess of fair value of
net assets acquired, net 6,900 8,101
Other assets 4,037 2,427
-------- --------
$ 24,377 $ 25,586
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 7,264 $ 8,672
Current portion of long-term debt 1,712 744
Current portion of capital leases 46 187
Deferred revenue 1,479 1,428
-------- --------
Total current liabilities 10,501 11,031
-------- --------
Long-term debt, net of current portion 11,747 10,598
-------- --------
Capital lease obligations, net of current portion 101 164
-------- --------
Commitments and contingencies
Shareholders' Equity:
Preferred stock, $.01 par value,
4 million shares authorized,
none outstanding -- --
Common stock, $.01 par value,
25 million shares authorized,
6,870,559 and 6,540,065 shares
outstanding, respectively 69 65
Capital in excess of par value 34,379 33,517
Accumulated deficit (32,420) (29,789)
-------- --------
Total shareholders' equity 2,028 3,793
-------- --------
$ 24,377 $ 25,586
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
24
SoftNet Systems, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
for the years ended September 30, 1997, 1996 and 1995
(In thousands)
Capital in
Common Stock excess of Accumulated
Shares Amount par value deficit
Balance, October 1, 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 Senior Notes - - 66 -
Exercise of warrants 100 1 187 -
Common stock issued in connection with acquisitions,
net of issuance costs 1,143 11 7,533 -
Conversion of convertible subordinated notes 201 2 1,628 -
Settlement of related party receivable - - 1,028 -
Net loss - - - (9,656)
-------- -------- -------- -----------
Balance, September 30, 1995 5,547 55 27,584 (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 -
Net loss - - - (6,097)
-------- -------- -------- -----------
Balance, September 30, 1996 6,540 65 33,517 (29,789)
Exercise of warrants 251 3 432 -
Conversion of convertible subordinated notes 70 1 386 -
Common stock issued to pay acquisition costs 10 - 44 -
Net loss - - - (2,631)
-------- -------- -------- -----------
Balance, September 30, 1997 6,871 $ 69 $ 34,379 $ (32,420)
======= ======== ========== ===========
In fiscal 1995, the Company recorded $7,738,000 of unrealized appreciation of
available-for-sale securities in a Shareholders' Equity account. In fiscal 1996,
this amount was eliminated upon the sale of the securities.
The accompanying notes are an integral part of these consolidated financial
statements.
25
SoftNet Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended September 30, 1997, 1996 and 1995
(In thousands)
1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net loss $ (2,631) $ (6,097) $ (9,655)
Adjustments to reconcile net loss to
net cash used in operating activities:
Write-off of acquired in-process unproven technology -- -- 5,000
Depreciation and amortization 2,045 1,997 822
Write-off of prepaid software licenses 1,000 -- --
Write-off of capitalized product design costs 1,137 -- --
Acquisition costs -- -- 648
Net change of liabilities of discontinued operations -- -- 586
(Gain) loss on the disposal of property and equipment 121 (3) 393
Gain on sale of available-for-sale securities -- (5,689) --
Deferred income taxes -- -- (12)
Debt discount and deferred financing amortization 19 95 87
Provision for bad debts 199 155 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:
Accounts receivable (1,289) (741) (1,208)
Non-current lease receivable (3,054) -- --
Inventories 896 (1,756) (1,707)
Prepaid expenses (179) 3 160
Accounts payable and accrued expenses (1,106) 1,365 (46)
Deferred revenue 374 207 196
-------- -------- --------
Net cash used in operating activities (2,468) (4,403) (4,669)
-------- -------- --------
Cash flows from investing activities:
Net cash paid in connection with acquisitions -- (2,055) (2,562)
Purchase of prepaid software licenses -- (1,000) --
Purchase of property and equipment (626) (973) (1,418)
Additions to capitalized product design (654) (462) --
Settlement of remaining obligations to owners
of discontinued operations -- (117) --
Proceeds from sale of investment securities -- 7,678 1,027
Other 70 -- (134)
Proceeds from sale of property and equipment 30 28 31
-------- -------- --------
Net cash provided (used in) by investing activities (1,180) 3,099 (3,056)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt,
net of deferred financing costs 4,728 -- 4,131
Repayment of long-term debt (1,587) (178) (979)
Borrowings under revolving credit note 9,685 12,802 6,904
Payments under revolving credit note (9,884) (11,923) (1,684)
Proceeds from settlement of related party receivable -- 815 --
Repayment of prior revolving credit facility -- -- (1,208)
Proceeds from sale of available-for-sale securities -- -- 720
Payment of put obligation -- (200) --
Proceeds from exercise of warrants 435 22 169
Capitalized lease obligations paid (118) (181) (202)
-------- -------- --------
Net cash provided by financing activities 3,259 1,157 7,851
-------- -------- --------
Net increase (decrease) in cash (389) (147) 126
Cash, beginning of period, net of cash of
discontinued operations 426 573 447
-------- -------- --------
Cash, end of period $ 37 $ 426 $ 573
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
26
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.
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 (see Note 5).
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, 1997, the Company had no significant concentrations of credit
risk.
Significant Customer
For the fiscal years ended September 30, 1997 and 1996, one customer (different
customer each year) accounted for 11% and 13%, respectively, 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.
27
Cash and Cash Equivalents
The Company considers cash equivalents to include all highly liquid financial
instruments purchased with a maturity of three months or less to be cash
equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method. The components of inventories as of September
30, 1997 and 1996 are as follows (in thousands):
1997 1996
-------- --------
Raw materials $ 2,763 $ 3,154
Work-in-process 564 853
Finished goods 983 1,897
-------- --------
$ 4,310 $ 5,904
======== ========
Receivables
The Company has recorded an allowance for uncollectible accounts of $406,000,
$371,000 and $67,000 at September 30, 1997, 1996 and 1995, respectively.
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 MTC, are included in other
non-current assets and were $592,000, $792,000 and $991,000 at September 30,
1997, 1996 and 1995, respectively.
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. 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 was classified as
available-for-sale and, as a result, was stated at fair value. During fiscal
1996 the Company sold its entire holdings of IMNET Systems, Inc. and realized a
gain of $ 5.7 million.
28
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) are amortized on a straight-line basis over 10 to 20 years.
Amortization expense for fiscal 1997, 1996 and 1995 was $1.2 million, $1.1
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, 1997, 1996 and 1995 was $2.1 million, $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. 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 and Web and database development. 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 and
database development is recognized upon completion of the service.
Leases to Customers
The Company's equipment lease transactions with its customers primarily involve
the leasing of Computer Output Microfiche ("COM") equipment. Lease terms are
typically for periods of 3 to 5 years. The Company typically leases its COM
equipment on a "price per fiche" basis, in which monthly rents are driven by
actual monthly microfiche production by the lessee. Leases contain minimum
monthly rents by establishing provisions for minimum production volumes per
month.
At September 30, 1997, the Company has entered into various sales-type leases
with its customers. These leases provide for minimum future rents of $4.4
million and equipment residual values of $542,000. Unearned interest relating to
these leases total $673,000. The present value of these leases ($4.3 million) is
recorded in trade receivables and other assets in the accompanying consolidated
balance sheet. Future minimum lease payments are as follows (in thousands):
1998 $ 1,491
1999 1,362
2000 892
2001 471
2002 168
---------
Total $ 4,384
=======
29
Research and Development
Research and development is primarily incurred by the document management
segment. During fiscal 1997 and 1996, the Company expended $1.8 million and $1.1
million, respectively, for research and development.
Income Taxes
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 Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128. Earnings per Share (FAS
128), which specifies the computation, presentation and disclosure requirements
for earnings per share in order to simplify the computation of earnings per
share. FAS 128 is effective for financial statements ending after December 15,
1997 and earlier application is not permitted. After the effective date, all
prior period earnings per share data shall be restated to conform with the
provisions of FAS 128. The adoption of FAS 128 is not expected to have a
material impact on the Company's earnings per share data.
In June 1997, the FASB issued FAS 130, Reporting Comprehensive Income. This
statement, effective for fiscal years beginning after December 15, 1997, would
require the Company to report components of comprehensive income in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income is defined by Concepts Statement No. 6,
Elements of Financial Statements, as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. The
Company has not yet determined its comprehensive income.
Also in June 1997, the FASB issued FAS 131, Disclosures about Segments of an
Enterprise and Related Information. This statement, effective for financial
statements for periods beginning after December 15, 1997, requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Generally, financial information is required to
be reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. The adoption of
FAS 131 is not expected to have a material impact on the Company's financial
statements.
Use of Estimates in the Preparation of Financial Statements
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 the revenues and expenses during the reporting period.
Actual results could differ from those estimates.
30
Reclassifications
Certain reclassifications have been made in the 1995 financial statements to
conform with the 1997 and 1996 presentations.
3. Merger
On September 15, 1995, a wholly-owned subsidiary of the Company merged 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 revenues from continuing operations and net income
(loss) of the separate companies for the period preceding the acquisition (in
thousands):
SoftNet
Systems, Inc. KCI Combined
Nine months ended June 30, 1995
(Unaudited):
Net sales $ 8,285 $ 7,564 $ 15,849
Net income (loss) (1,777) 272 (1,505)
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 Operation 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
31
of the acquisition of MCW, the Company recorded costs in excess of fair value of
net assets acquired of $1.2 million, 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, a Chicago-based company,
sold and serviced 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 from
November 1, 1994 until they were subsequently sold. During fiscal 1996, the
Company sold a significant portion of the CDI business and, during fiscal 1997,
all of the remaining operation was sold.
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-to-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. As a result of the 1996 sale, 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 transaction. 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 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,
1996 1995
(unaudited)
--------- --------
Net sales from continuing operations $ 42,270 $ 40,020
Net loss from continuing operations (328) (9,175)
Net loss per share $ (0.05) $ (2.02)
32
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 it's 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, in fiscal 1995, the Company recorded a loss
on disposal of discontinued operations of $644,000, along with a loss from
discontinued operations of $420,000. Such amounts have not been adjusted for any
income tax effect given the Company's net operating loss carryforward. For the
year ended September 30, 1995, UMA contributed revenue of approximately $860,000
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 was to be forgiven. As of September 30, 1996, the Company had
made $189,000 in advances pursuant to this agreement. Subsequent to September
30, 1996, 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
$6.0 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.
The disposition of CDI was not contemplated at the time of the pooling with KCI.
During fiscal 1997, 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, chief executive officer and director
and Philip Kenny, a former SoftNet director. The buyer acquired certain assets
in exchange for a $209,000 promissory note and the assumption of current
liabilities of approximately $750,000. 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 the two former directors and the other two
shareholders of the merged company personally guaranteed obligations arising out
of the promissory note, the sub-lease arrangement and the assumption of certain
liabilities. 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 assumed liabilities are on a joint
and several basis but are limited to the two former directors. Concurrent with
this transaction, Messrs. Jellinek and Kenny resigned from the Company's board.
33
6. Change in Products
During fiscal 1996, the Company acquired from IMNET an exclusive worldwide
manufacturing right to certain microfilm retrieval technology, partially in
exchange for the prepayment of fees for 250 software licenses. Accordingly, the
Company recorded a prepaid license fee of $1.0 million in other non-current
assets in the accompanying consolidated balance sheets. As of September 30,
1997, the transfer to the Company of the technical and manufacturing know-how
for this technology has continued to be delayed. Despite the ongoing negotiation
and cooperation between the parties, the Company determined there was a
potential material risk in completing the transfer and getting the product to
market. As a result, the Company wrote-off the prepaid license fee of $1.0
million in the fourth quarter of fiscal 1997 (see Note 14).
Also, in the fourth quarter of 1997, the Company reevaluated the development and
timely offering of its RAPID (Rapid Archiving Peripheral for Images and
Documents) product. Market driven product enhancements, and the resulting
technological setbacks, delayed the estimated product offering date at least one
year to the second quarter of fiscal 1998. As a result, the Company has
written-off $1.1 million of capitalized product design costs associated with
this product.
In June, 1996, the Company signed an agreement to distribute Lucent
Technologies, Inc. products in the Chicago, Illinois 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 1997 include the effects of
the following:
A. A charge of $1.0 million related to the write-off of prepaid license fees
(see Notes 6 and 14).
B. A charge of $1.1 million related to the write-off of capitalized product
design costs (see Notes 6 and 14).
8. Property and Equipment
Balances of major classes of fixed assets and allowances for depreciation at
September 30, 1997 and 1996 are as
follows: (in thousands)
1997 1996
------- -------
Leasehold improvements $ 184 $ 227
Furniture and fixtures 800 1,630
Vehicles 55 83
Equipment 2,076 1,644
------- -------
Total 3,115 3,584
Less allowance for
depreciation and amortization (1,478) (1,270)
------- -------
Property and equipment, net $ 1,637 $ 2,314
======= =======
34
9. Debt
Debt is summarized as follows: (in thousands)
1997 1996
--------- --------
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 8.5%
at September 30, 1997). The note matures on January 15, 1999 $ 5,900 $ 6,099
Equipment Financing Agreement with a maximum borrowing limit of $3.15 million,
bearing interest at the bank's prime rate plus 1% (the bank's prime rate being
8.5% at September 30, 1997), principal and interest due in 60 monthly payments
with the final payment due May 2002 2,398 --
Draw Note with maximum borrowings for $1.5 million bearing interest, payable
monthly, at the bank's prime rate plus 1% (the bank's prime rate being 8.5% at
September 30, 1997) 675 --
9% Convertible Debentures due September 2000, interest payable quarterly,
convertible into the Company's common shares at $6.75 per share 2,619 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 25 75
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) 780 780
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 200 300
Promissory note due June 1998, interest payable at maturity accruing at 5% (terms
revised in 1997) 161 409
Promissory notes due November 1997, interest payable in arrears on each
principal due date accruing at 8.75% 75 200
Promissory note bearing interest at 12.25%, principal and interest due in 24 monthly
payments with final payment due October 1999 278 --
Promissory note bearing interest at 10.25%, principal and interest payable monthly
with final payment due December 1997 288 --
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
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 54 85
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
Other 6 73
-------- --------
13,459 11,342
Less current portion debt (1,712) (744)
-------- --------
Total long-term debt $ 11,747 $ 10,598
======== ========
35
The availability under the revolving credit note is subject to revisions on a
monthly basis based upon available assets (as defined). The revolving credit
note and the bank term loan (issued from the same bank) are collateralized by
substantially all of the assets of the Company.
The equipment financing agreement and the draw note were obtained from the same
bank as the revolving credit note and the assets collateralizing each financing
facility are excluded from the collateral associated with the revolving credit
note. The equipment financing agreement covers a specific lease agreement and
the draw note covers certain bank approved leases. The leases are initiated by
the Company acting as lessor through the ordinary course of business.
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 1997 and 1996, holders of the 6%, 9% and 10% convertible
subordinated notes converted $386,000 and $4.1 million face amount of notes into
69,000 and 781,000 shares, respectively, of the Company's common stock. An
additional $200,000 of notes were converted into 49,000 shares of the Company's
common stock after year end.
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 shares at $6.75 per share. The MTC 9% Debentures may be prepaid by the
Company in whole or in part at face value. During fiscal 1997, of the total
$386,000 of notes converted, $236,000 of these 9% debentures were converted into
35,000 shares of the Company's common stock.
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 share
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.
During fiscal 1997, the Company sold certain assets of its telecommunications
segment for cash, a note receivable and the assumption of certain liabilities.
In addition, the buyer repaid certain bank loans of the Company 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):
1998 $ 1,712
1999 7,005
2000 3,521
2001 315
2002 906
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).
36
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 $314,000 and
$520,000 under these capital leases as of September 30, 1997 and 1996,
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, 1997, 1996 and 1995 was $828,000, $755,000 and
$282,000, 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 leases Operating leases
1998 $ 58 $ 955
1999 48 523
2000 43 468
2001 23 447
2002 - 294
--------------- ----------------
Total minimum lease payments 172 $ 2,687
==============
Amount representing interest (25)
--------------
Present value of net minimum payments 147
Less current portion (46)
-------------
Capital lease obligation $ 101
=============
37
12. Income Taxes
The Company's provision for income taxes in fiscal 1995 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):
1997 1996 1995
----------- ---------- ---------
Current
Federal $ - $ - $ 113
State - - 23
----------- ---------- ---------
Total current - - 136
Deferred
Federal - - (10)
State - - (2)
----------- ---------- ---------
Total deferred - - (12)
$ - $ - $ 124
=========== ========== =========
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):
1997 1996
------------------------ ---------------------
Temporary Tax Temporary Tax
Difference Effect Difference Effect
Inventory and other operating reserves $ 499 $ 170 $ 1,240 $ 422
Allowance for doubtful accounts 104 35 541 184
Reserve for note receivable - - 624 212
Unpaid accruals 477 162 794 270
Reserve for lease termination - - 75 26
Deferred revenue 1,479 503 1,369 465
Other (17) (6) (9) (3)
Net operating loss carryforwards 6,747 2,294 7,854 2,670
-------- --------
Total deferred tax asset 3,158 4,246
Valuation allowance (3,158) (4,246)
-------- --------
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 $6.7 million are available as
of September 30, 1997 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 2010
and are subject to certain annual limitations as a result of the changes in
equity ownership.
38
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 1.5 million shares (including an increase of
900,000 shares approved by the shareholders during fiscal 1997) for issuance
under the plan. Outstanding options and warrants to purchase shares of common
stock at September 30, 1997, 1996 and 1995 were as follows (in thousands, except
price per option data):
Shares Price per option
Outstanding at October 1, 1994 730 1.75-6.125
Granted 924 1.75-8.50
Canceled (4) 4.0429
Expired - -
Exercised (100) 1.75
-------
Outstanding at September 30, 1995 1,550 1.75-8.50
Granted 574 8.125-10.00
Canceled (542) 6.50-8.25
Expired - -
Exercised (13) 1.75
-------
Outstanding at September 30, 1996 1,569 1.75 - 10.00
Granted 400 4.938-5.313
Canceled (283) 4.938-5.00
Expired -
Exercised (251) 1.75
-------
Outstanding at September 30, 1997 1,435 1.75-10.00
=======
Shares available under the Plan were 1,058,000, 303,000 and 600,000 at September
30, 1997, 1996 and 1995, respectively. As of September 30, 1997, 1996 and 1995,
there were 1.0 million, 1.2 million and 1.3 million exercisable options and
warrants, respectively.
During fiscal 1997, 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. In addition, 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.
During fiscal 1997, the Company was required to adopt Statement of Financial
Standards No. 123, Accounting for Stock-Based Compensation (FAS 123), which
encourages entities to adopt a fair value based method of accounting for stock
based compensation plans in place of the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), for all
arrangements under which employees receive shares of stock or other equity
instruments of the employer.
As allowed by FAS 123, the Company will continue to apply the provisions of APB
25 in accounting for its stock based employee compensation arrangements, and
will disclose the pro forma net loss and loss per share information in its its
footnotes as if the fair value method suggested in FAS 123 had been applied.
39
Had compensation cost for the Company's LTIP been determined based on the fair
value at grant date for awards in fiscal 1997 and 1996 consistent with the
provisions of FAS 123, the Company's net loss and loss per share would have been
increased to the pro forma amounts indicated below:
(Dollar amounts in thousands, except per share data)
1997 1996
---------- ----------
Net loss, as reported $ (2,631) $ (6,097)
Net loss, pro forma (3,207) (6,348)
Loss per common share, as reported $ ( .40) $ (1.05)
Loss per common share, pro forma ( .48) (1.09)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997: dividend yield of 0.0%; expected volatility
of 58%; risk free interest rate spread of 5.8% - 6.4%; and expected life of 4
years. Options outstanding at September 30, 1997 had exercise prices ranging
from $4.94 to $5.31. The weighted average exercise price of these outstanding
options outstanding is $4.98 and the weighted average remaining contractual life
of those options is 8.8 years.
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 311,025 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.
During fiscal 1997, CDI sold its operations that support its Fujitsu maintenance
base in the Chicago metropolitan area to a new company formed by John J.
Jellinek, the Company's former president, chief executive officer, and director
and Philip Kenny, a former SoftNet director. The buyer acquired certain assets
in exchange for a $209,000 promissory note and the assumption of current
liabilities of approximately $750,000. 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 the two former directors and the other two
shareholders of the merged company personally guaranteed obligations arising out
of the promissory note, the sub-lease arrangement and the assumption of certain
liabilities. 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 assumed liabilities are on a joint
and several basis but are limited to the two former directors. Concurrent with
this transaction, Messrs. Jellinek and Kenny resigned from the Company's board.
40
In June 1996, the Company acquired the exclusive worldwide manufacturing rights
to IMNET's MegaSAR Microfilm Jukebox and completed and amended its obligations
under a previous agreement. 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. Subsequently, in fiscal 1997, the outstanding $410,000
promissory note was further reduced by $249,000, and a new promissory not in the
face amount of $161,000 was executed.
In July 1997, due to a delay in the transfer to the Company of the technical and
manufacturing know-how for the MegaSAR product, the Company and IMNET further
amended the June 1996 Agreement. In an attempt to facilitate the technology
transfer, the Company accepted an order from IMNET for the first 14 MegaSAR
units to be manufactured by the Company. A portion of the payment for these
inital units would be applied against the outstanding promissory note. The
transfer of the technology and the parts needed for production was to have
occurred no later than September 1, 1997.
As of September 30, 1997, the transfer to the Company of the technical and
manufacturing know-how for this product offering has continued to be delayed.
Despite the ongoing negotiation and cooperation between the two parties, the
Company determined there was a potential material risk in completing the
technology transfer and getting the product to market. As a result, in the
fourth quarter of fiscal 1997, the Company recorded a one-time charge of $1.0
million to write-off the associated prepaid licenses. The Company is currently
negotiating with IMNET to either complete the transfer or seek an alternative
solution.
During the fourth quarter of fiscal 1996, the Company decided to discontinue its
plans for 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 consolidate statements of operations.
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
1997 1996 1995
------- ------- ------
(in thousands)
Cash paid during the year for:
Interest $ 1,220 $ 1,730 $ 465
Income taxes -- -- 194
Non-cash investing and financing activities:
Common stock issued for acquisitions -- 1,022 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 387 4,077 1,630
Conversion of Senior Notes and accrued
interest to 9% Convertible Notes -- -- 309
Note received in sale of a portion of
CDI's operations 209 -- --
Equipment acquired by capital lease 83 89 332
Common stock issued to pay acquisition costs 44 -- --
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
41
were not material. Although the Company acquired MCW, an Internet service
provider, in June of 1996, its revenue and results of operations in fiscal 1996
are immaterial.
As of and for the Years Ended September 30,
--------------------------------------------
1997 1996 1995
------------- ---------- ----------
(In thousands of dollars)
Net Sales
Document Management 20,329 19,417 1,112
Telecommunications 17,219 21,803 20,140
Internet Services 1,008 - -
Other - 167 -
------------- ---------- ----------
38,556 41,387 21,252
============= ========== ==========
Income (loss) from continuing operations
before income taxes
Document Management 572 (a) (227) (b) (6,325) (c)
Telecommunications 739 (1,812) (d) (1,116) (e)
Internet Services (1,152) - -
Other (2,304) 2,003 (f) (1,027)
------------- ---------- ----------
(2,145) (36) (8,468)
============== ============= ===========
Identifiable Assets
Document Management 15,049 14,426 11,262
Telecommunications 7,517 8,706 11,911
Internet Services 1,364 - -
Corporate 447 1,134 12,223
Other - 1,302 -
------------- ---------- ----------
24,377 25,586 35,396
============= ========== ==========
Depreciation and Amortization Expense
Document Management 1,263 958 139
Telecommunications 248 623 628
Internet Services 458 - -
Corporate 76 306 55
Other - 110 -
------------- ---------- ----------
2,045 1,997 822
============= ========== ==========
Capital Expenditures
Document Management 137 614 2
Telecommunications 117 242 1,084
Internet Services 361 - -
Corporate 11 100 332
Other - 17 -
------------- ---------- ----------
626 973 1,418
============= ========== ==========
(a) Includes $2.1 million charge for costs associated with change in product
line and other
(b) Includes $1.5 million charge for costs associated with change in product
(c) Includes $5.0 million charge for the write-off of acquired in-process
unproven technology
(d) Includes $700,000 charge for costs associated with change in products
(e) Includes $472,000 of costs related to acquisitions
(f) 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.
42
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 February 26, 1998
under the captions "Election of Directors", "Executive Officers of the Company"
and "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 February 26, 1998
under the captions "Executive Compensation" and "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 February 26, 1998
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 February 26, 1998
under the caption "Certain Relationships and Related Transactions", which
information is hereby incorporated herein by reference.
43
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
Financial Statements and Exhibits:
1. Consolidated Financial Statements
See Index to Consolidated Financial Statements included in this Form
10-K on page 21.
2. Financial Statement Schedules
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,
1997
Schedule II - Valuation and Qualifying Accounts
3. Exhibits
See Index to Exhibits included in this Form 109-K on page __.
Reports on Form 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.
44
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.
/s/ A. J. R. Oosthuizen
A. J. R. Oosthuizen
President 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/ Ronald I. Simon
Ronald I. Simon Chairman of the Board of December 24, 1997
Directors and Director
/s/ A. J. R. Oosthuizen
A. J. R. Oosthuizen President, Chief Executive December 24, 1997
Officer, Chief Operating
Officer and Director
/s/ Mark A. Phillips
Mark Phillips Principal Accounting
Officer December 24, 1997
/s/ Ian B. Aaron
Ian B. Aaron Director December 24, 1997
/s/ John G. Hamm
John G. Hamm Director December 24, 1997
45
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of SoftNet Systems, Inc.:
Our report on the consolidated financial statements of SoftNet Systems, Inc. and
Subsidiaries is included on page 22 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 44 of this Form 10-K
In our opinion, the financial 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.
December 24, 1997
Chicago, Illinois
46
Schedule II
Valuation and Qualifying Accounts
(In thousands)
Beginning Ending
Balance Expensed Deductions Balance
Allowance for
Doubtful Accounts:
Fiscal Year 1997 $ 371 $ 199 $ 164 $ 406
Fiscal Year 1996 342 346 318 371
Fiscal Year 1995 64 321 43 342
47
INDEX TO EXHIBITS
Exhibits included herein:
EXHIBIT 10 Material Contracts
10.1 Loan Modification Agreement (Extension of Maturity
Date) made and entered into this 3rd day of February,
1997, 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.
10.2 Loan Modification Agreement (Incorporation of
Equipment Loan Facility) made and entered into this
14th day of May, 1997, 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.
10.3 Draw Note, in the face amount of $1,500,000 made and
entered into this 14th day of May, 1997, 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 Purchase Agreement (in regards to certain equipment
leases) made and entered into this 14th day of May,
1997, 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 Amendment "A" to Purchase Agreement (in regards to
certain equipment leases) made and entered into this
15th day of November, 1997, 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 (Extension of Maturity
Date) made and entered into this 14th day of August,
1997, 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
48
Exhibits incorporated herein by reference:
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.
(a)
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. (a)
2.3 Agreement for the Purchase and Sale of Certain 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. (a)
2.4 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.(c)
2.5 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
supplementary 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.
2.6 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
supplementary 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
3.1 Amended and Restated Articles of Incorporation of the
Registrant as filed in the Department of State of New
York on April 4, 1996. (a)
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 4 Instruments Defining the Rights of Security Holders including
Indentures
Reference is made to documents previously filed under EXHIBIT
10 - Material Contracts
EXHIBIT 10 Material Contracts
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10.1 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. (a)
10.2 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. (a)
10.3 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. (a)
10.4 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. (a)
10.5 Manufacturing and Distribution Licensing 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. (a)
10.6 Loan and Security Agreement, dated September 15,
1995, by and between West Suburban Bank and SoftNet
Systems, Inc. (b)
10.7 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 (b)
10.8 SoftNet Systems, Inc. 1995 Long Term Incentive Plan.
(b)
10.9 Registration Rights Agreement dated September 15,
1995 by and among R.C.W. Mauran, A.J.R. Oosthuizen
and SoftNet Systems, Inc. (b)
10.10 Employment Agreement dated September 15, 1995 by and
among A.J.R. Oosthuizen, SoftNet Systems, Inc. and
Micrographic Technology Corporation. (b)
10.11 SoftNet Systems, Inc. Employee Stock Option Plan for
employees of Micrographic Technology Corporation. (b)
10.12 Form of SoftNet Systems, Inc. 9% Convertible
Subordinated Debentures due 2000. (b)
10.13 $660,000 principal amount of Micrographic Technology
Corporation 6% Convertible Subordinated Secured
Debentures due 2002 issued to R.C.W. Mauran. (b)
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10.14 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. (b)
10.15 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. (b)
10.16 Employment Agreement, dated October 28, 1994, by and
between Communicate Direct, Inc. and Ian Aaron. (c)
10.17 Registration Rights Agreement, dated as of October
28, 1994, by and among SoftNet Systems, Inc., Marc
Zionts and Ian Aaron. (c)
10.18 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. (c)
10.19 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. (c)
10.20 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.
(c)
10.21 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. (c)
10.22 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 (c)
10.23 Note and Warrant Purchase Agreement, dated as of
October 28, 1994, by and between SoftNet Systems,
Inc. and D&K Stores, Inc. (c)
10.24 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. (c)
10.25 SoftNet Systems, Inc. Common Stock Purchase Warrant
expiring October 27, 1999 held by D&K Stores, Inc.
(c)
10.26 Note and Warrant Purchase Agreement, dated as of
October 28, 1994, by and between SoftNet Systems,
Inc. and Willard Aaron. (c)
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 Willard Aaron. (c)
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10.28 SoftNet Systems, Inc. Common Stock Purchase Warrant
expiring October 27, 1999 held by Willard Aaron. (c)
10.29 Note and Warrant Purchase Agreement, dated as of
October 28, 1994, by and between SoftNet Systems,
Inc. and BWJ Partnership. (c)
10.30 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. (c)
10.31 SoftNet Systems, Inc. Common Stock Purchase Warrant
expiring October 27, 1994 held by BWJ Partnership.
(c)
10.32 Note and Warrant Purchase Agreement, dated as of
October 28, 1994, by and between SoftNet Systems,
Inc. and Forsythe/McArthur Associates, Inc. (c)
10.33 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.
(c)
10.34 SoftNet Systems, Inc. Common Stock Purchase Warrant
expiring October 27, 1999 held by Forsythe/McArthur
Associates, Inc. (c)
10.35 Note and Warrant Purchase Agreement, dated as of
November 1, 1994, by and between SoftNet Systems,
Inc. and Joseph Rich. (c)
10.36 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. (c)
10.37 SoftNet Systems, Inc. Common Stock Purchase Warrant
expiring October 31, 1999 held by Joseph Rich. (c)
10.38 SoftNet Systems, Inc. Subscription Agreement, dated
October 27, 1994, by and between SoftNet Systems,
Inc. and Compania Di Investimento Antillianna. (c)
10.39 Common Stock Purchase Warrant expiring October 27,
1999 held by Compania Di Investimento Antillianna.
(c)
10.40 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. (c)
10.41 Form of SoftNet Systems, Inc. Common Stock Purchase
Warrant. (b)
10.42 Form of SoftNet Systems, Inc. Promissory Note. (b)
10.43 Form of SoftNet Systems, Inc. Note Extension
Agreement. (b)
10.44 Form of SoftNet Systems, Inc. Warrant to Purchase
Common Stock granted to holders of SoftNet Systems,
Inc. Promissory Notes. (b)
10.45 Form of 9% Convertible Subordinated Note. (d)
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10.46 Stockholders Agreement dated March 24, 1995 among
SoftNet Systems, Inc., A.J.R. Oosthuizen and R.C.W.
Mauran. (d)
10.47 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. (b)
10.48 Stock Exchange Agreement dated December 17, 1992
between SoftNet Systems, Inc. and Jelken Corp. (b)
10.49 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. (b)
10.50 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-K
for the fiscal year ended September 30, 1996.
(b) 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.
(c) Incorporated by reference to exhibits of equivalent
number to the Company's Current Report on Form 8-K
dated October 31, 1994.
(d) Incorporated by reference to exhibits of equivalent
number to the Company's Registration Statement on
Form S-4, as amended, Registration No. 33-95542.
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