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
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(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
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Common Stock, par American Stock Exchange
value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at 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
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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)
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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.
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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.
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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.
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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
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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.
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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.
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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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Fiscal years ended September 30,
1997 1996(b) 1995(c) 1994 1993(c)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
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
<FN>
- ---------------------
(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.
</FN>
</TABLE>
15
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
SoftNet Systems, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
for the years ended September 30, 1997, 1996 and 1995
(In thousands)
<CAPTION>
Capital in
Common Stock excess of Accumulated
Shares Amount par value deficit
<S> <C> <C> <C> <C>
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)
======= ======== ========== ===========
</TABLE>
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
<PAGE>
<TABLE>
SoftNet Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended September 30, 1997, 1996 and 1995
(In thousands)
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
9. Debt
Debt is summarized as follows: (in thousands)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
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
======== ========
</TABLE>
35
<PAGE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
1997 1996
------------------------ ---------------------
Temporary Tax Temporary Tax
Difference Effect Difference Effect
<S> <C> <C> <C> <C>
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 $ - $ -
======== ========
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
As of and for the Years Ended September 30,
--------------------------------------------
1997 1996 1995
------------- ---------- ----------
<S> <C> <C> <C>
(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
============= ========== ==========
<FN>
(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
</FN>
</TABLE>
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
42
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
49
<PAGE>
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)
50
<PAGE>
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)
51
<PAGE>
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)
52
<PAGE>
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.
53
LOAN MODIFICATION AGREEMENT
(EXTENSION OF MATURITY DATE)
THIS AGREEMENT is made and entered into this ______ day of
_______________, 199__, by and between SOFTNET SYSTEMS, INC., a New York
Corporation ("Softnet"), COMMUNICATE DIRECT, INC., an Illinois Corporation
("CDI"), MICROGRAPHIC TECHNOLOGY CORPORATION, a Delaware Corporation ("MTC"),
KANSAS COMMUNICATIONS, INC., a Kansas Corporation ("KCI") (Softnet, CDI, MTC,
and KCI collectively referred to as "Borrowers") and WEST SUBURBAN BANK
("Bank").
WHEREAS, Borrowers have executed and delivered to Bank a Revolving
Credit Note dated September 15, 1995 (the "Note") in the original principal
amount of $6,500,000.00 in which each of the Borrowers promises to pay to the
order of Bank the principal amount and interest thereon as more specifically
provided in the Note; and
WHEREAS, to secure the repayment of the Borrowers' obligations under
the Note, each of the Borrowers has executed and delivered to Bank a Loan and
Security Agreement dated September 15, 1995 (collectively the "Loan
Agreements"); and
WHEREAS, to further secure the repayment of the Borrowers' obligations
under the Note, Softnet has executed and delivered to Bank a Stock Pledge
Agreement dated September 15, 1995 (the "Pledge Agreement") whereby Softnet has
pledged 377,770 shares (subsequently reduced to 277,770 shares) of common stock
of IMNET Systems, Inc. in favor of Bank; and
WHEREAS, Borrowers and Bank executed a Loan Modification Agreement
dated March 15, 1996 wherein the maximum amount of credit under the Note and the
Loan Agreements was increased to $9,500,000.00 and the Borrowing Base
limitations were modified in accordance with the terms thereof; and
WHEREAS, the Note (as modified from time to time) is scheduled to
mature by its terms on ________________________, 19___, and Borrowers have
requested that the maturity date of the Note be extended to _________________,
199__, and Bank has agreed to so extend the maturity date of the Note, subject
to the terms and conditions hereof.
NOW, THEREFORE, in consideration of Ten ($10.00) Dollars in hand paid
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. The foregoing recitals are incorporated herein by reference as though
fully set forth. Borrowers represent and warrant that the foregoing
recitals are true and correct.
2. The terms of the Note are hereby further amended to provide that the
Maturity Date is extended to ______________________, 199__, on which
date the entire principal balance, all accrued unpaid interest, and all
other amounts due under the terms of the Note and the other Loan
Documents shall be immediately due and payable without notice.
3. The terms of the Loan Documents (as such term is defined in the Loan
Agreements) are hereby amended and modified to comport with the terms
of this instrument to the extent the terms of any of the Loan Documents
may be otherwise inconsistent with the terms hereof. In all other
respects, the terms and provisions of the Loan Documents shall remain
in full force and effect.
<PAGE>
4. Borrowers hereby reaffirm all of the terms, provisions, warranties, and
representations set forth in each of the Loan Agreements and the other
Loan Documents as modified hereby. Without limiting the generality of
the foregoing, each of the Borrowers warrants and represents that no
event of default exists under any of the Loan Agreements or any of the
other Loan Documents and no event has occurred or condition exists
which with the passage of time or the giving of notice would or could
constitute an event of default.
IN WITNESS WHEREOF, the parties have entered into this Loan
Modification Agreement on the date first above written.
SOFTNET SYSTEMS, INC.
By: ____________________________
Its: ____________________________
Attest: ____________________________
Its: ____________________________
COMMUNICATE DIRECT, INC.
By: ____________________________
Its: ____________________________
Attest: ____________________________
Its: ____________________________
MICROGRAPHIC TECHNOLOGY CORPORATION
By: ____________________________
Its: ____________________________
Attest: ____________________________
Its: ____________________________
KANSAS COMMUNICATIONS, INC.
By: ____________________________
Its: ____________________________
Attest: ____________________________
Its: ____________________________
WEST SUBURBAN BANK
By: ____________________________
Its: ____________________________
Attest: ____________________________
Its: ____________________________
westsub2\softnet2.lma\051596\cp
<PAGE>
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of SOFTNET SYSTEMS, INC., a New York Corporation, and
________________________________, _____________________ of said Corporation,
personally known to me to be the same persons whose names are subscribed to the
foregoing instrument as such ____________________ and ____________________,
appeared before me this day in person and severally acknowledged that they
signed and delivered the said instrument as their own free and voluntary act and
as the free and voluntary act of said Corporation; for the uses and purposes
therein set forth. GIVEN under my hand and official seal this ________ day of
______________, 1996.
--------------------------------------------
Notary Public
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of COMMUNICATE DIRECT, INC., an Illinois Corporation, and
_____________________________, ___________________ of said Corporation,
personally known to me to be the same persons whose names are subscribed to the
foregoing instrument as such ____________________ and __________________,
appeared before me this day in person and severally acknowledged that they
signed and delivered the said instrument as their own free and voluntary act and
as the free and voluntary act of said Corporation; for the uses and purposes
therein set forth. GIVEN under my hand and official seal this ________ day of
______________, 1996.
--------------------------------------------
Notary Public
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of MICROGRAPHIC TECHNOLOGY CORPORATION, a Delaware
Corporation, and ________________________________, ___________________ of said
Corporation, personally known to me to be the same persons whose names are
subscribed to the foregoing instrument as such ____________________ and
_____________________, appeared before me this day in person and severally
acknowledged that they signed and delivered the said instrument as their own
free and voluntary act and as the free and voluntary act of said Corporation;
for the uses and purposes therein set forth. GIVEN under my hand and official
seal this ________ day of ______________, 1996.
--------------------------------------------
Notary Public
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of KANSAS COMMUNICATIONS, INC., a Kansas Corporation, and
______________________________, ___________________ of said Corporation,
personally known to me to be the same persons whose names are subscribed to the
foregoing instrument as such ____________________ and _______________________,
appeared before me this day in person and severally acknowledged that they
signed and delivered the said instrument as their own free and voluntary act and
as the free and voluntary act of said Corporation; for the uses and purposes
therein set forth. GIVEN under my hand and official seal this ________ day of
______________, 1996.
--------------------------------------------
Notary Public
<PAGE>
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of WEST SUBURBAN BANK, an Illinois Banking Corporation,
personally known to me to be the same person whose name is subscribed to the
foregoing instrument as such ____________________, appeared before me this day
in person and acknowledged that he/she signed and delivered the said instrument
as his/her own free and voluntary act and as the free and voluntary act of said
Corporation; for the uses and purposes therein set forth. GIVEN under my hand
and official seal this ________ day of ______________, 1996.
--------------------------------------------
Notary Public
LOAN MODIFICATION AGREEMENT
(INCORPORATION OF EQUIPMENT LOAN FACILITY)
THIS AGREEMENT is made and entered into this ______ day of May, 1997,
by and between SOFTNET SYSTEMS, INC., a New York Corporation ("Softnet"),
COMMUNICATE DIRECT, INC., an Illinois Corporation ("CDI"), MICROGRAPHIC
TECHNOLOGY CORPORATION, a Delaware Corporation ("MTC"), KANSAS COMMUNICATIONS,
INC., a Kansas Corporation ("KCI") (Softnet, CDI, MTC, and KCI collectively
referred to as "Borrowers") and WEST SUBURBAN BANK ("Bank").
WHEREAS, Borrowers have executed and delivered to Bank a Revolving
Credit Note dated September 15, 1995 (the "Note") in the original principal
amount of $6,500,000.00 in which each of the Borrowers promises to pay to the
order of Bank the principal amount and interest thereon as more specifically
provided in the Note; and
WHEREAS, to secure the repayment of the Borrowers' obligations under
the Note, each of the Borrowers has executed and delivered to Bank a Loan and
Security Agreement dated September 15, 1995 and various other instruments and
documents executed in connection therewith (collectively the "Loan Agreements");
and
WHEREAS, Borrowers and Bank executed a Loan Modification Agreement
dated March 15, 1996 wherein the maximum amount of credit under the Note and the
Loan Agreements was increased to $9,500,000.00 and the Borrowing Base
limitations were modified in accordance with the terms thereof; and
WHEREAS, Borrowers and Bank executed additional Loan Modification
Agreements from time to time which further modified the terms of the Note and
the Loan Agreements; and
WHEREAS, Borrowers have requested that the Loan Agreements be further
modified in order to enable Borrowers to access the credit available thereunder
for purposes of financing equipment which Borrowers will lease to third party
lessees in accordance with the provisions of "price per fiche" agreements by and
between Borrowers and such third party lessees; and
WHEREAS, Bank has agreed to so modify the terms of the Loan Agreements
in accordance with the terms hereof.
NOW, THEREFORE, in consideration of Ten ($10.00) Dollars in hand paid
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. The foregoing recitals are incorporated herein by reference as though
fully set forth. Borrowers represent and warrant that the foregoing
recitals are true and correct.
2. Capitalized terms used herein shall have the meanings set forth in the
Loan Agreements unless the context clearly indicates otherwise.
<PAGE>
3. The terms of each of the Loan Agreements are hereby modified to provide as
follows:
A. Additional Defined Terms. The following defined terms are hereby added
to the Loan Agreements:
i. "Equipment Loan" shall mean the credit facility in the amount
of $1,500,000.00 as more particularly described hereinbelow.
The Equipment Loan shall be evidenced by Borrowers' Draw Note
of even date herewith in the principal sum of $1,500,000.00, a
copy of which is attached hereto as Exhibit "A" and
incorporated herein by reference.
ii. "Draw Note" shall mean the Draw Note executed by Borrowers in
favor of Bank in the amount of $1,500,000.00 evidencing the
Equipment Loan.
iii. "Revolving Credit Note" shall mean the Revolving Credit Note
dated September 15, 1995 executed by Borrowers in favor of
Bank in the original amount of $6,500,000.00 (increased to
$9,500,000.00 in accordance with the provisions of the Loan
Modification Agreement dated March 15, 1996).
iv. "Note" shall include, collectively and individually, the Draw
Note and the Revolving Credit Note together with all
modifications, extensions, renewals, and replacements thereof.
v. "Leases" shall mean all leases or other lettings of possession
or use which Borrowers may have previously or may hereafter
enter into, including all amendments, supplements, renewals,
and replacements thereof, with respect to any of the Leased
Equipment, including all rights of Borrowers to receive
payment thereon.
vi. "Leased Equipment" shall mean all Equipment now owned or
hereafter acquired by Borrowers which were or will be
purchased with proceeds of Advances on the Equipment Loan.
vii. In addition to all other categories of property interests set
forth in the Loan Agreements, the term "Collateral" shall also
include the Leases and the Leased Equipment.
B. Basic Terms of the Equipment Loan
i. Maximum Amount/Availability. The maximum aggregate principal
balance of the Equipment Loan shall not at any time exceed
$1,500,000.00 (the "Credit Limit"). Principal which is repaid
may, subject to the terms and conditions hereof, be eligible
for disbursement again. Provided an Event of Default has not
occurred, Borrowers may make any number of draws ("Advances")
per month under the Equipment Loan subject to the terms and
limitations set forth herein and in the other Loan Documents.
Bank will render to Borrowers each month a statement of
Borrowers' account which shall constitute an account stated
and shall be deemed to be correct and accepted by and binding
upon Borrowers unless Bank receives a written notification of
Borrowers' exceptions within thirty (30) days after the date
such statement was rendered to Borrowers.
2
<PAGE>
ii. Purpose/Use of Proceeds. Borrowers may utilize and draw
available funds under the Equipment Loan for the sole purpose
of financing Leased Equipment to be leased to third parties by
Borrowers in the ordinary course of Borrowers' business.
Advances will be made available for funding an amount not to
exceed 65% of the list price of each item of Leased Equipment.
Bank reserves the right to physically inspect and approve each
item of Leased Equipment to be financed with proceeds of any
Advance as a condition of making such Advance. All Leases of
Leased Equipment financed with proceeds of Advances hereunder
shall have a term of not more than 36 months. All Advances
under the Equipment Loan shall be subject to Bank's approval
which Bank may provide or withhold in its sole discretion.
Each item of Leased Equipment financed with proceeds of any
Advance shall be free of all other liens, encumbrances, and
other security interests and shall become subject to a
purchase money security interest in favor of Bank, and
Borrowers agree to execute and deliver all instruments,
documents, and financing statements requested from time to
time by Bank in order to evidence and perfect such purchase
money security interest. Borrowers further agree to take any
and all other action reasonably requested by Bank from time to
time in order to notify third parties of
Bank's security interest in such Leased Equipment.
iii. Expiration of Term. The Equipment Loan shall expire on the
Maturity Date, whereupon Bank's obligation to make Advances
thereon shall terminate without notice.
iv. Interest Rate. The rate of interest charged on the outstanding
principal balance during the entire term of the Equipment Loan
shall be the Prime Rate in effect from time to time plus one
(1%) percent per annum. During the term of the Equipment Loan,
changes in the interest rate will take effect
contemporaneously with changes in the Prime Rate on a daily
basis without notice.
v. Repayment Terms. Monthly payments of interest shall be made in
arrears and shall be due and payable on the first (1st) day of
each month until the Equipment Loan is repaid in full. In
addition to monthly interest payments, monthly principal
reduction payments shall be due and payable on the first (1st)
day of each month in an amount equivalent to one thirty-sixth
(1/36) of the original amount of each Advance until repaid in
full. In the event any item of Leased Equipment is sold or
otherwise disposed of by Borrowers, Borrowers shall
immediately repay the Advance attributable to such item of
Leased Equipment. Also, in the event any item of Leased
Equipment ceases to be leased to a third party lessee for a
period of six months, Borrowers shall immediately repay the
Advance attributable to such item of Leased Equipment.
vi. Prepayment. All or part of the principal balance of the
Equipment Loan may be prepaid in whole or in part at any time
without penalty.
vii. Leasing Documentation. Prior to each Advance, Borrowers shall
provide to Bank (a) a true and correct copy of the duly
executed Lease document; (b) an executed collateral assignment
of the Lease document; (c) an executed UCC-1 financing
statement describing the Lease and the item of Leased
Equipment; (d) an acceptance certificate duly executed by the
lessee of the item of Leased Equipment; (e) a delivery and
installation certificate duly executed by the lessee of the
item of Leased Equipment; (f) Borrower's undated letter
instructing the Lessee under the Lease to remit payment
directly to Bank; and (g)
3
<PAGE>
any other information requested by Bank, all of which shall be
in form and substance satisfactory to Bank. Borrowers shall
also provide to Bank monthly status reports and such further
documents, schedules, or information as Bank may request,
including but not limited to schedules setting forth names and
addresses of lessees, locations of Leased Equipment, and
payments and maturities with respect to all Leases.
C. Aggregate Credit Limit. The amount of credit available under the
Revolving Credit Note and the Draw Note shall not exceed $11,000,000.00
in the aggregate.
D. Effect on Borrowing Base. The rental streams derived from the Leases of
Leased Equipment financed with proceeds of Advances of the Equipment
Loan shall be excluded from the definition of "Eligible Receivables"
for purposes of determining the Borrowing Base limitations applicable
to the Revolving Credit Note.
The Leased Equipment shall likewise be excluded from the definition of
"Eligible Inventory" for purposes of determining the Borrowing Base
limitations applicable to the Revolving Credit Note.
E. Cross-Collateralization. The Collateral shall secure repayment of both
the Revolving Credit Note and the Draw Note, together with all other
obligations under the Loan Documents.
F. Cross-Default. The cross default clause appearing in Section 14 of each
of the Loan Agreements shall apply to the Draw Note and the Revolving
Credit Note, together with all of the other Loan Documents. Upon the
occurrence of an Event of Default, in addition to all other rights and
remedies of Bank, Bank shall have the right to complete and date
Borrower's letters to the lessees instructing them to remit payments
directly to Bank and to transmit such letters to the lessees, and Bank
shall have the immediate right of possession of the original Lease
documents and shall have the right to enforce all rights of the lessor
thereunder.
G. Maturity Date. The Maturity Date of the Indebtedness evidenced by both
the Revolving Credit Note and the Draw Note shall be July 15, 1998, on
which date all of the Indebtedness shall be immediately due and payable
without notice or grace period.
4. The terms of the Loan Documents (as such term is defined in the Loan
Agreements) are hereby amended and modified to comport with the terms
of this instrument to the extent the terms of any of the Loan Documents
may be otherwise inconsistent with the terms hereof. In all other
respects, the terms and provisions of the Loan Documents shall remain
in full force and effect.
5. Borrowers hereby reaffirm all of the terms, provisions, warranties, and
representations set forth in each of the Loan Agreements and the other
Loan Documents as modified hereby. Without limiting the generality of
the foregoing, each of the Borrowers warrants and represents that no
event of default exists under any of the Loan Agreements or any of the
other Loan Documents and no event has occurred or condition exists
which with the passage of time or the giving of notice would or could
constitute an event of default.
6. Borrowers agree to promptly reimburse Bank for all attorney's fees and
costs incurred by Bank in connection with the negotiation, preparation,
and execution of this instrument.
4
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Loan
Modification Agreement on the date first above written.
SOFTNET SYSTEMS, INC. COMMUNICATE DIRECT, INC.
By: ____________________________ By: ____________________________
Its: ____________________________ Its: ____________________________
Attest: ____________________________ Attest: ____________________________
Its: ____________________________ Its: ____________________________
MICROGRAPHIC TECHNOLOGY KANSAS COMMUNICATIONS, INC.
CORPORATION
By: ____________________________ By: ___________________________
Its: ____________________________ Its: ___________________________
Attest: ____________________________ Attest: ___________________________
Its: ____________________________ Its: ___________________________
WEST SUBURBAN BANK
By: ____________________________
Its: ____________________________
Attest: ____________________________
Its: ____________________________
westsub2\softnteq.lma\051297\cp
................................................................................
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of SOFTNET SYSTEMS, INC., a New York Corporation, and
________________________________, _____________________ of said Corporation,
personally known to me to be the same persons whose names are subscribed to the
foregoing instrument as such ____________________ and ____________________,
appeared before me this day in person and severally acknowledged that they
signed and delivered the said instrument as their own free and voluntary act and
as the free and voluntary act of said Corporation; for the uses and purposes
therein set forth. GIVEN under my hand and official seal this ________ day of
______________, 1997.
---------------------------------------
Notary Public
5
<PAGE>
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of COMMUNICATE DIRECT, INC., an Illinois Corporation, and
_____________________________, ___________________ of said Corporation,
personally known to me to be the same persons whose names are subscribed to the
foregoing instrument as such ____________________ and __________________,
appeared before me this day in person and severally acknowledged that they
signed and delivered the said instrument as their own free and voluntary act and
as the free and voluntary act of said Corporation; for the uses and purposes
therein set forth. GIVEN under my hand and official seal this ________ day of
______________, 1997.
---------------------------------------
Notary Public
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of MICROGRAPHIC TECHNOLOGY CORPORATION, a Delaware
Corporation, and ________________________________, ___________________ of said
Corporation, personally known to me to be the same persons whose names are
subscribed to the foregoing instrument as such ____________________ and
_____________________, appeared before me this day in person and severally
acknowledged that they signed and delivered the said instrument as their own
free and voluntary act and as the free and voluntary act of said Corporation;
for the uses and purposes therein set forth. GIVEN under my hand and official
seal this ________ day of ______________, 1997.
---------------------------------------
Notary Public
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of KANSAS COMMUNICATIONS, INC., a Kansas Corporation, and
______________________________, ___________________ of said Corporation,
personally known to me to be the same persons whose names are subscribed to the
foregoing instrument as such ____________________ and _______________________,
appeared before me this day in person and severally acknowledged that they
signed and delivered the said instrument as their own free and voluntary act and
as the free and voluntary act of said Corporation; for the uses and purposes
therein set forth. GIVEN under my hand and official seal this ________ day of
______________, 1997.
---------------------------------------
Notary Public
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of WEST SUBURBAN BANK, an Illinois Banking Corporation,
personally known to me to be the same person whose name is subscribed to the
foregoing instrument as such ____________________, appeared before me this day
in person and acknowledged that he/she signed and delivered the said instrument
as his/her own free and voluntary act and as the free and voluntary act of said
Corporation; for the uses and purposes therein set forth. GIVEN under my hand
and official seal this ________ day of ______________, 1997.
---------------------------------------
Notary Public
6
DRAW NOTE
$1,500,000.00 State of Illinois
May ___, 1997
I.
DESCRIPTION
1.1 Description of Parties. This Draw Note (hereinafter referred to as
"Note") is made by the following corporations:
a. SOFTNET SYSTEMS, INC., a corporation organized under the laws of the
State of New York ("SoftNet"); and
b. COMMUNICATE DIRECT, INC., a corporation organized under the laws of the
State of Illinois ("CDI"), being formerly known as CDI Acquisition
Corp., an Illinois corporation, and being the successor by merger to
and the surviving corporation of a corporate merger by and between CDI
and CDI Acquisition Corp.; and
c. MICROGRAPHIC TECHNOLOGY CORPORATION, a corporation organized under the
laws of the State of Delaware ("MTC"), being formerly known as MTC
Acquisition Corp., a Delaware corporation, and being the successor by
merger to and the surviving corporation of a corporate merger by and
between MTC and Micrographic Technology Corporation, a California
corporation; and
d. KANSAS COMMUNICATIONS, INC., a corporation organized under the laws of
the State of Kansas ("KCI"), being the successor by merger to and the
surviving corporation of a corporate merger by and between KCI and KCI
Acquisition Corp., a Kansas corporation.CDI, MTC, and KCI are each
wholly-owned subsidiaries of SoftNet. Softnet, CDI, MTC, and KCI are
collectively and individually referred to herein as "Maker." This Note
is payable to the order of WEST SUBURBAN BANK, an Illinois banking
corporation (hereinafter referred to as "Payee") and evidences a loan
(hereinafter referred to as the "Loan") made by Payee to Maker.
1.2 Description of Security. SoftNet, CDI, MTC, and KCI have each
executed and delivered to Payee a separate Loan and Security Agreement dated
September 15, 1995 as modified from time to time and as most recently modified
by a Loan Modification Agreement of even date herewith (collectively the "Loan
Agreements") securing the repayment of this Note.
1.3 Description of Loan Documents. This Note and the Loan Agreements,
together with any amendments, modifications, renewals and replacements thereof
and any and all other instruments now or hereinafter given to Payee, by or on
behalf of the Maker or any guarantor of Maker's obligations to Payee, or by
their respective agents in connection with the Loan, are collectively referred
to herein as the "Loan Documents".
1.4 Description of Loan. This Note evidences the Equipment Loan
described in the Loan Modification Agreement of even date herewith by and
between Payee and each Maker. Each disbursement of funds hereunder is referred
to as an "Advance."
<PAGE>
II.
PAYMENT
2.1 FOR VALUE RECEIVED, the Maker promises to pay to the order of the
Payee in legal tender of the United States of America, the principal sum of ONE
MILLION FIVE HUNDRED THOUSAND AND 00/100 ($1,500,000.00) DOLLARS (the "Principal
Sum") or so much thereof as may have been advanced pursuant to the terms of the
Loan Agreements (the "Principal Balance") together with interest on the
Principal Balance remaining from time to time unpaid as follows:
a. Monthly Payments. With respect to each Advance, commencing on the 1st
day of the month following the date of the Advance and on the same day
of each successive month thereafter until the Maturity Date (as
hereinafter defined), Maker agrees to make monthly installment payments
in an amount equal to one thirty-sixth (1/36) of the original amount of
the Advance, plus interest on the principal balance of the Advance
remaining from time to time unpaid at the interest rate provided
herein. Maker also agrees to make such earlier repayments of principal
as are required under the terms of the Loan Agreements as modified from
time to time.
b. Interest Rate. The unpaid Principal Balance shall bear interest at a
daily rate equivalent to the Prime Rate (as hereinafter defined) in
effect from time to time plus one (1%) percent per annum. The rate at
which interest accrues hereon shall change contemporaneously with
changes in the Prime Rate on a daily basis without notice. Changes in
the interest rate will result in changes in the amount of monthly
payments.
c. Maturity Date. The entire outstanding Principal Balance, all interest
accrued thereon, and all other amounts due hereunder or under the Loan
Documents, unless sooner paid, shall be due and payable in full on July
15, 1998 (the "Maturity Date").
d. Prime Rate. The "Prime Rate" as used herein shall mean that rate so
announced and/or published by West Suburban Bank, Lombard, Illinois, as
its prime rate and in effect daily. Changes in the Prime Rate shall
have the effect of changing the interest charged hereunder in a manner
corresponding with such change in the Prime Rate. Such Prime Rate is
not necessarily the most favorable rate charged on loans by West
Suburban Bank to its most creditworthy customers. In the event West
Suburban Bank discontinues the use of its Prime Rate, then in such
event the term "Prime Rate" shall mean that rate published from time to
time in The Wall Street Journal, Midwest Edition, as the prime rate of
interest,and in the event more than one such rate is so published in
The Wall Street Journal, Midwest Edition, on any applicable date, the
highest such rate shall be applicable.
e. Interest Rate Computation. All interest calculated hereunder shall be
computed on the basis of a three hundred sixty (360) day year and not
on the basis of a calendar year and shall be calculated on the actual
number of days elapsed in each month. The outstanding balance hereunder
shall be evidenced by the Payee's books and records, which are
incorporated herein by reference, which shall be conclusive as to the
principal amount outstanding hereunder.
f. Prepayment Privilege. Maker may prepay all or any part of the
outstanding Principal Balance of the Loan at any time without premium
or penalty.
2
<PAGE>
g. Application of Payments. All payments made hereunder shall be applied
first to the payment of accrued interest and the remainder, if any,
shall be applied to the Principal Balance.
h. Place of Payment. The payments of all amounts due under the Loan
Documents shall be made at the principal office of the Payee at 711
South Westmore-Meyers Road, Lombard, Illinois, 60148, or such other
place as Payee may from time to time designate in writing.
III
ADDITIONAL COVENANTS
3.1 Attorneys' Fees and Costs. In addition to the amounts due pursuant
to Section 2.1 herein Maker agrees to pay to Payee all attorneys' fees and other
costs and expenses incurred by Payee for legal representation related to the
preparation and negotiation of the Loan Documents, to be paid promptly upon
demand.
3.2 Events of Default. If any one or more of the following events
("Events of Default") shall occur, to wit:
a. failure to make prompt payment, when due, of any payment of principal
or interest herein on or before the due date thereof; or
b. the occurrence of any other Event of Default as such term is defined in
any of the Loan Agreements;
then, at any time thereafter, at the sole option of Payee, without notice to
Maker, the Principal Balance and accrued interest shall become immediately due
and payable without presentment, demand, notice or protest of any kind, all of
which are expressly waived by the Maker. All sums coming due and payable under
this paragraph 3.2 shall bear interest after acceleration at a daily rate
equivalent to the Prime Rate plus four (4.0%) percent per annum.
3.3 Collection. Maker, in addition to payment of all sums due herein,
shall pay and/or reimburse Payee for all costs, expenses and reasonable
attorney's fees incurred in seeking to enforce the terms of this Note or the
other Loan Documents, or to defend any action or proceeding relating thereto,
including but not limited to those incurred in connection with any probate or
bankruptcy actions or proceedings; preparations for the commencement of any
action, proceeding or suit; and preparations for the defense of any threatened
action, proceeding or suit related to the Loan or Loan Documents whether or not
suit is actually filed. All such costs, expenses and fees shall become
additional indebtedness hereunder and shall become immediately due and payable
when paid or incurred by Payee.
3.4 Extensions. Except as herein provided, Maker agrees that the time
of payment of the Principal Balance or any part thereof may be extended from
time to time without modifying or releasing the Loan Documents or the liability
of Maker or any other such parties, the right of recourse against Maker and such
parties being hereby reserved by Payee.
3.5 Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of Illinois.
3
<PAGE>
3.6 Names. As used herein, the term "Payee" shall also mean the
subsequent holder or holders of this Note from time to time. Regardless of their
form, all words shall be deemed singular or plural and shall have the gender as
required by the text.
3.7 Benefit of Payee. This Note shall inure to the benefit of the Payee
and its successors and assigns and shall be binding upon the Maker and its
successors and assigns.
3.8 Waiver of Set-Off/Recoupment. Maker waives any right of set-off
and/or recoupment it may have against Payee in connection with claims against
Payee related to any other claim it now or forever may have against Payee and
agrees that it will not assert any claim including but not limited to a set-off
and/or recoupment, it may now or hereafter have against Payee as a defense
against payment under the Loan Documents.
3.9 Time of Essence. Time is of the essence of this Note.
3.10 Compliance with Applicable Law. Maker agrees that the obligations
evidenced by this Note constitute an exempt transaction under the
Truth-In-Lending Act, 15 U.S.C. Section 1601, et seq., and said obligations
constitute a business loan which comes within the purview of Section 4(1)(c) of
"An Act In Relation To The Rate of Interest and Lending of Money," approved May
24, 1879, as amended, 815.ILCS 205/4.
3.11 Severability. If any provision in this Note is held by a court of
law to be in violation of any applicable local, state or federal ordinance,
statute, law, administrative or judicial decision, or public policy, and if such
court should declare such provision of this Note to be illegal, invalid,
unlawful, void, voidable, or unenforceable as written, then such provision shall
be given full force and effect to the fullest possible extent that it is legal,
valid and enforceable, that the remainder of this Note shall be construed as if
such illegal, invalid, unlawful, void, voidable or unenforceable provision was
not contained therein, and that the rights, obligations and interest of the
Maker and the holder hereof under the remainder of this Note shall continue in
full force and effect.
3.12 Lawful Interest. It being the intention of Payee and Maker to
comply with the applicable laws with regard to the interest charged hereunder,
it is agreed that, notwithstanding any provision to the contrary in this Note or
the other Loan Documents, no such provision, including without limitation any
provision of this Note providing for the payment of interest or other charges,
shall require the payment of permit the collection of any amount ("Excess
Interest") in excess of the maximum amount of interest permitted by law to be
charged for the use or detention, or the forbearance in the collection, of all
or any portion of the indebtedness evidenced by this Note. If any Excess
Interest is provided for, or is adjudicated to be provided for, in this Note or
the other Loan Documents, then in such event:
a. the provisions of this paragraph shall govern and control;
b. Maker shall not be obligated to pay any Excess Interest;
c. any Excess Interest that Payee may have received hereunder shall, at
the option of Payee, be (i) applied as a credit against the Principal
Balance due under this Note or accrued and unpaid interest thereon not
to exceed the maximum amount permitted by law, or both; (ii) refunded
to the Maker; or (iii) any combination of the foregoing;
4
<PAGE>
d. the applicable interest rate or rates shall be automatically subject to
reduction to the maximum lawful rate allowed to be contracted for in
writing under the applicable governing usury laws, and this Note and
the Loan Documents shall be deemed to have been, and shall be, reformed
and modified to reflect such reduction in such interest rate or rates;
and
e. Maker shall not have any action or remedy against Payee for any damages
whatsoever or any defense to enforcement of the Note or arising out of
the payment or collection of any Excess Interest.
3.13 Notices. Any notices or other communications required or permitted
hereunder shall be (a) in writing and shall be deemed to be given when either:
(i) delivered in person; (ii) received after deposit in a regularly maintained
receptacle of the United States mail as registered or certified mail, postage
prepaid; (iii) when received if sent by private courier services; or (iv) on the
day on which either party refuses delivery by mail or by private courier
service, and (b) addressed as follows or to such other address as the parites
hereto may designate in writing from time to time:
Maker: SoftNet Systems, Inc.
Attn: Martin Koehler, C.F.O.
717 Forest Avenue
Lake Forest, Illinois 60045
Payee: West Suburban Bank
Attn: Michael P. Brosnahan, Senior Vice President
711 South Westmore-Meyers Road
Lombard, Illinois 60148
3.14 Liability of Maker. The liability of each of the Makers hereunder
shall be primary, direct, joint, and several, and none of the Makers shall be
deemed a surety, accommodation maker, or guarantor. The liability of each of the
Makers shall not be affected by (a) modification, extension, renewal,
substitution or replacement of any of the Loan Documents; (b) the extension of
additional credit separate from this transaction by Payee; (c) the surrender,
release, renewal, extension, sale, exchange, or other disposition of all or any
part of the collateral securing the Loan or the acceptance of any additional or
substituted collateral for the Loan; (d) Payee's failure to protect any such
collateral from waste, diminution in value, or otherwise; (e) Payee's purchase
of any such collateral at judicial or other sale, or any subsequent resale at
public or private sale; (f) any extension of time or any other indulgence
granted by Payee under any of the Loan Documents; (g) any failure or delay by
Payee in attempting to enforce any of its rights or remedies under any of the
Loan Documents; (h) Payee's proceeding against fewer than all parties liable
under this Note; (i) Payee's release, settlement, or compromise of its claim
against any other party liable on this Note; or (j) the occurrence of any other
event which might otherwise operate as a discharge under principles of
suretyship. Each Maker waives all rights to seek contribution, indemnification,
or other form of reimbursement from the other Makers or any other person liable
under this Note, including any rights of subrogation to the rights of Payee. In
the event any payment on this Note to Payee is held to constitute a preference
under the bankruptcy laws, the liability of each Maker shall automatically be
revived to the full extent of such payment.
3.15 Headings. The various headings used in this Note as headings for
sections or otherwise are for convenience and reference only and shall not be
used in interpreting the text of the section in which they appear and shall not
limit or otherwise affect the meanings thereof.
5
<PAGE>
IV.
INCORPORATION BY REFERENCE
4.1 To the extent not inconsistent with the terms of this Note, the
terms of the Loan Documents are incorporated herein and made a part hereof by
reference.
IN WITNESS WHEREOF, each Maker has executed this Note by its duly
authorized representatives.
SOFTNET SYSTEMS, INC. COMMUNICATE DIRECT, INC.
By: ______________________________ By: ___________________________
Its: ______________________________ Its: ___________________________
Attest: ______________________________ Attest: ___________________________
Its: ______________________________ Its: ___________________________
MICROGRAPHIC TECHNOLOGY KANSAS COMMUNICATIONS, INC.
CORPORATION
By: ______________________________ By: ___________________________
Its: ______________________________ Its: ___________________________
Attest: ______________________________ Attest: ___________________________
Its: ______________________________ Its: ___________________________
westsub2\softdraw.not\051297\cp
6
<PAGE>
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of SOFTNET SYSTEMS, INC., a New York Corporation, and
______________________________________, ____________________ of said
Corporation, personally known to me to be the same persons whose names are
subscribed to the foregoing instrument as such ____________________ and
_____________________, respectively, appeared before me this day in person and
acknowledged that they signed and delivered the said instrument as their own
free and voluntary act and as the free and voluntary act of said Corporation;
and the said _______________________ then and there acknowledged that, as
custodian of the Corporate Seal of said Corporation, did affix the Corporate
Seal of said Corporation to said instrument, for the uses and purposes therein
set forth. GIVEN under my hand and official seal this ________ day of
______________, 1997.
--------------------------------------------
Notary Public
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of COMMUNICATE DIRECT, INC., an Illinois Corporation, and
______________________________________, ____________________ of said
Corporation, personally known to me to be the same persons whose names are
subscribed to the foregoing instrument as such ____________________ and
_____________________, respectively, appeared before me this day in person and
acknowledged that they signed and delivered the said instrument as their own
free and voluntary act and as the free and voluntary act of said Corporation;
and the said _______________________ then and there acknowledged that, as
custodian of the Corporate Seal of said Corporation, did affix the Corporate
Seal of said Corporation to said instrument, for the uses and purposes therein
set forth. GIVEN under my hand and official seal this ________ day of
______________, 1997.
--------------------------------------------
Notary Public
lic
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of MICROGRAPHIC TECHNOLOGY CORPORATION, a Delaware
Corporation, and ______________________________________, ____________________ of
said Corporation, personally known to me to be the same persons whose names are
subscribed to the foregoing instrument as such ____________________ and
_____________________, respectively, appeared before me this day in person and
acknowledged that they signed and delivered the said instrument as their own
free and voluntary act and as the free and voluntary act of said Corporation;
and the said _______________________ then and there acknowledged that, as
custodian of the Corporate Seal of said Corporation, did affix the Corporate
Seal of said Corporation to said instrument, for the uses and purposes therein
set forth. GIVEN under my hand and official seal this ________ day of
______________, 1997.
--------------------------------------------
Notary Public
7
<PAGE>
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of KANSAS COMMUNICATIONS, INC., a Kansas Corporation, and
______________________________________, ____________________ of said
Corporation, personally known to me to be the same persons whose names are
subscribed to the foregoing instrument as such ____________________ and
_____________________, respectively, appeared before me this day in person and
acknowledged that they signed and delivered the said instrument as their own
free and voluntary act and as the free and voluntary act of said Corporation;
and the said _______________________ then and there acknowledged that, as
custodian of the Corporate Seal of said Corporation, did affix the Corporate
Seal of said Corporation to said instrument, for the uses and purposes therein
set forth. GIVEN under my hand and official seal this ________ day of
______________, 1997.
--------------------------------------------
Notary Public
8
PURCHASE AGREEMENT
THIS AGREEMENT is made as of this ______ day of May, 1997, by and
between WEST SUBURBAN BANK, an Illinois banking corporation ("Purchaser") with
its principal place of business at 711 South Westmore-Meyers, Lombard, Illinois,
60148, and MICROGRAPHIC TECHNOLOGY CORPORATION, a Delaware corporation
("Seller"), with its principal place of business at 520 Logue Avenue, Mountain
View, California, 94043.
W I T N E S S E T H:
WHEREAS, Seller owns the PPF Agreement and the Machines (as defined
herein); and
WHEREAS, Seller desires to sell the PPF Agreement and the Machines to
Purchaser and Purchaser desires to purchase the PPF Agreement and the Machines
from Seller in accordance with the terms and conditions hereof.
NOW, THEREFORE, for and in consideration of the premises, the sum of
Ten ($10.00) Dollars in hand paid, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
1. Defined Terms. Whenever used herein, the following terms, when
capitalized, shall have the following respective meanings unless the
context shall clearly indicate otherwise:
a. "Agreement" shall mean this Purchase Agreement.
b. "Closing Date" shall mean May ___, 1997.
c. "Delivery and Acceptance Certificates" shall mean the instruments
executed and delivered by M&I certifying that the Machines have been
delivered to and accepted by M&I in satisfactory condition.
d. "Impositions" shall mean any property, sales, use, or other taxes or
similar charges or levies related to the Machines, the PPF Agreement,
or any payments to be made thereunder.
e. "Interest Equivalent" shall mean an amount equivalent to interest on
the Unrecovered Purchase Price at a rate equivalent to the Prime Rate
plus (1%) percent per annum, adjusted daily.
f. "Machines" shall mean the twelve (12) microfiche production machines,
together with all processing, stacking, duplicating, collating,
printing, and other equipment and software related thereto as more
fully described in Schedule 2 to the PPF Agreement.
g. "M&I" shall mean Marshall & Ilsley Corporation, whose address is 4900
West Brown Deer Road, Milwaukee, Wisconsin, 53223.
h. "PPF Agreement" shall mean the Price Per Fiche Agreement dated July 24,
1996 by and between Seller and M&I, including all addenda, exhibits,
schedules, and attachments thereto, and all amendments and
modifications thereof, which provides for Seller's placement of twelve
(12) Machines with M&I for use by M&I through the Termination Date, a
copy of which is attached hereto and incorporated herein by reference.
<PAGE>
i. "PPF Documents" shall mean the PPF Agreement and all Delivery and
Acceptance Certificates, applications, credit reports, insurance
policies, purchase orders and invoices, bills of sale, UCC financing
statements, and all other written matter or materials prepared or
obtained in connection with the PPF Agreement.
j. "Prime Rate" shall mean that rate so announced and/or published by West
Suburban Bank, Lombard, Illinois, as its prime rate and in effect
daily. Such Prime Rate is not necessarily the most favorable rate
charged on loans by West Suburban Bank to its most creditworthy
customers. In the event West Suburban Bank discontinues the use of its
Prime Rate, then in such event the term "Prime Rate" shall mean that
rate published from time to time in The Wall Street Journal, Midwest
Edition, as the prime rate of interest, and in the event more than one
such rate is so published in The Wall Street Journal, Midwest Edition,
on any applicable date, the highest such rate shall be applicable.
k. "Purchase Price" shall mean $3,150,000.00.
l. "Rent" shall mean all monies due or to become due under the PPF
Agreement.
m. "Termination Date" shall man May 20, 2002.
n. "Unrecovered Purchase Price" shall mean the Purchase Price as reduced
from time to time by the amount by which payments remitted to Purchaser
by M&I with respect to the PPF Agreement exceed the Interest Equivalent
and any Impositions.
2. Purchase and Sale of PPF Agreement and Machines
a. Transfer of PPF Agreement. Effective as of the Closing Date, Seller
hereby sells to Purchaser and Purchaser hereby purchases from Seller,
the PPF Agreement (including the Machines and all Rent accruing after
the Closing Date), together with all of Seller's rights, title,
interest, and remedies under the PPF Documents.
b. Payment of Purchase Price.
(i) On the Closing Date, Purchaser shall pay the sum of
$2,650,000.00 to Seller.
(ii) The balance of the Purchase Price (to wit, the sum of
$500,000.00) shall be paid by Purchaser to Seller at such time
as M&I has accepted all twelve (12) of the Machines and has
provided written acknowledgment, in form acceptable to
Purchaser, that all nine (9) of the conditions enumerated in
the "Acceptance Criteria" section of Amendment No. 1 to the
PPF Agreement have been satisfied with respect to all twelve
(12) of the Machines.
(iii) The Purchase Price shall be paid to Seller (or to such third
parties as Seller may direct) by wire transfer in accordance
with the provisions of wire transfer instructions to be
provided by Seller.
c. No Assumption of Liability. Purchaser does not accept or assume any of
Seller's liability or obligations under the PPF Agreement. Seller
expressly reserves and promises to perform all actions necessary to
complete the installation of the Machines in order to induce M&I to
accept
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<PAGE>
the Machines in accordance with the acceptance criteria and other
provisions of the PPF Agreement and to otherwise perform all
obligations to M&I under the PPF Agreement. Seller agrees to indemnify,
defend, and hold Purchaser harmless from and against any liability to
M&I with respect to the PPF Agreement.
d. Conditions Precedent. The obligations of Seller to sell the PPF
Agreement and of Purchaser to purchase the PPF Agreement are subject to
the satisfaction of the following:
(i) Delivery of the PPF Documents and such other documents as may
reasonably be requested by Purchaser.
(ii) The representations and warranties of the respective parties
herein and in any certificate or document delivered pursuant
to or in connection herewith shall be true and correct on and
as of the Closing date as if made on and as of that date.
(iii) The respective parties shall have performed or caused to be
performed all obligations and agreements and complied or
caused to be complied with all covenants contained herein to
be performed or complied with by it at or prior to the Closing
Date.
e. Nondisturbance. Purchaser agrees that so long as Seller and M&I are not
in default of their respective obligations under the PPF Agreement,
Purchaser will not consent to the removal of the Machines from the
premises of M&I as described in the PPF Agreement without Seller's
consent.
3. Representations and Warranties of Seller
Seller hereby represents and warrants to and agrees with Purchaser as
follows:
a. Concerning the PPF Agreement. The PPF Agreement: (i) has been duly and
validly executed and delivered by Seller and M&I; (ii) is in full force
and effect; and (iii) constitutes the valid and binding obligation of
M&I enforceable in accordance with its terms (subject, however, to laws
of general application affecting creditors' rights). No payment
default, and to Seller's knowledge, no other default or condition
which, with or without the passage of time, the giving of notice, or
both, would constitute a default under the PPF Agreement by either
Seller or, to the best of Seller's knowledge, M&I. Seller has not
previously assigned any interest in the PPF Agreement to any other
party. M&I has not prepaid any portion of its obligations under the PPF
Agreement. There is only one original of the PPF Agreement signed by
the parties, which is marked "Original." No security interest in the
PPF Agreement may be created through the transfer and possession of any
signed counterpart other than the one marked "Original." The PPF
Agreement and the advertising, solicitation, application procedures,
servicing, collection, and administration of the PPF Agreement, fully
comply with or are exempt from the provisions of the Federal
Truth-In-Lending Act, Regulation Z, the Equal Credit Opportunity Act,
Regulation B, the Federal Trade Commission Act, the Fair Debt
Collection Practices Act, all applicable statutes and regulations
pertaining to interest and other charges, and all other applicable
federal and state laws and regulations and substitutes and replacements
thereof.
b. Concerning the Machines. Nine (9) of the Machines are located at the
premises of M&I as specified in the PPF Agreement and are currently
used for production. The remaining three (3)
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Machines are in the process of being delivered or being made fully
operational. Nothing has come to Seller's attention which would lead
Seller to believe that the sale, use, or operation of the Machines
violates or infringes the patent, trademark, trade name or other rights
of any party. To the best of Seller's knowledge, the Machines are
and/or will be in good working order, condition and appearance.
c. Title. Seller owns, and by this Agreement transfers to Purchaser, good
and marketable title to, the Machines and all of the rights of Seller
under the PPF Agreement, free and clear of any and all liens, claims,
encumbrances or other charges, except, as to the Machines, the rights
of M&I. No financing statement covering the PPF Agreement or any of the
Machines is on file in any public office or is presently in the
possession of any third party (excepting solely precautionary UCC
filings in favor of Seller which are assignable to Purchaser).
d. Acquisition Taxes. All sales, use, property or other taxes, licenses,
tolls, inspection fees or other fees, bonds, permits or certificates
which were (or may be) required to be paid or obtained, as the case may
be, in connection with the leasing of the Machines to M&I pursuant to
the PPF Agreement have been (or when due will promptly be) paid in full
(or adequate provision for such payment has or shall have been made) or
obtained, as the case may be.
e. Documents Furnished. The entire agreement with M&I with respect to the
leasing of the Machines is embodied solely in the PPF Agreement and the
PPF Documents and no oral agreements exist with M&I not contained in
the PPF Agreement and the other PPF Documents.
f. Organization and Existence. Seller is and at all times hereafter shall
be a corporation duly and validly organized and existing in good
standing under the laws of the State of Delaware and is duly qualified
and/or licensed to own its properties and carry on its business in each
jurisdiction where the failure to be so qualified would violate
applicable laws, regulations, rules, or ordinances.
g. Power and Authority. Seller has the power and authority to execute and
deliver or accept, as the case may be, this Agreement and all other
agreements, instruments and documents executed and delivered and/or
accepted, as the case may be, in connection herewith or therewith and
to pay and perform, when due, its obligations hereunder.
h. Authorization. The execution and delivery of this Agreement by Seller,
and the payment and performance by Seller, when due, of its obligations
hereunder, have been duly authorized by all necessary action of Seller
and do not violate or conflict with, or with or without the giving of
notice, the passage of time or both, constitute a default under, any
provision of Seller's articles of incorporation, by-laws, or
resolutions, any law, any order, writ, injunction, decree, rule or
regulation of any court, administrative agency or any other
governmental authority or any agreement or other document or instrument
to which Seller is a party or by which Seller is, or may be, bound.
i. Enforceability. This Agreement constitutes the valid and binding
obligations of Seller enforceable against it in accordance with its
terms, subject, however, to laws of general application affecting
creditors' rights and to limitations imposed upon the availability of
specific enforcement, injunctive relief or equitable remedies.
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<PAGE>
j. Miscellaneous Representations and Warranties Concerning Seller.
(i) Seller now has and shall have at all times hereafter capital
sufficient to carry on its business and transactions and all
businesses and transactions in which it is about to engage;
(ii) There are no actions or proceedings which are pending or
threatened against Seller which might result in any material
and adverse change in its financial condition or materially
affect its assets;
(iii) Seller possesses adequate assets, licenses, patents,
copyrights, trademarks and tradenames to continue to conduct
its business as previously conducted by it;
(iv) Seller is and at all times hereafter shall remain in good
standing with respect to all governmental permits,
certificates, consents and franchises necessary to continue to
conduct its business and to own or lease and operate its
properties as now owned or leased by it;
(v) None of said permits, certificates, consents or franchises
contain any term, provision, condition or limitation more
burdensome than such as are generally applicable to persons
engaged in the same or similar business as Seller;
(vi) Seller is not a party to any contract or agreement or subject
to any charge, restriction, judgment, decree or order
materially and adversely affecting its business, property,
assets, operations or condition, financial or otherwise;
(vii) Seller is not in violation of any applicable statute,
regulation or ordinance of the United States of America, of
any state, city, town municipality, county or of any other
jurisdiction, or of any agency thereof, in any respect
materially and adversely affecting its business, property,
assets, operations or condition, financial or otherwise;
(viii) Seller is not in default with respect to any indenture, loan
agreement, mortgage, deed or other similar agreement relating
to the borrowing of monies to which it is a party or by which
it is bound;
(ix) All information furnished to Purchaser concerning the PPF
Agreement and financial affairs of Seller, and all other
written information heretofore or hereafter furnished by
Seller to Purchaser, is and will be true and correct; and
(x) Seller has filed all federal, state and local tax returns and
other reports it is required to file and has paid or made
adequate provision for payment of all such taxes, assessments
and other governmental charges.
4. Representations and Warranties of Purchaser
Purchaser represents and warrants to, and agrees with, Seller as
follows:
a. Organization and Existence. Purchaser is an Illinois banking
corporation duly and validly
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<PAGE>
organized and existing in good standing under the laws of the State of
Illinois and is duly qualified to own its properties and carry on its
business in each jurisdiction where the failure to be so qualified
would violate applicable laws, regulations, rules, or ordinances.
b. Power and Authority. Purchaser has the power and authority to execute
and deliver or accept, as the case may be, this Agreement and to pay
and perform, when due, its obligations hereunder.
c. Authorization. The execution and delivery or acceptance, as the case
may be, of this Agreement by Purchaser, and the payment and performance
by Purchaser, when due, of its obligations hereunder, have been duly
authorized by all necessary action of Purchaser and do not violate or
conflict with, or with or without the giving of notice, the passage of
time or both, constitute a default under, any provision of Purchaser's
articles of incorporation, by-laws, or resolutions, any law, any order,
writ, injunction, decree, rule or regulation of any court,
administrative agency or any other governmental authority or any
agreement or other document or instrument to which Purchaser is a party
or by which Purchaser is, or may be, bound.
d. Enforceability. This Agreement constitutes the valid and binding
obligations of Purchaser enforceable against it in accordance with its
terms, subject, however, to laws of general application affecting
creditors' rights and to limitations imposed upon the availability of
specific enforcement, injunctive relief or equitable remedies.
5. Collections and Application of Payments.
a. Seller hereby assigns to Purchaser all monies hereafter payable by M&I
under the PPF Agreement (including all price per fiche usage payments,
all interest, and all Impositions due in connection therewith).
b. Seller agrees to monitor all activity of the Machines under the PPF
Agreement, calculate amounts due from M&I thereunder, and send timely
invoices to M&I for amounts due thereunder. All payments shall be made
by M&I directly to Purchaser.
c. Monies collected by Purchaser under the PPF Agreement shall be applied
by Purchaser as follows:
(i) First, Purchaser shall retain for its own account an
amount equal to Interest Equivalent which has accrued
during the corresponding period.
(ii) Second, Purchaser shall retain for its own account
the following minimum amounts to be applied toward
Unrecovered Purchase Price:
June, 1997 - Sept. 1997..........$63,095.00 per month
Oct., 1997 - May, 1999...........$76,253.00 per month
June, 1999 - May, 2000...........$57,190.00 per month
June, 2000 - May, 2001...........$38,127.00 per month
June, 2001 - May, 2002...........$19,063.00 per month
All remittances are due on or before the 20th day of each respective
month. In the event of a shortage in any month, Purchaser shall have
the right to make up such shortage by recovering
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<PAGE>
any overages in any subsequent months. Further, if Purchaser reasonably
believes that a shortage may occur in a future month or months,
Purchaser may accumulate excess receipts as a reserve against
anticipated shortages.
(iii) The balance, if any, shall be remitted by Purchaser to Seller.
d. Seller shall be responsible for the payment of all Impositions.
e. After Purchaser has recovered the full amount of Purchase Price and has
collected all Interest Equivalent to which Purchaser is entitled
hereunder, Purchaser shall remit all subsequent amounts collected with
respect to the PPF Agreement to Seller.
6. Return of Machines/Remarketing
In the event any of the Machines are returned prior to their allowed
return date, as defined in the PPF Agreement, Seller exercise its best
efforts to remarket the Machine for the best price and other terms it
can reasonably obtain. Remarketing may be by sale, lease, or contract
use under a price per fiche or other agreement with M&I or another
buyer or user. Seller shall promptly advise Purchaser of any offers it
receives. Any remarketing agreement shall be subject to the prior
written consent of Purchaser. If the Machine is sold, leased, or
otherwise delivered to a party other than M&I, Seller shall be
responsible for dismantling, repairing, refurbishing, storing, and/or
transporting the Machine at Seller's expense. Seller shall attempt to
re-market the Machines as soon as possible, however, Seller shall have
no obligation to Purchaser with respect to the Machines returned early
so long as Purchaser is receiving an Early Return Buyout Payment, as
defined on schedule 1 of the PPF Agreement. Upon the termination of the
Early Return Buyout Payment, or for Machines returned in compliance
with the System Return Allowance, Seller shall re-market the Machines
within 180 days of said date. In the event the Machine is not
remarketed by Seller in a manner satisfactory to Purchaser within one
hundred eighty (180) days after the date of early return, Seller shall
pay Purchaser an amount equivalent to the fair market value of the
Machine whereupon title to the Machine shall be reconveyed by Purchaser
to Seller by appropriate bill of sale or other instrument of conveyance
and Seller shall be entitled to remarket the Machine without further
obligation to Purchaser. Any payments made by Seller to Purchaser
pursuant to this paragraph shall be in addition to those required under
Section 5 above and shall be applied towards Unrecovered Purchase
Price.
7. Seller's Repurchase Obligations Upon Seller's Failure to Fulfill
Acceptance Criteria. Notwithstanding any provision to the contrary set
forth herein, Seller shall be obligated to repurchase the PPF Agreement
and the Machines from Purchaser upon the occurrence of any of the
following events ("Repurchase Events"):
a. Seller's failure to provide Purchaser with M&I's written
acknowledgment, on or before June 15, 1997, stating that at least nine
(9) of the Machines meet the requirements of paragraphs 1, 2, 3, 4, and
5 of the "Acceptance Criteria" section of Amendment No. 1 to the PPF
Agreement.
b. Seller's failure to provide Purchaser with M&I's written
acknowledgment, on or before August 1, 1997, stating that the remaining
three (3) Machines meet the requirements of paragraphs 1, 2, 3, 4, and
5 of the "Acceptance Criteria" section of Amendment No. 1 to the PPF
Agreement.
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c. Seller's failure to provide Purchaser with M&I's written
acknowledgment, on or before September 15, 1997, stating that all
twelve (12) of the Machines have been accepted by M&I and meet all
requirements of all paragraphs of the "Acceptance Criteria" section of
Amendment No.
1 to the PPF Agreement.
Upon the occurrence of a Repurchase Event, without notice or demand,
Seller shall immediately pay Purchaser the entire Unrecovered Purchase
Price and all accrued and unpaid Interest Equivalent, whereupon the PPF
Agreement and the Machines shall be reconveyed by Purchaser to Seller
by appropriate bill of sale or other instrument of conveyance.
8. Residual Value of Machines
After Purchaser has recovered the entire Purchase Price and the full
amount of Interest Equivalent to which Purchaser is entitled hereunder,
all proceeds subsequently derived from the Machines (whether by lease,
contract usage, sale, or otherwise) shall be the property of Seller. If
any such proceeds come into Purchaser's possession, Purchaser agrees to
remit such proceeds to Seller. Purchaser agrees to execute and deliver
to Seller such bills of sale, assignments, leases, contracts, or other
instruments which may be reasonably requested by Seller in connection
with Seller's remarketing of the Machines.
9. Additional Agreements of Seller
a. Seller hereby covenants, represents and warrants that Seller:
i. Shall perform all of its obligations and responsibilities
under the PPF Agreement;
ii. Shall, upon request of Purchaser, execute such bills of sale,
assignments, financing statements and other documents (and pay
the cost of filing or recording the same in all public offices
deemed necessary by Purchaser) and do such other acts and
things, all as Purchaser may from time to time request to
establish and maintain its sole ownership interest in the PPF
Agreement and the Machines and to consummate the transactions
contemplated in or by this Agreement;
iii. Shall keep at its principal place of business, its records
concerning the PPF Agreement and the Machines, which records
will be of such character as will enable Purchaser or its
agents to determine at any time the status thereof, and Seller
will not, unless Purchaser shall otherwise consent in writing,
duplicate any such records at any other address;
iv. Shall, upon the request of Purchaser, deliver to Purchaser
copies of the PPF Documents and any and all other documents
evidencing any interest in the PPF Agreement and the
Machines;
v. Shall, at its own cost and expense, file all sales tax returns
and remit to the appropriate taxing authorities all sales and
use taxes and other Impositions on that portion of each
payment due Seller which relates to services and supplies
provided under the PPF Agreement;
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<PAGE>
vi. Shall furnish Purchaser such additional information concerning
Seller and the PPF Agreement and the Machines as Purchaser may
from time to time request;
vii. Shall permit Purchaser and its agents, from time to time, but
not less than once a month, to inspect the PPF Documents, and
to inspect, audit and make copies of and extracts from all
records and all other papers in the possession of Seller and
will, upon request of Purchaser, deliver to Purchaser all of
such records and papers which pertain to the PPF Agreement and
the Machines;
viii. Shall comply with all operational procedures established from
time to time by Purchaser with respect to the transactions
covered by this Agreement;
ix. Shall, upon request of Purchaser, stamp on the file jackets
pertaining to the PPF Agreement a notation, in form
satisfactory to Purchaser, of the ownership interest of
Purchaser;
x. Shall, at its sole cost and expense, keep and maintain an
errors and omissions insurance policy in favor of Purchaser.
Such policy of insurance shall be in form, with insurer and in
such amount as may be satisfactory to Purchaser. Seller shall
deliver to Purchaser the original (or certified) copy of said
policy of insurance, or a certificate of insurance, and
evidence of payment of all premiums for such policy. Such
policy of insurance shall contain an endorsement, in a form
and substance acceptable to Purchaser, showing loss payable to
Purchaser, and shall provide that the insurance company will
give Purchaser at least thirty (30) days written notice before
any such policy or policies of insurance shall be altered or
canceled and that no act or default of Seller or any other
person or entity shall affect the right of Purchaser to
recover under such policy or policies of insurance. Borrower
hereby directs the insurer under such policy of insurance to
pay all proceeds payable thereunder directly to Purchaser and
hereby irrevocably appoints Purchaser as Seller's agent and
attorney-in-fact to make, settle and adjust claims under such
policy of insurance and endorse the name of Seller on any
check, draft, instrument or other item of payment for the
proceeds of such policy of insurance;
xi. Shall promptly notify Purchaser in writing of any change in
location of its principal place of business or any change in
location of the PPF Documents;
b. All of the representations and warranties of Seller contained herein
will be and remain true and correct during the term of this Agreement;
c. Seller shall furnish to Purchaser:
i. as soon as practicable and in any event within 20 days after
the end of each month, current month-end unaudited profit and
loss statement and balance sheet of Seller, in reasonable
detail and in form acceptable to Purchaser, certified by the
chief financial or accounting officer of Seller to be true and
correct, to the best of such officer's knowledge and belief,
based upon a reasonable review of the affairs of Seller
conducted by such officer, subject to normal recurring
year-end audit adjustments, and to have been prepared in
accordance with generally accepted accounting principles
consistently applied;
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ii. as soon as practicable and in any event within 90 days of the
close of each calendar year (or fiscal year if Seller reports
on the basis of a fiscal year), annual financial statements
(including balance sheet, income statement, and statement of
changes in financial position of Seller), prepared in
accordance with generally accepted accounting principles
consistently applied, and audited by independent certified
public accountants acceptable to Purchaser, such audit report
to include an unqualified opinion of such accountants;
iii. as soon as practicable and in any event within 30 days after
the due date for filing (including any extensions), complete
copies of annual federal and state income tax returns filed by
Seller; and
iv. such other or further financial information as may be
requested by Purchaser.
d. In the event Seller defaults on any of its obligations and
responsibilities under the PPF Agreement (including without limitation
failure to invoice or provide supplies or maintenance), Purchaser may
(but shall not be required to) perform such obligations and
responsibilities in any manner Purchaser deems appropriate, whereupon
Purchaser may deduct the cost of such performance from any remittances
due Seller hereunder and Seller shall be liable to Purchaser for any
deficiency.
10. Indemnity
Seller agrees to indemnify Purchaser, and to protect, defend and hold
it harmless from and against any and all loss, cost, damage, injury or
expense, including without limitation, reasonable attorney's fees and
other legal expenses, which Purchaser may incur for or by reason of:
(i) the untruthfulness of any of the warranties and representations of
Seller contained herein; or (ii) a breach by Seller of any of the
warranties, covenants and agreements of Seller contained herein. For
purposes hereof, "Purchaser" shall include Purchaser and its employees,
officers, directors, representatives, agents, and attorneys.
11. Miscellaneous
a. Brokerage Fees. Seller represents and warrants to Purchaser that Seller
has not engaged any third party broker to which fees are payable in
connection with the transactions referred to herein. Purchaser
represents and warrants to Seller that Purchaser has not engaged any
third party broker to which fees are payable in connection with the
transactions referred to herein.
b. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and
assigns except that Seller shall not have the right to assign any of it
servicing obligations under this Agreement without the prior written
consent of Purchaser.
c. Purchaser's Attorney's Fees. Seller agrees to reimburse Purchaser for
all reasonable attorney's fees and costs incurred by Purchaser with
respect to the preparation and negotiation of this Agreement and the
transactions contemplated thereby.
d. No Waiver. No delay or failure by either party to insist upon the
strict performance of any term hereof or to exercise any right, power
or remedy provided for herein, shall constitute a waiver
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<PAGE>
of any such term, or such right, power or remedy. The exercise of any
right, power or remedy conferred by this Agreement or by law or equity
shall not preclude any other or further exercise thereof or the
exercise of any other right, power or remedy.
e. Amendment. This Agreement shall not be amended, modified or terminated
orally but may only be amended, modified or terminated pursuant to
written agreement between Seller and Purchaser.
f. Notices. Any notice, demand, request or other communication desired to
be given or required pursuant to the terms hereof shall be in writing
and shall be delivered by personal service or sent by registered or
certified mail, return receipt requested, postage prepaid, addressed to
the addresses first set forth herein or to such other address as the
parties hereto may designate in writing from time to time. Any such
notice, demand, request, or other communication shall be deemed given
on the date of personal service or on the date of deposit into the U.S.
Mail.
g. Headings. The various headings used in this Agreement as headings for
paragraphs or otherwise are for convenience only and shall not be used
in interpreting the text of the paragraphs in which they appear and
shall not limit or otherwise affect the meanings thereof.
h. Severability. If any provision in this Agreement is held by a court of
law to be in violation of any applicable local, state or federal
ordinance, statute, law, administration or judicial decision, or public
policy, and if such court should declare such provision of this
Agreement to be illegal, invalid, unlawful, void, voidable, or
unenforceable as written, then such provision shall be given full force
and effect to the fullest possible extent that is legal, valid and
enforceable. The remainder of this Agreement shall be construed as if
such illegal, invalid, unlawful, void, voidable or unenforceable
provision was not contained therein.
i. Names. Regardless of their form, all words shall be deemed singular or
plural and to have such gender as required by the text.
j. Governing Law/Venue. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Illinois. All actions,
suits and proceedings in any manner or way arising out of or in respect
to this Agreement, any documents executed concurrently herewith, shall
be litigated in courts within the County of DuPage, or having
jurisdiction with respect to said county. Seller and Purchaser each
hereby waives a right to a jury trial in any litigation brought with
respect to this Agreement or the transactions contemplated herein.
k. No Party Deemed Drafter. Seller acknowledges and agrees that Seller has
been afforded the opportunity to review and approve this Agreement and
to have this Agreement reviewed and approved by counsel of Seller's
choice, that this Agreement constitutes an arms-length transaction
between the parties, and that neither Seller nor Purchaser shall be
deemed the drafter of this Agreement for purposes of construing the
terms hereof.
l. Further Assurances. Purchaser and Seller agree to execute and deliver
promptly to the other all such further instruments and documents as may
reasonably be requested by the other in order to carry out fully the
intent, and to accomplish the purposes, of the transactions referred to
herein.
m. Not an Extension of Credit or Joint Venture. This Agreement constitutes
a sale of 100% ownership interest in the PPF Agreement and the Machines
and shall in no way be construed as
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an extension of credit by Purchaser to Seller or a partnership or joint
venture by and between Seller and Purchaser.
n. Time of Essence. Time is of the essence hereof.
IN WITNESS WHEREOF, this Purchase Agreement is executed and effective
as of the date first set forth above.
SELLER: PURCHASER:
MICROGRAPHIC TECHNOLOGY CORPORATION, WEST SUBURBAN BANK
a Delaware Corporation
By: _____________________________ By: _________________________
Its: _____________________________ Its: _________________________
Attest: _____________________________
Its: _____________________________
westsub2\microtec.agm\051297\cp
................................................................................
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public, in and for the County and State
aforesaid, DO HEREBY CERTIFY, that __________________________, personally known
to me to be President of MICROGRAPHIC TECHNOLOGY CORPORATION, a Delaware
Corporation, and ______________________, personally known to me to be the Vice
President of said Corporation, and personally known to me to be the same persons
whose names are subscribed to the foregoing instrument, appeared before me this
day in person and severally acknowledged that as such President and Vice
President they signed and delivered the said instrument as President and Vice
President of said Corporation, pursuant to authority, given by the Board of
Directors of said Corporation as their free and voluntary act, and as the free
and voluntary act and deed of said Corporation, for the uses and purposes
therein set forth. GIVEN under my hand and official seal this _______ day of
_____________, 1997.
---------------------------------------------
Notary Public
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of WEST SUBURBAN BANK, an Illinois Banking Corporation,
personally known to me to be the same person whose name is subscribed to the
foregoing instrument as such ____________________, appeared before me this day
in person and acknowledged that he/she signed and delivered the said instrument
as his/her own free and voluntary act and as the free and voluntary act of said
Corporation; for the uses and purposes therein set forth. GIVEN under my hand
and official seal this ________ day of ______________, 1997.
---------------------------------------------
Notary Public
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<PAGE>
GUARANTY OF SOFTNET SYSTEMS, INC.
In consideration of and as an inducement to the execution of that
certain Purchase Agreement of even date herewith (the "Agreement") by and
between WEST SUBURBAN BANK ("Purchaser") and MICROGRAPHIC TECHNOLOGY CORPORATION
("Seller"), the undersigned hereby unconditionally guarantees the payment and
performance of all of Seller's obligations to Purchaser under the provisions of
the Agreement.
The undersigned waives: (1) acceptance and notice of acceptance by the
Purchaser of the foregoing undertakings; (2) notice of demand for payment or
non-performance of any obligations hereby guaranteed; (3) protest and notice of
default to any party with respect to the indebtedness or non-performance of any
obligations hereby guaranteed; (4) any right it may have to require that an
action be brought against Seller or any other person as a condition of
liability; (5) any and all claims and defenses which might otherwise operate as
a discharge of the liability of the undersigned under principles of suretyship
or otherwise; (6) all rights of subrogation, contribution and other recovery of
the obligations guaranteed hereby from the Seller; and (7) any and all other
notices and legal or equitable defenses to which he may be entitled.
Dated: _____________________
SOFTNET SYSTEMS, INC.
By: ______________________________
Its: ______________________________
...............................................................................
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of SOFTNET SYSTEMS, INC., a(n) ____________ Corporation,
personally known to me to be the same person whose name is subscribed to the
foregoing instrument as such ____________________, appeared before me this day
in person and acknowledged that he/she signed and delivered the said instrument
as his/her own free and voluntary act and as the free and voluntary act of said
Corporation; for the uses and purposes therein set forth. GIVEN under my hand
and official seal this ________ day of ______________, 1997.
--------------------------------------------
Notary Public
westsub2\microtec.agm\051297\cp
13
AMENDMENT "A" TO
PURCHASE AGREEMENT
DATED MAY 14, 1997 BETWEEN
WEST SUBURBAN BANK
AND
MICROGRAPHIC TECHNOLOGY CORPORATION
WHEREAS, M&I has provided the attached written acknowledgement (dated
August 15, 1997, included as Attachment 1) certifying that nine of the twelve
machines have meet the requirements as outlined paragraphs 1, 2, 3, 4, and 5 of
the "Acceptance Criteria" section of Amendment No. 1 to the PPF Agreement.
WHEREAS, M&I has continued to make timely payments in-full relating to
all twelve installed machines.
WHEREAS, MTC is continuing to pursue complete acceptance of all
machines pursuant to the requirements of the "Acceptance Criteria" section of
Amendment No. 1 to the PPF Agreement.
West Suburban Bank hereby amends Section 7 of the Purchase Agreement to
waive the existing Repurchase Events (as listed in Section 7, paragraphs a, b,
and c) and replaces said Repurchase Events with:
"Seller's failure to provide Purchaser with M&I's written
acknowledgement, on or before June 15, 1998, stating that all twelve
(12) of the Machines have been accepted by M&I and meet all
requirements of all paragraphs of the "Acceptance Criteria" section of
Amendment No. 1 to the PPF Agreement.
"Upon the occurrence of a Repurchase Event, without notice or demand,
Seller shall immediately pay Purchaser the entire Unrecovered Purchase
Price and all accrued and unpaid Interest Equivalent, whereupon the PPF
Agreement and the Machines shall be reconveyed by Purchaser to Seller
by appropriate bill of sale or other instrument of conveyance."
IN WITNESS WHEREOF, this Amendment A is executed and effective as of
___ day of ______________, 1997.
SELLER: PURCHASER:
MICROGRAPHIC TECHNOLOGY WEST SUBURBAN BANK
CORPORATION a Delaware Corporation
By: ______________________________ By: ________________________________
Its: _____________________________ Its: ________________________________
WESTSUB.MI/np/110697
LOAN MODIFICATION AGREEMENT
(EXTENSION OF MATURITY DATE)
THIS AGREEMENT is made and entered into this ______ day of
____________, 19__, by and between SOFTNET SYSTEMS, INC., a New York Corporation
("Softnet"), COMMUNICATE DIRECT, INC., an Illinois Corporation ("CDI"),
MICROGRAPHIC TECHNOLOGY CORPORATION, a Delaware Corporation ("MTC"), KANSAS
COMMUNICATIONS, INC., a Kansas Corporation ("KCI") (Softnet, CDI, MTC, and KCI
collectively referred to as "Borrowers") and WEST SUBURBAN BANK ("Bank").
WHEREAS, Borrowers have executed and delivered to Bank a Revolving
Credit Note dated September 15, 1995 (the "Note") in the original principal
amount of $6,500,000.00 in which each of the Borrowers promises to pay to the
order of Bank the principal amount and interest thereon as more specifically
provided in the Note; and
WHEREAS, to secure the repayment of the Borrowers' obligations under
the Note, each of the Borrowers has executed and delivered to Bank a Loan and
Security Agreement dated September 15, 1995 (collectively the "Loan
Agreements"); and
WHEREAS, Borrowers and Bank executed a Loan Modification Agreement
dated March 15, 1996 wherein the maximum amount of credit under the Note and the
Loan Agreements was increased to $9,500,000.00 and the Borrowing Base
limitations were modified in accordance with the terms thereof; and
WHEREAS, the Note (as modified from time to time) is scheduled to
mature by its terms on ___________ 15, 199_, and Borrowers have requested that
the maturity date of the Note be extended to ___________ 15, 199_, and Bank has
agreed to so extend the maturity date of the Note, subject to the terms and
conditions hereof.
NOW, THEREFORE, in consideration of Ten ($10.00) Dollars in hand paid
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. The foregoing recitals are incorporated herein by reference as though
fully set forth. Borrowers represent and warrant that the foregoing
recitals are true and correct.
2. The terms of the Note are hereby further amended to provide that the
Maturity Date is extended to ___________ 15, 199_, on which date the
entire principal balance, all accrued unpaid interest, and all other
amounts due under the terms of the Note and the other Loan Documents
shall be immediately due and payable without notice.
3. The terms of the Loan Documents (as such term is defined in the Loan
Agreements) are hereby amended and modified to comport with the terms
of this instrument to the extent the terms of any of the Loan Documents
may be otherwise inconsistent with the terms hereof. In all other
respects, the terms and provisions of the Loan Documents shall remain
in full force and effect.
4. Borrowers hereby reaffirm all of the terms, provisions, warranties, and
representations set forth in each of the Loan Agreements and the other
Loan Documents as previously modified and as modified hereby. Without
limiting the generality of the foregoing, each of the Borrowers
warrants and represents that no event of default exists under any of
the Loan Agreements or any
<PAGE>
of the other Loan Documents and no event has occurred or condition
exists which with the passage of time or the giving of notice would or
could constitute an event of default.
IN WITNESS WHEREOF, the parties have entered into this Loan
Modification Agreement on the date first above written.
SOFTNET SYSTEMS, INC.
By: ____________________________
Its: ____________________________
Attest: ____________________________
Its: ____________________________
COMMUNICATE DIRECT, INC.
By: ____________________________
Its: ____________________________
Attest: ____________________________
Its: ____________________________
MICROGRAPHIC TECHNOLOGY CORPORATION
By: ____________________________
Its: ____________________________
Attest: ____________________________
Its: ____________________________
KANSAS COMMUNICATIONS, INC.
By: ____________________________
Its: ____________________________
Attest: ____________________________
Its: ____________________________
WEST SUBURBAN BANK
By: ____________________________
Its: ____________________________
Attest: ____________________________
Its: ____________________________
westsub2\softnet3.lma\080597\cp
<PAGE>
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of SOFTNET SYSTEMS, INC., a New York Corporation, and
________________________________, _____________________ of said Corporation,
personally known to me to be the same persons whose names are subscribed to the
foregoing instrument as such ____________________ and ____________________,
appeared before me this day in person and severally acknowledged that they
signed and delivered the said instrument as their own free and voluntary act and
as the free and voluntary act of said Corporation; for the uses and purposes
therein set forth. GIVEN under my hand and official seal this ________ day of
______________, 199_.
------------------------------------------
Notary Public
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of COMMUNICATE DIRECT, INC., an Illinois Corporation, and
_____________________________, ___________________ of said Corporation,
personally known to me to be the same persons whose names are subscribed to the
foregoing instrument as such ____________________ and __________________,
appeared before me this day in person and severally acknowledged that they
signed and delivered the said instrument as their own free and voluntary act and
as the free and voluntary act of said Corporation; for the uses and purposes
therein set forth. GIVEN under my hand and official seal this ________ day of
______________, 199_.
------------------------------------------
Notary Public
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of MICROGRAPHIC TECHNOLOGY CORPORATION, a Delaware
Corporation, and ________________________________, ___________________ of said
Corporation, personally known to me to be the same persons whose names are
subscribed to the foregoing instrument as such ____________________ and
_____________________, appeared before me this day in person and severally
acknowledged that they signed and delivered the said instrument as their own
free and voluntary act and as the free and voluntary act of said Corporation;
for the uses and purposes therein set forth. GIVEN under my hand and official
seal this ________ day of ______________, 199_.
------------------------------------------
Notary Public
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of KANSAS COMMUNICATIONS, INC., a Kansas Corporation, and
______________________________, ___________________ of said Corporation,
personally known to me to be the same persons whose names are subscribed to the
foregoing instrument as such ____________________ and _______________________,
appeared before me this day in person and severally acknowledged that they
signed and delivered the said instrument as their own free and voluntary act and
as the free and voluntary act of said Corporation; for the uses and purposes
therein set forth. GIVEN under my hand and official seal this ________ day of
______________, 199_.
------------------------------------------
Notary Public
<PAGE>
STATE OF ILLINOIS )
) SS.
COUNTY OF ______ )
I, the undersigned, a Notary Public in and for the County and State
aforesaid, DO HEREBY CERTIFY that ________________________________,
_____________________ of WEST SUBURBAN BANK, an Illinois Banking Corporation,
personally known to me to be the same person whose name is subscribed to the
foregoing instrument as such ____________________, appeared before me this day
in person and acknowledged that he/she signed and delivered the said instrument
as his/her own free and voluntary act and as the free and voluntary act of said
Corporation; for the uses and purposes therein set forth. GIVEN under my hand
and official seal this ________ day of ______________, 199_.
------------------------------------------
Notary Public
EXHIBIT 21 Subsidiaries
SoftNet Systems, Inc.
List of Subsidiaries of the Registrant
September 30, 1997
MediaCity World, Inc. (Deleware)
Communicate Direct, Inc. (Illinois)
Kansas Communications, Inc. (Kansas)
Micrographic Technology Corporation (Delaware)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from Form 10-K for the year
ended September 30, 1997 and is qualified in its entirety by reference to such
Form 10-K.
</LEGEND>
<CIK> 0000097196
<NAME> SOFTNET SYSTEMS INC.
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1.000
<CASH> 37
<SECURITIES> 0
<RECEIVABLES> 7,389
<ALLOWANCES> 406
<INVENTORY> 4,310
<CURRENT-ASSETS> 11,803
<PP&E> 3,115
<DEPRECIATION> 1,478
<TOTAL-ASSETS> 24,377
<CURRENT-LIABILITIES> 10,501
<BONDS> 11,848
0
0
<COMMON> 34,448
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 24,377
<SALES> 38,556
<TOTAL-REVENUES> 38,556
<CGS> 23,608
<TOTAL-COSTS> 15,995
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,194
<INCOME-PRETAX> (2,145)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,145)
<DISCONTINUED> 0
<EXTRAORDINARY> (486)
<CHANGES> 0
<NET-INCOME> (2,631)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> 0
</TABLE>
