U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(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
--------------------- ---------------------------
Common Stock, par American Stock Exchange
value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at December 31, 1997 was approximately $42.4 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 December 31, 1997
- -------------------------------------- -----------------------------------
Common stock, $.01 per share par value 6,974,546
Documents Incorporated by Reference:
Proxy Statement for Annual Meeting of Shareholders to be held on
February 26, 1998 (Part III)
<PAGE>
Note: The discussions in this Annual Report contain forward-looking statements
that involve risks and uncertainties. The actual results of SoftNet Systems,
Inc. and its subsidiaries could differ significantly from those set forth
herein. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in "Business", particularly "Business-Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" as well as those discussed elsewhere in this Annual
Report. Statements contained herein that are not historical facts are
forward-looking statements that are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995. Words such as "believes",
"anticipates", "expects", "intends" and similar expressions are intended to
identify forward-looking statements, but are not the exclusive means of
identifying such statements. A number of important factors could cause the
Company's actual results for fiscal 1998 and beyond to differ materially from
past results and those expressed in any forward-looking statements made by, or
on behalf of, the Company. These factors include, without limitation, those
listed in "Business-Risk Factors".
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.
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 paper's 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.
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.
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 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 approximately
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.
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.
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 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
(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.
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. 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.
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.
Risk Factors
This Annual Report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from past
results and from those indicated by such forward-looking statements. Factors
that may cause such differences include, but are not limited to, those discussed
below.
Limited Operating History; Lack of Profitable Operations: The Company currently
operates in three industries; telecommunications, document management and
Internet services. On September 15, 1995, a wholly-owned subsidiary of the
Company merged with Kansas Communications, Inc. ("KCI"), a 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 and video conferencing systems. On December 29, 1995,
KCI acquired the Milwaukee operations of Executone Information Systems, Inc., in
a business combination accounted for as a purchase. KCI represents the
telecommunications segment of the Company. Also on September 15, 1995, the
Company acquired Micrographic Technology Corporation ("MTC") in a business
combination accounted for as a purchase. MTC is a designer, developer,
manufacturer and integrator of comprehensive, non-paper based systems and
components that enable MTC to deliver to its customers cost-effective solutions
for storage, indexing and/or distribution of high-volume output data streams.
MTC represents the document management segment of the Company. 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 whose services
include business to business Internet access and web development for sales,
marketing and electronic commerce applications. MCW also provides the ISP
Channel service, a no-cost solution for small to middle market cable and
wireless cable operators that allows these operators to provide broadband
Internet access and multimedia voice and video services to their subscribers
over the existing cable plant.
The Company has sustained substantial losses in each of the fiscal years that it
has operated in these three industries. In addition, the Company will require
significant funds to continue to implement its business strategies. Factors
which have had an influence on and may continue to influence the Company,
resulting in continued losses, include (i) the Company's expense levels are
based on anticipated future revenues and are relatively fixed in the short-term;
(ii) the Company incurs significant expenses in connection with research and
development of new product and service offerings, and the continued development
of its direct and indirect selling and marketing efforts; and (iii) the Company
may continue to incur charges related to acquisitions, divestitures, business
alliances or changing technologies. As a result, there can be no assurance that
the Company will be profitable in the future or that available funds, together
with funds provided by operations will be sufficient to fund the Company's
ongoing operations. If the Company has insufficient funds, there can be no
assurance that additional financing can be obtained on acceptable terms, if at
all. The absence of such financing would have a material adverse effect on the
Company's business, including a possible reduction or cessation of operations.
Fluctuations in Quarterly Results; Lack of Backlog; Volatility of Stock Price:
Results of operations have fluctuated and may continue to fluctuate
significantly from quarter to quarter. Factors which have had an influence on
and may continue to influence the Company's results of operations in a
particular quarter include the size and timing of customer orders and subsequent
shipments, customer order deferrals in anticipation of new products and
services, timing of product introductions or enhancements by the Company or its
competitors, market acceptance of new products and services, technological
changes in the industry, competitive pricing pressures, accuracy of customer
forecasts of end-user demand, changes in the Company's operating expenses,
personnel changes, foreign currency fluctuations, changes in the mix of products
sold, quality control of products sold, disruption in sources of supply, capital
spending, delays of payments by customers and general economic conditions.
Product sales to the Company's customers typically involve long approval and
procurement cycles and can involve large purchase commitments. Accordingly,
cancellation or deferral of one or a small number of orders could cause
significant fluctuations in the Company's quarterly results of operations.
Because the Company generally ships products within a short period after receipt
of an order, the Company typically does not have a material backlog of unfilled
orders, and revenues in any quarter are substantially dependent on orders booked
in that quarter. The Company's expense levels are based in large part on
anticipated future revenues and are relatively fixed in the short-term.
Therefore, the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected shortfall of orders. Accordingly, any significant
shortfall of demand in relation to the Company's expectations or any material
delay of customer orders would have an almost immediate adverse impact on the
Company's business and results of operations.
The Company expects to continue to evaluate new product and service
opportunities and engage in extensive research and development activities. This
will require the Company to continue to invest in research and development and
sales and marketing, which could adversely affect short-term results of
operations. The Company believes that its future revenue growth and
profitability will principally depend on its success in developing new products
and services. Failure to increase revenues from new products and services,
whether due to lack of market acceptance, competition, technological change or
otherwise, would have a material adverse effect on the Company's business and
quarterly results of operations.
As a result, the Company believes that period-to-period comparisons of its
revenues and results of operations are not necessarily meaningful and should not
be relied upon as indicators of future performance. Due to the aforementioned
factors, among others, it is possible that the Company's operating results will
be below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock could significantly decline. In
addition, the market price for the Company's Common Stock has been volatile and
in the future could be adversely affected. Market fluctuations may adversely
affect the market price of the Company's Common Stock without regard to the
operating performance of the Company. In addition, the Company believes that
factors such as announcements of developments related to the Company's business,
fluctuations in the Company's results of operations, sales of substantial
amounts of securities of the Company into the marketplace, general conditions in
the Company's industries or the worldwide economy, an outbreak of hostilities, a
shortfall in revenues or earnings compared to analysts' expectations, changes in
analysts' recommendations or projections, announcements of new products by the
Company or its competitors or developments in the Company's relationships with
its suppliers or customers could cause the price of the Company's Common Stock
to fluctuate in the future, perhaps substantially. There can be no assurance
that the market price of the Company's Common Stock will not experience
significant fluctuations in the future, including fluctuations that are
unrelated to the Company's performance. General market price declines or market
volatility in the future could adversely affect the market price of the Common
Stock, and the current market price of the Common Stock may not be indicative of
future market prices.
Rapid Technological Change; Dependence on New Products: There can be no
assurance that the Company's future development efforts will result in
commercially successful products or that the Company's products and services
will not be rendered obsolete by changing technology, new industry standards or
new product announcements by competitors. The markets for the Company's products
and services are characterized by intense competition, rapid technological
advances, evolving industry standards, changes in end-user requirements,
frequent new product introductions and enhancements, and rapidly evolving,
alternative service offerings. If technologies or standards applicable to the
Company's products or service offerings become obsolete or fail to gain
widespread commercial acceptance, then the Company's business and results of
operations will be materially adversely affected. Moreover, the introduction of
products embodying new technology or the emergence of new industry standards
could render the Company's existing products, as well as products under
development, obsolete and unmarketable.
The Company's past sales have resulted, to a significant extent, from its
ability to anticipate changes in technology and industry standards, and to
develop and introduce new and enhanced products and service offerings. The
Company's continued ability to adapt to such changes will be a significant
factor in maintaining or improving its competitive position and its prospects
for growth. Due to rapid technological changes in the Internet,
telecommunication and document imaging industries, the lengthy product approval
and purchase processes of the Company's customers and the Company's reliance on
third-party technology for the development of new products and service
offerings, however, there can be no assurance that the Company will successfully
introduce new products and services on a timely basis or achieve sales of new
products and services in the future. In addition, there can be no assurance that
the Company will have the financial and manufacturing resources necessary to
continue to successfully develop new products based on emerging technology or to
otherwise successfully respond to changing technology and/or industry standards.
Moreover, due to intense competition, there may be a time-limited market
opportunity for the Company's cable-based consumer and business Internet
services. There can be no assurance that the Company will be successful in
achieving widespread acceptance of its services before competitors offer
products and services with speed and performance similar to the Company's
current offerings.
Dependence on the Internet; Security Risks; Government Regulation: Market
acceptance of the Company's Internet services is substantially dependent upon
the adoption of the Internet for communications, entertainment and commerce. In
addition, critical issues concerning the commercial use of the Internet remain
unresolved and may affect the growth of Internet use, especially in the business
and consumer markets targeted by the Company. Despite growing interest in the
commercial possibilities for the Internet, many businesses and consumers have
been deterred from purchasing Internet access services for a number of reasons,
including inconsistent quality of service, lack of availability of
cost-effective, high-speed service, a limited number of local access points for
corporate users, inability to integrate business applications on the Internet,
the need to deal with multiple and frequently incompatible vendors, inadequate
protection of the confidentiality of stored data and information moving across
the Internet and a lack of tools to simplify Internet access and use. The
adoption of the Internet for commerce and communications, particularly by those
individuals and enterprises that have historically relied upon alternative means
of commerce and communication, generally requires understanding and acceptance
of a new way of conducting business and exchanging information. In particular,
enterprises that have already invested substantial resources in other means of
conducting commerce and exchanging information, or in relationships with other
ISPs, may be reluctant and slow to adopt a new strategy that may make their
existing personnel, infrastructure and ISP relationship obsolete. If the market
fails to develop, develops more slowly than expected or market competition
increases, the Company's business, operating results and financial condition may
be materially adversely affected.
Despite the implementation of security measures, the Company's or the Company's
cable affiliates' networks may be vulnerable to unauthorized access, computer
viruses and other disruptive problems. ISPs and OSPs have in the past
experienced, and may in the future experience, interruptions in service as a
result of the accidental or intentional actions of Internet users, current and
former employees or others. Unauthorized access could also potentially
jeopardize the security of confidential information stored in the computer
systems of the Company and its subscribers, which may result in liability of the
Company to its subscribers and also may deter potential subscribers. Although
the Company intends to continue to implement industry-standard security
measures, such measures have been circumvented in the past, and there can be no
assurance that measures implemented by the Company will not be circumvented in
the future. Moreover, the Company has no control over the security measures that
the Company's cable affiliates adopt. Eliminating computer viruses and
alleviating other security problems may require interruptions, delays or
cessation of service to the Company's subscribers, which could have a material
adverse effect on the Company's business, operating results and financial
condition.
Although the Company's services are not directly subject to current regulations
of the Federal Communications Commission ("FCC") or any other federal or state
communications regulatory agency, changes in the regulatory environment relating
to the Internet connectivity and the telecommunications markets, including
regulatory changes that, directly or indirectly, affect telecommunications
costs, limit usage of subscriber-related information or increase the likelihood
or scope of competition from the RBOCs or other telecommunications companies,
could affect the prices at which the Company may sell its services. For example,
proposed regulations by the FCC would require discounted Internet connectivity
rates for schools and libraries, which would limit revenues without reducing
related costs. The Company cannot predict the impact, if any, that future
regulation or regulatory changes might have on its business. In addition,
regulation of cable television rates may affect the speed at which the Company's
cable affiliates upgrade their cable infrastructures to two-way HFC. Currently,
the Company's cable affiliates have generally elected to classify the
distribution of the Company's services as "additional cable services" under
their respective franchise agreements, and to pay franchise fees in accordance
therewith. Local franchise authorities may attempt to subject the cable
affiliates to higher or other franchise fees or taxes or otherwise seek to
require them to obtain additional franchises in connection with their
distribution of the Company's services. There are thousands of franchise
authorities in the United States alone, and thus it will be difficult or
impossible for the Company or its cable affiliates to operate under a unified
set of franchise requirements. It is possible that governmental authorities may
attempt to impose additional fees or regulations on cable affiliates carrying
the Company's services. In the event that the FCC or another governmental agency
were to classify the cable system operators as "common carriers" of Internet
services, or cable system operators were to seek such classification as a means
of protecting themselves against liabilities, the Company's rights as the
exclusive ISP over the systems of certain of the cable affiliates could be lost.
In addition, if the Company or its cable affiliates were classified as common
carriers, they could be subject to government-regulated tariff schedules for the
amounts they could charge for their services. To the extent the Company
increases the number of foreign jurisdictions in which it offers its services,
the Company will be subject to additional governmental regulation. Any future
implementation of any of the aforementioned regulations, or any other regulation
not necessarily discussed herein, could have a material adverse effect on the
Company's business, operating results and financial condition.
In addition, the Company's business and results of operations may also be
adversely affected by the imposition of certain tariffs, duties and other import
restrictions on components which the Company obtains from non-domestic
suppliers. Changes in or future laws or regulations, in the U.S. or elsewhere,
could materially adversely affect the Company's business and results of
operations.
Need For Additional Financing: The Company must continue to enhance and expand
its product and service offerings in order to maintain its competitive position
and increase its market share. As a result, the continuing operations of the
Company's business may require substantial capital infusions. Whether or when
the Company can achieve cash flow levels sufficient to support its operations,
its development of new products and services, and its expansion of its Internet
business cannot be accurately predicted. Unless such cash flow levels are
achieved, the Company will require additional borrowings or the sale of debt or
equity securities, or some combination thereof, to provide funding for its
operations. In December 31, 1997, the Company completed a private placement of
Series A Convertible Preferred Stock for $5 million to fund its expansion of the
Company's Internet business. In the event that the Company cannot generate
sufficient cash flow from its operations, or is unable to borrow or otherwise
obtain additional funds to finance its operations when needed, the Company's
financial condition and results of operations could be adversely affected.
Competition: The markets for the Company's products and services are intensely
competitive and the Company expects competition to increase in the future. Many
of the Company's competitors and potential competitors have greater financial,
technological, manufacturing, marketing and human resources than the Company.
Any increase in competition could reduce the Company's gross margin, require
increased spending by the Company on research and development and sales and
marketing, and otherwise materially adversely affect the Company's business and
results of operations. In the document management industry, 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. In the
telecommunications industry 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"). 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 RBOCs 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
materially adversely affected. Furthermore, the markets for the Company's
Internet products and services are considered to be especially competitive and
the Company expects this competition to intensify in the future. Some of the
Company's most direct competitors in the access markets are ISP's, national long
distance carriers and local exchange carriers, wireless service providers, and
Internet content aggregators. Several competitors in this area are AT&T, BBN
Corporation, Earthlink Network, Inc., Netcom On-Line Communications Services,
Inc., PSInet Inc. and WorldCom, Inc., who provide basic Internet access to
residential consumers and businesses, generally using existing telephone network
infrastructures. This method is widely available and inexpensive. Barriers to
entry are low, resulting in a highly competitive and fragmented market. Some of
the Company's competitors are offering diversified packages of
telecommunications services, including Internet access service, to residential
customers and could bundle such services together, which could place the Company
at a competitive disadvantage. 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. The bases of competition in these
markets include transmission speed, reliability of service, ease of access,
price/performance, ease-of-use, content quality, quality of presentation,
timeliness of content, customer support, brand recognition, operating experience
and revenue sharing. 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 that are not covered by an exclusive relationship
between the Company and its cable affiliates. The Company's competitors in the
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 that are planning to deploy data services and with which the Company
would like to work. 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. Such competitors may be able to
undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and devote substantially more resources to developing Internet services
or on-line content 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.
Further, as a strategic response to changes in the competitive environment, the
Company may make certain pricing, service or marketing decisions or enter into
acquisitions or new ventures that could have a material adverse effect on the
Company's business, operating results or financial condition.
Dependence on Third-Party Technology: Some of the Company's products and service
offerings incorporate technology developed and owned by third parties.
Consequently, the Company must rely upon third parties to develop and introduce
technologies which enhance the Company's current products and enable the
Company, in turn, to develop its own products on a timely and cost-effective
basis to meet changing customer needs and technological trends in its
industries. Any impairment or termination of the Company's relationship with any
licensers of third-party technology would force the Company to find other
developers on a timely basis or develop its own technology. There can be no
assurance that the Company will be able to obtain the third-party technology
necessary to continue to develop and introduce new and enhanced products, that
the Company will obtain third-party technology on commercially reasonable terms
or that the Company will be able to replace third-party technology in the event
such technology becomes unavailable, obsolete or incompatible with future
versions of the Company's products. The absence of or any significant delay in
the replacement of third-party technology would have a material adverse effect
on the Company's business and results of operations. Exclusivity contracts;
Dependence on Sole Suppliers: Certain key products resold by the Company are
currently contracted exclusively for distribution in certain of the Company's
markets. For instance, the Company's telecommunications division currently
maintains an exclusivity contract with Executone Information Systems, Inc., for
the resale of their products in each of their defined markets. For the year
ended September 30, 1997, such products accounted for approximately 30% of the
Company's telecommunications business revenues, or 13% of the Company's total
revenues. Any change in the exclusivity provisions of these types of contracts,
or loss thereof, could have a materially adverse effect on the Company and its
results of operations.
In the Company's manufacturing operations, certain key components may be
available to the Company only through a limited number of suppliers. There can
be no assurance that delays in key components or product deliveries will not
occur in the future due to shortages resulting from the limited number of
suppliers, the financial or other difficulties of such suppliers or the possible
limited availability in the suppliers underlying raw materials. The inability to
obtain sufficient key components or to develop alternative sources for such
components, if and as required in the future, could result in delays or
reductions in product shipments, which in turn could have a material adverse
effect on the Company's customer relationships, its business and its results of
operations.
Ability to Expand Internet Business: The Company's current strategy for growth
is to focus on expanding its Internet business. As the Company recently entered
the Internet business with its acquisition of MCW in June 1996, it has very
limited operating history in this area and consequently has limited experience
in the Internet business. The successful expansion of the Company's Internet
business will require strategies and operations that are different from those
historically used by the Company in connection with its two other business
segments. There can be no assurance that the Company will be able to develop or
maintain strategies and business operations that are necessary to increase the
revenues of the Company's Internet business. The Company's ability to manage and
expand its Internet business will require the Company to continue to improve its
operational, management and financial systems and controls and to train,
motivate and manage its employees in an industry in which it has very limited
operating history. Consequently, such expansion could place a significant strain
on the Company's services and support operations, sales and administrative
personnel and other resources. As a result, the Company is subject to certain
expansion-related risks, including the risk that it will be unable to retain the
necessary personnel or acquire the experience and other resources necessary to
service such expansion adequately.
Risks Associated with Acquisitions: As part of the Company's strategy to enhance
and maintain its competitive position, the Company has previously consummated
several acquisitions and continues to evaluate potential acquisitions of
businesses, products and technologies. In considering an acquisition, the
Company may compete with other potential acquirors, many of whom may have
greater financial and operational resources. Further, the evaluation,
negotiation, and integration of such acquisitions may divert significant time
and resources of the Company, particularly of management. There can be no
assurance that suitable acquisition candidates will be identified, that any
acquisitions can be consummated or that any acquired businesses or products can
be successfully integrated into the Company's operations. In addition, there can
be no assurance that the previous acquisitions or any future acquisitions will
not have a material adverse effect upon the Company, particularly in the fiscal
quarters immediately following the consummation of such transactions due to
operational disruptions, unexpected expenses and accounting charges which may be
associated with the integration of such acquisitions.
Proprietary Technology; Risk of Third-Party Claims of Infringement: To develop
and maintain its competitive position, the Company relies primarily upon the
technical expertise and creative skills of its personnel, confidentiality
agreements and, to some degree, patents and copyrights. The Company owns patents
and has license rights to certain patents held by third parties. These patents
and patent rights relate to aspects of the technology used in certain of the
Company's products and services. Successful litigation against the Company
regarding its patents or patent rights, or infringement by the Company of the
patent rights of others, could have a material adverse effect on the Company's
business. There can be no assurance that patents issued to or licensed by the
Company will not be challenged or circumvented by competitors or be found to be
sufficiently broad to protect the Company's technology or to provide it with any
competitive advantage. Moreover, the Company's business and results of
operations may be materially adversely affected by competitors who independently
develop substantially equivalent technology. In addition, there can be no
assurance that confidentiality agreements will not be breached or that the
Company will have adequate remedies for any such breach. The Company's
competitive industries may be affected by an increasing number of patents and
frequent litigation based on allegations of patent and other intellectual
property infringement. To the knowledge of the Company there are no such claims
pending against or involving the Company. There can be no assurance that third
parties will not assert infringement claims against the Company in the future,
that assertions by such parties will not result in costly litigation, or that
the Company would prevail in any such litigation or be able to license any valid
and infringed patents from third parties on commercially reasonable terms.
Further, such litigation, regardless of its outcome, could result in substantial
costs to and diversion of effort by the Company. Any infringement claim or other
litigation against or by the Company could have a material adverse effect on the
Company's business and results of operations. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights to the same
extent as U.S. law.
Product Liability: Some of the Company's products, such as those sold by the
document management division, are used to provide information that relates to
the customer's enterprise operations and information that may be used in other
critical applications. Any failure by the Company's products to provide accurate
and timely information could result in claims against the Company. The Company
maintains insurance to protect against claims associated with the use of its
products, but there can be no assurance that its insurance coverage would
adequately cover any claim asserted against the Company. A successful claim
brought against the Company in excess of its insurance coverage could have a
material adverse effect on the Company. Even unsuccessful claims could result in
the Company's expenditure of funds in litigation and management time and
resources. There can be no assurance that the Company will not be subject to
product liability claims, that such claims will not result in liability in
excess of its insurance coverage or that the Company's insurance will cover such
claims or that appropriate insurance will continue to be available to the
Company in the future at commercially reasonable rates.
Dependence on Key Personnel: The success of the Company is dependent, in part,
on its ability to attract and retain qualified technical, marketing, sales and
management personnel. Competition for such personnel is intense and the
Company's inability to attract and retain additional key employees or the loss
of one or more of its current key employees could materially adversely affect
the Company's business and results of operations. There can be no assurance that
the Company will be successful in hiring or retaining key personnel.
Risks Due to Expanding International Operations: Sales outside of the United
States accounted for approximately 12% and 13% of the Company's total revenues
for fiscal years 1997 and 1996, respectively. Sales to foreign customers in the
fiscal years 1997 and 1996 have been attributable primarily to the document
management division. Further development of foreign distribution channels by all
of the Company's divisions, covering potentially all of the Company's products
and services, could require a significant investment by the Company, which could
adversely affect short-term results of operations. The Company believes that its
future revenue growth and profitability in the foreign markets will principally
depend on its success in developing these new distribution channels. Failure to
increase revenues from the introduction of new products and services to these
markets, could have a material adverse effect on the Company's business. Due to
its export sales, the Company is subject to the risks of conducting business
internationally, including unexpected changes in regulatory requirements,
foreign currency fluctuations which could result in reduced revenues or
increased operating expenses, tariffs and trade barriers, potentially longer
payment cycles, difficulty in accounts receivable collection, foreign taxes, and
the burdens of complying with a variety of foreign laws and trade standards. To
date, the Company's contracts have all been denominated in U.S. currency, and
therefore the Company has not suffered transaction losses due to foreign
currency fluctuations. This may not be the case in the future as the Company
further develops its foreign distribution channels. Similarly, the Company has
not previously engaged in hedging with respect to any foreign currency exposure
but may do so in the future. The Company also is subject to general geopolitical
risks, such as political and economic instability and changes in diplomatic and
trade relationships, in connection with its international operations. In
addition, the laws of certain foreign countries may not protect the Company's
proprietary technology to the same extent as do the laws of the U.S. There can
be no assurance that the risks associated with the Company's international
operations will not materially adversely affect the Company's business and
results of operations in the future or require the Company to modify
significantly its current business practices.
<PAGE>
SIGNATURE
The undersigned Registrant hereby files this amendment to its Annual Report on
Form 10-K for the fiscal year ended September 30, 1997.
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
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A. J. R. Oosthuizen
President and
Chief Executive Officer
