SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended September 30, 2000.
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)
Delaware 11-1817252
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
650 Townsend Street, Suite 225, San Francisco, CA 94103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 365-2500
Securities registered pursuant to Section
12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common stock, par NASDAQ National Market
value $0.01 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. |X|
The aggregate market value of the voting stock held by non-affiliates of the
registrant at November 30, 2000 was approximately $54,134,000.
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 30, 2000
------------------------------- --------------------------------
Common stock, $0.01 par value 26,650,555
<PAGE>
PART I
Item 1. Business
This Annual Report of Form 10-K contains forward-looking statements concerning
the Company's anticipated future operating results, future revenues and
earnings, adequacy of future cash flow, or expected Y2K readiness. (These
forward-looking statements include, but are not limited to, statements
containing the words "expect", "believe", "will", "may", "should", "project",
"estimate" and like expressions, and the negative thereof.) These statements are
subject to risks and uncertainties that could cause actual results to differ
materially from the statements, including the risks attendant to a growing
business in a new industry as well as those risks described under the caption
"Factors Affecting the Company's Operating Results".
For the year ended September 30, 2000, SoftNet Systems, Inc. and subsidiaries
(the "Company") further modified its plans to become a leading provider of
broadband Internet services. The Company's satellite subsidiary, Intelligent
Communications, Inc. ("Intellicom"), continued to expand by entering into the
Latin American market place as well as creating new products and services.
In addition on January 24, 2000, the Company founded Aerzone Corporation
("Aerzone"), a Delaware corporation, to provide wireless high-speed Internet
access and related services to global business travelers. As part of Aerzone's
business, the Company acquired Laptop Lane Limited ("Laptop Lane"), a Washington
corporation, on April 21, 2000. As of September 30, 2000 Laptop Lane provided
business center services in 12 airports in the United States and Amsterdam. On
December 19, 2000, the Company decided to discontinue the Aerzone business in
light of , among other things, signficant long-term capital needs and the
difficulty of securing the necessary financing because of the current state of
the financial markets. As part of the discontinuance of the Aerzone business,
the Company anticipates that it will sell the Laptop Lane business.
On December 7, 2000, the Company's Board of Directors approved a plan to
discontinue providing cable-based high-speed Internet access through its ISP
Channel, Inc. ("ISP Channel") subsidiary by December 31, 2000 because of (1)
consolidation in the cable industry made it difficult for ISP Channel to achieve
the economies of scale necessary to provide such services profitably, and (2)
the Company was no longer able to bear costs of maintaining the ISP Channel.
The Company is currently exploring whether it will develop new lines of business
as well as other alternative uses for the cash and other assets that will remain
after the discontinuance of ISP Channel and Aerzone.
The total employees of the Company have increased from 229 as of September 30,
1999 to approximately 552 as of September 30, 2000; of whom approximately 436
are associated with the various discontinued operations.
The Company's current principal executive office is located at 650 Townsend
Street, Suite 225, San Francisco, California 94103. As of September 30, 2000,
the Company had approximately 33 employees at its principal executive office.
<PAGE>
Intellicom
Intellicom combines Internet services with sophisticated two-way satellite
technology to deliver a turnkey solution for Internet service providers
("ISP's"), schools, corporations and businesses. Since 1995, Intellicom has
provided two-way satellite based global network services using a proprietary
network optimizing technology. Intellicom utilizes state-of-the-art wireless
technologies, broadband delivery, data-push and satellite-based Internet access
caching products to provide its customers with fast access to information and
efficient utilization of existing network capacity. Headquartered in Livermore,
California, Intellicom operates over 400 earth stations in the United States,
Latin America and the Caribbean, as well as a 24-hour-a-day, seven-day-a-week
Network Operations Center, Internet Data Center and Customer Support Center to
provide reliability and support for customers.
Products and Services
Intellicom offers two-way satellite connectivity solutions to North American and
Latin American markets through its branded services called SkyPOP(TM) and
K.I.D.S.(TM). These services provide customers with `one-hop' connectivity to
the U.S. Internet backbone structure via two different satellite systems,
"SatMex-5" and "GE-3". The Intellicom connectivity niche includes very small
aperture terminal ("VSAT") side services, including primary domain name services
("DNS") and extensive caching as well as standard Internet application services
including web and e-mail servers and user firewall. Hub side Internet services
include secondary DNS, Usenet alias and parent caching services as well as
reverse proxy or mirroring of VSAT customer web sites. In addition, Intellicom
utilizes a proprietary satellite protocol which overcomes the geo-stationary
latency issues through an optimized and efficient satellite protocol. The SkyPOP
and K.I.D.S. services are asymmetrical connectivity solutions with a 2 mb/s
broadcast and a scalable return channel from 19.2 kb/s to 256 kb/s utilizing
DVB-S satellite modem technology. The OEM-manufactured satellite system includes
both the outdoor and indoor units, creating a total `turn-key' service.
Products for ISP's. SkyPOP is targeted at the worldwide ISP market. A turnkey
solution, SkyPOP provides all the hardware, software, and services an ISP
requires to get up and running. SkyPOP's flexibility offers the ability for the
ISP to grow easily and quickly without major changes to their configuration.
SkyPOP is easy to deploy in any geography within a few hours and is a complete
solution for the ISP. Satellite service is customized to the ISP's need with a
dedicated 19.2 to 256 kbs link to the Internet and comes standard with a 2 Mb
shared down link for fast output of information to the ISP.
Intellicom also offers revenue-generating products and services that the ISP can
bundle with their Internet access to differentiate themselves in the market.
These include adding wireless LAN connectivity, Web hosting, and online content
management, such as from CMeRun who provides the Microsoft Office Suite for
consumers. Intellicom will also provide supporting professional services to the
ISP - through co-location, network management, and customer service - so that
the ISP can focus on growing their business with their subscribers. Intellicom's
standard service offering provides instant Internet backbone. Intellicom has
configured each SkyPOP with the services the ISP wants and needs.
The standard SkyPOP product includes an Internet services server, branded "Edge
Connector(TM)" with the following features:
Usenet Alias - Intellicom provides a domain name alias on behalf of its
customers and allows either `push' or `pull' usenet feeds. This provides up to
25% more bandwidth efficiency.
Primary and Secondary DNS - Intellicom provides name services as close to the
end user (subscriber) as possible. Without incurring a satellite hop,
Intellicom's Edge Connector provides primary DNS translation at the network
edge.
Integrated Firewall - Intellicom's Edge Connector provides an integrated
firewall and network Internet protocol ("IP") address that creates a barrier for
internal and external networks.
Transport Protocol - Intellicom has integrated a satellite protocol that
overcomes the geo- stationary satellite latency issue with TCP/IP and related
error correction.
<PAGE>
Preemptive Caching - The faster the information can reach the end user the
better. Intellicom caches the top 15% of activity on its network, with the goal
of eliminating all redundant data. This makes the end user experience better and
optimizes the network.
Products for Schools. Intellicom's K.I.D.S. service is designed exclusively for
the education community. Intellicom has been connecting schools to the Internet
for five years and Intellicom's K.I.D.S. package reflects the needs of the
education professional. Easily provisioned at the school site, the K.I.D.S.
product delivers one-hop access to the U.S. Internet portal. Computer labs are
directly connected to the Internet through an Ethernet cable which, connects
directly to the K.I.D.S. hardware. Installations are commonly completed in less
than a day.
The K.I.D.S. Web server has all the features described in SkyPOP. Additional
professional services are also provided to schools, with content targeted
specifically at the educational market. An example of this is OzNewMedia, which
develops graphical educational software for school curricula.
Future Products and Services. Intellicom is developing the following products
and services.
Voice over IP ("VoIP"). VoIP is one of the fastest growing applications in the
Internet world. Once used only as an inexpensive PC-to-PC telephone with poor
quality, large telecommunication companies are now investing heavily in
packetized voice for their standard networks with high quality telephone to
telephone transmission. Intellicom intends add VoIP capabilities to its product
portfolio as demand has already been expressed in the Caribbean and Latin
America regions for both enterprise intranets and ISP services.
Wireless Networking. This is Intellicom's total wireless solution for Internet
access that combines satellite IP gateway services and wireless technologies to
business users. This capability also provides alternatives where the terrestrial
infrastructure will not provide quick and cost-effective connectivity.
Content Hosting. Intellicom's hosting services allow companies to quickly
implement e-business networking and computing initiatives without prohibitive
costs for equipment, telecommunications networks and maintenance. Hosting
e-business applications with Intellicom reduces these expenses, while providing
access to an engineering group with satellite networking expertise, an
operations team that is always available, security experts, dedicated servers,
network reporting and monitoring and superior pro-active customer service.
Mediacasting. Intellicom's mediacasting services include data broadcasting,
mirroring, content delivery and streaming IP services. Customers benefit from
having their content and applications intelligently delivered via Intellicom's
connectivity services, by-passing the congested terrestrial networks. Intellicom
can provide broadcasting services or act as the transport layer only.
Intellicom's streaming mediacasting services provide comprehensive solutions for
both live and on-demand events, and support multiple streaming formats including
Apple's QuickTime(TM), RealAudio(TM) G2, RealVideo(TM) G2 and Microsoft Windows
Media(TM) player. The companies that use Intellicom's mediacasting service can
leverage its computing resources and avoid the need to invest in the hardware
and other infrastructure necessary to serve content on their own. Intellicom
intends to establish a dedicated 2 mb/s multicast broadcast carrier for
broadcasting services, utilizing small, yet scalable satellite return channel
starting at 19.2 kb/s or a telecommunication company based return path. This
platform will provide the transport layer for both data casting and mediacasting
services.
Network Architecture
Intellicom's network design integrates the broadcast capabilities of satellites
with Internet networking technologies to offer its customers a scalable solution
to the constraints of the public Internet infrastructure. Intellicom's network's
open technical architecture enables it to provide three categories of Internet
services: (a) high-speed broadband connectivity to the Internet backbone, (b)
enhanced Internet services, such as Internet telephony, and (c) Internet content
distribution, such as news feeds and streaming media. Intellicom's high
performance network is designed to provide enhanced connectivity to its
customers. Intellicom's Livermore, California Internet Data Center ("IDC") is
the central hub for the North and South American market penetration. The IDC is
connected to the Internet by high-speed SONET circuits.
Intellicom leases satellite transponder space from GE Americom and Loral SatMex.
Intellicom continues to negotiate for additional long-term satellite space
segment in the North American and Latin America markets. From the Livermore,
California IDC, Intellicom operates three Central Earth Station systems linking
with the two geo-stationary satellites. Intellicom currently uses 2 mb/s
outbound shared carriers and is currently operating approximately 15 carriers.
The inbound transmitters from Intellicom's customer VSAT sites range from 19.2
kb/s to 256 kb/s SCPC dedicated links.
<PAGE>
Sales and Marketing
Intellicom's sales and marketing objective is to achieve broad market
penetration and increase brand name recognition among Internet content
providers, Web hosting companies and ISPs on a global basis through investments
in the expansion of its sales organization and extensive marketing activities.
Intellicom targets its customers predominantly through distributors complemented
by a range of external alliances. Intellicom co-markets with other companies to
increase the effectiveness of its distributors and to serve market segments and
geographies that are better served through alternative channels. Furthermore,
Intellicom's strategic relationships with companies such as Radyne ComStream
Inc. and Mentat Systems, Inc. provide it with references and leads arising from
their sales forces.
Intellicom's marketing organization is responsible for strategy and business
planning, product management, product marketing, public relations, sales support
and marketing communications. Product management includes defining the product
plan and bringing to market Intellicom's products and services. These activities
include product strategy and definition, pricing, competitive analysis, product
launches, channel program development and product life cycle management.
Intellicom stimulates product demand through a broad range of marketing
communications and public relations activities. Primary marketing communications
activities include public relations, collateral, advertising, direct response
programs and management of its Web site. Intellicom's public relations focuses
on cultivating industry analyst and media relationships with the goal of
securing broad media coverage and recognition as a leader and innovator in
global Internet applications deployment.
Strategic Relationships. Intellicom believes that strategic technology and
marketing/reselling relationships enhance its ability to reach new customers.
Strategic relationships with Intellicom's customers in its target markets, such
as with Tricom Communications, Inc., bring not only a high level of
understanding of the specific needs of that market but also credibility and
visibility with potential new customers. Intellicom also has strategic
relationships with companies that can enhance its ability to develop and deliver
new application services, such as Radyne ComStream Inc.. These strategic
relationships provide powerful additional sales channels for Intellicom; for
example Intellicom will be promoted by Radyne ComStream Inc.'s sales force.
Additionally, Intellicom hopes to leverage these enterprises' research and
development expertise to develop new satellite connectivity solutions. As
opportunities arise, Intellicom looks to establish new relationships with system
integrators, hardware and software vendors and application service providers
that provide network equipment, software and consulting services to companies.
Customer Service and Quality Assurance
Intellicom offers a high level of customer service and quality assurance by
understanding the technical requirements and business objectives of its
customers and addressing their needs proactively on an individual basis. By
working closely with its customers, Intellicom is able to enhance the
performance of its customers' Internet operations, avoid downtime, resolve
quickly any problems that may arise and make appropriate adjustments in services
as customer needs change over time. Intellicom works with its customers to
ensure that it is offering the appropriate types and quality of service.
Intellicom uses advanced software tools to aid in its customer monitoring and
service efforts.
Customer service begins before a sale, when Intellicom provides technical
support for complex orders. During the installation phase, Intellicom assigns a
transition team and a project manager, who also retains responsibility for the
account after installation, to assist the new customer with the installation
process. After installation, the customer's equipment is supervised by
Intellicom's network operations center in Eau Claire, Wisconsin, which is
operated twenty-four hours a day, seven days a week by technicians who answer
customer calls, monitor the site and network operations and activate teams to
solve problems that arise. Intellicom's customer service personnel are also
available to assist customers whose operations require specialized procedures.
Customer Service Center ("CSC") Intellicom offers technical support services to
its customers through a CSC location in Eau Claire, Wisconsin. As part of
Intellicom's value-added services, Intellicom will provide technical support for
its clients' customers. The call center team operates in various levels of
service, from incoming subscriber services, end-user connectivity and orders to
satellite network monitoring, as well as product support for network servers and
routers. This diversified team of support technicians manages Intellicom's
customer's incidents as well as operates Intellicom's small dial-up ISP
division. The CSC staff is multi-lingual with emphasis on Spanish in support of
Intellicom's Latin American deployments. In addition, Intellicom supports
various clients in an out-sourced relationship.
Network Integration and Testing Facilities
Intellicom operates an assembly and integration facility in Livermore,
California. From this location, Intellicom receives components from
approximately 35 vendors, and assembles the components into turn-key customer
systems. Upon completion of the assembly process, the systems are tested on six
dedicated satellite systems at the facility. Final customer RF and IP
configurations are downloaded, tested and the entire system packaged and
shipped.
<PAGE>
Competition
Intellicom's business is intensely competitive. There are few substantial
barriers to entering the hosting service business, and Intellicom expects that
it will face additional competition from existing competitors and new market
entrants in the future. Intellicom believes that participants in this market
must grow rapidly and achieve a significant presence in the market in order to
compete effectively. Intellicom believes that the principal competitive factors
in Intellicom's market are uncongested connectivity, quality of facilities,
level of customer service, price, the financial stability and credibility of the
provider, brand name, the management team and the availability of network
management tools. Intellicom might not have the resources or expertise to
compete successfully in the future. Intellicom's current and potential
competitors in the market include: (i) providers of satellite based Internet
connectivity services, such as NetSat Express, Interpacket Networks, which is
being acquired by a subsidiary of American Tower Corporation, Loral Orion,
Hughes Electronics' PanAmSat and Hughes Network Systems as well as providers of
co-location services, such as Exodus Communications, Inc., Frontier
GlobalCenter, Inc., which is being acquired by Global Crossing Holdings, Ltd,
Hiway Technologies, Inc., which was acquired by Verio Inc. and Globix
Corporation; (ii) national and regional ISPs, such as Concentric Network
Corporation, PSINet, Inc., MCI WorldCom and certain subsidiaries of GTE
Corporation; (iii) global, regional and local telecommunications companies, such
as Sprint, MCI WorldCom and regional bell operating companies, some of whom
supply capacity to Intellicom; and (iv) large information technology outsourcing
firms, such as International Business Machines Corporation and Electronic Data
Systems. Some of these companies operate in one or more of these markets. In
addition, many of Intellicom's current and potential competitors have
substantially greater financial, technical and marketing resources, larger
customer bases, longer operating histories, greater name recognition and more
established relationships in the industry than Intellicom does. As a result,
some of these competitors may be able to develop and expand their network
infrastructures and service offerings more quickly, adapt to new or emerging
technologies and changes in customer requirements more quickly, take advantage
of acquisitions and other opportunities more readily, devote greater resources
to the marketing and sale of their services and adopt more aggressive pricing
policies than Intellicom can. In an effort to gain market share, some of
Intellicom's competitors have offered co-location services similar to
Intellicom's, at lower prices or with incentives not matched by Intellicom,
including free start-up and domain name registration, and periods of free
service and low-priced Internet access. As a result of these policies,
Intellicom may encounter increasing pricing pressure that could have a
significant adverse effect on its business and operating results.
In addition, these competitors have entered and will likely continue to enter
into joint ventures, consortiums or consolidations to provide additional
services competitive with those provided by Intellicom. As a result, such
competitors may be able to provide customers with additional benefits in
connection with their co-location and network management solutions, including
reduced communications costs, which could reduce the overall costs of their
services relative to Intellicom's services. Intellicom might not be able to
offset the effects of any such price reductions. In addition, Intellicom expects
competition to intensify as its current and potential competitors incorporate a
broader range of bandwidth, connectivity and Internet networking services and
tools into their service offerings. Intellicom believes that companies seeking
co-location and Internet connectivity providers for their critical Internet
operations may use more than one company to provide this service. As a result,
these customers would be able to shift the amount of service and bandwidth usage
from one provider to another. Intellicom may also face competition from its
suppliers. Intellicom's agreements with its suppliers and other partners do not
limit or restrict those parties from offering similar services to Intellicom's
customers, thereby enabling such parties to compete against Intellicom.
Employees
As of September 30, 2000, Intellicom has 83 employees.
Facilities
Intellicom operates from leased facilities in Livermore, California; Eau Claire,
Wisconsin; and Miami, Florida. The Livermore location houses Intellicom's
operations data center and up/down link facility as well as the administrative
and sales offices. The Eau Claire, Wisconsin office consists of Intellicom's
customer service center and Intellicom's ISP subsidiary. The Miami, Florida
office consists of Intellicom's Latin American sales and engineering
departments.
Legal Proceedings
Intellicom has no material pending litigation.
<PAGE>
ISP Channel, Inc.
On December 7, 2000, the Company decided to discontinue providing cable-based
high-speed Internet access through its ISP Channel subsidiary because, among
other things, consolidation in the cable industry made it difficult for the ISP
Channel to achieve the economies of scale necessary to provide such services
profitably.
As of December 31, 2000, ISP Channel ceased operations at the majority of its
locations. ISP Channel will seek to wind down its business by the end of January
2001. The financial statements presented elsewhere in this Annual Report on Form
10-K include the operations of ISP Channel as a discontinued operation.
Employees
As of September 30, 2000, ISP Channel had 276 employees.
Facilities
ISP Channel has a network operations center and customer care center located
respectively at 510 and 520 Logue Avenue, Mountain View, California 94043. The
Company also maintains sales offices in Chicago, Illinois; Denver, Colorado; and
Los Angeles, California.
Legal Proceedings
ISP Channel has no material pending litigation.
<PAGE>
Aerzone Corporation
On January 24, 2000 the Company founded Aerzone (formerly SoftNet Zone, Inc.), a
Delaware corporation, to provide business travelers wireless broadband Internet
services as well as business center services at airports, hotels, convention
centers, and other high traffic areas where business people congregate. On April
21, 2000, the Company acquired Laptop Lane, a provider of business center
services primarily at airports, and transferred Laptop Lane to Aerzone in
exchange for Aerzone common stock. On December 19, 2000, the Company announced
that it would discontinue the operations of Aerzone and anticipated that it will
sell the Laptop Lane business. In making the decision to discontinue the Aerzone
business, the Company determined that the capital needs of the Aerzone wireless
business were greater than the Company's financial capacity and that Aerzone's
ability to raise the investment capital necessary to support its growth was not
likely.
With the exception of the potential sale of Laptop Lane, Aerzone will seek to
wind down its business by the end of January 2001. The financial statements
presented elsewhere in this Annual Report on Form 10-K include the operations of
Aerzone as a discontinued operation.
Laptop Lane
As of September 30, 2000, Aerzone, through Laptop Lane, operated 19 retail
stores in 12 airports, and had an additional 4 retail stores under construction
in 2 airports and one convention center. The total number of workstations at
such retail stores, either operating or under construction, was 178.
A Laptop Lane business center includes 4 to 8 private workstations. Each
workstation includes a desktop computer, a docking station for a laptop
computer, a telephone, and high-speed Internet connectivity. Each Laptop Lane
also provides printing, faxing, copying, packaging and shipping, and
videoconferencing services. Where space permits, Laptop Lanes include conference
centers for meetings. In addition to providing a workstation, Laptop Lanes sell
products geared to business travelers.
Employees
As of September 30, 2000, Aerzone had 160 employees, of whom 109 worked in
Laptop Lanes across the United States and in Amsterdam.
Facilities
Aerzone is headquartered at SoftNet's offices in San Francisco, California.
Aerzone has additional offices in Seattle and Bellevue, Washington and
Amsterdam, the Netherlands.
Legal Proceedings
Aerzone has no material pending litigation.
<PAGE>
Factors Affecting The Company's Operating Results
The risks and uncertainties described below are not the only ones that the
Company faces. Additional risks and uncertainties not presently known to the
Company or that the Company currently deems immaterial may also impair the
Company's business operations. If any of the following risks actually occur, the
Company's business, financial condition or results of operations could be
materially adversely affected. In such case, the trading price of the Company's
common stock could decline, and you may lose all or part of your investment.
Company Risks
The Company has a Limited History Operating Internet Businesses, which may make
it Difficult to Evaluate the Company's Performance and Prospects
Any evaluation of the Company's businesses will be difficult because of its
limited operating history in the Internet access and services business. The
Company acquired ISP Channel in June 1996, Intelligent Communications in
February 1999 and formed Aerzone in January 2000. Prior to 1996, the Company did
not have any experience in businesses related to the Internet or high
technology, and since the acquisition of Intellicom in February 1999, the nature
of the Company's business has changed. As a result, the Company's historical
financial information may not be indicative of the Company's future results, and
the Company's prospects are difficult to predict and may change rapidly.
In addition, the Company confronts all of the challenges and uncertainties
encountered by growing, early-stage companies, particularly companies in the new
and rapidly evolving international market for Internet connectivity, access and
related services. These challenges include the Company's ability to:
o Increase the services purchased from the Company by its customers and the
amount of revenue the Company receives from each of its customers;
o Satisfy the changing needs of the Company's existing and future customers;
o Acquire, develop and market new Internet services;
o Respond to the changing needs of the Internet access and content delivery
market;
o Expand Intellicom's international customer base;
o Develop and maintain strategic and business relationships;
o Capitalize on the Company's early entrant status; and o Recruit and retain
key personnel.
The Company has a History of Losses and Expects to Incur Losses in the Future
The Company has sustained substantial losses over the last five fiscal years and
expects to continue to report net losses for the foreseeable future. For the
year ended September 30, 2000, the Company had a net loss of $232,353,000. As of
September 30, 2000, the Company had an accumulated deficit of $332,600,000. The
Company expects to incur additional losses and experience negative cash flows
related to capital expenditures, sales and marketing, and general and
administrative expenses as Intellicom expands its satellite-based Internet
services. These efforts may be more expensive than the Company currently
anticipates. The Company cannot guaranty it will ever achieve profitability or
reduce its accumulated deficit.
The Company may not Generate Sufficient Cash Flows to Support its Expenses
The Company's current expense levels are to a large extent fixed on expectations
of future revenues. In addition, the Company may be unable to adjust spending
quickly enough to compensate for any unexpected revenue shortfall. As a result,
the Company may not be able to grow its revenues quickly enough to absorb these
expenses.
The Company may not have Sufficient Capital to Fund its Business Plan
The Company cannot predict with any degree of accuracy whether the Company will
ultimately achieve cash flow levels sufficient to support the Company's
operations, development of new products and services, and expansion of the
Company's Internet services. Unless the Company reaches such cash flow levels,
the Company may require additional financing to provide funding for operations.
If the Company is required to raise capital through a debt financing, the
Company may be highly leveraged and such debt securities may have rights or
privileges senior to those of the Company's current stockholders. If the Company
is required to raise capital by issuing equity securities, the percentage
ownership of the Company's stockholders will be reduced, stockholders may
experience dilution and such securities may have rights, preferences and
privileges senior to those of the Company's common stock. The Company cannot
provide any assurance that such financing will be on terms that are favorable to
the Company. In the event that the Company cannot generate sufficient cash flow
from operations, or is unable to borrow or otherwise obtain additional funds on
favorable terms to finance operations when needed, the Company's business,
financial condition, and prospects would be materially adversely affected.
<PAGE>
The Company's Quarterly Results are Unpredictable and may Adversely Affect the
Trading Price of the Company's Common Stock
The Company's operating results have fluctuated widely on a quarterly basis, and
we expect to experience fluctuation in future quarterly operating results. In
addition, the Company cannot predict with any significant degree of certainty
the Company's quarterly operating results. Many of the factors that cause the
Company's quarter-to-quarter operating results to be unpredictable are largely
beyond the Company's control. Factors that impact operating results include:
o Demand for the Company's products and services;
o Conditions in the Internet services industries;
o Timing of dispositions, acquisitions and capital expenditures;
o General economic conditions; and
o Timing and conditions of sales.
As a result, the Company believes that period-to-period comparisons of the
Company's revenues and results of operations are not necessarily meaningful and
should not be relied upon as indicators of future performance. It is likely that
in one or more future quarters the Company's results may fall below the
expectations of analysts and investors. In such event, the trading price of the
Company's common stock would likely decrease.
The Company's Purchase of Intellicom may Adversely Affect the Company's
Financial Condition
The purchase of Intellicom involves other risks including potential negative
effects on the Company's reported results of operations from acquisition-related
charges and amortization of acquired technology and other intangible assets. As
a result of the Intellicom acquisition, the Company recorded approximately
$16,075,000 of intangible assets. The resulting amortization expense will
adversely affect the Company's earnings and profitability for the foreseeable
future. If the amount of such recorded intangible assets is increased or if the
Company has future losses and is unable to demonstrate the Company's ability to
recover the amount of intangible assets recorded during such time periods, the
period of amortization could be shortened, which may further increase annual
amortization charges. In such event, the Company's business and financial
condition could be materially and adversely affected. In addition, the
Intellicom acquisition was structured as a purchase by the Company of all of the
outstanding stock of Intellicom. As a result, the Company could be adversely
affected by direct and contingent liabilities of Intellicom. It is possible that
the Company is not aware of all of the liabilities of Intellicom , and that
Intellicom has greater liabilities than the Company expected.
If the Company is unable to Successfully Integrate Future Acquisitions into the
Company's Operations, then the Company's Results and Financial Condition may be
Adversely Affected
In addition to the recent acquisitions of Intellicom and Laptop Lane, the
Company may acquire other businesses that the Company believes will complement
the Company's existing businesses. The Company cannot predict if or when any
prospective acquisitions will occur or the likelihood that they will be
completed on favorable terms. Acquiring a business involves many risks,
including:
o Disruption of the Company's ongoing business and diversion of resources and
management time;
o Dilution to existing stockholders if the Company uses equity securities to
finance acquisitions;
o Incurrence of unforeseen obligations or liabilities;
o Inability of management to maintain uniform standards, controls, procedures
and policies;
o Difficulty assimilating the acquired operations and personnel;
o Risks of entering markets in which the Company has little or no direct
prior experience; and
o Impairment of relationships with employees or customers as a result of
changes in management.
The Company cannot assure that it will make any acquisitions or that it will be
able to obtain additional financing for such acquisitions, if necessary. If any
acquisitions are made, the Company cannot assure that it will be able to
successfully integrate the acquired business into its operations or that the
acquired business will perform as expected.
<PAGE>
The Company's Equity Investments in Other Companies may not Yield any Returns
The Company has made equity investments in several Internet-related companies,
including joint ventures in other countries. In most instances, these
investments are in the form of illiquid securities of private companies. These
companies typically are in an early stage of development and may be expected to
incur substantial losses. The Company's investments in these companies may not
yield any return. Furthermore, if these companies are not successful, the
Company could incur charges related to the write-down or write-off of assets.
The Company also records and continues to record a share of the net losses in
these companies, up to the Company's cost basis. The Company may make additional
investments in the future. Losses or charges resulting from these investments
could harm the Company's operating results.
The Company does not Intend to pay Dividends
The Company has not historically paid any cash dividends on the Company's common
stock and does not expect to declare any such dividends in the foreseeable
future. Payment of any future dividends will depend upon the Company's earnings
and capital requirements, the Company's debt obligations and other factors the
board of directors deems relevant. The Company currently intends to retain its
earnings, if any, to finance the development and expansion of its businesses.
The Company's Stock Price is Volatile
The volatility of the Company's stock price may make it difficult for holders of
the common stock to transfer their shares at the prices they want. The market
price for the Company's common stock has been volatile in the past, and several
factors could cause the price to fluctuate substantially in the future. These
factors include:
o Announcements of developments related to the Company's business;
o Fluctuations in the Company's results of operations;
o Sales of substantial amounts of the Company's securities into the
marketplace;
o General conditions in the Company's industries or the worldwide economy;
o An outbreak of war or hostilities;
o A shortfall in revenues or earnings compared to securities analysts'
expectations;
o Changes in analysts' recommendations or projections;
o Announcements of new products or services by the Company or the Company's
competitors; and
o Changes in the Company's relationships with the Company's suppliers or
customers.
The market price of the Company's common stock may fluctuate significantly in
the future, and these fluctuations may be unrelated to the Company's
performance. General market price declines or market volatility in the future
could adversely affect the price of the Company's common stock, and thus, the
current market price may not be indicative of future market prices.
Prospective Anti-Takeover Provisions could Negatively Impact the Company's
Stockholders
The Company is a Delaware corporation. The Delaware General Corporation Law
contains certain provisions that may discourage, delay or make a change in
control of the Company more difficult or prevent the removal of incumbent
directors. In addition, the Company's certificate of incorporation and bylaws
have certain provisions that have the same effect. These provisions may have a
negative impact on the price of the Company's common stock and may discourage
third-party bidders from making a bid for the Company or may reduce any premiums
paid to stockholders for their common stock.
Intellicom Risks
If Intellicom Fails to Manage its Expanding Business Effectively, its Business,
Financial Condition and Prospects could be Adversely Affected
Intellicom's growth and expected growth is likely to continue to place a
significant strain on its resources. To exploit fully the market for
Intellicom's products and services, Intellicom must rapidly execute its sales
strategy while managing anticipated growth through the use of effective planning
and operating procedures. In addition, Intellicom must develop its customer
service and network operations centers. To manage Intellicom's anticipated
growth, it must, among other things:
<PAGE>
o Continue to develop and improve Intellicom's operational, financial and
management information systems as well as its customer service and network
operations centers;
o Hire and train additional qualified personnel;
o Continue to expand and upgrade core technologies; and
o Effectively establish and manage multiple relationships with various
customers, suppliers and other third parties.
Consequently, such expansion could place a significant strain on Intellicom's
services and support operations, sales and administrative personnel and other
resources. Intellicom may, in the future, also experience difficulties meeting
demand for its products and services. Intellicom cannot assure that its systems,
procedures or controls will be adequate to support its operations or that
management will be able to exploit fully the market for its products and
services. Intellicom's failure to manage growth effectively could have a
material adverse effect on the Company's business, financial condition and
prospects.
Intellicom may Fail if its Industry as a Whole Fails or its Products and
Services do not Gain Commercial Acceptance
It has become feasible to offer Internet services using satellites on a broad
scale only recently. There is no proven commercial acceptance of satellite-based
Internet services and none of the companies offering such services are currently
profitable. It is currently very difficult to predict whether these companies
will become viable. The failure of the broadband Internet services industry to
evolve in the manner in which it is currently contemplated could adversely
affect the Company's business, financial condition and prospects.
The success of Intellicom will depend upon the willingness of new and existing
subscribers to pay the monthly fees and installation costs associated with the
service and to purchase or lease the equipment necessary to access the Internet.
Accordingly, the Company cannot predict whether Intellicom's pricing models will
be viable, whether demand for Intellicom's services will materialize at the
prices they expect to charge, or whether current or future pricing levels will
be sustainable. If Intellicom does not achieve or sustain such pricing levels or
if their services do not achieve or sustain broad market acceptance, then the
Company's business, financial condition, and prospects will be materially
adversely affected.
An Interruption in the Supply of Products and Services that Intellicom Obtains
from Third Parties could cause a Decline in Sales of Intellicom Services
In designing, developing and supporting Intellicom's Internet services,
Intellicom relies extensively on third parties. In particular, Intellicom relies
on satellite providers, satellite dish manufacturers and Internet hardware
manufacturers and systems integrators to help build its networks. These
suppliers may experience difficulty in supplying Intellicom with products and
services sufficient to meet the needs of Intellicom or they may terminate or
fail to renew contracts for supplying these products and services to Intellicom
on terms that it finds acceptable. Any significant interruption in the supply of
any of these products or services could cause a decline in sales of Intellicom's
services.
Intellicom Derives a Significant Portion of its Revenues from Providing
Equipment and Internet Services to a Limited Number of Customers which Presents
Credit Risks and could cause Increased Expenses or Losses of Future Revenue
For the year ended September 30, 2000, sales to Intellicom's largest customer,
Tricom, S.A., accounted for approximately 82% of Intellicom's net revenue and as
of September 30, 2000, Tricom accounted for approximately 92% of Intellicom's
total accounts receivable. Intellicom expects that a small number of customers
will continue to account for a significant portion of its revenue for the
foreseeable future. If any one of Intellicom's customers, especially Tricom,
discontinues its relationship for any reason, Intellicom may suffer a
significant reduction to its future revenue and may incur significant losses.
Intellicom Depends on Third-Party Carriers to Maintain its Networks and any
Interruption of its Operations due to the Failure to Maintain such Networks
would have a Material Adverse Effect on the Company's Business, Financial
Condition and Prospects
Intellicom's success will depend upon the capacity, reliability and security of
the network used to carry data between its subscribers and the Internet. A
portion of the network used by Intellicom, is owned by third parties, and
accordingly Intellicom has no control over its quality and maintenance.
Currently, Intellicom has transit agreements with MCIWorldCom, Sprint, and
others to support the exchange of traffic between its network operations centers
and the Internet. In addition, Intellicom has agreements with SatMex and GE
Americom for satellite transponder space. The failure of any other link in the
delivery chain resulting in an interruption of Intellicom's operations would
have a material adverse effect on the Company's business, financial condition
and prospects.
<PAGE>
Intellicom's Services may be Subject to Downward Pricing Pressures, which would
Negatively Impact its Financial Results
The market for Internet access in the U.S. is subject to downward pricing
pressure caused by a number of factors, including increased competition and
technological advances. Pricing pressures outside of the U.S. in the markets
Intellicom serves may develop as international Internet access and services
become more available. To operate, Intellicom has certain costs, such as its
lease of satellite transmission capacity, which are relatively fixed and
generally not susceptible to downward pricing pressure. As a result, Intellicom
has little flexibility in lowering the price for its services. If Intellicom is
affected by downward pricing pressure, it cannot assure that it will be able to
offer Internet services at prices that are competitive or profitable.
Intellicom has a Lengthy and Complex Sales Cycle, which may Require it to Commit
Significant Resources Prior to Receiving Revenues
Intellicom targets large enterprises as ideal customers. Because the purchase of
Intellicom's products and services is a significant investment for its customer
base, Intellicom's customers generally take a long time to evaluate Intellicom's
products and services. Intellicom expects that most of its customers will
evaluate its products and services in a process involving multiple people and
departments. In addition, Intellicom's customers may have concerns about the
introduction or announcement of new products, services and technologies, whether
by Intellicom or by others, as well as requests for product or service
enhancements. Accordingly, Intellicom has and expects to continue to expend
significant resources educating prospective customers about the uses and
benefits of its services. Intellicom's limited historical experience indicates
that its sales cycle can range from three months to nine months, although the
cycle could be longer due to significant delays over which Intellicom has little
or no control, such as the budgeting and approval process of its customers. As a
result of this long sales cycle, Intellicom may take a substantial amount of
time to generate revenue from sales efforts. In addition, any delay in selling
Intellicom's products and services could lead prospective customers to find
alternatives from a competitor or to develop an in-house solution. Further,
Intellicom may spend a significant amount of time and money on a potential
customer that ultimately does not purchase its services.
Intellicom's Business will Suffer and its Financial Results will Deteriorate if
it does not Continue to Expand its Customer Base
Intellicom's success depends primarily on the growth of its customer base, the
retention of its current customers and its ability to expand the number of
Internet services it offers to its customers so that revenue per customer and
overall revenue increase. If Intellicom is unable to maintain and expand its
customer base its business and financial results will suffer. Intellicom's
ability to attract new customers and, to a lesser degree, maintain current
customers, as well as its ability to increase the amount of revenue it receives
from each customer, depends on a variety of factors, including:
o Continued growth in demand by international ISPs and corporate enterprises
for Internet backbone connectivity;
o Intellicom's ability to provide adequate bandwidth to all of its customers;
o Intellicom's ability to provide additional services across its network;
o Intellicom's ability to broadcast content around the world;
o The success in Intellicom's development and management of its strategic and
business relationships;
o Intellicom's success in establishing and maintaining business relationships
with content aggregators, Internet backbone operators and regional
satellite owners; and
o The reliability and cost-effectiveness of Intellicom's services.
If Intellicom is unable to Maintain, Expand and Adapt its Network
Infrastructure, the Demand for its Services may Decrease
Intellicom must continue to expand and adapt its network as the number of its
international customers grow, as users place increasing demands on its network,
and as other requirements change. As Intellicom grows its customer base, it may
not be able to provide its customers with the increasing levels of data
transmission capacity that they may require for a number of reasons, such as
Intellicom's possible inability to raise the funds needed to develop the network
infrastructure to maintain adequate transmission speeds and the lack of
additional network availability from third-party suppliers of satellite and
fiber optic cable transmission capacity. Intellicom's failure to achieve or
maintain high capacity transmissions could significantly reduce demand for its
services, decreasing its revenue and harming its business and financial results.
<PAGE>
If Intellicom Fails to Accurately Predict its Satellite Bandwidth Requirements
and Effectively Manage its Fixed Costs, the Company's Operating Results will
Suffer
If Intellicom does not obtain adequate satellite bandwidth capacity on
acceptable terms and realize corresponding customer volume for this bandwidth,
it is unlikely that Intellicom will achieve positive gross profit. Intellicom
purchases this bandwidth capacity based on its projected future needs on a
fixed-price basis in advance of the sale of its services that utilize the
bandwidth. Substantially all of this bandwidth capacity can be purchased only on
a long-term basis. Intellicom sells its services on the basis of actual usage
and total bandwidth capacity used by its customers, which changes from month to
month and is difficult to predict. If Intellicom's sales fail to match its
projections, it could be subject to periods of excess satellite capacity, which
could seriously harm its business. As a result, Intellicom must obtain enough
bandwidth to meet its projected customer needs, and Intellicom must realize
adequate volume from its customers to support and justify the bandwidth capacity
and expense. If demand from existing or potential customers exceeds Intellicom's
capacity, the quality of its service may suffer or Intellicom may be unable to
capitalize on potential business opportunities. If that happens, Intellicom may
lose existing or potential customers and its operating results would suffer.
Problems Associated with Operating in International Markets could Prevent
Intellicom from Achieving or Sustaining its Intended Growth
The majority of Intellicom's business will be derived from ISPs and other
businesses located in foreign countries. Intellicom's failure to manage its
international operations effectively would limit the future growth of its
business. Intellicom faces certain inherent challenges in conducting
international operations, such as:
o Changes in telecommunications regulatory requirements or trade barriers
restricting Intellicom's ability to deliver Internet services to its
customers;
o The imposition of unanticipated fees, taxes and costs by foreign
governments, which could significantly increase Intellicom's costs;
o Political and economic instability disrupting the operations of
Intellicom's customers;
o Protectionist laws and business practices favoring local competition
potentially giving unequal bargaining leverage to competitors; and
o Currency fluctuations increasing the cost of Intellicom's services to its
international customers.
Intellicom's failure to adequately respond to any of these challenges could
seriously harm its operations and prospects.
Failure to Recruit and Retain Key Management, Technical and Sales Personnel will
Adversely Affect Intellicom's Ability to Operate
Intellicom's success depends, in large part, on Intellicom's ability to attract
and retain qualified technical, marketing, sales and management personnel. With
the expansion of Intellicom's services, it is currently seeking new employees.
However, competition for such personnel is intense in Intellicom's business, and
thus, Intellicom may be unsuccessful in its hiring efforts. If Intellicom does
not attract and retain such personnel, it may not be able to grow its business
and may experience disruptions in operations. The failure to attract or retain
other key employees could have a material adverse effect on the Company's
business, financial condition and prospects.
New Members of the Company's Management Team will have to Effectively Integrate
to Implement its Strategies
The Company depends on the ability of its management team to effectively execute
its strategies. Because certain members of the Company's management team have
worked together for a short period of time, the Company needs to integrate these
officers into its operations. To integrate into the Company's operations, these
individuals must spend a significant amount of time learning its business model
and management system, in addition to performing their regular duties.
Accordingly, the integration of new personnel has and will continue to result in
some disruption to the Company's ongoing operations. If we fail to complete this
integration in an efficient manner, the Company's business and financial results
will suffer.
Any Damage or Failure that Causes Interruptions in Intellicom's Operations could
have a Material Adverse Effect on its Business, Financial Condition and
Prospects
Intellicom's operations are dependent upon its ability to support a highly
complex network and avoid damages from fires, earthquakes, floods, power losses,
telecommunications and satellite failures, network software flaws, transmission
cable cuts and similar events. The occurrence of any one of these events could
cause interruptions in the services Intellicom provides. In addition, the
failure of an incumbent local exchange carrier or other service provider to
provide the communications capacity Intellicom requires, as a result of a
natural disaster, operational disruption or any other reason, could cause
interruptions in the services Intellicom provides. Any damage or failure that
causes interruptions in Intellicom's operations could have a material adverse
effect on the Company's business, financial condition and prospects.
<PAGE>
Intellicom may be Vulnerable to Unauthorized Access, Computer Viruses and Other
Disruptive Problems, which may Result in Intellicom's Liability to its Customers
and may Deter Others from Becoming Customers
While Intellicom has taken substantial security measures, its networks may be
vulnerable to unauthorized access, computer viruses and other disruptive
problems. Internet service providers and online service providers have
experienced in the past, and may experience in the future, interruptions in
service as a result of the accidental or intentional actions of Internet users.
Unauthorized access by current and former employees or others could also
potentially jeopardize the security of confidential information stored in
Intellicom's computer systems and those of its customers. Such events may result
in Intellicom's liability to its customers and may deter others from becoming
customers, which could have a material adverse effect on the Company's business,
financial condition and prospects. Although Intellicom intends to continue using
industry-standard security measures, such measures have been circumvented in the
past, and Intellicom cannot assure you that these measures will not be
circumvented in the future. Eliminating computer viruses and alleviating other
security problems may cause Intellicom's subscribers delays due to interruptions
or cessation of service. Such delays could have a material adverse effect on the
Company's business, financial condition and prospects.
Intellicom may Face Potential Liability for Defamatory or Indecent Content,
which may cause it to Modify the way it Provides Services
Any imposition of liability on Intellicom for information carried on the
Internet could have a material adverse effect on the Company's business,
financial condition and prospects. The law relating to liability of Internet
service providers and online service providers for information carried on or
disseminated through their networks is currently unsettled. A number of lawsuits
have sought to impose such liability for defamatory speech and indecent
materials. Congress has attempted to impose such liability, in some
circumstances, for transmission of obscene or indecent materials. In one case, a
court has held that an online service provider could be found liable for
defamatory matter provided through its service, on the ground that the service
provider exercised active editorial control over postings to its service.
Because of the potential liability for materials carried on or disseminated
through Intellicom's systems, the Company may have to implement measures to
reduce its exposure to such liability. Such measures may require the expenditure
of substantial resources or the discontinuation of certain products or services.
Intellicom may face Potential Liability for Information Retrieved and Replicated
that may not be Covered by its Insurance
Intellicom's liability insurance may not cover potential claims relating to
providing Internet services or may not be adequate to indemnify Intellicom for
all liability that may be imposed. Any liability not covered by insurance or in
excess of insurance coverage could have a material adverse effect on
Intellicom's business, financial condition and prospects. Because subscribers
download and redistribute materials that are cached or replicated by Intellicom
in connection with its Internet services, claims could be made against
Intellicom under both U.S. and foreign law for defamation, negligence, copyright
or trademark infringement, or other theories based on the nature and content of
such materials. These types of claims have been successfully brought against
online service providers. In particular, copyright and trademark laws are
evolving both domestically and internationally, and it is uncertain how broadly
the rights provided under these laws will be applied to online environments. It
is impossible for Intellicom to determine who the potential rights holders may
be with respect to all materials available through its services. In addition, a
number of third-party owners of patents have claimed to hold patents that cover
various forms of online transactions or online technology. As with other online
service providers, patent claims could be asserted against Intellicom based upon
its services or technologies.
Third Parties may Claim that Intellicom's Product Infringes on their
Intellectual Property, which could Result in Significant Expenses for Litigation
or for Developing or Licensing New Technology
The Internet and telecommunications industries are characterized by the
existence of a large number of patents and frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. Third parties may assert claims that Intellicom's current or future
products, networks or ways of doing business infringe on their intellectual
property. Intellicom cannot predict whether third parties will assert these
types of claims against Intellicom or against the licensors of technology
licensed to Intellicom. Intellicom cannot predict whether such assertions would
harm its business.
<PAGE>
If Intellicom is required to defend against these types of claims, whether they
are with or without merit or whether they are resolved in favor of or against
Intellicom or its licensors, it may face costly litigation and diversion of
management's attention and resources. As a result of these disputes, Intellicom
may have to develop or otherwise obtain non-infringing technology or enter into
licensing agreements, any of which may be costly.
A Perceived or Actual Failure by Intellicom to Achieve or Maintain High Speed
Data Transmission could Significantly Reduce Consumer Demand for its Services
and have a Material Adverse Effect on the Company's Business, Financial
Condition and Prospects
Because Intellicom has only been operational for a relatively short period of
time its ability to connect and manage a substantial number of online
subscribers at high transmission speeds is unknown. Intellicom faces risks
related to its ability to scale up to expected subscriber levels while
maintaining superior performance. The actual downstream data transmission speeds
for each customer may be slower and will depend on a variety of factors,
including:
o Actual speed provisioned for the customer's equipment;
o Quality of the server used to deliver content;
o Overall Internet traffic congestion;
o The number of active customers on the network at the same time; and
o For Intellicom, the service quality of the networks of Intellicom's
customers.
The actual data delivery speeds realized by customers may be significantly lower
than peak data transmission speeds and will vary depending on the customer's
hardware, operating system and software configurations. Intellicom cannot assure
you that it will be able achieve or maintain data transmission speeds high
enough to attract and retain its planned numbers of subscribers, especially as
the number of subscribers to its services grows. Consequently, a perceived or
actual failure by Intellicom to achieve or maintain high speed data transmission
could significantly reduce consumer demand for their services and have a
material adverse effect on the Company's business, financial condition and
prospects.
Intellicom may not be able to keep Pace with Rapid Technological Changes or
Emerging Industry Standards that could make its Services Obsolete and
Unmarketable
Intellicom's services may become less useful to its customers if it is unable to
respond to technological advances that shape the Internet or alternative
technologies or services become available to them. Keeping pace with
technological advances in Intellicom's industry may require substantial
expenditures and lead time. In addition, future advances in technology or
fundamental changes in the way Internet access or other Internet services can be
delivered may render Intellicom's services obsolete or less cost competitive.
Intellicom may not be able to adequately respond to or incorporate technological
advances on a cost-effective or timely basis into its businesses.
The Internet Industry Operates in an Uncertain Legal Landscape and the Adoption
or Interpretation of Future or Existing Regulations could Harm Intellicom's
Business
The Internet and the markets in which Intellicom offers its Internet services
are relatively new. Many of the laws and regulations that govern Intellicom and
the Internet have yet to be interpreted or enforced. It is likely that in the
future many new laws will take effect that will regulate the Internet and the
markets in which the Company operates. The applicability to the Internet of
existing laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation and tariffs, libel, consumer protection,
obscenity, pricing and personal privacy is uncertain. Current and future laws
and regulations may:
o Decrease the growth of the Internet;
o Regulate our customers in ways that harm our ability to sell our services
to them;
o Decrease demand for our services; and
o Impose taxes or other costly requirements or otherwise increase the cost of
doing business.
Thus, the adoption and interpretation of any future or existing regulations
could seriously harm Intellicom's business.
<PAGE>
The Legal Environment in which Intellicom Operates is Uncertain and Claims
Against Intellicom and other Legal Uncertainties could cause its Business to
Suffer
Because most of Intellicom's business is conducted outside the U.S., Intellicom
is susceptible to the governmental regulations and legal uncertainties of
foreign countries. In general, the laws of countries outside the U.S. governing
the Internet and Internet services, to the extent they exist at all, vary
widely, are unclear and in flux and have failed to keep pace with the rapid
advancements in Internet technology and the expanding range of Internet-based
services being offered. Partly because of these problems, and Intellicom's view
that local regulatory compliance is a greater issue of concern for our ISP
customers, Intellicom has not, and currently does not intend to, determine
conclusively whether it complies with the requirements of any particular foreign
country.
Any one or more of the countries where Intellicom conducts business may require
that Intellicom qualifies to do business in that particular country, is liable
for certain taxes or tariffs, is otherwise subject to regulation or is
prohibited from conducting its business in that foreign country. Thus,
Intellicom cannot assure that it is currently in compliance with the legal
requirements of any particular country or all of the countries outside the U.S.
in which it conducts business, that Intellicom will be able to comply with any
such requirements or that the requirements will not change in a way that would
render the receipt of its services in a particular country illegal. Intellicom's
failure to comply with foreign laws and regulations could cause it to lose
customers, restrict it from entering profitable markets and seriously harm its
business.
Intellicom's customers also face many of the governmental and legal
uncertainties that Intellicom faces and currently are, or in the future may
become, subject to many of the same requirements to which Intellicom may be
subject. Intellicom makes no effort to determine whether its customers comply
with applicable regulations. The failure of Intellicom's customers to comply
with applicable laws and regulations could cause it to lose customers or
otherwise seriously harm its business.
ISP Channel Risks
The Company may face Unexpected Liabilities in Winding Down the Business of ISP
Channel
The Company has determined that it is in the best interests of the Company and
its shareholders to wind down the business of ISP Channel. While the Company
expects the process of winding down ISP Channel to be substantially complete by
January 31, 2001, there can be no assurances that it will be able to do so. The
Company expects to incur significant costs related to terminating cable
affiliate and other contracts, reducing the workforce and recovering and
disposing of deployed assets. In addition, the Company may face litigation from
customers, cable affiliates and others with respect to such winding down
activities.
Aerzone Risks
The Company may face Unexpected Liabilities in Winding Down the Business of
Aerzone
The Company has determined that it is in the best interests of the Company and
its shareholders to wind down the business of Aerzone. While the Company expects
the process of winding down Aerzone (with the exception of the sale of the
Laptop Lane business) to be substantially complete by January 31, 2001, there
can be no assurances that it will be able to do so. The Company expects to incur
costs related to terminating airport and other contracts, reducing the workforce
and recovering and disposing of deployed assets. In addition, the Company may
face litigation with respect to such winding down activities.
Further, the Company may be unsuccessful in its efforts to sell the Laptop Lane
business. There can be no assurance that a buyer will be found at an acceptable
price or that the business can be sold for any particular amount of cash,
securities or other consideration.
<PAGE>
Item 2. Properties
The Company maintains office space for its corporate headquarters and Aerzone's
headquarters at 650 Townsend Street, San Francisco, California, in a state of
the art facility of approximately 35,100 square feet under lease through July
2005. Approximately 18,300 square feet of this facility were used by Aerzone.
Additionally, Aerzone leases a total of approximately 17,000 square feet of
office space in Seattle and Bellevue, Washington. These leases expire in August
2005 and June 2002, respectively.
Intellicom leases a total of approximately 16,700 square feet of office space in
Livermore, California, which expires in December 2004, approximately 3,770
square feet of office space for its call center in Eau Claire, Wisconsin, and
approximately 2,144 square feet of office space in Miami, Florida for its sales
office.
Additionally, the Company has leases on approximately 49,450 square feet of
office space in Mountain View, California, that were used by ISP Channel. These
leases expire in July 2003 and July 2005. ISP Channel also leases space for
sales offices in Chicago, Illinois; Denver, Colorado; and Los Angeles,
California.
Item 3. Legal Proceedings
The Company has no material pending litigation.
Item 4. Submission of Matters to a Vote of Security Holders
None
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Since April 14, 1999, the Company's common stock has been listed and traded on
the NASDAQ National Market ("NASDAQ") under the symbol "SOFN". Prior to that
date, the Company's common stock was traded and listed on the American Stock
Exchange ("AMEX") under the symbol "SOF". The per share range of high and low
sale prices for the Company's common stock as reported on NASDAQ or AMEX, as
applicable, for each three month period over the two years ended September 30,
2000 are as follows:
High Low
Year Ended September 30, 1999:
December 31, 1998...................... $ 21 $ 5 9/16
March 31, 1999......................... 40 3/8 14 1/2
June 30, 1999.......................... 69 1/2 19 1/8
September 30, 1999..................... 37 16 5/8
Year Ended September 30, 2000:
December 31, 1999...................... $ 45 $ 21 5/8
March 31, 2000......................... 50 1/4 22
June 30, 2000.......................... 29 9/16 8 3/8
September 30, 2000..................... 11 3/4 4 9/16
As of November 30, 2000 there were 431 record holders of the Company's common
stock. The closing price for the Company's common stock on November 30, 2000 was
$2 1/32.
The Company has not declared dividends on its common stock and has no intention
of declaring dividends in the foreseeable future. Other than restrictions that
may be part of various debt instruments, the Company does not have any legal
restriction on paying dividends.
Recent Sales of Unregistered Securities
In October 1994, the Company issued $1,250,000 of its 10% Convertible
Subordinated Notes due October 31, 1999 in a private placement transacted
without the use of an underwriter. The notes were issued in association with the
Company's purchase of Communicate Direct, Inc. ("CDI"). The proceeds were used
to perfect the CDI acquisition and for general corporate purposes. These 10%
notes have a conversion price of $4.10. These securities were issued in a
non-public offering pursuant to transactions exempt under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"). For the year ended
September 30, 1996, the Company issued 231,708 common stock shares pursuant to
the conversion of $950,000 of these convertible notes by a single holder of
these notes. For the year ended September 30, 1997, the Company issued 24,390
common stock shares pursuant to the conversion of $100,000 of these convertible
notes by a single holder of these notes. For the year ended September 30, 1998,
the Company issued 48,780 common stock shares pursuant to the conversion of the
remaining $200,000 of these convertible notes by the final holder of these
notes.
In December 1994, the Company issued $2,189,000 of its 9% Convertible
Subordinated Notes due December 31, 1998 in a private placement transacted
without the use of an underwriter. The proceeds were used for general corporate
purposes. These 9% notes have a conversion price of $5.00. These securities were
issued in a non-public offering pursuant to transactions exempt under Section
4(2) of the Securities Act. For the year ended September 30, 1996, the Company
issued 422,898 common stock shares pursuant to the conversion of $2,114,000 of
these convertible notes by seventeen individual holders of these notes. For the
year ended September 30, 1997, the Company issued 10,000 common stock shares
pursuant to the conversion of $50,000 of these convertible notes by a single
holder of these notes. For the year ended September 30, 1998, the Company issued
5,000 common stock shares pursuant to the conversion of the remaining $25,000 of
these convertible notes by the final holder of these notes.
On September 15, 1995, in association with the acquisition of MTC, the Company
assumed $1,800,000 of 6% Convertible Subordinated Secured Debentures due
February 28, 2002. These 6% 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
issued if the debentures were converted. These debentures are convertible into
the Company's common stock at $8.10 per share. These securities were issued in a
non-public offering pursuant to transactions exempt under Section 4(2) of the
<PAGE>
Securities Act. For the year ended September 30, 1996, the Company issued
125,925 common stock shares pursuant to the conversion of $1,020,000 of these
convertible debentures by ten separate holders of these debentures. For the year
ended September 30, 1998, the Company issued 7,407 shares of the Company's
common stock pursuant to the conversion of $60,000 of these convertible
debentures by a single holder of these debentures. For the year ended September
30, 1999, the Company issued 7,407 common stock shares pursuant to the
conversion of $60,000 of these convertible debentures by a single holder of
these debentures. Subsequently, during November 2000, the remaining principal of
$660,000 and accrued interest was paid.
On September 15, 1995, the Company issued $2,856,000 of its 9% Convertible
Subordinated Debentures due September 15, 2000 in conjunction with the
acquisition of MTC. The debentures were issued to the shareholders of MTC as
partial consideration for the acquisition. These 9% debentures have a conversion
price of $6.75. These securities were issued in a non-public offering pursuant
to transactions exempt under Section 4(2) of the Securities Act. For the year
ended September 30, 1997, the Company issued 35,104 common stock shares pursuant
to the conversion of $237,000 of convertible debt by four separate holders of
these debentures. For the year ended September 30, 1998, the Company issued
123,377 common stock shares pursuant to the conversion of $833,000 of
convertible debt by seven separate holders of these debentures. For the year
ended September 30, 1999, the Company issued 63,719 common stock shares pursuant
to the conversion of $430,000 of convertible debt by five separate holders of
these debentures. For the year ended September 30, 2000, the Company issued
1,467 common stock shares pursuant to the conversion of $63,000 of convertible
debt by 2 separate holders of these debentures. On September 15, 2000, the
Company paid the remaining $1,294,000 of convertible debt and accrued interest
in cash.
On January 2, 1998, the Company issued $1,444,000 principal amount of its 5%
Convertible Subordinated Debentures due September 30, 2002 to Mr. R.C.W. Mauran,
who was at the time of the transaction a beneficial owner of more than 5% of the
Company's common stock, in exchange for the assignment to the Company of certain
equipment leases and other consideration, all of which have been assimilated
into the business of Micrographic Technology Corporation. The debentures are
convertible into the Company's common stock at $8.25 per share after December
31, 1998. These securities were issued in a non-public offering pursuant to
transactions exempt under Section 4(2) of the Securities Act.
Since December 31, 1997, the Company has issued three series of its 5%
convertible preferred stock denominated Series A Convertible Preferred Stock
(the "Series A Preferred Stock"), Series B Convertible Preferred Stock (the
"Series B Preferred Stock") and Series C Convertible Preferred Stock (the
"Series C Preferred Stock"), together (the "Preferred Stock"). In connection
with the issuance of the 5% Preferred Stock, the Company has also issued
warrants to purchase its common stock (the "Preferred Warrants"). Proceeds from
the sale of the Preferred Stock and the Preferred Warrants were used to fund the
expenditures incurred in the expansion of the Company's Internet business,
particularly the ISP Channel service, and for general corporate purposes.
On December 31, 1997, the Company issued to RGC International Investors, LDC
("RGC"), 5,000 shares of its Series A Preferred Stock and warrants to purchase
150,000 common stock shares (the "Series A Warrants") for an aggregate purchase
price of $5,000,000; $435,000 of the purchase price has been allocated to the
value of the Series A Warrants. The conversion price of the Series A Preferred
Stock was equal to the lower of $8.28 per share and the lowest consecutive
two-day average closing price of the common stock during the 20-day trading
period immediately prior to such conversion. The sale was arranged by Shoreline
Pacific Institutional Finance ("SPIF"), the Institutional Division of Financial
West Group, which received a fee of $250,000 plus warrants to purchase 20,000
common stock shares, which are exercisable at $6.625 and expire on December 31,
2000. The Series A Preferred Stock was issued in a nonpublic offering pursuant
to transactions exempt under Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"). For the year ended September 30, 1998, RGC
received 100.78 shares of Series A Preferred Stock as dividends paid in kind.
For the year ended September 30, 1998, the Company issued 299,946 common stock
shares pursuant to the conversion of 2,000 Series A Preferred Stock shares,
including accrued dividends, at a price of $6.6875 per share. For the year ended
September 30, 1999, the Company issued 413,018 common stock shares pursuant to
the conversion of the remaining 3,100.78 Series A Preferred Stock shares at a
price of $7.5625 per share.
On May 28, 1998, the Company issued to RGC and Shoreline Associates I, LLC
("Shoreline"), 9,000 and 1,000 shares, respectively, of its Series B Preferred
Stock and warrants to purchase 180,000 and 20,000 shares, respectively, of
common stock (the "Series B Warrants") for an aggregate purchase price of
$10,000,000; $900,000 of the purchase price has been allocated to the value of
the Series B Warrants. Prior to February 28, 1999, the conversion price of the
Series B Preferred Stock was equal to $13.20 per share. Thereafter, the
conversion price of the Series B Preferred Stock was equal to the lower of
$13.20 per share and the lowest five-day average closing price of the common
stock during the 20-day trading period immediately prior to such conversion. The
sale was arranged by SPIF, which received a fee of $500,000 plus warrants to
purchase 50,000 common stock shares, which are exercisable at $11.00 and expire
on May 28, 2002. The Series B Preferred Stock was issued in a nonpublic offering
<PAGE>
pursuant to transactions exempt under Section 4(2) of the Securities Act. For
the year ended September 30, 1998, RGC and Shoreline received 112.5 and 12.5
shares, respectively, of Series B Preferred Stock as dividends paid in kind. For
the year ended September 30, 1999, RGC and Shoreline received 113.90 and 12.66
shares, respectively, of Series B Preferred Stock as dividends paid in kind. For
the year ended September 30, 1999, the Company issued 782,352 common stock
shares pursuant to the conversion of all 10,251.56 Series B Preferred Stock
shares at a price of $13.20 per share.
On August 31, 1998, the Company issued to RGC 7,500 shares of its Series C
Preferred Stock and warrants to purchase 93,750 common stock shares (the "Series
C Warrants") for an aggregate purchase price of $7,500,000; $277,000 of the
purchase price has been allocated to the value of the Series C Warrants. Prior
to May 31, 1999, the conversion price of the Series C Preferred Stock was equal
to $9.00 per share. Thereafter, the conversion price of the Series C Preferred
Stock was equal to the lower of $9.00 per share and the lowest five-day average
closing price of the common stock during the 30-day trading period immediately
prior to such conversion. The sale was arranged by SPIF, which received a fee of
$375,000 plus warrants to purchase 26,250 common stock shares, which are
exercisable at $7.50 and expire on August 31, 2002. The Series C Preferred Stock
was issued in a nonpublic offering pursuant to transactions exempt under Section
4(2) of the Securities Act. For the year ended September 30, 1998, RGC received
31.25 shares of Series C Preferred Stock as dividends paid in kind. For the year
ended September 30, 1999, RGC received 94.14 shares of Series C Preferred Stock
as dividends paid in kind. For the year ended September 30, 1999, the Company
issued 909,148 common stock shares pursuant to the conversion of all 7,625.39
Series C Preferred Stock shares at a price of $9.00 per share.
Each series of the Preferred Stock had similar rights and privileges, and each
share of the Preferred Stock has a par value of $0.10 and a face amount of
$1,000. The Preferred Stock was convertible into the number of common stock
shares determined by dividing the face amount of the Preferred Stock being
converted by the applicable conversion price. A holder of the Series A Preferred
Stock or the Series B Preferred Stock could not convert its Series A Preferred
Stock or Series B Preferred Stock in the event such conversion would result in
its beneficially owning more than 4.99% of the Company's common stock (not
including shares underlying the Series A Preferred Stock or the Series A
Warrants for the Series A Preferred Stock conversions, or the Series B Preferred
Stock or the Series B Warrants for the Series B Preferred Stock conversions),
but they could waive this prohibition by providing the Company a notice of
election to convert at least 61 days prior to such conversion. Similarly, a
holder of the Series C Preferred Stock cannot convert its Series C Preferred
Stock in the event such conversion would result in beneficially owning more than
4.99% of the Company's common stock (not including shares underlying the Series
C Preferred Stock or the Series C Warrants for the Series C Preferred stock
conversion). Notwithstanding this limitation, the holders of the Preferred Stock
cannot convert into an aggregate of more than 19.99% of the Company's common
stock without the approval of the Company's common stockholders or NASDAQ. In
addition, the Series B Preferred Stock and Series C Preferred Stock each cannot
convert into more than 2,000,000 common stock shares. As of September 30, 1999,
all of the Preferred Stock, including dividends paid-in-kind and accrued
interest, has been converted into an aggregate of 2,404,464 shares of the
Company's common stock.
On January 12, 1999, the Company issued $12,000,000 of its 9% Senior
Subordinated Convertible Notes (the "Notes") due January 1, 2001, to a group of
institutional investors. These Notes were convertible into the Company's common
stock with an initial conversion price of $17.00 per share until July 1, 1999,
and, thereafter, at the lower of $17.00 per share (the "Initial Conversion
Price") and the lowest five-day average closing bid price of the Company's
common stock during the 30-day trading period ending one day prior to the
applicable conversion date (the "Conversion Price"). In connection with these
Notes, the Company issued to these investors warrants to purchase an aggregate
of 300,000 shares of the Company's common stock. These warrants have an exercise
price of $17.00 per share and expire in 2003. On April 28, 1999, as a result of
the Company's underwritten secondary public offering (the "Secondary Offering"),
and in conjunction with an anti-dilution provision associated with the Notes,
the Initial Conversion Price was reduced from $17.00 to $16.49 per share.
Furthermore, in order to secure three month lock-up agreements from the holders
of the Notes in conjunction with the Secondary Offering, the Company entered
into a new arrangement with the holders of the Notes to issue all future
interest payments, beginning with the three months ended June 30, 1999, in the
form of convertible notes with substantially the same form and features as the
original Notes. Therefore, the Company issued an additional $549,000 in notes,
representing interest for the six months ended September 30, 1999 (the "Interest
Notes"). The Notes and warrants were issued in a nonpublic offering pursuant
Regulation D under the Securities Act. On October 22, 1999, all of the 9% Senior
Subordinated Convertible Notes, related Interest Notes and accrued interest were
converted into 765,201 shares of the Company's common stock.
On February 9, 1999, a wholly owned subsidiary of the Company merged with and
into Intelligent Communications, Inc. ("Intellicom" and the "Intellicom
Acquisition"). The purchase price of $14,869,000 was comprised of: (i) a cash
component of $500,000 (the "Cash Consideration"); (ii) a promissory note in the
amount of $1,000,000 bearing interest at 7.5% per annum and due one year after
closing (the "First Promissory Note"); (iii) a promissory note in the amount of
<PAGE>
$2,000,000 bearing interest at 8.5% per annum and due two years after closing
(the "Second Promissory Note", together with the First Promissory Note, the
"Debt Consideration"); (iv) the issuance of 500,000 shares of the Company's
common stock (adjustable upwards after one year in certain circumstances),
valued at $14.938 per share, for a total value of $7,469,000 (the "Closing
Shares"); (v) additional shares of the Company's common stock issuable upon the
first, second and third anniversaries of the closing, valued at a total of
$3,500,000 (the "Anniversary Shares", together with the Closing Shares, the
"Equity Consideration"); and (vi) certain direct acquisition costs totaling
$400,000. The Debt Consideration may be partially or wholly converted into the
Company's common stock, under certain circumstances. The conversion price of the
Debt Consideration is based upon the average closing price of the Company's
common stock for the 15 days immediately preceding the conversion date. Both the
Debt Consideration and the Equity Consideration were issued in a nonpublic
offering pursuant to transactions exempt under Section 4(2) of the Securities
Act. In April 1999, the Company paid the First Promissory Note and related
interest in full with a combination of cash and equity. The Company paid
$832,000 in cash and the remainder, after expenses, with 6,118 common stock
shares valued at $190,000. The Intellicom Acquisition agreement requires the
Company to issue $1,500,000 of common stock shares on the first anniversary date
of the Intellicom Acquisition. Accordingly, on February 8, 2000, the Company
issued 43,314 common stock shares valued at $1,499,000 and paid $1,000 for
fractional shares to the former shareholders of Intellicom. Additionally, the
Intellicom Acquisition agreement includes a demonstration bonus ("Demonstration
Bonus") of $1,000,000 payable in cash or shares of the Company's common stock at
the Company's option by the first anniversary date of the Intellicom Acquisition
if certain conditions are met. On February 8, 2000, the opportunity to earn the
Demonstration Bonus had expired, and accordingly the Demonstration Bonus was not
paid or included in the purchase price of Intellicom.
On February 22, 1999, the Company entered into a license agreement with Inktomi
Corporation ("Inktomi", the "Inktomi Licensing Agreement") allowing the Company
rights to install certain Inktomi caching technology into the Company's
cable-based Internet network infrastructure. The Inktomi Licensing Agreement was
valued at $4,000,000 for a total of 500 licenses, of which the first $1,000,000
was paid with 65,843 shares of the Company's common stock and the remaining
amount payable in cash in eight quarterly payments of $375,000. For the years
ended September 30, 2000 and 1999, total payments amounted to $1,500,000 and
$1,125,000, respectively. The Inktomi Licensing Agreement allows the Company to
purchase up to 500 additional licenses during the first four years of the
agreement. Prepaid license fees at September 30, 2000 and 1999, were $2,602,000
and $2,101,000, respectively. As a result of the Company discontinuing the
operations of ISP Channel, prepaid license fees were reflected in the loss on
disposition of discontinued operations, net of tax for the year ended September
30, 2000, and in the net assets associated with discontinued operations at
September 30, 1999. These common stock shares were issued in a nonpublic
offering pursuant to transactions exempt under Section 4(2) of the Securities
Act.
On March 22, 1999, the Company issued warrants to purchase 3,013 common stock
shares to an institutional lender in connection with a $3,000,000 credit
facility. The credit facility was used to fund certain capital equipment
acquisitions. The warrants have an exercise price of $29.875 and expire on March
22, 2003. These securities were issued in a nonpublic offering pursuant to
transactions exempt under Section 4(2) of the Securities Act.
In conjunction with offering incentives to launch the Company's ISP Channel
cable-based Internet services, the Company issued common stock to cable
affiliates in return for the exclusive rights to provide Internet services to
their customers. During the year ended September 30, 1999 the Company issued an
aggregate of 13,574 common stock shares valued at $337,000 to eight separate
cable affiliates. During the year ended September 30, 2000 the Company issued
35,160 common stock shares valued at $419,000 to two separate cable affiliates.
In addition, on April 12, 1999 the Company issued 660,000 common stock shares to
an investor for $14,990,000 in cash and a modification of the affiliate
agreement between the Company and Teleponce Cable TV, which is controlled by the
investor; the modification of the affiliate agreement was valued at $8,925,000
as a cable affiliate launch incentive. Further, on November 4, 1999, the Company
entered into various definitive agreements with Mediacom LLC ("Mediacom"). In
exchange for signing an agreement to launch the ISP Channel services, the
Company issued a total of 3,500,000 common stock shares to Mediacom, of which
3,150,000 shares were restricted. The restrictions were lifted as Mediacom
launched ISP Channel's services in Mediacom's cable television systems. As of
September 30, 2000 there are 2,100,000 shares restricted and unvalued. The
unrestricted 1,400,000 shares have been valued at $26,513,000 as cable affiliate
launch incentive. As a result of the Company discontinuing the operations of ISP
Channel, the cable affiliate launch incentive, net of amortization, was written
off and was reflected in the loss on disposition of discontinued operations, net
of tax for the year ended September 30, 2000, and in the net assets associated
with discontinued operations at September 30, 1999. These common stock shares
were issued in a nonpublic offering pursuant to transactions exempt under
Section 4(2) of the Securities Act.
<PAGE>
On December 13, 1999 the Company completed a private placement of 5,000,000
common stock shares for net proceeds of $128,121,000 to Pacific Century
Cyberworks Limited ("Pacific Century"), and entitled Pacific Century to
designate two persons for election to the Board of Directors. These common stock
shares were issued in a nonpublic offering pursuant to transactions exempt under
Section 4(2) of the Securities Act
On April 21, 2000, the Company acquired Laptop Lane Limited ("Laptop Lane"), a
Washington corporation, under the purchase method of accounting and the results
of Laptop Lane are included in the consolidated financial statements since the
date of acquisition. Laptop Lane is a leading provider of business center
services in airports. The Company paid approximately $21,559,000 consisting of
(i) 972,266 common stock shares of the Company valued at $15,107,000, net of
adjustment for expenses paid by the Company on behalf of Laptop Lane, exchanged
for all outstanding common stock shares of Laptop Lane, (ii) direct acquisition
costs of approximately $2,300,000, which includes a bonus payment to Laptop Lane
employees for $431,000 in lieu of Laptop Lane stock options, and (iii) 250,000
common stock shares of the Company valued at $3,652,000 to be issued to former
Laptop Lane stockholders in payment for achieving certain criteria. As part of
the acquisition, an additional 333,333 common stock shares of the Company will
be distributed to former Laptop Lane stockholders if certain performance goals
or other criteria are met. These common stock shares were issued in a nonpublic
offering pursuant to transactions exempt under Section 4(2) of the Securities
Act. As of September 30, 2000, Laptop Lane has achieved three of the four
performance goals; as a result, 249,981 common stock shares of the Company and
cash amounting to $3,652,000 was distributed to the former Laptop Lane
stockholders. The fourth performance goal requirement was met in October 2000,
as a result, upon the resolution of certain claims against Laptop Lane, all or a
portion of the remaining 83,333 common stock shares of the Company amounting to
$500,000 was accrued for and will be issued to the former Laptop Lane
stockholders.
Through September 30, 2000, the Company has granted options to seven separate
non-employee consultants to purchase an aggregate of 180,500 common stock
shares. The options were granted as partial consideration for services rendered.
The options typically vest over the period of contracted service. The exercise
price of these options range from $7.375 to $23.8125. In the aggregate, the
options have a weighted average exercise price of $13.08. As of September 30,
2000, non-employee consultant options for 64,306 common stock shares were
outstanding. For the year ended September 30, 2000 the Company issued 63,194
common stock shares pursuant to the exercise of non-employee consultant options
at an average price of $9.6003 per share. These options for common stock shares
were granted in a nonpublic offering pursuant to transactions exempt under
Section 4(2) of the Securities Act.
<PAGE>
Item 6. Selected Financial Data
The following table sets forth for the periods selected consolidated financial
and operating data for the Company. The statements of operations for the years
ended and balance sheets data as of September 30, 2000 and 1999 have been
derived from the Company's consolidated financial statements audited by KPMG
LLP. The statements of operations for the years ended and balance sheet data as
of September 30, 1998, 1997 and 1996 were derived from the Company's
consolidated financial statements audited by PricewaterhouseCoopers LLP. The
selected consolidated financial data should be read in conjunction with
"Management's Discussions and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the notes thereto
included elsewhere in this report.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------
------------- ------------ ------------ ------------ ------------
2000 (b) 1999 (c) 1998 1997 1996 (d)
-------- -------- ---- ---- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data (a):
Net sales........................................ $ 9,927 $ 1,584 $ - $ - $ -
Cost of sales.................................... 10,465 1,449 - - -
----------- ----------- ----------- ----------- -----------
Gross profit (loss)........................... (538) 135 - - -
------------ ----------- ----------- ----------- -----------
Operating expenses:
Selling and marketing, engineering, and general
and administrative.......................... 22,064 9,147 1,866 1,128 1,654
Depreciation and amortization................. 3,284 1,888 84 76 306
Compensation related to stock options......... 14,557 8,538 27 - -
Acquisition costs and other................... - - - - 321
----------- ----------- ----------- ----------- -----------
Total operating expenses.................... 39,905 19,573 1,977 1,204 2,281
----------- ----------- ----------- ----------- -----------
Loss from continuing operations.................. (40,443) (19,438) (1,977) (1,204) (2,281)
Other income (expenses):
Interest income............................... 11,843 3,617 112 - -
Interest expense.............................. (526) (4,716) (966) (1,028) (1,122)
Gain on sale of available-for-sale securities. - - - - 5,689
Other income (expense)........................ 8,572 (1,390) (173) (72) 31
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations before
income taxes.................................. (20,554) (21,927) (3,004) (2,304) 2,317
Provision for income taxes....................... - - - - -
----------- ------------ ----------- ----------- -----------
Income (loss) from continuing operations......... (20,554) (21,927) (3,004) (2,304) 2,317
Income (loss) from discontinued operations....... (72,399) (29,902) (13,998) 159 (2,353)
Gain (loss) on disposal of discontinued operations (139,400) 1,820 - (486) (6,061)
----------- ----------- ----------- ----------- -----------
Net loss......................................... (232,353) (50,009) (17,002) (2,631) (6,097)
Preferred dividends.............................. - (473) (343) - -
----------- ----------- ----------- ----------- -----------
Net loss applicable to common shares............. $ (232,353) $ (50,482) $ (17,345) $ (2,631) $ (6,097)
=========== =========== =========== =========== ===========
Income (loss) from continuing operations per
common share..................................... $ (0.87) $ (1.78) $ (0.41) $ (0.35) $ 0.39
Discontinued operations.......................... (9.01) (2.27) (1.89) (0.05) (1.44)
Preferred dividends.............................. - (0.04) (0.05) - -
----------- ----------- ----------- ----------- -----------
Basic and diluted loss per common share.......... $ (9.88) $ (4.09) $ (2.35) $ (0.40) $ (1.05)
============ ============ ============ ============ ============
Balance Sheet Data (a):
Working capital (deficit)........................ $ 115,172 $ 133,790 $ 11,817 $ (969) $ (1,009)
Total assets..................................... 212,306 194,150 21,810 11,999 15,103
Long-term liabilities............................ 4,104 20,153 9,048 8,719 9,477
Redeemable convertible preferred stock........... - - 18,187 - -
Stockholders' equity (deficit)................... 139,914 163,709 (6,171) 2,028 3,793
<FN>
(a) Restated to reflect business center services, cable-based Internet services,
document management and telecommunications segments as discontinued
operations.
(b) Includes Aerzone Corporation as a discontinued operation since its formation
on January 24, 2000, and Laptop Lane Limited as a discontinued operation
since its acquisition on April 21, 2000.
(c) Includes Intelligent Communications, Inc. since its acquisition on February
9, 1999.
(d) Includes ISP Channel, Inc. (formerly MediaCity World, Inc.) as a
discontinued operation since its acquisition on June 21, 1996.
</FN>
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with, and is qualified in its entirety
by reference to, the Consolidated Financial Statements of the Company and the
related Notes thereto appearing elsewhere in this Form 10-K. This discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in the
forward-looking statements as a result of certain factors including, but not
limited to, those discussed in "Risk Factors", "Business" and elsewhere in this
Form 10-K. The Company disclaims any obligation to update information contained
in any forward-looking statement.
Overview
The Company currently conducts its continuing operations through its subsidiary,
Intelligent Communications, Inc. ("Intellicom"), which provides two-way
broadband satellite connectivity utilizing very small aperture terminal ("VSAT")
technology to a wide variety of business customers.
Revenue for Intellicom consists of (i) monthly service fees paid by users of the
satellite service on a per VSAT basis, (ii) VSAT-related equipment sales, (iii)
revenue from sub-leasing of excess satellite transponder space and (iv) data
center processing fees. The last category represents legacy business that
Intellicom exited September 30, 1999, to focus on its core business of providing
high-speed Internet access using two-way satellite technology.
Cost of sales for Intellicom consists primarily of connectivity cost and costs
of VSAT equipment sold. Intellicom's connectivity cost consists primarily of
satellite transponder fees. Currently, Intellicom has transponder space on two
satellites, GE-3 and SatMex 5, both of which provide coverage over the
continental United States and beyond.
The Company reports operating expenses in several categories: (i) selling and
marketing includes, in addition to the costs of selling and marketing the
Company's services to end users, customer care, content production, and cable
partnering costs; (ii) engineering, which includes the costs of maintaining and
manning the network operations center, field engineering and information
technology; and (iii) general and administrative costs. Also included in
operating expenses is depreciation, amortization and compensation related to
stock options. Amortization expense primarily consists of the periodic write off
of developed technology acquired. Compensation related to stock options
primarily relates to the amortization of deferred stock compensation expense
from stock options granted between October 1998 and March 1999.
The results of operations for the years ended September 30, 1999 and 1998 have
been restated for the effects of discontinued operations of Micrographic
Technology Corporation ("MTC"), Kansas Communications, Inc. ("KCI"), ISP
Channel, Inc. ("ISP Channel") and Aerzone Corporation ("Aerzone"), which
includes the results of Laptop Lane Limited ("Laptop Lane") since its
acquisition on April 21, 2000.
Results of Continuing Operations for the Year Ended September 30, 2000 Compared
to the Year Ended September 30, 1999
Net Sales. Consolidated net sales are attributable entirely to Intellicom, which
increased $8,343,000, or 526%, to $9,927,000 for year ended September 30, 2000,
as compared to $1,584,000 for the two hundred thirty four days ended September
30, 1999, primarily as a result of equipment sales to Tricom, S.A. and an
additional one-hundred-thirty-one days of net sales for year ended September 30,
2000, as compared to September 30, 1999, due to the acquisition of Intellicom on
February 9, 1999, offset by Intellicom exiting from the data processing service
business on September 30, 1999, and no transponder sublease income for the year
ended September 30, 2000. Net sales from Intellicom's core business of
satellite-based Internet services increased $609,000, or 118%, to $1,125,000 for
the year ended September 30, 2000, as compared to $516,000 for the two hundred
thirty four days ended September 30, 1999. Equipment sales increased $7,956,000
to $8,092,000 for the year ended September 30, 2000, as compared to $136,000 for
the two hundred thirty four days ended September 30, 1999, as a result of VSAT
equipment sales to Tricom, S.A. Other sources of sales, excluding data
processing service fees and transponder sublease income, increased $527,000 to
$710,000 for the year ended September 30, 2000, as compared to $183,000 for the
two hundred thirty four days ended September 30, 1999.
Cost of Sales. Consolidated cost of sales are attributable entirely to
Intellicom, which increased $9,016,000, or 622%, to $10,465,000 for the year
ended September 30, 2000, as compared to $1,449,000 for the two hundred thirty
four days ended September 30, 1999, primarily as a result of VSAT equipment
sales to Tricom, S.A. and the space segment leasing of a full transponder
beginning on December 1, 1999, in preparation for providing satellite-based
Internet services to existing and prospective customers. The largest component
of Intellicom's cost of sales for the year ended September 30, 2000, are
equipment costs resulting from VSAT equipment sales to Tricom, S.A. Another
component of Intellicom's cost of sales is transponder fees, which amounted to
$3,063,000 for the year ended September 30, 2000, as compared to $788,000 for
the two hundred thirty four days ended September 30, 1999.
Selling and Marketing. Consolidated selling and marketing expenses (exclusive of
non-cash compensation expense (benefit) of $(166,000) for 2000 and $166,000 for
1999) increased $4,433,000, or 802%, to $4,986,000 for the year ended September
30, 2000, as compared to $553,000 for the year ended September 30, 1999.
<PAGE>
Intellicom's selling and marketing expenses increased $2,679,000, or 485%, to
$3,232,000 for the year ended September 30, 2000, as compared to $553,000 for
the two hundred thirty four days ended September 30, 1999, primarily as a result
of the hiring Intellicom has done to staff these departments. The Company
believes that these costs will continue to increase as Intellicom continues to
develop its business.
For the year ended September 30, 2000, corporate incurred selling and marketing
expenses of $1,754,000, which are primarily personnel costs associated with the
formation of the new business development and public relations departments.
These costs are expected to decrease going forward as part of a corporate
restructuring.
Engineering. Consolidated engineering expenses (exclusive of non-cash
compensation expense of $55,000 for 2000 and $199,000 for 1999) increased
$3,894,000, or 908%, to $4,323,000 for the year ended September 30, 2000, as
compared to $429,000 for the year ended September 30, 1999.
Intellicom's engineering expenses increased $3,358,000 to $3,787,000 for the
year ended September 30, 2000, as compared to $429,000 for the two hundred
thirty four days ended September 30, 1999, primarily as a result of hiring
Intellicom has done to staff these departments. The Company believes that these
costs will continue to increase as Intellicom continues to develop its business.
For the year ended September 30, 2000, corporate incurred engineering expenses
of $536,000, which are primarily personnel costs associated with the formation
of a corporate technology department. The corporate technology department is
responsible for technology and strategic development for the Company. Subsequent
to the year ended September 30, 2000, this department was eliminated in a
corporate restructuring.
General and Administrative. Consolidated general and administrative expenses
(exclusive of non-cash compensation expense of $14,668,000 for 2000 and
$8,173,000 for 1999) increased $4,590,000, or 56%, to $12,755,000 for the year
ended September 30, 2000, as compared to $8,165,000 for the year ended September
30, 1999.
Intellicom's general and administrative expenses increased $1,071,000, or 119%,
to $1,967,000 for the year ended September 30, 2000, as compared to $896,000 for
the two hundred thirty four days ended September 30, 1999, primarily as a result
of leasing an additional office facility in Livermore, California; the write off
of a customer receivable; and an additional one-hundred-thirty-one days of
general and administrative expenses for the year ended September 30, 2000 as
compared to September 30, 1999 due to the acquisition of Intellicom on February
9, 1999. The Company believes that these costs will continue to increase as
Intellicom continues to develop its business.
Corporate general and administrative expenses increased $3,519,000, or 48%, to
$10,788,000 for the year ended September 30, 2000, as compared to $7,269,000 for
the year ended September 30, 1999. The growth in corporate general and
administrative expenses are a result of the hiring that corporate has done to
staff its administrative, executive and finance departments to support both the
continuing and discontinued operations. These costs are expected to decrease
going forward as part of a corporate restructuring.
Depreciation and Amortization. Consolidated depreciation and amortization
expenses increased $1,396,000, or 74%, to $3,284,000 for the year ended
September 30, 2000, as compared to $1,888,000 for the year ended September 30,
1999.
Intellicom's depreciation and amortization expense increased $1,216,000, or 71%,
to $2,929,000 for the year ended September 30, 2000, as compared to $1,713,000
for the two hundred thirty four days ended September 30, 1999, primarily as a
result of an additional one-hundred-thirty-one days of depreciation and
amortization expense for September 30, 2000, as compared to September 30, 1999,
due to the acquisition of Intellicom on February 9, 1999. The Company believes
depreciation expense will increase as Intellicom continues to expand its
facilities, while amortization expense is expected to remain the same.
Corporate depreciation and amortization expense increased $180,000, or 102%, to
$355,000 for the year ended September 30, 2000, as compared to $175,000 for the
year ended September 30, 1999, primarily as a result of increased depreciation
related to leasehold improvements and office furniture of its corporate offices.
Non-Cash Compensation Expense Related to Stock Options. The Company recognized a
non-cash compensation expense related to stock options of $14,557,000 for the
year ended September 30, 2000, as compared to $8,538,000 for the year ended
September 30, 1999. For the year ended September 30, 2000, non-cash compensation
expense related to stock options consisted of $14,296,000 related to employee
stock options and $261,000 related to non-employee options, and for the year
ended September 30, 1999 non-cash compensation expense related to stock options
consisted of $6,877,000 related to employee stock options and $1,661,000 related
to non-employee options. The increase is primarily due to the additional five
months of deferred stock compensation amortization related to employee stock
options for the year ended September 30, 2000.
<PAGE>
Interest Income. Consolidated interest income was $11,843,000 for the year ended
September 30, 2000, as compared to $3,617,000 for the year ended September 30,
1999. This increase was primarily due to the increased cash, cash equivalent and
short-term investment balances as a result of the secondary offering of
4,600,000 common stock shares for $141,502,000 on April 28, 1999, and the sale
of 5,000,000 common stock shares for $128,121,000 to Pacific Century CyberWorks
Limited ("Pacific Century") on December 13, 1999.
Interest Expense. Consolidated interest expense decreased $4,190,000, or 89%, to
$526,000 for the year ended September 30, 2000, as compared to $4,716,000 for
the year ended September 30, 1999. This decrease is primarily due to the
reduction of interest expense resulting from the conversion of the 9% senior
subordinated convertible notes.
Other Income (Expense). Other income was $8,572,000 for the year ended September
30, 2000, as compared to other expense of $1,390,000 for the year ended
September 30, 1999. The increase is primarily due to the $10,194,000 gain on
exchange of 50,000 common stock shares of Big Sky Network Canada, Limited for
(i) $2,500,000 in cash, (ii) a promissory note in the amount of $1,700,000
bearing interest at 8% per annum due September 29, 2001, and (iii) 1,133,000
common stock shares valued at $9,630,000 from China Broadband Corporation on
September 29, 2000. China Broadband is the leading cable broadband provider in
China. China Broadband is listed and traded on the NASDAQ Over-the-Counter
Bulletin Board under the symbol "CBBD". As of September 30, 2000, the investment
in China Broadband is an available for sale security and accordingly classified
as short-term investments on the accompanying consolidated balance sheets.
Income Taxes. The Company made no provision for income taxes for the year ended
September 30, 2000, and the year ended September 30, 1999, as a result of the
Company's continuing losses.
Loss from Discontinued Operations. The Company recognized a loss from
discontinued operations of $211,799,000 for the year ended September 30, 2000,
as compared to $28,082,000 for the year ended September 30, 1999. This consisted
of a loss on disposal of ISP Channel of $97,200,000, a net loss from the
operations of ISP Channel of $60,249,000, a loss on disposal of Aerzone of
$42,200,000, and a net loss from the operations of Aerzone of $12,150,000 for
the year ended September 30, 2000. This as compared to a net loss from the
operations of ISP Channel of $29,439,000, a net loss from the operations of MTC
of $633,000, a loss on disposal of MTC of $321,000, a net income from the
operations of KCI of $170,000, and a gain on disposal of KCI of $2,141,000 for
year ended September 30, 1999.
Preferred Dividends. The Company paid dividends of $473,000 for the year ended
September 30, 1999, related to the 5% redeemable convertible preferred stock.
The Company paid no dividends for the year ended September 30, 2000 as a result
of the conversion the 5% redeemable convertible preferred stock to common stock
during the year ended September 30, 1999.
Net Loss. The Company had a net loss applicable to common shares of
$232,353,000, or a net loss per share of $9.88, for the year ended September 30,
2000, as compared to a net loss applicable to common shares of $50,482,000, or a
net loss per share of $4.09, for the year ended September 30, 1999.
Results of Continuing Operations for the Year Ended September 30, 1999 Compared
to the Year Ended September 30, 1998
Net Sales. Consolidated net sales are attributable entirely to Intellicom, which
was $1,585,000 for the two hundred thirty four days ended September 30, 1999. No
net sales were recorded for the year ended September 30, 1998, as a result of
the Company's acquisition of Intellicom on February 9, 1999. Net sales from
Intellicom's core business of satellite-based Internet services generated
$516,000 for the two hundred thirty four days ended September 30, 1999.
Equipment sales were $136,000 for the two hundred thirty four days ended
September 30, 1999. Other sources of sales, excluding data processing service
fees and transponder sublease income, was $183,000 for the two hundred thirty
four days ended September 30, 1999.
Cost of Sales. Consolidated cost of sales are entirely to Intellicom, which was
$1,449,000 for the two hundred thirty four days ended September 30, 1999. No
cost of sales were recorded for the year ended September 30, 1998, as a result
of the Company's acquisition of Intellicom on February 9, 1999. The largest
component of Intellicom's cost of sales is transponder fees, which amounted to
$788,000 for the two hundred thirty four days ended September 30, 1999.
Selling and Marketing. Consolidated selling and marketing expenses (exclusive of
non-cash compensation expense of $166,000 for 1999 and no expense for 1998)
consisted entirely of Intellicom, which was $553,000 for the two hundred thirty
four days ended September 30, 1999. No selling and marketing expenses were
recorded for the year ended September 30, 1998 as a result of the Company's
acquisition of Intellicom on February 9, 1999.
Engineering. Consolidated engineering expenses (exclusive of non-cash
compensation expense of $199,000 for 1999 and no expense for 1998) consisted
entirely of Intellicom, which was $429,000 for the two hundred thirty four days
ended September 30, 1999. No engineering expenses were recorded for the year
ended September 30, 1998, as a result of the Company's acquisition of Intellicom
on February 9, 1999.
General and Administrative. Consolidated general and administrative expenses
(exclusive of non-cash compensation expense of $8,173,000 for 1999 and $27,000
for 1998) increased $6,299,000, or 338%, to $8,165,000 for the year ended
September 30, 1999, as compared to $1,866,000 for the year ended September 30,
1998.
Intellicom's general and administrative expenses were $896,000 for the two
hundred thirty four days ended September 30, 1999. No general and administrative
expenses were recorded for the year ended September 30, 1998, as a result of the
Company's acquisition of Intellicom on February 9, 1999.
<PAGE>
The Company's corporate general and administrative expenses increased
$5,403,000, or 289%, to $7,269,000 for the year ended September 30, 1999, as
compared to $1,866,000 for the year ended September 30, 1998. The growth in
corporate general and administrative expenses are a result of the hiring that
corporate has done to staff its administrative, executive and finance
departments to support both the continuing and discontinued operations.
Depreciation and Amortization. Consolidated depreciation and amortization
expenses increased $1,804,000 to $1,888,000 for the year ended September 30,
1999, as compared to $84,000 for the year ended September 30, 1998.
Intellicom's depreciation and amortization expense was $1,713,000 for the two
hundred thirty four days ended September 30, 1999. No depreciation and
amortization expenses were recorded for the year ended September 30, 1998, as a
result of the Company's acquisition of Intellicom on February 9, 1999.
The Company's corporate depreciation and amortization expense increased $91,000,
or 108%, to $175,000 for the year ended September 30, 1999, as compared to
$84,000 for the year ended September 30, 1998, as a result of increased
depreciation on leasehold improvements and office equipment of its corporate
offices.
Non-Cash Compensation Expense Related to Stock Options. The Company recognized a
non-cash compensation expense related to stock options of $8,538,000 for the
year ended September 30, 1999, as compared to $27,000 for the year ended
September 30, 1998. For the year ended September 30, 1999 non-cash compensation
expense related to stock options consisted of $6,877,000 related to employee
stock options and $1,661,000 related to non-employee options, and for the year
ended September 30, 1998, non-cash compensation expense related to stock options
consisted of $27,000 related to non-employee options. The increase is primarily
due to the deferred stock compensation amortization related to employee stock
options for the year ended September 30, 1999.
Interest Income. Consolidated interest income was $3,617,000 for the year ended
September 30, 1999, as compared to $112,000 for the year ended September 30,
1998. This increase was primarily due to the increased cash, cash equivalent and
short-term investment balances as a result of the secondary offering of
4,600,000 common stock shares for $141,502,000 on April 28, 1999.
Interest Expense. Consolidated interest expense increased $3,750,000, or 388%,
to $4,716,000 for the year ended September 30, 1999, as compared to $966,000 for
the year ended September 30, 1998. This increase is primarily due to the
interest expense resulting from the $12,000,000 9% senior subordinated
convertible notes issued on January 12, 1999, and the related amortization of
deferred debt issuance costs including the value attributed to the beneficial
conversion feature of the loan notes, and the promissory notes issued in
connection with the acquisition of Intellicom on February 9, 1999.
Other Income (Expense). Other expense was $1,390,000 for the year ended
September 30, 1999, as compared to other expense of $173,000 for the year ended
September 30, 1998. This increase was primarily a result of the indirect
expenses associated with the Company's financing activities, including the
Secondary Offering, as well as the penalty incurred in connection with the
Series C redeemable convertible preferred stock.
Income Taxes. The Company made no provision for income taxes for the year ended
September 30, 1999, and the year ended September 30, 1998, as a result of the
Company's continuing losses.
Loss from Discontinued Operations. The Company recognized a loss from
discontinued operations of $28,082,000 for the year ended September 30, 1999, as
compared to $13,998,000 for the year ended September 30, 1998. This consisted of
a net loss from the operations of ISP Channel of $29,439,000, a net loss from
the operations of MTC of $633,000, a loss on disposal of MTC of $321,000, net
income from the operations of KCI of $170,000, and a gain on disposal of KCI of
$2,141,000 for year ended September 30, 1999, as compared to a net loss from
operations of ISP Channel of $8,272,000, a net loss of $5,652,000 from the
operations of MTC, and a net loss of $73,000 from the operations of KCI for the
year ended September 30, 1998.
Preferred Dividends. The Company paid dividends of $473,000 for the year ended
September 30, 1999, and $343,000 for the year ended September 30, 1998 related
to the 5% redeemable convertible preferred stock.
Net Loss. The Company had a net loss applicable to common shares of $50,482,000,
or a net loss per share of $4.09, for the year ended September 30, 1999, as
compared to a net loss applicable to common shares of $17,345,000, or a net loss
per share of $2.35, for the year ended September 30, 1998.
<PAGE>
Liquidity and Capital Resources
Since September 1998, the Company has funded the significant negative cash flows
from its operating activities and the associated capital expenditures through a
combination of public and private equity sales, convertible debt issues and
equipment leases. On April 28, 1999, the Company completed a secondary public
offering (the "Secondary Offering"), in which it sold 4,600,000 common stock
shares at $33.00 per share. The Company received $141,502,000 in cash, net of
underwriting discounts, commissions and other offering costs. On December 13,
1999, the Company completed a private placement of 5,000,000 common stock shares
for net proceeds of $128,121,000 to Pacific Century, and entitled Pacific
Century to designate two persons for election to the Board of Directors. As of
September 30, 2000, the Company had $173,402,000 in cash, cash equivalents and
short-term investments compared with $142,585,000 as of September 30, 1999.
Net cash used in operating activities of continuing operations for the year
ended September 30, 2000 was $21,142,000. Of this amount, approximately
$20,554,000 million stemmed from the Company's net loss from continuing
operations as reduced by approximately $11,787,000, for non-cash charges,
primarily depreciation ($987,000), amortization ($2,297,000) and compensation
expense related to stock options ($14,557,000). This was offset in part by
approximately $9,355,000, which was generated from an increase in operating
assets and increase in operating liabilities. Operating activities of
discontinued operations used $49,751,000 of net cash.
Net cash used in investing activities of continuing operations for the year
ended September 30, 2000 was approximately $85,013,000. Of this amount,
$68,894,000 was used to purchase short-term investments, $4,442,000 was used to
purchase property, plant and equipment, $7,047,000 was used to acquire long-term
equity investments, $6,000,000 was used to provide working capital to Laptop
Lane under a secured promissory note prior to the close of the acquisition, and
$1,867,000 (net of cash acquired) payment for the purchase of Laptop Lane,
offset by $1,000,000 payment received on the 8% $1,000,000 promissory note
related to KCI sale to Convergent Communications Services, Inc., $2,500,000
proceeds related to exchange of 50,000 Big Sky Network Canada, Ltd common stock
shares, and $1,302,000 proceeds from sale of the Intellicom headquarters'
building. Investing activities of discontinued operations used $17,165,000 of
net cash.
Net cash provided by financing activities for the year ended September 30, 2000
was $129,901,000 primarily through the private placement sale of 5,000,000
common stock shares to Pacific Century for net proceeds of $128,121,000,
proceeds from common stock purchase by employee stock purchase plan for
$145,000, proceeds from exercise of warrants and options for $5,209,000, offset
by principal payments of debt for $1,294,000 and payment for purchase of
treasury stock of $2,279,000 . Financing activities of discontinued operations
used $1,598,000 of net cash.
The Company believes it has sufficient cash and unutilized lease facilities to
meet its presently anticipated business requirements over the next twelve months
including the funding of net operating losses, working capital requirements,
capital investments and strategic investments.
Acquisition of Intellicom. On February 9, 1999, a wholly owned subsidiary of the
Company merged with and into Intelligent Communications, Inc. ("Intellicom" and
the "Intellicom Acquisition"). The purchase price of $14,869,000 was comprised
of: (i) a cash component of $500,000 (the "Cash Consideration"); (ii) a
promissory note in the amount of $1,000,000 bearing interest at 7.5% per annum
and due one year after closing (the "First Promissory Note"); (iii) a promissory
note in the amount of $2,000,000 bearing interest at 8.5% per annum and due two
years after closing (the "Second Promissory Note", together with the First
Promissory Note, the "Debt Consideration"); (iv) the issuance of 500,000 shares
of the Company's common stock (adjustable upwards after one year in certain
circumstances), valued at $14.938 per share, for a total value of $7,469,000
(the "Closing Shares"); (v) additional shares of the Company's common stock
issuable upon the first, second and third anniversaries of the closing, valued
at a total of $3,500,000 (the "Anniversary Shares", together with the Closing
Shares, the "Equity Consideration"); and (vi) certain direct acquisition costs
totaling $400,000. The Debt Consideration may be partially or wholly converted
into the Company's common stock, under certain circumstances. The conversion
price of the Debt Consideration is based upon the average closing price of the
Company's common stock for the 15 days immediately preceding the conversion
date. Both the Debt Consideration and the Equity Consideration were issued in a
nonpublic offering pursuant to transactions exempt under Section 4(2) of the
Securities Act. In April 1999, the Company paid the First Promissory Note and
related interest in full with a combination of cash and equity. The Company paid
$832,000 in cash and the remainder, after expenses, with 6,118 common stock
shares valued at $190,000. The Intellicom Acquisition agreement requires the
Company to issue $1,500,000 of common stock shares on the first anniversary date
of the Intellicom Acquisition. Accordingly, on February 8, 2000, the Company
issued 43,314 common stock shares valued at $1,499,000 and paid $1,000 for
fractional shares to the former shareholders of Intellicom. Additionally, the
Intellicom Acquisition agreement includes a demonstration bonus ("Demonstration
Bonus") of $1,000,000 payable in cash or shares of the Company's common stock at
the Company's option by the first anniversary date of the Intellicom Acquisition
if certain conditions are met. On February 8, 2000, the opportunity to earn the
Demonstration Bonus had expired, and accordingly the Demonstration Bonus was not
paid nor included in the purchase price of Intellicom.
<PAGE>
Formation of Aerzone, Acquisition of Laptop Lane, and Discontinued Operations of
Aerzone. On January 24, 2000 the Company founded Aerzone (formerly SoftNet Zone,
Inc.), a Delaware corporation, to provide high-speed Internet access to global
business travelers. As part of the Aerzone business, the Company acquired Laptop
Lane, a Washington corporation, on April 21, 2000. The acquisition was accounted
for under the purchase method and the results of Laptop Lane are included in the
consolidated financial statements since the date of acquisition. Laptop Lane is
a leading provider of business center services in airports. The Company paid
approximately $21,559,000 consisting of (i) 972,266 common stock shares of the
Company valued at $15,107,000, net of adjustment for expenses paid by the
Company on behalf of Laptop Lane, exchanged for all outstanding common stock
shares of Laptop Lane, (ii) direct acquisition costs of approximately
$2,300,000, which includes a bonus payment to Laptop Lane employees for $431,000
in lieu of Laptop Lane stock options, and (iii) 250,000 common stock shares of
the Company valued at $3,652,000 to be issued to former Laptop Lane stockholders
in payment for achieving certain criteria. As part of the acquisition, an
additional 333,333 common stock shares of the Company will be distributed to
former Laptop Lane stockholders if certain performance goals or other criteria
are met. As of September 30, 2000, Laptop Lane has achieved three of the four
performance goals, as a result 249,981 common stock shares of the Company and
cash amounting to $3,652,000 was distributed to the former Laptop Lane
stockholders. The fourth performance goal requirement was met in October 2000,
as a result, upon the resolution of certain claims against Laptop Lane, all or a
portion of the remaining 83,333 common stock shares of the Company amounting to
$500,000 was accrued for and will be issued to the former Laptop Lane
stockholders. Additionally, in connection with the acquisition, the Company
provided $6,000,000 in working capital to Laptop Lane, under a secured
promissory note.
Subsequently, on December 19, 2000, the Company decided to discontinue the
Aerzone business in light of significant long-term capital needs and the
difficulty of securing the necessary financing because of the current state of
the financial markets. The plan includes a reduction in personnel. The Company
anticipates that it will sell Laptop Lane. The operating results of Aerzone has
been segregated from continuing operations and is reported as loss from
discontinued operations, net of tax on the consolidated statement of operations.
The assets and liabilities of such operations are reflected in the discontinued
operations reserve on the consolidated balance sheets as of September 30, 2000.
The estimated loss on disposal of Aerzone is $42,200,000.
Discontinued Operations of ISP Channel. On December 7, 2000, the Company's Board
of Directors approved a plan to discontinue providing cable-based Internet
services through its ISP Channel subsidiary by December 31, 2000 because of (1)
consolidation in the cable television industry made it difficult for ISP Channel
to achieve the economies of scale necessary to provide such services profitably,
and (2) the Company was no longer able to bear the costs of maintaining the ISP
Channel. The operating results of ISP Channel has been segregated from
continuing operations and is reported as loss from discontinued operations, net
of tax on the consolidated statements of operations. The estimated loss on
disposal of ISP Channel is $97,200,000.
Sale of KCI. On February 12, 1999, substantially all of the assets of the
telecommunications segment, KCI, were sold to Convergent Communications
Services, Inc. ("Convergent Communications") for an aggregate purchase price of
approximately $6,300,000 subject to adjustment in certain events. Convergent
Communications paid $100,000 in cash in November 1998 upon execution of the
letter of intent to purchase and paid the remainder of the purchase price on the
closing date as follows: (i) $1,400,000 in cash; (ii) approximately 30,000
shares of Convergent Communications' parent company common stock with an agreed
value of approximately $300,000 (the "Convergent Shares"); (iii) a promissory
note in the amount of $2,000,000 (the "First Convergent Note") bearing simple
interest at the rate of 11% per annum and payable on July 1, 2000; (iv) a
promissory note in the amount of $1,000,000 (the "Second Convergent Note")
bearing simple interest at the rate of 8% per annum and payable 12 months
following the closing date ; and (v) a promissory note in an amount of
$1,500,000 (the "Third Convergent Note") bearing simple interest at the rate of
8% per annum and payable 12 months following the closing date, which is subject
to mandatory prepayment in certain events. Furthermore, a purchase price
adjustment subsequent to closing provided the Company with additional Convergent
Shares with an agreed value of $198,000 for a total investment in Convergent
Communications common stock of $498,000. The sale of KCI's assets resulted in a
gain of $2,141,000. For the year ended September 30, 1999, the First and Third
Convergent Notes were paid in full. On November 5, 1999, the Second Convergent
Note was paid in full. The initial cash proceeds received from the sale of KCI
were used to pay down the Company's revolving credit facility with West Suburban
Bank.
<PAGE>
Sale of MTC. On September 30, 1999, the Company sold the Company's document
management business, MTC, to Global Information Distribution GmbH ("GID") for an
aggregate purchase price of approximately $4,894,000 in cash, which, after
selling costs, resulted in a loss of $321,000. GID paid $100,000 as a
non-refundable deposit upon acceptance of the GID term sheet. GID paid the
Company the remaining $4,794,000 at the closing. The cash proceeds from the sale
of MTC were used in part to repay the Company's revolving credit facility with
West Suburban Bank. As of September 30, 1999 there was nothing outstanding under
this facility. The balance of the proceeds was used to pay for transaction costs
associated with the sale of MTC and to increase the Company's cash position.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the increase or decrease in the amount of interest income the
Company can earn on its investment portfolio and on the increase or decrease in
the amount of interest expense the Company must pay with respect to its various
outstanding debt instruments. The risk associated with fluctuating interest
expense is limited, however, to the exposure related to those debt instruments
and credit facilities, which are tied to market rates. The Company does not use
derivative financial instruments in its investment portfolio. The Company
ensures the safety and preservation of its invested principal funds by limiting
default risks, market risk and reinvestment risk. The Company mitigates default
risk by investing in safe and high-credit quality securities.
The Company had short-term investments of $127,403,000 at September 30, 2000.
These short-term investments consist of highly liquid investments with original
maturities at the date of purchase of between three and eighteen months. These
investments are subject to interest rate risk and will fall in value if market
interest rates increase. The Company believes a hypothetical increase in market
interest rates by 10 percent from levels at September 30, 2000, would cause the
fair value of these short-term investments to fall by an immaterial amount.
Since the Company is not required to sell these investments before maturity, we
have the ability to avoid realizing losses on these investments due to a sudden
change in market interest rates. On the other hand, declines in the interest
rates over time will reduce our interest income.
The Company had outstanding convertible debt instruments of approximately
$2,104,000 at September 30, 2000. These instruments have fixed interest rates
ranging from 5.0% to 6.0%. Because the interest rates of these instruments are
fixed, a hypothetical 10 percent increase in interest rates will not have a
material effect on the Company. Interest rate increases, however, will increase
interest expense associated with future borrowing by the Company, if any. The
Company does not hedge against interest rate fluctuations.
Equity Price Risk
The Company through its business dealings has obtained common stock of various
publicly traded technology companies, which are classified as available-for-sale
securities. As a result, the Company values these investments on its balance
sheet at September 30, 2000 at market value. Unrealized gains and losses are
excluded from earnings and are reported in accumulated other comprehensive loss
component of stockholders' equity. The Company has not attempted to reduce or
eliminate its market exposure on these securities, and such investments were not
significant to the Company in the prior year. A 50% adverse change in equity
prices, based on a sensitivity analysis of technology stocks, would result in an
approximate $4,900,000 decrease in the fair value of the Company's
available-for-sale securities portfolio as of September 30, 2000.
Currency Exchange Risk
The Company has historically had very low exposure to changes in foreign
currency exchange rates, and as such, has not used derivative financial
instruments to manage foreign currency fluctuation risk. As the Company expands
globally, the risk of foreign currency exchange rate fluctuation may
dramatically increase. Therefore, in the future, the Company may consider
utilizing derivative instruments to mitigate such risks.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements.
Implementation is scheduled for fiscal years beginning after December 15, 1999,
which would be effective for the Company beginning in fiscal year 2001. SAB 101
addresses various topics in revenue recognition including the recognition of
revenue for contracts involving multiple deliverables. Based on management's
current understanding and interpretation, SAB 101 is not expected to have a
material impact on the Company's consolidated financial statements.
<PAGE>
In June 2000, the FASB issued Statement of Financial Accounting Standards No.
138 ("FASB 138"), Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an amendment to FASB Statement No. 133 ("FASB 133"). FASB
138 addresses a limited number of issues causing implementation difficulties for
companies that are required to apply FASB 133. FASB 133, as amended by FASB
Statement No. 137, Accounting for Derivative Instruments and Hedging Activities
- Deferral of the effective date of FASB Statement No. 133, is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The Company
believes that FASB 133 and FASB 138 will not have a material impact on its
financial position, results of operations or cash flows.
<PAGE>
Item 8. Financial Statements and Supplementary Data
SoftNet Systems, Inc. and Subsidiaries
Index To Consolidated Financial Statements September 30, 2000
Page
Report of Independent Auditors KPMG LLP .................................. 33
Report of Independent Accountants PricewaterhouseCoopers LLP ............. 34
Consolidated Balance Sheets as of September 30, 2000 and 1999 ............ 35
Consolidated Statements of Operations for the three years
ended September 30, 2000 .............................................. 36
Consolidated Statements of Stockholders' Equity (Deficit) for
the three years ended September 30, 2000 .............................. 37
Consolidated Statements of Cash Flows for the three years
ended September 30, 2000 .............................................. 38
Notes to Consolidated Financial Statements ............................ 39-58
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of SoftNet Systems, Inc.:
We have audited the accompanying consolidated balance sheet of SoftNet Systems,
Inc. and Subsidiaries as of September 30, 2000 and 1999, and the related
consolidated statement of operations, stockholders' equity (deficit) and
comprehensive and cash flows for each of the years ended September 30, 2000. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in the index appearing
under Item 14(a)(2). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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 consolidated 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, 2000 and 1999, and the
results of their operations and cash flows for each of the years in the two year
period ended September 30, 2000 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set therein.
KPMG LLP
San Francisco, California
January 5, 2001
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of SoftNet Systems, Inc.:
In our opinion, the accompanying consolidated statements of operations, of
stockholders' equity (deficit) and of cash flows present fairly, in all material
respects, the results of operations and cash flows of SoftNet Systems, Inc. and
its subsidiaries for the year ended September 30, 1998 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 14(a)(1) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Jose, California
December 1, 1998, except for Note 8 regarding the Senior Subordinated
Convertible Notes for which the date is January 13, 1999, and Note 3 regarding
the discontinuance of the document management segment for which the date is
April 13, 1999 and the discontinuance of the cable-based Internet services
segment for which the date is December 7, 2000
<PAGE>
SoftNet Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30,
----------------------------
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 44,731 $ 89,499
Short-term investments, available-for-sale....................................... 127,403 52,586
Accounts receivable, net of allowance for doubtful accounts of $68 (2000) and $28
(1999)......................................................................... 2,558 240
Notes receivable................................................................. 2,100 1,000
Inventory........................................................................ 4,128 36
Other current assets............................................................. 1,272 717
------------- -------------
Total current assets................................................................ 182,192 144,078
Restricted cash..................................................................... 1,492 922
Property and equipment, net of accumulated depreciation of $1,172 (2000) and $355
(1999)........................................................................... 4,679 2,728
Intangibles, net of accumulated amortization of $3,828 (2000) and $1,531 (1999)..... 12,257 14,544
Accounts receivable, non current portion............................................ 3,409 -
Long-term equity investments........................................................ 7,734 525
Deferred debt issuance costs........................................................ 41 2,798
Other assets........................................................................ 502 305
Net assets associated with discontinued operations of ISP Channel, Inc.............. - 28,424
------------- -------------
$ 212,306 $ 194,324
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 3,530 $ 6,063
Accrued compensation and related expenses........................................ 2,752 1,246
Net liabilities associated with discontinued operations of ISP Channel, Inc...... 37,711 -
Net liabilities associated with discontinued operations of Aerzone Corporation... 18,884 -
Other accrued expenses........................................................... 3,250 1,635
Current portion of long-term debt................................................ 2,161 1,518
------------- -------------
Total current liabilities........................................................... 68,288 10,462
Long-term debt, net of current portion.............................................. 2,104 16,653
Business acquisition liability...................................................... 2,000 3,500
------------- -------------
Total liabilities................................................................... 72,392 30,615
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.10 par value, 3,970,000 shares designated, no shares issued
and outstanding................................................................ - -
Common stock, $0.01 par value, 100,000,000 shares authorized; 28,523,474 (2000)
and 17,225,523 (1999) shares issued and outstanding............................ 264 172
Additional-paid-in capital....................................................... 503,802 327,445
Deferred stock compensation...................................................... (28,577) (63,346)
Accumulated other comprehensive loss............................................. (696) (315)
Accumulated deficit.............................................................. (332,600) (100,247)
Treasury stock, at cost, 409,500 (2000) and no 1999 shares ...................... (2,279) -
------------- -------------
Total stockholders' equity.......................................................... 139,914 163,709
------------- -------------
$ 212,306 $ 194,324
============= =============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
SoftNet Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales ........................................................... $ 9,927 $ 1,584 $ --
Cost of sales ....................................................... 10,465 1,449 --
--------- --------- ---------
Gross profit (loss) .............................................. (538) 135 --
--------- --------- ---------
Operating expenses:
Selling and marketing, exclusive of non-cash compensation expense
(benefit) of $(166) (2000), $166 (1999) and $0 (1998) .......... 4,986 553 --
Engineering, exclusive of non-cash compensation expense of $55
(2000), $199 (1999) and $0 (1998) .............................. 4,323 429 --
General and administrative, exclusive of non-cash compensation
expense of $14,668 (2000), $8,173 (1999) and $27 (1998) ........ 12,755 8,165 1,866
Depreciation ..................................................... 987 357 84
Amortization ..................................................... 2,297 1,531 --
Non-cash compensation related to stock options ................... 14,557 8,538 27
--------- --------- ---------
Total operating expenses ............................................ 39,905 19,573 1,977
--------- --------- ---------
Loss from continuing operations before other income (expense), income
taxes and discontinued operations ................................ (40,443) (19,438) (1,977)
Other income (expense):
Interest income .................................................. 11,843 3,617 112
Interest expense ................................................. (526) (4,716) (966)
Equity in net losses of investee companies ....................... (581) -- --
Gain on disposition of long-term equity investments, net ......... 10,157 -- --
Other expense, net ............................................... (1,004) (1,390) (173)
--------- --------- ---------
Loss from continuing operations before income taxes and discontinued
operations, net of tax ........................................... (20,554) (21,927) (3,004)
Provision for income taxes .......................................... -- -- --
--------- --------- ---------
Loss from continuing operations ..................................... (20,554) (21,927) (3,004)
Loss from discontinued operations, net of tax ....................... (72,399) (29,902) (13,998)
Gain (loss) on disposition of discontinued operations, net of tax ... (139,400) 1,820 --
--------- --------- ---------
Net loss ............................................................ (232,353) (50,009) (17,002)
Preferred dividends ................................................. -- (473) (343)
--------- --------- ---------
Net loss applicable to common shares ................................ $(232,353) $ (50,482) $ (17,345)
========= ========= =========
Basic and diluted loss per common share:
Loss from continuing operations applicable to common shares....... $ (0.87) $ (1.78) $ (0.41)
Discontinued operations........................................... (9.01) (2.27) (1.89)
Preferred dividends............................................... -- (0.04) (0.05)
--------- --------- ---------
Net loss applicable to common shares.............................. $ (9.88) $ (4.09) $ (2.35)
========= ========= =========
Shares used to compute basic and diluted loss per common share....... 23,518 12,342 7,391
========= ========= =========
<FN>
See accompanying notes to consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SoftNet Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
(In thousands)
Accumulated
Common Stock Additional Deferred Other
----------------------- Paid in Stock Comprehen-
Shares Amount Capital Compensation sive Loss
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1997.......................... 6,871 $ 69 $ 34,379 $ - $ -
Common stock shares issued in connection with:
Conversion of convertible subordinated notes...... 185 2 1,116 - -
Conversion of preferred shares.................... 299 3 1,663 - -
Exercise of warrants.............................. 684 7 3,879 - -
Exercise of stock options......................... 152 1 830 - -
Common stock warrants issued with preferred stock.. - - 1,612 - -
Dividends paid on preferred shares:
Additional preferred shares....................... - - - - -
Cash.............................................. - - - - -
Common stock...................................... 1 - 6 - -
Deferred stock compensation........................ - - 215 (215) -
Amortization of deferred stock compensation........ - - - 27 -
Net loss........................................... - - - - -
----------- ---------- ---------- ---------- ----------
Balance, September 30, 1998.......................... 8,192 82 43,700 (188) -
Common stock shares issued in connection with:
Secondary public offering, net of issuance costs.. 4,600 46 141,456 - -
Non-public offering, net of selling costs......... 660 7 23,908 - -
Acquisition of Intelligent Communications, Inc.... 500 5 7,464 - -
Purchase of prepaid license fees.................. 66 1 999 - -
Repayment of short-term debt...................... 6 - 190 - -
Cable incentive program........................... 14 - 337 - -
Conversion of convertible subordinated notes...... 71 1 489 - -
Conversion of preferred shares.................... 2,034 20 18,234 - -
Penalty paid on preferred shares.................. 55 - 498 - -
Exercise of warrants.............................. 572 6 5,273 - -
Exercise of stock options......................... 441 4 2,785 - -
Common stock warrants issued with new debt......... - - 4,334 - -
Value assigned to beneficial conversion feature of
debt.............................................. - - 1,529 - -
Dividends paid on preferred shares:
Additional preferred shares....................... - - - - -
Cash.............................................. - - - - -
Common stock...................................... 15 - 157 - -
Deferred stock compensation........................ - - 79,313 (79,313) -
Reversal of deferred stock compensation charge due
to employee termination........................... - - (3,221) 3,221 -
Amortization of deferred stock compensation........ - - - 12,934 -
Unrealized losses on securities.................... - - - - (315)
Net loss........................................... - - - - -
----------- ---------- ---------- ---------- -----------
Balance, September 30, 1999.......................... 17,226 172 327,445 (63,346) (315)
Common stock shares issued in connection with:
Non-public offering, net of selling costs......... 5,000 50 128,071 - -
Acquisition of Laptop Lane Limited................ 1,205 12 18,398 - -
Acquisition of Intelligent Communications, Inc.
(Anniversary Shares)............................. 43 - 1,499 - -
Repayment of long-term debt....................... 77 1 1,861 - -
Cable incentive program, Mediacom LLC............. 3,500 - - - -
Value assigned to cable incentive program, Mediacom
LLC.............................................. - 14 26,499 - -
Cable incentive program, other.................... 35 - 419 - -
Conversion of convertible subordinated notes...... 767 8 9,941 - -
Exercise of warrants.............................. 200 2 1,536 - -
Exercise of options............................... 455 5 3,666 - -
Employee stock purchase plan...................... 15 - 145 - -
Value assigned to beneficial conversion feature of
debt.............................................. - - 34 - -
Common stock repurchased........................... - - - - -
Reversal of deferred stock compensation charge due
to employee termination........................... - - (15,712) 15,712 -
Amortization of deferred stock compensation........ - - - 19,057 -
Unrealized losses on securities.................... - - - - (385)
Foreign currency translation adjustment............ - - - - 4
Net loss........................................... - - - - -
----------- ---------- ---------- ---------- ----------
Balance, September 30, 2000.......................... 28,523 $ 264 $ 503,802 $ (28,577) $ (696)
=========== ========== ========== =========== ===========
<FN>
See accompanying notes to consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SoftNet Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)-- continued
(In thousands)
Total
Treasury Stock Stockholders'
Accumulated ---------------------- Equity Comprehensive
Deficit Shares Amount (Deficit) Loss
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1997.......................... $ (32,420) - $ - $ 2,028
Common stock shares issued in connection with:
Conversion of convertible subordinated notes...... - - - 1,118
Conversion of preferred shares.................... - - - 1,666
Exercise of warrants.............................. - - - 3,886
Exercise of stock options......................... - - - 831
Common stock warrants issued with preferred stock.. - - - 1,612
Dividends paid on preferred shares:
Additional preferred shares....................... (257) - - (257)
Cash.............................................. (80) - - (80)
Common stock...................................... (6) - - -
Deferred stock compensation........................ - - - -
Amortization of deferred stock compensation........ - - - 27
Net loss........................................... (17,002) - - (17,002) $ (17,002)
---------- ---------- ---------- ----------- -----------
Balance, September 30, 1998.......................... (49,765) - - (6,171) $ (17,002)
===========
Common stock shares issued in connection with:
Secondary public offering, net of issuance costs.. - - - 141,502
Non-public offering, net of selling costs......... - - - 23,915
Acquisition of Intelligent Communications, Inc.... - - - 7,469
Purchase of prepaid license fees.................. - - - 1,000
Repayment of short-term debt...................... - - - 190
Cable incentive program........................... - - - 337
Conversion of convertible subordinated notes...... - - - 490
Conversion of preferred shares.................... - - - 18,254
Penalty paid on preferred shares.................. - - - 498
Exercise of warrants.............................. - - - 5,279
Exercise of stock options......................... - - - 2,789
Common stock warrants issued with new debt......... - - - 4,334
Value assigned to beneficial conversion feature of
debt.............................................. - - - 1,529
Dividends paid on preferred shares:
Additional preferred shares....................... (221) - - (221)
Cash.............................................. (95) - - (95)
Common stock...................................... (157) - - -
Deferred stock compensation........................ - - - -
Reversal of deferred stock compensation charge due
to employee termination........................... - - - -
Amortization of deferred stock compensation........ - - - 12,934
Unrealized losses on securities.................... - - - (315) $ (315)
Net loss........................................... (50,009) - - (50,009) (50,009)
---------- ---------- ---------- ----------- -----------
Balance, September 30, 1999.......................... (100,247) - - 163,709 $ (50,324)
===========
Common stock shares issued in connection with:
Non-public offering, net of selling costs......... - - - 128,121
Acquisition of Laptop Lane Limited................ - - - 18,410
Acquisition of Intelligent Communications, Inc.
(Anniversary Shares)............................. - - - 1,499
Repayment of long-term debt....................... - - - 1,862
Cable incentive program, Mediacom LLC............. - - - -
Value assigned to cable incentive program, Mediacom
LLC.............................................. - - - 26,513
Cable incentive program, other.................... - - - 419
Conversion of convertible subordinated notes...... - - - 9,949
Exercise of warrants.............................. - - - 1,538
Exercise of options............................... - - - 3,671
Employee stock purchase plan...................... - - - 145
Value assigned to beneficial conversion feature of
debt.............................................. - - - 34
Common stock repurchased........................... - 409 (2,279) (2,279)
Reversal of deferred stock compensation charge due
to employee termination........................... - - - -
Amortization of deferred stock compensation........ - - - 19,057
Unrealized losses on securities.................... - - - (385) $ (385)
Foreign currency translation adjustment............ - - - 4 4
Net loss........................................... (232,353) - - (232,353) (232,353)
----------- ---------- ---------- ------------ -----------
Balance, September 30, 2000.......................... $ (332,600) 409 $ (2,279) $ 139,914 $ (232,734)
=========== ========== =========== =========== ===========
<FN>
See accompanying notes to consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SoftNet Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year Ended September 30,
---------------------------------------
2000 1999 1998
------------ ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................................ $ (232,353) $ (50,009) $ (17,002)
Adjustments to reconcile net loss to net cash used in operating
activities:
Loss from discontinued operations..................................... 72,399 29,902 13,998
(Gain) loss on disposal of discontinued operations.................... 139,400 (1,820) -
Depreciation and amortization......................................... 3,284 1,888 84
Amortization of deferred stock compensation........................... 14,557 8,538 27
Amortization of deferred debt issuance costs.......................... 59 3,181 -
Provision for doubtful accounts....................................... 233 31 -
Provision for inventory losses........................................ 118 - -
Loss on long-term equity investment................................... 581 - -
Loss on disposition of long-term equity investment.................... 25 - -
(Gain) loss on disposition of short-term investment................... (10,321) 600 -
Interest paid with additional convertible notes....................... 69 549 -
Charges incurred upon conversion of redeemable convertible preferred
stock to common stock............................................... - 498 -
Loss on disposition of property and equipment......................... 162 - 118
Changes in operating assets and liabilities (net of effect of
acquisitions and discontinued operations):
Decrease (increase) in accounts receivable, net..................... (5,960) (67) 120
Decrease (increase) in inventory.................................... (4,210) (36) -
Decrease (increase) in other current assets......................... (555) (491) 69
Increase in other assets............................................ (567) (225) (755)
Increase (decrease) in accounts payable and accrued expenses........ 1,937 6,602 (417)
----------- ----------- -----------
Net cash used in operating activities of continuing operations............. (21,142) (859) (3,758)
----------- ----------- -----------
Net cash used in operating activities of discontinued operations........... (49,751) (22,038) (1,911)
------------ ------------ -----------
Cash flows from investing activities:
Payment for purchase of short-term investments.......................... (69,849) (53,002) -
Payment for purchase of Laptop Lane Limited, net of cash acquired....... (1,867) - -
Payment for purchase of Intelligent Communications, Inc., net of cash
acquired.............................................................. - (803) -
Payments for purchase of long-term equity investments................... (7,047) (500) -
Payment for purchase of property and equipment.......................... (4,442) (2,422) (2)
Payment for purchase of intangibles..................................... (10) - -
Disbursement for promissory notes issued................................ (6,600) - -
Proceeds from sale of net assets from discontinued operations, net of
selling costs......................................................... - 8,870 -
Proceeds from sale of short-term investments............................ 2,500 - -
Proceeds from sale of property and equipment............................ 1,302 - -
Payment received on note receivable..................................... 1,000 - -
----------- ----------- -----------
Net cash used in investing activities of continuing operations............. (85,013) (47,857) (2)
----------- ----------- -----------
Net cash used in investing activities of discontinued operations........... (17,165) (19,803) (5,773)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock, net of selling costs................ 128,121 156,492 -
Proceeds from exercise of warrants...................................... 1,538 5,279 3,886
Proceeds from exercise of options and purchases by employee stock
ownership plan........................................................ 3,816 2,789 831
Payment for fractional shares related to anniversary issuance of common
stock to former Intelligent Communications, Inc. stockholders......... (1) - -
Payments for additional costs of issuance of redeemable convertible
preferred stock....................................................... - (154) -
Payment of preferred dividend........................................... - (95) (80)
Payment for purchase of treasury stock.................................. (2,279) - -
Proceeds from issuance of redeemable convertible preferred stock, net of
selling costs......................................................... - - 21,208
Proceeds from issuance of long-term debt, net of deferred financing costs - 11,884 -
Borrowings under revolving credit facility.............................. - 18,285 16,089
Payments under revolving credit facility................................ - (23,383) (16,891)
Principal payments of long-term debt.................................... (1,294) (1,431) (106)
Principal payments of capital lease obligations......................... - - (12)
----------- ----------- -----------
Net cash provided by financing activities of continuing operations......... 129,901 169,666 24,925
----------- ----------- -----------
Net cash used in financing activities of discontinued operations........... (1,598) (2,114) (1,014)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents....................... (44,768) 76,995 12,467
Cash and cash equivalents, beginning of period............................. 89,499 12,504 37
----------- ----------- -----------
Cash and cash equivalents, end of period................................... $ 44,731 $ 89,499 $ 12,504
=========== =========== ===========
<FN>
See accompanying notes to consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
SoftNet Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business
SoftNet Systems, Inc. ("SoftNet") and Subsidiaries (collectively referred to as
the "Company") is engaged in the business of providing broadband Internet
services. The Company currently operates one business segment, satellite-based
Internet services and very small aperture terminal ("VSAT") equipment sales
through its wholly owned subsidiary, Intelligent Communications, Inc.
("Intellicom"). Intellicom was acquired on February 9, 1999 (see Note 3) and the
results of its operations have been included in the consolidated financial
statements since its acquisition. Four previously reported business segments,
business center services, cable-based Internet services, document management and
telecommunications, are in process of ceasing operations or have been sold , and
accordingly are reported as discontinued operations (see Note 3).
Key Technology Suppliers
The Company currently depends on a limited number of suppliers for certain key
technologies used to build and manage the Company's services. Although the
Company believes that there are alternative suppliers for each of these
technologies, the Company has established favorable relationships with each of
its current suppliers and it could take a significant period of time to
establish relationships with alternative suppliers and substitute their
technologies.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of SoftNet and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in the preparation of the consolidated
financial statements.
Restatements and Reclassifications
The financial statements have been restated for the effects of the discontinued
operations of the cable-based Internet services, document management and
telecommunications segments (see Note3). Certain reclassifications have been
made to prior years' financial statements in order to conform to the current
year presentation.
Use of Estimates and Assumptions
The preparation of consolidated 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.
Foreign Currency Translation
The adjustments resulting from translating foreign functional currency financial
statements into U.S. Dollars are included in accumulated other comprehensive
loss of the accompanying consolidated balance sheets.
Cash, Cash Equivalents, Short-term Investments and Restricted Cash
The Company considers all highly liquid investments with maturities of three
months or less from date of purchase to be cash equivalents. Short-term
investments generally consist of highly liquid securities with original
maturities in excess of three months. The Company has classified its short-term
investments as available-for-sale securities. These short-term investments are
carried at fair value based on quoted market prices with unrealized gains and
losses reported in accumulated other comprehensive loss of the accompanying
consolidated balance sheets. Realized gains and losses on short-term investments
are computed using the specific identification method and are reported in other
income (expense) of the accompanying consolidated statements of operations.
The Company has pledged cash as collateral on several letters of credit relating
to certain operating leases. These amounts are classified as restricted cash in
the accompanying consolidated balance sheets.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables, cash and cash equivalents,
and short-term investments. One customer comprised 82% of the Company's net
revenue for the year ended September 30, 2000. Accounts receivable from this
customer at September 30, 2000, was $5,524,000. For the years ended September
30, 1999 and 1998, no other customer accounted for more than 10% of revenues.
<PAGE>
Cash, cash equivalents and short-term investments are managed by recognized
financial institutions, which follow the Company's investment policy. Such
investment policy limits the amount of credit exposure in any one issue and the
maturity date of the investment securities that typically comprise investment
grade short-term debt instruments.
Inventory
Inventory consists of finished goods and is stated at the lower of cost or
market. Cost is determined using the first-in, first-out method.
Property and Equipment
Property and equipment, including leasehold improvements, are recorded at cost.
When property and equipment is retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts and the resulting
gain or loss is included in other income (expense) of the accompanying
consolidated statements of operations. Depreciation is computed on a
straight-line basis over the estimated useful lives of three to seven years or
the life of the lease, whichever is shorter.
Intangibles
Intangibles consists of acquired technology resulting from the acquisition of
Intellicom and the acquisition of a domain name (see Note 7), which are
amortized on a straight-line basis over the estimated useful lives of seven
years and eight years, respectively.
Deferred Debt Issuance Costs
Costs related to the issuance of new debt, including the value of the warrants
issued in connection with such debt, are capitalized and amortized to interest
expense using the effective interest method over the life of the debt.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments (including cash and cash
equivalents, short-term investments, trade receivables and accounts payable) are
estimated to approximate the carrying values due to their short maturities. The
fair value of current and long-term debt approximates carrying value based upon
borrowing rates currently available to the Company for borrowings with similar
terms.
Revenue Recognition
Revenue from the satellite-based Internet services segment consists primarily of
(i) monthly service fees, (ii) VSAT related equipment sales, and (iii)
installation charges. Service fees are recognized as the service is provided.
Payments received in advance of providing services are deferred until the period
such services are provided. Equipment sales are recognized upon fulfillment of
contractual obligations of the sale, and installation charges are recognized
when installation is complete.
Income Taxes
The Company recognizes its tax expense/benefit in accordance to Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. Deferred
tax liabilities and assets are provided 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 (see
Note 16).
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share are computed using the weighted average
number of common stock shares outstanding during the period. Diluted earnings
(loss) per common share are computed using the weighted average number of common
stock shares and common stock equivalents shares outstanding during the period.
Common stock equivalents consist of convertible preferred stock (using the as if
converted method) stock options and stock warrants (using the treasury stock
method). Common stock equivalents have been excluded from the computation of
diluted earnings per share for all periods presented, as their effect would have
been anti-dilutive.
Stock Option Plans
The Company accounts for employee stock-based compensation using the intrinsic
value method, as prescribed by Accounting Principles Board Opinion No. 25 ("APB
25"), Accounting for Stock Issued to Employees. As such, deferred compensation
is recorded only if the exercise price of the option is below the current market
price of the Company's common stock on the date of grant. Deferred compensation
expense for employee stock options is amortized on a straight-line basis over
the vesting term of the option, which typically is four years.
<PAGE>
The Company accounts for non-employee stock-based compensation using the fair
value method, as required by Statement of Financial Accounting Standard No. 123
("SFAS 123"), Accounting for Stock-Based Compensation. As such, deferred
compensation is recorded for all non-employee stock options as of the date of
grant. Deferred compensation expense for non-employee stock options is amortized
on an accelerated basis, as prescribed by Financial Interpretation No. 28 ("FIN
28"), Accounting for Stock Appreciation Rights and Other Variable Stock Option
or Award Plans, over the contractual life of the option.
Impairment of Long-lived Assets
The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable based on expected undiscounted cash flows attributable to that
asset. The amount of any impairment is measured as the difference between the
carrying value and the fair value of the impaired asset. The Company does not
have any long-lived assets as part of continuing operations it considers to be
impaired.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements.
Implementation is scheduled for fiscal years beginning after December 15, 1999,
which would be effective for the Company beginning in fiscal year 2001. SAB 101
addresses various topics in revenue recognition including the recognition of
revenue for contracts involving multiple deliverables. Based on Management's
current understanding and interpretation, SAB 101 is not expected to have a
material impact on the Company's consolidated financial statements.
In June 2000, the FASB issued Statement of Financial Accounting Standards No.
138 ("FASB 138"), Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an amendment to FASB Statement No. 133 ("FASB 133"). FASB
138 addresses a limited number of issues causing implementation difficulties for
companies that are required to apply FASB 133. FASB 133, as amended by FASB
Statement No. 137, Accounting for Derivative Instruments and Hedging Activities
- Deferral of the effective date of FASB Statement No. 133, is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The Company
believes that FASB 133 and FASB 138 will not have a material impact on its
financial position, results of operations or cash flows.
3. Acquisitions and Discontinued Operations
Acquisition of Intellicom
On February 9, 1999, a wholly owned subsidiary of the Company merged with and
into Intelligent Communications, Inc. ("Intellicom" and the "Intellicom
Acquisition"). The purchase price of $14,869,000 was comprised of: (i) a cash
component of $500,000 (the "Cash Consideration"); (ii) a promissory note in the
amount of $1,000,000 bearing interest at 7.5% per annum and due one year after
closing (the "First Promissory Note"); (iii) a promissory note in the amount of
$2,000,000 bearing interest at 8.5% per annum and due two years after closing
(the "Second Promissory Note", together with the First Promissory Note, the
"Debt Consideration"); (iv) the issuance of 500,000 shares of the Company's
common stock (adjustable upwards after one year in certain circumstances),
valued at $14.938 per share, for a total value of $7,469,000 (the "Closing
Shares"); (v) additional shares of the Company's common stock issuable upon the
first, second and third anniversaries of the closing, valued at a total of
$3,500,000 (the "Anniversary Shares", together with the Closing Shares, the
"Equity Consideration"); and (vi) certain direct acquisition costs totaling
$400,000. The Debt Consideration may be partially or wholly converted into the
Company's common stock, under certain circumstances. The conversion price of the
Debt Consideration is based upon the average closing price of the Company's
common stock for the 15 days immediately preceding the conversion date. Both the
Debt Consideration and the Equity Consideration were issued in a nonpublic
offering pursuant to transactions exempt under Section 4(2) of the Securities
Act. In April 1999, the Company paid the First Promissory Note and related
interest in full with a combination of cash and equity. The Company paid
$832,000 in cash and the remainder, after expenses, with 6,118 common stock
shares valued at $190,000. The Intellicom acquisition agreement requires the
Company to issue $1,500,000 of common stock shares on the first anniversary date
of the Intellicom acquisition. Accordingly, on February 8, 2000, the Company
issued 43,314 common stock shares valued at $1,499,000 and paid $1,000 for
fractional shares to the former shareholders of Intellicom. Additionally, the
Intellicom Acquisition agreement includes a demonstration bonus ("Demonstration
Bonus") of $1,000,000 payable in cash or shares of the Company's common stock at
the Company's option by the first anniversary date of the Intellicom Acquisition
if certain conditions are met. On February 8, 2000, the opportunity to earn the
Demonstration Bonus had expired, and accordingly the Demonstration Bonus was not
paid or included in the purchase price of Intellicom.
<PAGE>
The purchase price, including direct acquisition costs, has been allocated to
assets acquired and liabilities assumed based on fair market value at the date
of acquisition. The fair value of assets acquired and liabilities assumed is
summarized as follows (in thousands):
Current assets............................ $ 503
Property and equipment.................... 684
Acquired technology....................... 16,075
Other assets.............................. 77
Current liabilities....................... 2,470
The Company accounted for the Intellicom Acquisition using the purchase method
and allocated the purchase price of $14,469,000 to acquired technology.
Additionally, due to the negative fair value of Intellicom's net assets at the
time of acquisition, the Company recognized additional acquired technology in
Intellicom totaling $1,206,000. Furthermore, in connection with the Intellicom
Acquisition, the Company incurred certain fees and expenses. Such costs, which
total $400,000, were capitalized and have also been allocated to acquired
technology, bringing the total amount allocated to acquired technology to
$16,075,000. The results of operations of Intellicom are included in the
accompanying financial statements from the date of acquisition.
The nature of the developed technology acquired provides the Company with a
proprietary satellite system, involving both hardware and software, which
provides a high-performance, two-way satellite-based Internet access service.
The nature of the acquired technology will, among other things, allow the
Company to lower the costs of bringing the Internet customers. The technology
acquired has already been tested and proven to be a viable business. Therefore,
the Company believes that the underlying technology acquired in the Intellicom
Acquisition is not subject to rapid change, and such acquired technology will
support the Company's business plan over the typical length of its contracts
without having to significantly change or enhance the acquired technology. The
Company's contracts with its cable affiliates typically run from five to ten
years. In determining how much of the purchase price in excess of the tangible
book value of Intellicom to allocate to acquired technology, the Company
considered that there was little value ascribable to other intangible assets,
such as customer lists or workforce. Rather, the Company, after careful
consideration, determined that the fair market value of the acquired technology
is equivalent to the intangible assets acquired in this acquisition. The Company
amortizes this amount using the straight-line method over a period of seven
years, the average term of a typical cable affiliate contract as well as the
anticipated useful life of this acquired technology.
Acquisition of Laptop Lane, Formation of Aerzone and Discontinued Operations of
Aerzone
On January 24, 2000, the Company founded Aerzone (formerly SoftNet Zone, Inc.),
a Delaware corporation, to provide high-speed Internet access and related
services to global business travelers. As part of the Aerzone business, the
Company acquired Laptop Lane, a Washington corporation, on April 21, 2000. The
acquisition was accounted for under the purchase method and the results of
Laptop Lane are included in the consolidated financial statements since the date
of acquisition. Laptop Lane is a leading provider of business center services in
airports. The Company paid approximately $21,559,000, consisting of (i) 972,266
common stock shares of the Company valued at $15,107,000, net of adjustment for
expenses paid by the Company on behalf of Laptop Lane, exchanged for all
outstanding common stock shares of Laptop Lane, (ii) direct acquisition costs of
approximately $2,300,000, which includes a bonus payment to Laptop Lane
employees for $431,000 in lieu of Laptop Lane stock options, and (iii) 250,000
common stock shares of the Company valued at $3,652,000 to be issued to former
Laptop Lane stockholders in payment for achieving certain criteria. As part of
the acquisition, an additional 333,333 common stock shares of the Company would
be distributed to former Laptop Lane stockholders if certain performance goals
or other criteria are met. As of September 30, 2000, Laptop Lane has achieved
three of the four performance goals, as a result 249,981 common stock shares of
the Company and cash for a total value of $3,652,000 was distributed to the
former Laptop Lane stockholders. The fourth performance goal requirement was met
in October 2000, as a result, upon the resolution of certain claims against
Laptop Lane, all or a portion of the remaining 83,333 common stock shares of the
Company valued at $500,000 was accrued for and will be issued to the former
Laptop Lane stockholders. Additionally, prior to the acquisition the Company
provided $6,000,000 in working capital to Laptop Lane under a secured promissory
note, which was included as part of the purchase price consideration for
determining allocation.
<PAGE>
The purchase price, including direct acquisition costs, has been allocated to
assets acquired and liabilities assumed based on fair value at the date of
acquisition. The allocation of purchase price includes goodwill, which is
amortized on a straight-line basis over four years. The fair value of assets
acquired and liabilities assumed is summarized as follows (in thousands):
Current assets............................ $ 1,707
Property and equipment, net............... 4,478
Goodwill.................................. 23,195
Other assets.............................. 128
Current liabilities....................... 806
Other liabilities......................... 7,843
Subsequently, on December 19, 2000, the Company decided to discontinue the
Aerzone business in light of significant long-term capital needs and the
difficulty of securing the necessary financing because of the current state of
the financial markets. The plan includes a reduction in personnel. The Company
anticipates that it will sell Laptop Lane. The operating results of Aerzone has
been segregated from continuing operations and is reported as loss from
discontinued operations, net of tax on the consolidated statement of operations.
Although it is difficult to predict the final results, the loss from
discontinued operations includes management's estimates of costs to wind down
the business, costs to settle its outstanding liabilities, and the proceeds from
the sale of assets including Laptop Lane. The actual results could differ
materially from these estimates. The assets and liabilities of such operations
are reflected as net liabilities associated with discontinued operations of
Aerzone on the consolidated balance sheets as of September 30, 2000.
Operating results of Aerzone from January 24, 2000, date of inception, to
September 30, 2000 is as follows (in thousands):
Revenues.................................. $ 2,163
=============
Loss before income taxes.................. $ (12,150)
Provision for income taxes................ -
-------------
Net loss.................................. $ (12,150)
==============
Net liabilities associated with discontinued operations of Aerzone at September
30, 2000, is as follows (in thousands):
Current assets:
Accounts receivable, net............................ $ 376
Inventory........................................... 326
Other current assets................................ 1,149
--------------
Total current assets................................... 1,851
Property, plant and equipment, net..................... 4,226
Other assets........................................... 241
--------------
Total assets........................................... $ 6,318
==============
Current liabilities:
Accounts Payable.................................... $ 1,884
Estimated net operating loss from
October 1, 2000 through closure date............ 12,720
Estimated contract termination costs................ 2,955
Estimated retention and severance costs............. 2,547
Accrued expenses.................................... 3,654
Laptop Lane Limited acquisition reserve 1,329
Current portion of long-term debt................... 113
--------------
Total current liabilities.............................. $ 25,202
==============
Net liabilities associated with discontinued operations $ (18,884)
===============
<PAGE>
Discontinued Operations of ISP Channel, Inc.
On December 7, 2000, the Company's Board of Directors approved a plan to
discontinue providing cable-based Internet services through its ISP Channel,
Inc. ("ISP Channel") subsidiary by December 31, 2000 because of (1)
consolidation in the cable television industry made it difficult for ISP Channel
to achieve the economies of scale necessary to provide such services profitably,
and (2) the Company was no longer able to bear the costs of maintaining the ISP
Channel. The operating results of ISP Channel has been segregated from
continuing operations and is reported as loss from discontinued operations, net
of tax on the consolidated statements of operations. Although it is difficult to
predict the final results, the loss from discontinued operations includes
management's estimates of costs to wind down the business, costs to settle its
outstanding liabilities, and the proceeds from the sale of assets. The actual
results could differ materially from these estimates. The assets and liabilities
of such operations were reflected as net assets (liabilities) associated with
discontinued operations of ISP Channel as of September 30, 2000 and 1999.
Operating results of ISP Channel are as follows (in thousands):
Year Ended September 30,
------------------------------------------
2000 1999 1998
-------------- ------------- -------------
Revenues............................ $ 6,039 $ 2,550 $ 1,018
============= ============ ============
Loss before income taxes............ $ (60,249) $ (29,440) $ (8,272)
Provision for income taxes.......... - - -
------------- ------------ ------------
Net loss............................ $ (60,249) $ (29,440) $ (8,272)
============== ============ ============
Net assets (liabilities) associated with discontinued operations of ISP Channel
at September 30, 2000 and 1999, are as follows (in thousands):
September 30,
------------------------
2000 1999
----------- -----------
Current assets:
Accounts receivable, net....................... $ 1,000 $ 685
Inventory, net................................. 2,701 1,955
Other current assets........................... 469 1,068
----------- -----------
Total current assets.............................. 4,170 3,708
Property, plant and equipment, net................ 12,890 24,016
Cable affiliate launch incentives, net............ - 9,956
Other assets...................................... 222 2,244
----------- -----------
Total assets...................................... $ 17,282 $ 39,924
=========== ===========
Current liabilities:
Accrued expenses............................... $ 7,836 $ 6,600
Estimated net operating loss from
October 1, 2000 through closure date........ 9,972 -
Estimated contract termination costs........... 13,938 -
Estimated retention and severance costs........ 7,776 -
Estimated other costs 1,008 -
Current portion of long-term debt.............. 1,464 567
Current portion of capital leases.............. 5,243 1,760
----------- -----------
Total current liabilities......................... 47,237 8,927
Long-term debt, net of current portion............ 1,615 628
Capital lease obligation, net of current portion.. 6,141 1,945
----------- -----------
Total liabilities................................. $ 54,993 $ 11,500
=========== ===========
Net assets (liabilities) associated with
discontinued operations........................ $ (37,711) $ 28,424
============ ===========
<PAGE>
Discontinued Operations of Micrographic Technology Corporation
On September 30, 1999, the Company sold the document management business,
Micrographic Technology Corporation ("MTC"), to Global Information Distribution
GmbH ("GID") for an aggregate purchase price of approximately $4,894,000 in
cash, which, after selling costs, resulted in a loss of $321,000. The sale
proceeds were used to reduce outstanding indebtedness and provide additional
working capital. The operating results of MTC have been segregated from
continuing operations and are reported as part of the loss from discontinued
operations, net of tax on the consolidated statements of operations.
Operating results of MTC are as follows (in thousands):
Year Ended
September 30,
------------------------------
1999 1998
-------------- ---------------
Revenues.......................... $ 13,690 $ 13,043
============= ==============
Loss before income taxes.......... $ (633) $ (5,652)
Provision for income taxes........ - -
------------- --------------
Net loss.......................... $ (633) $ (5,652)
============= ==============
Interest expense allocated to the MTC totaled $155,000 and $394,000 for the
years ended September 30, 1999 and 1998, respectively.
Discontinued Operations of Kansas Communications, Inc.
On February 12, 1999, substantially all of the assets of the telecommunications
segment, Kansas Communications, Inc. ("KCI"), were sold to Convergent
Communications Services, Inc. ("Convergent Communications") for an aggregate
purchase price of approximately $6,300,000 subject to adjustment in certain
events. Convergent Communications paid $100,000 in cash in November 1998 upon
execution of the letter of intent to purchase and paid the remainder of the
purchase price on the closing date as follows: (i) $1,400,000 in cash; (ii)
approximately 30,000 shares of Convergent Communications' parent company common
stock with an agreed value of approximately $300,000 ($10.00 per share) (the
"Convergent Shares"); (iii) a promissory note in the amount of $2,000,000 (the
"First Convergent Note") bearing simple interest at the rate of 11% per annum
and payable on July 1, 2000; (iv) a promissory note in the amount of $1,000,000
(the "Second Convergent Note") bearing simple interest at the rate of 8% per
annum and payable 12 months following the closing date ; and (v) a promissory
note in an amount of $1,500,000 (the "Third Convergent Note") bearing simple
interest at the rate of 8% per annum and payable 12 months following the closing
date , which is subject to mandatory prepayment in certain events. Furthermore,
a purchase price adjustment subsequent to closing provided the Company with
additional Convergent Shares with an agreed value of $198,000 for a total
investment in Convergent Shares of $498,000, which, after reduction to its
current market value of $79,000 is classified as a short-term investment in the
accompanying consolidated balance sheet. The sale of KCI's assets resulted in a
gain of $2,141,000. For the year ended September 30, 1999, the First and Third
Convergent Notes were paid in full. On November 5, 1999, the Second Convergent
Note was paid in full. The Company had previously deferred the recognition of
gain due to the uncertainty of Convergent Communications' ability to perform.
As a result of Convergent Communication's successful initial public offering on
July 20, 1999, the Company recognized the gain on sale. The operating results of
KCI has been segregated from continuing operations and is reported as loss from
discontinued operations, net of tax on the consolidated statements of
operations.
Operating results of KCI are as follows (in thousands):
Year Ended September 30,
------------------------------
1999 1998
-------------- ---------------
Revenues............................... $ 4,730 $ 16,065
============= ==============
Income before income taxes............. $ 242 $ 277
Provision for income taxes............. (72) (350)
------------- --------------
Net income (loss)...................... $ 170 $ (73))
============= ==============
Interest expense allocated to KCI totaled $2,000 and $5,000 for the years ended
September 30, 1999 and 1998, respectively.
The provision for income taxes for the years ended September 30, 1999 and 1998
are related to prior period adjustments in deferred maintenance revenue for KCI.
<PAGE>
4. Cash, Cash Equivalents and Short-Term Investments
Cash equivalents consist of securities with maturities of three months or less
at date of purchase. Short-term investments as of September 30, 2000, consist of
$112,182,000 of debt securities which mature in less than one year, $5,511,000
of debt securities, which mature in one to five years and $9,710,000 of
short-term equity securities. Cash and cash equivalents, and short-term
investments consisted of the following as of September 30, 2000 (in thousands):
<TABLE>
<CAPTION>
Unrealized Unrealized
Cost gain loss Market
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents:
Cash................................... $ 21,025 $ - $ - $ 21,025
Municipal securities................... 21,913 - (4) 21,909
Money market funds..................... 1,797 - - 1,797
------------- -------------- ------------- --------------
$ 44,735 $ - $ (4) $ 44,731
============= ============== ============== ==============
Short-term investments:
Municipal securities................... $ 65,365 $ - $ (52) $ 65,313
US Treasury securities................. 35,782 - (20) 35,762
Auction market preferreds.............. 3,411 - - 3,411
Foreign debt securities................ 13,217 - (10) 13,207
Common and preferred stock............. 10,324 - (614) 9,710
------------- -------------- ------------- --------------
$ 128,099 $ - $ (696) $ 127,403
============= ============= ============ =============
</TABLE>
Cash equivalents consist of securities with maturities of three months or less
at date of purchase. Short-term investments as of September 30, 1999 consisted
of $30,065,000 of debt securities which mature in less than one year,
$22,263,000 of debt securities which mature in one to five years, and $258,000
of short-term equity securities. Cash and cash equivalents, and short-term
investments consisted of the following as of September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Unrealized Unrealized
Cost gain loss Market
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents:
Cash.............................. $ 40,650 $ - $ - $ 40,650
Municipal securities.............. 40,156 - - 40,156
US Government Agency notes........ 5,785 - - 5,785
Money market funds................ 2,159 - - 2,159
Foreign debt securities........... 749 - - 749
------------- -------------- ------------- -------------
$ 89,499 $ - $ - $ 89,499
============= ============== ============= =============
Short-term investments:
Municipal securities.............. $ 23,496 $ - $ (44) $ 23,452
US Treasury securities............ 11,219 - (11) 11,208
Auction market preferreds......... 9,114 - - 9,114
Foreign debt securities........... 8,574 - (20) 8,554
Common stock...................... 498 - (240) 258
------------- -------------- ------------- -------------
$ 52,901 $ - $ (315) $ 52,586
============= ============= ============ ============
</TABLE>
As of September 30, 2000 and 1999, cost approximated market value for cash
equivalents.
5. Equity Investments
On August 18, 1999, the Company acquired 106,250 series A convertible preferred
stock shares of YourDay.com, Inc. ("YourDay"), a Delaware corporation, for
$250,000. YourDay is a leading online calendar and scheduling system that
seamlessly integrates Palm Pilots, telephones and the Internet anywhere in the
world. As of September 30, 1999, the investment in YourDay is classified as a
long-term equity investment on the accompanying consolidated balance sheets.
Subsequently, on February 23, 2000, YourDay merged with deltathree.com, Inc.
("Deltathree"), a Delaware corporation. The merger called for each YourDay
series A convertible preferred stock share be converted into .0469 Deltathree
series A common stock share. The Company received 4,983 Deltathree series A
common stock shares in the exchange, and accounted for the exchange at fair
value, which resulted in a loss of $37,000 included in other income (expense).
Deltathree is a global provider of IP telephony services and other enhanced
web-based communications to individuals and businesses worldwide. Deltathree is
listed and traded on the NASDAQ National Market under the symbol "DDDC". As of
September 30, 2000, the investment in Deltathree is an available for sale
security and accordingly is classified as a short-term investment on the
accompanying consolidated balance sheets.
<PAGE>
On February 23, 2000, the Company entered into an agreement to provide
management consulting advice on strategy, operations, marketing, technology and
content; and training related to high speed Internet services through cable
television networks to Big Sky Network Canada, Ltd. ("Big Sky"), a British
Virgin Islands international business company. As part of the agreement the
Company acquired 10,000 Big Sky common stock shares for $500,000. On April 24,
2000, the Company acquired an additional 40,000 Big Sky common stock shares for
$2,000,000. Additionally, the Company incurred an additional $1,136,000 of
expenses on behalf of Big Sky for a total investment of $3,636,000. Big Sky is a
company that forms cooperative joint venture relationships with
government-approved partners to offer high capacity, high speed Internet access
and services in major urban markets throughout the People's Republic of China.
Subsequently, on September 29, 2000, the Company sold its 50,000 Big Sky common
stock shares for $13,830,000 to the other owner of Big Sky, China Broadband
Corporation ("China Broadband"), a Nevada corporation, which resulted in a gain
of $10,194,000 included in other income (expense). Proceeds from the sale
consisted of (i) $2,500,000 in cash, (ii) a promissory note in the amount of
$1,700,000 bearing interest at 8% per annum due September 29, 2001, and (iii)
1,133,000 China Broadband common stock shares valued at $9,630,000. China
Broadband is the leading cable broadband provider in China. China Broadband is
listed and traded on the NASDAQ Over-the-Counter Bulletin Board under the symbol
"CBBD". As of September 30, 2000, the investment in China Broadband is an
available for sale security and accordingly classified as short-term investments
on the accompanying consolidated balance sheets.
On August 18, 1999, the Company acquired 83,330 series A convertible preferred
stock shares of YourStuff.com, Inc. ("YourStuff"), a Delaware corporation, for
$250,000. YourStuff provides a secure web-based central file repository.
Subsequently, on October 30, 2000, YourStuff merged with SenseNet, Inc.
("SenseNet"), a Delaware corporation. The Company received 267,501 SenseNet
common stock shares in the exchange, and accounted for the exchange at cost.
SenseNet is a privately held company that provides intranet business
applications that focus on increasing productivity and profitability. As of
September 30, 2000 and 1999, these investments are classified as long-term
equity investments on the accompanying consolidated balance sheets.
On January 14, 2000, the Company acquired 337,496 series B preferred stock
shares of Dotcast.com, a California corporation, for $1,000,000. Dotcast.com is
a privately held company developing a national high-speed digital network for
the distribution of digital entertainment, interactive services and multimedia
communications. As of September 30, 2000, this investment is classified as a
long-term equity investment on the accompanying consolidated balance sheets.
On October 12, 1999, the Company entered into memorandum of understanding with
Pacific Century CyberWorks Limited ("Pacific Century") to form a joint venture,
Pacific Century SoftNet, to market cable-based Internet products and services to
cable operators throughout Asia. This investment is accounted for under the
equity method and accordingly classified as long-term equity investments on the
accompanying consolidated balance sheet. For the year ended September 30, 2000,
the Company contributed $230,000 to this joint venture and recognized equity
losses of $191,000, which is reflected in other income (expense) on the
accompanying consolidated statements of operations.
On March 24, 2000, the Company entered into an agreement to provide management
consulting advice on strategy, operations, marketing, technology and content;
and training related to high speed Internet services through cable television
networks to Interactive Cable Communications Incorporated ("ICC"). As part of
this agreement, the Company acquired 4,600 common stock shares of ICC for
$3,763,000, and formed a joint venture with Marubeni Corporation, a Japan
corporation. ICC is engaged in the business of providing data transferring
services including high-speed cable-based Internet services. This investment is
accounted for under the equity method and accordingly classified as long-term
equity investments on the accompanying consolidated balance sheet. For the year
ended September 30, 2000, equity losses for this investment was $390,000, and is
reflected in other income (expense) on the accompanying consolidated statements
of operations.
On September 15, 2000, the Company entered into a stock purchase agreement to
acquire 3,000,000 series A convertible preferred stock shares of Freewire
Networks, Inc. ("Freewire"), a Delaware corporation, for $3,000,000. Freewire is
a privately held company developing wireless broadband services at sporting
venues using IEEE 802.11 technology. The Company holds Freewire in a corporate
joint venture with Lucent Technologies Inc. ("Lucent") and Freewire's founding
management stockholders. Under certain circumstances, Lucent has the option to
require the Company to purchase Lucent's shares in Freewire. The investment is
accounted for under the equity method and accordingly is classified as a
long-term equity investment on the accompanying consolidated balance sheet.
<PAGE>
6. Property and Equipment, Net
Property and equipment consist of the following (in thousands):
September 30,
------------------------------
2000 1999
-------------- ---------------
Leasehold improvements............... $ 1,203 $ 1,315
Furniture and fixtures............... 800 376
Equipment............................ 3,843 1,392
Construction in Progress............. 5 -
------------- --------------
Property and equipment, gross........ 5,851 3,083
Less allowance for depreciation...... (1,172) (355)
------------- --------------
Property and equipment, net.......... $ 4,679 $ 2,728
============= ==============
7. Intangibles, Net
Intangibles consist of the following (in thousands):
September 30,
------------------------------
2000 1999
-------------- ---------------
Acquired technology (see Note 3)...... $ 16,075 $ 16,075
Other................................. 10 -
------------- --------------
16,085 16,075
Accumulated amortization.............. (3,828) (1,531)
------------- --------------
$ 12,257 $ 14,544
============= ==============
8. Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
------------------------------
2000 1999
-------------- ---------------
<S> <C> <C>
9% Senior Subordinated Convertible Notes due January 1, 2001, interest payable
quarterly, convertible into the Company's common stock (see below)............... $ - $ 12,549
9% Convertible Subordinated Debentures due September 15, 2000, interest payable
quarterly, convertible into the Company's common stock at $6.75 per share........ - 1,357
6% Convertible Subordinated Secured Debentures, due February 28, 2002, with
semi-annual interest payments, convertible into the Company's common stock at
$8.10 per share.................................................................. 660 660
5% Convertible Subordinated Debentures, due September 30, 2002, interest payable
annually, convertible into the Company's common stock at $8.25 per share
after
December 31, 1998................................................................ 1,444 1,444
Promissory note bearing interest at 8.5%, due February 9, 2001, principal and
interest due and payable at maturity or at date of prepayment or acceleration
of
note (see Note 3)................................................................ 2,000 2,000
Other............................................................................... 161 161
------------- --------------
Total long-term debt................................................................ 4,265 18,171
Less current portion................................................................ (2,161) (1,518)
------------- --------------
Long-term debt, net of current portion.............................................. $ 2,104 $ 16,653
============= ==============
</TABLE>
<PAGE>
On January 12, 1999, the Company issued $12,000,000 of its 9% Senior
Subordinated Convertible Notes (the "Notes") due January 1, 2001 to a group of
institutional investors. These Notes were convertible into the Company's common
stock with an initial conversion price of $17.00 per share until July 1, 1999,
and, thereafter, at the lower of $17.00 per share (the "Initial Conversion
Price") and the lowest five-day average closing bid price of the Company's
common stock during the 30-day trading period ending one day prior to the
applicable conversion date (the "Conversion Price"). In connection with these
Notes, the Company issued to these investors warrants to purchase an aggregate
of 300,000 shares of the Company's common stock. These warrants have an exercise
price of $17.00 per share and expire in 2003. On April 28, 1999, as a result of
the Company's underwritten secondary public offering (the "Secondary Offering"),
and in conjunction with an anti-dilution provision associated with the Notes,
the Initial Conversion Price was reduced from $17.00 to $16.49 per share.
Furthermore, in order to secure three month lock-up agreements from the holders
of the Notes in conjunction with the Secondary Offering, the Company entered
into a new arrangement with the holders of the Notes to issue all future
interest payments, beginning with the three months ended June 30, 1999, in the
form of convertible notes with substantially the same form and features as the
original Notes. Therefore, the Company issued an additional $549,000 in notes,
representing interest for the six months ended September 30, 1999, (the
"Interest Notes"). Proceeds from the sale of the Notes were used to fund the
expenditures incurred in the continuing expansion of the Company's Internet
business, particularly the ISP Channel service, and for general corporate
purposes. On October 22, 1999, all of the 9% Senior Subordinated Convertible
Notes, related Interest Notes and accrued interest were converted into 765,201
shares of the Company's common stock.
On September 15, 1995, the Company issued $2,856,000 of its 9% Convertible
Subordinated Debentures due September 15, 2000, in conjunction with the
acquisition of MTC. The debentures were issued to the shareholders of MTC as
partial consideration for the acquisition. These 9% debentures have a conversion
price of $6.75. For the year ended September 30, 1997, the Company issued 35,104
common stock shares pursuant to the conversion of $237,000 of convertible debt
by four separate holders of these debentures. For the year ended September 30,
1998, the Company issued 123,377 common stock shares pursuant to the conversion
of $832,000 of convertible debt by seven separate holders of these debentures.
For the year ended September 30, 1999, the Company issued 63,719 common stock
shares pursuant to the conversion of $430,000 of convertible debt by five
separate holders of these debentures. For the year ended September 30, 2000, the
Company issued 1,467 common stock shares pursuant to the conversion of $63,000
of convertible debt by 2 separate holders of these debentures. On September 15,
2000, the Company paid remaining $1,294,000 of convertible debt and accrued
interest.
On September 15, 1995, in association with the acquisition of MTC, the Company
assumed $1,800,000 of 6% Convertible Subordinated Secured Debentures due
February 28, 2002. These 6% 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
issued if the debentures were converted. These debentures are convertible into
the Company's common stock at $8.10 per share. For the year ended September 30,
1996, the Company issued 125,925 common stock shares pursuant to the conversion
of $1,020,000 of these convertible debentures by ten separate holders of these
debentures. For the year ended September 30, 1998, the Company issued 7,407
shares of the Company's common stock pursuant to the conversion of $60,000 of
these convertible debentures by a single holder of these debentures. For the
year ended September 30, 1999, the Company issued 7,407 common stock shares
pursuant to the conversion of $60,000 of these convertible debentures by a
single holder of these debentures.
On January 2, 1998, the Company issued $1,444,000 principal amount of its 5%
Convertible Subordinated Debentures due September 30, 2002, to Mr. R.C.W.
Mauran, who was at the time of the transaction a beneficial owner of more than
5% of the Company's common stock, in exchange for the assignment to the Company
of certain equipment leases and other consideration, all of which have been
assimilated into the business of Micrographic Technology Corporation. The
debentures are convertible into the Company's common stock at $8.25 per share
after December 31, 1998.
The scheduled maturities of long-term debt as of September 30, 2000, are as
follows (in thousands):
Year Ending September 30:
2001................................... $ 2,161
2002................................... 2,104
-------------
$ 4,265
=============
<PAGE>
9. Commitments and Contingencies
The Company has entered into operating leases for office space, manufacturing
facilities, satellite transponder space and certain other office equipment.
These operating leases provide for minimum rents and generally include options
to renew for additional periods.
Future minimum lease payments under non-cancelable operating leases as of
September 30, 2000, are as follows (in thousands):
Year Ending September 30:
2001................................... $ 4,435
2002................................... 3,471
2003................................... 3,326
2004................................... 2,240
2005................................... 660
2006 and thereafter.................... 1,062
-------------
$ 15,194
=============
The Company's rent expense for continuing operations for the years ended
September 30, 2000, 1999 and 1998, was $3,817,000, $1,395,000 and $207,000,
respectively.
On February 11, 2000, Intellicom entered into an agreement with Radyne ComStream
Inc. (`Radyne") to purchase 1,000 earth station terminals. Under the terms of
the agreement, Intellicom is required to pay in advance four equal payments
amounting to $8,565,000. Through September 30, 2000, Intellicom has paid a total
of $6,424,000 to Radyne and has received 715 earth station terminals. As of
September 30, 2000, advance payment of $300,000 to Radyne representing the cost
of 35 earth station terminals not yet received are included in other current
assets on the accompanying consolidated balance sheets.
10. Redeemable Convertible Preferred Stock and Common Stock
Redeemable Convertible Preferred Stock
For the year ended September 30, 1998, the Company issued three series of its 5%
convertible preferred stock (Series A, B and C). In connection with the issuance
of the preferred stock, the Company also issued warrants to purchase shares of
its common stock. The holders of the preferred stock received dividends at a
rate of 5% per annum at the Company's option, in cash or additional shares of
the applicable series of preferred stock. Proceeds from the sale of the
preferred stock and warrants were used to fund the expenditures incurred in the
continuing expansion of the Company's Internet segment, particularly the ISP
Channel service, and for general corporate purposes.
As of September 30, 1999, all of the previously issued 5% convertible preferred
stock had been converted to common stock.
The activity for the year ended September 30, 1999 and 1998 in convertible
preferred stock and related warrants is summarized as follows (in thousands,
except per share prices):
<TABLE>
<CAPTION>
Series A Series B Series C
--------------- --------------- --------------
<S> <C> <C> <C>
Date issued.................................. December 1997 May 1998 August 1998
Gross proceeds............................ $ 5,000 $ 10,000 $ 7,500
Issuance costs............................ (400) (572) (472)
--------------- --------------- --------------
Net proceeds.............................. $ 4,600 9,428 7,028
=============== =============== ==============
Dividends paid:
Additional preferred shares............... $ 101 $ 252 $ 125
Common shares issued upon
conversion............................. 29 75 59
Cash...................................... 38 42 95
Conversion dates............................. April 1998 and February 1999 May 1999
November 1998
Common shares issued upon conversion......... 709 777 847
Conversion price per share................... $6.69 and $7.56 $13.20 $9.00
Warrants issued to preferred
stockholders:
Common stock shares....................... 150 200 94
Exercise price per share.................. $7.950 $13.750 $9.375
Expiration date........................... December 2001 May 2002 August 2002
Warrants issued to sales agents:
Common stock shares....................... 20 50 26
Exercise price per share.................. $6.625 $11.000 $7.500
Expiration date........................... December 2000 May 2002 August 2002
</TABLE>
<PAGE>
For the year ended September 30, 1999, the Company incurred a penalty of
$498,000, included in other income (expense) in the consolidated statements of
operations, as a result of a delay in its ability to register the underlying
common stock of the Series C redeemable convertible preferred stock with the
Securities and Exchange Commission. This penalty was paid to the holders of the
Series C redeemable convertible preferred stock through the issuance of an
additional 55,378 common stock shares.
Common Stock
On February 22, 1999, the Company entered into a license agreement with Inktomi
Corporation ("Inktomi", the "Inktomi Licensing Agreement") allowing the Company
rights to install certain Inktomi caching technology into the Company's
cable-based Internet network infrastructure. The Inktomi Licensing Agreement was
valued at $4,000,000 for a total of 500 licenses, of which the first $1,000,000
was paid with 65,843 shares of the Company's common stock and the remaining
amount payable in cash in eight quarterly payments of $375,000. For the years
ended September 30, 2000 and 1999, total payments amounted to $1,500,000 and
$1,125,000, respectively. The Inktomi Licensing Agreement allows the Company to
purchase up to 500 additional licenses during the first four years of the
agreement. Prepaid license fees at September 30, 2000 and 1999, were $2,602,000
and $2,101,000, respectively. As a result of the Company discontinuing the
operations of ISP Channel, prepaid license fees were written off and reflected
in the loss on disposition of discontinued operations, net of tax for the year
ended September 30, 2000, and in the net assets associated with discontinued
operations at September 30, 1999.
On April 13, 1999, the Company held its Annual Stockholders' Meeting. At this
meeting, the following proposals, among others, were approved: (i) an increase
in the number of common shares authorized was increased from 25,000,000 to
100,000,000; (ii) the Company's 1998 Stock Incentive Plan under which 3,350,668
common stock shares were reserved for issuance; (iii) the sale of the Company's
document management segment (see Note 3); and (iv) the Company's
re-incorporation in Delaware.
On April 28, 1999, the Company completed a secondary public offering (the
"Secondary Offering"), in which it sold 4,600,000 common stock shares at $33.00
per share. The Company received $141,502,000 in cash, net of underwriting
discounts, commissions and other offering costs.
On the first anniversary date of the Intellicom Acquisition, the Intellicom
Acquisition agreement requires the Company to issue $1,500,000 of common stock
shares. Accordingly, on February 8, 2000, the Company issued 43,314 common stock
shares valued at $1,499,000 and paid $1,000 for fractional shares to the former
shareholders of Intellicom.
On December 13, 1999, the Company completed a private placement of 5,000,000
common stock shares for net proceeds of $128,121,000 to Pacific Century
Cyberworks Limited ("Pacific Century"), and entitled Pacific Century to
designate two persons for election to the Board of Directors.
In conjunction with offering incentives to launch the Company's ISP Channel
cable-based Internet services, the Company issued common stock to cable
affiliates in return for the exclusive rights to provide Internet services to
their customers . During the year ended September 30, 1999, the Company issued
an aggregate of 13,574 common stock shares valued at $337,000 to eight separate
cable affiliates. During the year ended September 30, 2000, the Company issued
35,160 common stock shares valued at $419,000 to two separate cable affiliates.
In addition, on April 12, 1999, the Company issued 660,000 common stock shares
to an investor for $14,990,000 in cash and a modification of the affiliate
agreement between the Company and Teleponce Cable TV, which is controlled by the
investor; the modification of the affiliate agreement was valued at $8,925,000
as a cable affiliate launch incentive. Further, on November 4, 1999, the Company
entered into various definitive agreements with Mediacom LLC ("Mediacom"). In
exchange for signing an agreement to launch the ISP Channel services, the
Company issued a total of 3,500,000 common stock shares to Mediacom, of which
3,150,000 shares were restricted. The restrictions were lifted as Mediacom
launched ISP Channel's services in Mediacom's cable television systems. As of
September 30, 2000, there are 2,100,000 shares restricted and unvalued. The
unrestricted 1,400,000 shares have been valued at $26,513,000 as cable affiliate
launch incentive. As a result of the Company discontinuing the operations of ISP
Channel, the cable affiliate launch incentive, net of amortization, was written
off and reflected in the loss on disposition of discontinued operations, net of
tax for the year ended September 30, 2000, and in the net assets associated with
discontinued operations at September 30, 1999.
<PAGE>
11. Treasury Stock
On August 15, 2000, the board of directors authorized the repurchase of up to
2,600,000 common stock shares of the Company. The Company's repurchases of
shares of common stock are recorded at cost as treasury stock and result in a
reduction of stockholders' equity.
12. 2000 Employee Stock Purchase Plan ("ESPP")
On February 22, 2000, the Company adopted ESPP, which provides for grants of
options to eligible employees of the Company to purchase shares of common stock
through payroll deductions during six-month offering periods. Initial enrollment
for ESPP began on March 13, 2000, for the first offering period of April 1, 2000
to June 30, 2000. Each subsequent offering period will begin July 1 or January 1
and end December 31 or June 30, respectively.
Substantially all employees are eligible for the plan if they are employed for
twenty (20) or more hours per week on the first day of the offering period.
Eligible employees may elect to contribute up to 15% of their base compensation.
The plan provides for the purchase at the lower of 85% of the fair market value
of the shares on the first day of the offering period or 85% of the fair market
value of the shares on the last day of the offering period. A total of 1,325,000
common stock shares are reserved for issuance under ESPP.
As of September 30, 2000, there were no committed-to-be-released or suspense
shares.
13. Stock Option and Warrants
1998 Stock Incentive Plan ("1998 Plan")
Effective October 1, 1998, the Company implemented the 1998 Plan, which the
Company's stockholders approved on April 13, 1999. Concurrent with such
stockholder approval, all outstanding options under the Company's 1995 Long-Term
Incentive Plan (the "Incentive Plan") were incorporated into the 1998 Plan, and
no further option grants or stock issuances will be made under the Incentive
Plan. However, the incorporated options will continue to be governed by their
existing terms, unless the Administrator of the 1998 Plan elects to extend one
or more features of the 1998 Plan to those options. Stock options granted under
the Incentive Plan have an exercise price not less than the fair market value of
the option shares on the grant date and generally become exercisable in three
successive equal installments over the optionee's period of continued service
with the Company. The 1998 Plan provides for the grants of non-statutory and
incentive stock option grants, stock appreciation rights, restricted stock
awards, performance shares, and other awards to officers, employees and other
individuals. Under the terms of the 1998 Plan, options have a maximum term of
ten years from the date of grant. The granted options have various vesting
criteria depending on the grantee; however, most grants having a vesting period
of four years. A total of 3,350,668 shares are reserved for issuance under the
1998 Plan. In addition, the number of common stock shares reserved for issuance
under the 1998 Plan will automatically be increased on the first trading day of
each calendar year, beginning in calendar year 2000, by an amount equal to four
percent of the total number of common stock shares outstanding on the last
trading day of the preceding calendar year, but in no event will any such annual
increase exceed 2,000,000 shares, subject to adjustment for subsequent stock
splits, stock dividends and similar transactions. As of September 30, 2000,
options for 5,781,428 common stock shares were outstanding, options for 971,471
common stock shares were vested and options for 660,282 common stock shares
remained available for future option grants and other awards.
1999 Supplemental Stock Incentive Plan ("1999 Plan")
The Company's 1999 Plan is an equity incentive program for employees and
consultants who are neither officers nor directors of the Company. Awards under
the 1999 Plan may, in general, be made in the form of non-statutory stock option
grants, stock appreciation rights, restricted stock awards or performance
shares. Each stock option grant will have an exercise price not less than the
fair market value of the option shares on the grant date and will generally have
a vesting period of four years. A total of 750,000 common stock shares are
reserved for issuance under the 1999 Plan. As of September 30, 2000, options for
573,940 common stock shares were outstanding, options for 89,844 common stock
shares were vested, and options for 176,060 common stock shares remained
available for future option grants and other awards.
<PAGE>
Micrographic Technology Corporation Employee Stock Option Plan ("MTC Plan")
The Company's former MTC Plan was an equity incentive, program which was
established for the employees of Micrographic Technology Corporation. The
Company sold Micrographic Technology Corporation on September 30, 1999 (See Note
5). A total of 40,000 common stock shares were reserved for issuance under the
MTC Plan. All options granted under the MTC Plan are designed to qualify as
incentive stock options under the federal tax laws. Each granted option became
exercisable for the option shares in a series of three successive equal annual
installments over the optionee's period of continued service with Micrographic
Technology Corporation. As of September 30, 2000, options for 1,693 common stock
shares were outstanding and fully vested and no common stock shares remained
available for future options grants.
Non-Plan Consultant and Employee Stock Options
The Company has granted stock options to certain consultants as partial
consideration for services rendered. These options were granted outside of any
plan because certain consultants are ineligible to be issued stock options out
of plans whose shares are registered with the Securities & Exchange Commission
using Form S-8, such as the Company's 1998 and 1999 Plans. As of September 30,
2000, non-plan consultant options for 94,306 common stock shares were
outstanding and options for 65,694 common stock shares were vested. The Company
has also granted non-plan employee stock options to certain employees in order
to comply with employment offer letter terms not available under the 1998 or
1999 Plans. As of September 30, 2000, non-plan employee options for 21,583
common stock shares were outstanding and options for 8,925 common stock shares
were vested.
Common Stock Warrants
For the year ended September 30, 1999, the Company issued warrants to purchase
an aggregate of 303,013 shares of its common stock in association with two
separate rounds of financing. Warrants to purchase 300,000 shares were issued in
connection with the issuance of the Company's 9% Senior Subordinated Convertible
Notes (see Note 7). Additionally, warrants to purchase 3,013 shares were issued
in connection with the procurement of a $3,000,000 credit facility. For the year
ended September 30, 2000, no warrants were issued.
The fair value of the warrants on the issuance date was estimated using the
Black-Scholes option pricing model with the following assumptions: volatility of
108%, risk free interest rate of 4.78%, no dividend yield, and an expected
contractual life of four years. The total fair value of $4,334,000 has been
recorded as deferred debt issuance costs in the accompanying consolidated
balance sheets and is being amortized to interest expense over the contractual
life of the associated debt instruments.
Options and Warrants Outstanding
The following table summarizes the outstanding options and warrants to purchase
common stock shares for the three years ended September 30, 2000:
<TABLE>
<CAPTION>
Outstanding
Outstanding Options Outstanding Warrants Options and Warrants
------------------------- --------------------- -------------------------
Weighted
Weighted Average Weighted
Average Exercise Average
Shares Exercise Price Shares Price Shares Exercise Price
----------- -------------- --------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1997 482,952 $ 5.14 952,400 $ 6.06 1,435,352 $ 5.75
Granted.................... 1,143,533 8.07 576,559 10.32 1,720,092 8.82
Exercised.................. (152,540) 5.47 (683,941) 5.81 (836,481) 5.75
Canceled................... (103,820) 6.76 (12,619) 2.52 (116,439) 6.30
----------- ----------- -----------
Balance, September 30, 1998 1,370,125 7.42 832,399 9.27 2,202,524 8.12
Granted.................... 2,618,700 16.68 303,013 17.13 2,921,713 16.73
Exercised.................. (440,730) 6.33 (572,064) 9.87 (1,012,794) 8.33
Canceled................... (155,192) 13.89 (60,335) 8.72 (215,527) 12.44
----------- ----------- -----------
Balance, September 30, 1999 3,392,903 14.43 503,013 13.38 3,895,916 14.29
Granted.................... 4,891,000 20.93 - - 4,891,000 20.93
Exercised.................. (365,592) 7.53 (200,000) 7.69 (565,592) 7.59
Canceled................... (1,445,361) 21.08 - - (1,445,361) 21.08
----------- ----------- -----------
Balance, September 30, 2000 6,472,950 $ 13.75 303,013 $ 17.13 6,775,963 $ 13.90
=========== =========== ===========
</TABLE>
<PAGE>
The following table summarizes information regarding stock options outstanding
at September 30, 2000:
<TABLE>
<CAPTION>
Outstanding Options Vested Options
-------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Price Shares Life (Years) Price Shares Price
----------------------------- ----------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ 0.01 to $ 10.00 1,697,367 8.63 $ 7.11 520,727 $ 7.16
10.01 to 20.00 2,129,121 9.20 14.04 331,932 14.13
20.01 to 30.00 1,818,872 9.07 24.75 243,165 23.28
30.01 to 40.00 610,090 9.31 35.29 28,031 34.64
40.01 to 50.00 217,500 9.22 43.99 13,772 42.75
----------- -----------
$ 0.01 to $ 50.00 6,472,950 9.04 $ 18.55 1,137,627 $ 13.89
=========== ===========
</TABLE>
Stock Option Compensation on a Pro Forma Basis
As allowed by Statement of Financial Accounting Standards No. 123 ("FASB 123"),
Accounting for Stock-Based Compensation, the Company continues to apply the
provisions of Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting
for Stock Issued to Employees, in accounting for its stock based employee
compensation arrangements and discloses the pro forma net loss and loss per
share information as if the fair value method suggested in FASB 123 had been
applied.
Had compensation cost for the Company's stock-based compensation arrangements
for employees been determined based on the fair value at grant date of the
awards for the years ended September 30, 2000, 1999 and 1998, consistent with
the provisions of FASB 123, the Company's net loss and loss per share would have
been increased to the pro forma amounts as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net loss applicable to common shares, as reported.......... $ (232,353) $ (50,482) $ (17,345)
=========== =========== ===========
Net loss applicable to common shares, pro forma............ $ (303,420) $ (54,030) $ (18,889)
=========== =========== ===========
Basic and diluted loss per common share, as reported....... $ (9.88) $ (4.09) $ (2.35)
=========== =========== ===========
Basic and diluted loss per common share, pro forma......... $ (12.90) $ (4.38) $ (2.56)
=========== =========== ===========
</TABLE>
The fair value of each stock option grant on the date of grant was estimated
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
Year Ended September 30,
-------------------------------------------
2000 1999 1998
-------------- --------------- ------------
Volatility....................... 96.72% 85.00% 63.00%
Risk-free interest rate.......... 5.88% 5.74% 5.28%
Dividend yield................... - - -
Expected lives................... 4 Years 4 Years 4 Years
Weighted average fair value...... $ 14.53 $ 39.81 $ 4.62
14. Deferred Compensation
During the period from October 1998 to April 1999, the Company, pursuant to the
1998 Plan, granted to certain employees, pending stockholder approval, an
aggregate of 1,618,550 incentive and non-qualified common stock options at a
weighted average exercise price of $12.74 per share. As a result of the adoption
of the 1998 Plan (see Note 13), and in accordance with APB 25 the Company
recorded a non-cash deferred stock compensation charge of $77,361,000 related to
the issuance of these stock options. Although all of the options issued under
the 1998 Plan were granted at what was then the fair market value of the
Company's common stock on the date of grant, the Company must recognize a
non-cash compensation charge for the difference between the various grant prices
and $59.875, the closing price of the Company's common stock on the date of
stockholder approval of the 1998 Plan. Deferred stock compensation is amortized
on a straight-line basis over the remaining vesting period of such stock options
to compensation related to stock options. For the years ended September 30, 2000
and 1999, the Company recognized compensation expense related to these stock
options of $18,711,000, which includes $4,415,000 allocated to the discontinued
operations of ISP Channel; and $11,258,000, which includes $4,339,000 allocated
to the discontinued operations of ISP Channel, respectively.
Also, in accordance with FASB 123 the Company recognized deferred compensation
charges of approximately $1,952,000 with respect to the 140,500 option shares it
has issued to certain consultants. These deferred compensation charges are being
amortized, on an accelerated basis over the vesting period of such options, in
accordance with Financial Accounting Standards Board Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans. For the years ended September 30, 2000, 1999 and 1998, the Company
has recognized compensation expense related to these stock options of $345,000,
which includes $84,000 allocated to the discontinued operations of ISP Channel;
$1,676,000, which includes $57,000 allocated to the discontinued operations of
ISP Channel; and $27,000, respectively.
<PAGE>
15. Related Party Transactions
On January 2, 1998, the Company issued $1,444,000 principal amount of its 5%
Convertible Subordinated Debentures due September 30, 2002, to Mr. R. C. W.
Mauran, who was at the time of the transaction a beneficial owner of more than
5% of the Company's common stock, in exchange for the assignment to the Company
of certain equipment leases and other consideration, all of which have been
assimilated into the business of Micrographic Technology Corporation. The
debentures are convertible into the Company's common stock at $8.25 per share
after December 31, 1998.
16. Income Taxes
The Company made no provision for income taxes for the Company's continuing
businesses due to losses incurred.
The tax effects of the components of deferred taxes for continuing operations
are as follows (in thousands):
As of September 30,
------------------------------
2000 1999
-------------- ---------------
Inventory and other operating reserves.... $ 31 $ 562
Allowance for doubtful accounts........... 26 234
Unpaid accruals........................... 108 175
Deferred revenue.......................... 60 26
Depreciation.............................. (322) (336)
Other..................................... 22 228
Net operating loss carryforwards.......... 8,322 21,576
------------- --------------
Total deferred tax asset.................. 8,247 22,465
Valuation allowance....................... (8,247) (22,465)
------------- --------------
Net deferred tax asset.................... $ - $ -
============= ==============
The Company has established a valuation allowance for the portion of the
deferred tax assets for which realization is uncertain. The valuation allowance
for deferred tax assets as of September 30, 2000 and 1999 was $8,247,000 and
$22,465,000, respectively. The change in valuation allowance for the years ended
September 30, 2000 and 1999 was $14,218,000 and $15,188,000, respectively.
The Company has net operating loss carryforwards for federal and state income
tax purposes of approximately $37,300,000 and $23,100,000, respectively,
available to reduce future income subject to income taxes. The federal net
operating loss carryforwards expire in fiscal years 2001 to 2020. The state net
operating loss carryforwards expire in fiscal years 2001 to 2005.
As of September 30, 2000, $15,582,000 of the net operating loss related to stock
option exercises; these will be charged to equity, for tax purposes, when
utilized.
Federal and California tax laws impose substantial restrictions on the
utilization of net operating loss and credit carryforwards in the event of an
"ownership change" for tax purposes, as defined in Section 382 of the Internal
Revenue Code. For tax purposes, the acquisition and disposition of certain
subsidiaries has triggered Section 382 ownership changes and, as a result,
utilization of the net operating losses will be subject to an annual limitation
in future years.
<PAGE>
17. Supplemental Cash Flow Information (in thousands)
<TABLE>
<CAPTION>
Year Ended September 30,
2000 1999 1998
-------------- ----------- -----------
<S> <C> <C> <C>
Cash paid during the year for:
Interest.......................................................... $ 302 $ 865 $ 957
Income taxes...................................................... - - -
Non-cash investing and financing activities:
Acquisition of Laptop Lane Limited:
Common stock issued............................................. 20,272 - -
Acquisition of Intelligent Communications, Inc.:
Equity consideration............................................ - 7,469 -
Business acquisition liability.................................. - 3,500 -
Debt consideration.............................................. - 3,000 -
Disposal of telecommunications segment:
Promissory notes received....................................... - 4,500 -
Convergent Communications Services Inc. common stock received... - 499 -
Exchange of equity investments:
China Broadband Corporation common stock received............... 9,630 - -
Promissory note received from China Broadband Corporation....... 1,700 - -
deltathree.com, Inc. series A common stock received............. 213 - -
Convertible debt issued for acquisition of equipment leases....... - - 1,444
Value assigned to debt conversion feature......................... 34 1,529 -
Common stock issued for-
Conversion of redeemable convertible preferred stock............ - 18,254 1,666
Conversion of subordinated notes................................ 9,949 490 1,118
Repayment of short-term debt.................................... - 190 -
Anniversary issuance of common stock to former Intelligent
Communications, Inc. stockholders............................. 1,499 - -
Cable affiliate launch incentives............................... 26,932 337 -
Prepayment of license fees...................................... - 1,000 -
Increase in additional-paid-in capital associated with common
stock options................................................... 15,712 76,092 -
Value assigned to common stock warrants issued upon the issuance of
long-term debt.................................................. - 4,334 -
Value assigned to common stock warrants issued with preferred stock - - 1,612
Value assigned to intangible assets in connection with common stock
issued for cable affiliate launch incentives.................... - 8,925 -
Preferred dividends paid with the issuance of:
Additional redeemable convertible preferred stock............... - 221 257
Common stock.................................................... - 157 6
Unrealized loss on short-term investments......................... 385 315 -
</TABLE>
18. Segment Information
The Company currently operates one business segment, satellite-based Internet
services and VSAT equipment sales through its wholly owned subsidiary,
Intellicom. The operating results of Intellicom have been included since its
acquisition on February 9, 1999. Segment information for continuing operations
is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Net Sales:
Satellite-based Internet services and VSAT equipment sales $ 9,927 $ 1,584 $ -
------------- ------------- --------------
$ 9,927 $ 1,584 $ -
============= ============= ==============
= Loss from continuing operations before income taxes:
Satellite-based Internet services and VSAT equipment sales $ (12,453) $ (3,456) $ -
Corporate................................................ (13,433) (7,444) (1,950)
Compensation related to stock options.................... (14,557) (8,538) (27)
Other income (expense), net.............................. 19,889 (2,489) (1,027)
------------- ------------- --------------
$ (20,554) $ (21,927) $ (3,004)
============= ============= ==============
Depreciation and Amortization Expense:
Satellite-based Internet services and VSAT equipment sales $ 2,929 $ 1,713 $ -
Corporate............................................... 355 175 84
------------- ------------- --------------
$ 3,284 $ 1,888 $ 84
============= ============= ==============
</TABLE>
<TABLE>
<CAPTION>
As of September 30,
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Identifiable Assets:
Satellite-based Internet services and VSAT equipment sales $ 27,369 $ 16,410 $ -
Corporate............................................... 184,937 149,490 13,513
Discontinued businesses................................. - 28,424 8,297
------------- ------------- --------------
$ 212,306 $ 194,324 $ 21,810
============= ============= ==============
Capital Expenditures:
Satellite-based Internet services and VSAT equipment sales $ 447 $ 767 $ -
Corporate............................................... 2,619 1,653 2
------------- ------------- --------------
$ 3,066 $ 2,420 $ -
============= ============= ==============
</TABLE>
19. Subsequent Events
On December 28, 2000, the Board of Directors approved a plan to reduce staff at
SoftNet's corporate headquarters over the next few months as Aerzone and ISP
Channel operations are finalized. As a result of this decision, the Company will
record a charge of approximately $4,000,000 for the three months ended December
31, 2000, primarily consisting of severance and retention costs for the impacted
personnel.
<PAGE>
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None
<PAGE>
PART III
Item 10. Directors and Executive Officers of Registrant
Directors of the Registrant
The directors of the Registrant are listed below:
Name of Nominee Age Position
--------------------------------- --- ---------------------------------------
Garrett J. Girvan................ 55 Chairman of the Board of Directors
Ronald I. Simon.................. 62 Vice Chairman of the Board of Directors
Edward A. Bennett................ 54 Director
George C. Chan................... 48 Director
Robert C. Harris, Jr............. 54 Director
Atam Lalchandani................. 56 Director
Jeffrey A. Bowden................ 54 Director
Garrett J. Girvan was elected Chairman of the Board of SoftNet Systems, Inc. and
Subsidiaries (the "Company") on December 17, 2000, and has served as the
Company's Chief Executive Officer since December 2000, the Company's Chief
Operating Officer from April 1998 until December 2000 and as the Company's Chief
Financial Officer from April 1998 to November 1998. Mr. Girvan has also served
as President of Aerzone Corporation, a subsidiary of the Company, since May
2000. Prior to joining the Company, Mr. Girvan held various positions at the
Cable Division of Viacom Inc. ("Viacom") over a 13-year period, including Chief
Financial Officer and Chief Operating Officer. While at Viacom, Mr. Girvan was
involved in the development of Viacom's broadband services.
Ronald I. Simon has served as a member of the Company's Board of Directors since
September 1995, Chairman of the Board from August 1997 until April 1999 and Vice
Chairman of the Board since April 1999. Mr. Simon has served as Director since
September 1999, and Executive Vice President and Chief Financial Officer from
May 1997 through April 2000 of Western Water Company, a developer and marketer
of water and water rights. Mr. Simon has also served as Director of Westcorp
Investments, a wholly-owned subsidiary of Westcorp, Inc., a holding company for
Western Financial Bank, since 1997; Director of Citadel Corporation, a real
estate investment company, from 1995 through 1999; and a Director of Collateral
Therapeutics Inc., a developer of non-surgical gene therapy procedures for the
treatment of cardiovascular diseases, since May 1999. In addition, Mr. Simon
served as Chairman and Chief Financial Officer of Sonant Corporation, an
interactive voice response equipment company, from 1993 to 1997.
Edward A. Bennett has served as a member of the Company's Board of Directors
since January 1998. Mr. Bennett is Chairman of MobileLogic Holdings, Inc., a
provider of wireless data solutions, and is a director of Engage Technologies
Inc., a director of Real Names Corp, and a director of WiredPlaner. From 1997
until 2000, Mr. Bennett served as President and Chief Executive Officer of
Bennett Media Collaborative, a new media, Internet and technology consulting
company. Mr. Bennett also served as President and Chief Executive Officer of
Prodigy Ventures, an Internet/technology investment firm from June 1996 to June
1997 and as President and Chief Executive Officer of Prodigy Services
Corporation, an Internet services company from 1995 to June 1996. Prior to that,
Mr. Bennett served as President and Chief Executive Officer of VH-1 Network, a
television programming company, from 1989 to 1994.
George C. Chan has served as a member of the Company's Board of Directors since
December 1999. Mr. Chan has been an Executive Vice President of Pacific Century
Group, a diversified holding company located in Hong Kong, since January 1994.
Mr. Chan is a director of several companies, both affiliated and not affiliated
with Pacific Century Group, in the investment, financial services, consultancy,
administrative and management services, technology and property, advertising,
and interactive data services industries.
<PAGE>
Robert C. Harris, Jr. has served as a member of the Company's Board of Directors
since May 1998. Mr. Harris has served as a Senior Managing Director and Head of
Investment Banking in the San Francisco office of Bear, Stearns & Co. Inc. since
November 1997. Mr. Harris also serves as Director of MDSI Mobile Data Solutions,
Inc. and Xoom.com. From 1989 to 1997, Mr. Harris was a co-founder and a Managing
Director of Unterberg Harris, a registered broker-dealer and investment advisory
firm. From 1984 to 1989, Mr. Harris was a General Partner, Managing Director,
and Director of Alex Brown & Sons.
Atam Lalchandani has served as a member of the Company's Board of Directors
since May 2000. He currently serves on the boards of @Comm Corporation (formerly
Xiox Corporation), a telecom product services company; Harmony Foods, a candy
and snack foods company; and NetResults, an early stage business-to-business
software company. From 1990 to 1992, Mr. Lalchandani served initially as Chief
Financial Officer and later as Chief Executive Officer for Objectivity, a
database software company. He was part of the financial management at National
Semiconductor Corporation starting in 1977, progressing to Chief Financial and
Administrative Officer for a subsidiary, National Advanced Systems. During 1990
he was the Chief Financial Officer of Oracle Corporation's domestic operations.
Jeffrey A. Bowden has served as a member of the Company's Board of Directors
since December 2000. He is Executive Vice President, Strategic Integration, of
Pacific Century CyberWorks. From 1994 to 1996, he served as Corporate Strategy
and Assurance and Vice President, Merger Integration, at the NYNEX Corporation,
where he led the company's merger integration with Bell Atlantic. Mr. Bowden has
served twice as a Vice President and Director of the Boston Consulting Group
Inc. ("BCG") from 1998 to 1994 and from 1998 to 2000. BCG is one of the world's
leading business international strategic management consulting companies. Mr.
Bowden was co-head of the firm's North America Technology and Communications
Practice, directing the Group's client relationships with North America's
leading communications and data services providers.
Executive Officers of the Registrant
The executive officers and certain other key employees of the Company are listed
below:
Name Age Positions
-------------------------- --- ---------------------------------------------
Garrett J. Girvan......... 55 Chief Executive Officer
Steven M. Harris.......... 46 Senior Vice President, Secretary, and General
Counsel
Carol Sorrick............. 44 President, Intelligent Communications, Inc.
Jonathan B. Marx.......... 49 President, ISP Channel, Inc.
Garrett J. Girvan's background is summarized under "Directors of the
Registrant".
Steven M. Harris has served as the Company's Senior Vice President, Secretary
and General Counsel since August 1998. He was promoted from Vice President to
Senior Vice President on February 8, 2000. Prior to joining the Company, Mr.
Harris worked at Pacific Telesis Group, most recently as Vice President-of
Broadband Services, where he was responsible for external affairs and policy
planning for video services and broadband networks. Previously, he was Executive
Director of Regulatory Planning and Policy for Pacific Bell with responsibility
for federal and state regulatory policies relating to competition, corporate
structure, interconnection, privacy and new technologies. He began with Pacific
Telesis Group in 1983 as Executive Director of Regulatory Relations, in
Washington, D.C. Mr. Harris was Commissioner's Assistant and Special Assistant
to the General Counsel at the Federal Communications Commission and was
previously in private practice.
Carol Sorrick has served as President of Intelligent Communications, a
subsidiary of the Company, since August 1999. Prior to joining the Company, she
was Vice President of Marketing for Centigram Communications. From September
1997 to May 1998, she was Vice President of International Marketing for Unisys
Corporation. From October 1979 to August 1997 she served in various capacities
at Pacific Bell, including Vice President of Marketing.
Jonathan B. Marx has served as President of ISP Channel, a subsidiary of the
Company, since March 1999. Prior to joining the Company, he served as Vice
President, Service Operations of TiVo, Inc. From 1996-1997, he was Vice
President, Strategy and Business Development for the Smart Yellow Pages division
of Pacific Bell Directory, Inc. From 1982 to 1996, he served in various
capacities at the Cable Division of Viacom Inc., including Senior Vice President
and Vice President, Operations.
<PAGE>
Item 11. Executive Compensation
The following table sets forth information for the last three years ended
September 30, 2000 concerning compensation paid or accrued by the Company to (i)
the Chief Executive Officer of the Company as of September 30, 2000 and (ii) the
four other most highly compensated executive officers of the Company whose total
annual salary and incentive compensation for the year ended September 30, 2000
exceeded $100,000 (collectively, the "Named Officers").
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------------- -----------
Other Annual Securities
Fiscal Salary ($) Bonus ($) Compensation Underlying
Name and Principal Position in Fiscal Year 2000 ($) Options (#)
----------------------------------------------- ------ ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Lawrence B. Brilliant (1) 2000 $ 372,115 $ 192,500 $ 7,200 $ 450,000
Chairman and Chief Executive Officer 1999 322,523 150,000 6,600 355,000
1998 128,396 - - 200,000
Garrett J. Girvan (2) 2000 $ 297,115 $ 121,000 $ 7,200 $ 225,000
Chief Operating Officer 1999 253,458 75,000 7,200 165,000
1998 89,623 - - 75,000
Steven M. Harris (3) 2000 $ 203,654 $ 77,000 $ - $ 75,000
General Counsel and Secretary 1999 175,000 25,000 - 120,000
1998 22,212 - - -
Jonathan B. Marx 2000 $ 206,279 $ 77,000 $ 5,250 $ 25,000
President, ISP Channel, Inc. 1999 124,327 - 3,750 -
1998 - - - -
Carol Sorrick 2000 $ 190,961 $ 25,000 $ - $ 50,000
President, Intelligent Communications, Inc. 1999 20,769 - - -
1998 - - - -
</TABLE>
(1) Dr. Brilliant's annual salary increased effective January 1, 2000 from
$350,000 to $375,000. Dr. Brilliant resigned as Chief Executive Officer of
the Company effective December 4, 2000.
(2) Mr. Girvan's annual salary was increased effective January 1, 2000 from
$275,000 to $300,000. Mr. Girvan was appointed Chief Executive Officer of
the Company on December 4, 2000.
(3) Mr. Harris' annual salary was increased effective January 1, 2000 from
$175,000 to $210,000.
Stock Option Information
Option Grants in Fiscal 2000. The following table sets forth information with
respect to stock options granted by the Company to the Named Officers during
Fiscal 2000. No stock appreciation rights were granted in Fiscal 2000.
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------
------------- -------------- ------------ ------------
Number of Percent of Exercise Expiration Potential Realizable Value
Total at Assumed Annual Rates of
Securities Options Stock Price Appreciation
Underlying Granted to or Base for
Options Employees in Price Option Term(5)
--------------
Fiscal
Name Granted(#)(1) Year(2) ($/Sh) (3) Date(4) 5%($) 10%($)
------------- -------- ---------- ------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Lawrence B. Brilliant ........ 50,000 1.02% $44.50 2/9/10 $ 1,399,291 $ 3,546,077
400,000 8.18% $25.25 1/3/10 $ 6,351,836 $ 16,096,799
Garrett J. Girvan ............ 50,000 1.02% $44.50 2/9/10 $ 1,399,291 $ 3,546,077
175,000 3.58% $25.25 1/3/10 $ 2,778,928 $ 7,042,349
Steven M. Harris.............. 50,000 1.02% $16.00 4/13/10 $ 503,116 $ 1,274,994
10,000 0.20% $44.50 2/9/10 $ 279,858 $ 709,215
15,000 0.31% $25.25 1/3/10 $ 238,194 $ 603,630
Jonathan B. Marx.............. 10,000 0.20% $44.50 2/9/10 $ 279,858 $ 709,215
15,000 0.31% $25.25 1/3/10 $ 238,194 $ 603,630
Carol Sorrick................. 35,000 0.72% $44.50 2/9/10 $ 979,503 $ 2,482,254
15,000 0.31% $25.25 1/3/10 $ 238,194 $ 603,630
</TABLE>
(1) Options granted under the 1995 Long-Term Incentive Plan generally become
exercisable at a rate of one-third of the shares of common stock underlying
to the option at the end of each year until fully vested or the employee
leaves the Company. Options granted under the 1998 Stock Incentive Plan
generally become exercisable for 25% of the option shares upon completion
of one (1) year of service measured from the grant date and for the balance
of the option shares in a series of 36 successive equal monthly
installments over the three (3) year period of service thereafter.
(2) The Company granted options to employees to purchase 4,890,500 shares of
common stock for the year ended September 30, 2000.
(3) The exercise price may be paid in (a) cash, (b) shares of common stock held
for the requisite period to avoid a charge to the Company's earnings for
financial reporting purposes, (c) through a same-day sale program or (d)
subject to the discretion of the Plan Administrator, by delivery of a
full-recourse, secured promissory note payable to the Company. Numbers are
rounded to the nearest tenth.
(4) The term of the options is typically 10 years.
(5) Potential realizable value is based on the assumption that the price of the
common stock underlying the option appreciates at the annual rate shown,
compounded annually from the date of grant until the end of the option
term. The values are calculated in accordance with rules promulgated by the
SEC and do not reflect the Company's estimate of future stock appreciation.
Aggregated Year-End Option Values. The following table sets forth certain
information concerning the number of options exercised by the Named Officers
during the year ended September 30, 2000, and the number of shares covered by
both exercisable and unexercisable stock options held by the Named Officers as
of September 30, 2000. Also reported are values for "in-the-money" options that
represent the positive spread between the respective exercise prices of
outstanding options and the fair market value of the Company's common stock as
of September 30, 2000 ($5.97).
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at in-the-Money Options at
Shares September 30, 1999(#) September 30, 1999($)
Acquired on Value --------------------------- ---------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
----------------------------- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lawrence B. Brilliant........ 15,818 $ 316,926 166,786 721,564 $ - $ -
Garrett J. Girvan............ 50,000 $ 128,125 59,895 355,105 $ - $ -
Steven M. Harris............. - $ - 50,623 144,377 $ - $ -
Jonathan B. Marx............. - $ - 26,378 88,622 $ - $ -
Carol Sorrick................ - $ - 13,541 86,459 $ - $ -
</TABLE>
Director Compensation
Members of the Board of Directors, who are not employees of the Company or of a
subsidiary of the Company, are each paid a monthly retainer fee of $1,000 in
connection with their attendance and participation at Board meetings. Mr. Simon
is paid an additional $1,500 per month for his services as Vice Chairman of the
Board. In addition, Board members are reimbursed for certain reasonable expenses
incurred in attending Board or committee meetings.
Upon joining the Board, each non-employee Board member also receives a purchase
option grant for shares of common stock under the 1998 Plan. In addition,
existing non-employee directors will each receive options to purchase 20,000
shares of common stock at the annual stockholders meeting to be held during 2001
and additional options to purchase 20,000 shares of common stock at each third
Annual Stockholders Meeting thereafter if such person continues to be a
director.
Members of the Board of Directors, who are employees or officers of the Company,
or of a subsidiary of the Company, do not receive any extra compensation for
serving on the Board of Directors.
A description of other transactions between directors and the Company is set
forth below in "Certain Relationships and Related Transactions".
Employment and Change of Control Agreements
On April 7, 1998, the Company entered into an employment agreement with Lawrence
B. Brilliant, a director of the Company, pursuant to which Dr. Brilliant was
appointed Vice Chairman of the Board, President and Chief Executive Officer of
the Company for a term of three years. Under the terms of this employment
agreement, Dr. Brilliant was granted an annual salary of $250,000 per year plus
such bonuses as the Compensation Committee may establish from time to time.
Concurrently with the signing of this employment agreement, Dr. Brilliant
received a Non-Qualified Stock Option to purchase from the Company a total of
125,000 shares of common stock under the terms of the Long Term Incentive Plan.
<PAGE>
Dr. Brilliant resigned as Chief Executive Officer of the Company effective
December 4, 2000, and as Chairman of the Board of Directors effective December
17, 2000. In January 2001, the Company and Dr. Brilliant entered into a
"Separation and Release Agreement". Under the terms of the Separation and
Release Agreement, Dr. Brilliant received a one time cash payment of $892,831
(minus withholding taxes). In addition, Dr. Brilliant will receive an annual
payment of $10,000, payable in accordance with the Company's normal payroll
cycles and remain eligible for medical, dental, vision and life insurance
coverage under the Company's insurance plans until December 31, 2002. All stock
options granted to Dr. Brilliant ceased vesting as of December 4, 2000, and Dr.
Brilliant is entitled to exercise vested stock options through March 5, 2001.
Under the Company's 1998 Stock Incentive Plan, in the event that the Company is
acquired by merger or sale of substantially all of its assets, each outstanding
option or other award under either the 1998 Stock Incentive Plan will
immediately vest, except to the extent the Company's obligations under that
option or award assumed by the successor corporation or such successor
corporation substitutes an award with substantially the same economic value.
Under the options issued pursuant to the Company's Amended 1995 Long-Term
Incentive Plan, which were incorporated into the 1998 Stock Incentive Plan, upon
an acquisition of the Company pursuant to a merger or asset sale, the option
will, at the discretion of the Stock Option Committee, either be assumed by any
successor entity, with or without accelerated vesting of the option shares, or
terminate upon the acquisition following a thirty (30)-day period during which
the option will be exercisable in full on an accelerated basis.
In the event of a change of control, (1) each employee of the Company would be
credited with 12 months of service in addition to their actual time of service
for purposes of option vesting, (2) in the event an employee or director is
terminated without cause or is removed as a director within 12 months of a
change of control, all of the options granted to such employee or director,
whether granted under the Company's stock option plans or otherwise, will
automatically vest, (3) in the event an executive officer (other than the Chief
Executive Officer) or certain key employees are terminated without cause within
12 months of a change of control, such executive officer or key employee will be
entitled to a lump sum payment equal to 1.5 times the sum of his or her salary
prior to such termination and his or her last annual bonus, and (4) in the event
the Chief Executive Officer is terminated without cause within 12 months of a
change of control, such Chief Executive Officer will be entitled to a lump sum
payment equal to 2 times the sum of his or her salary prior to such termination
and his or her last annual bonus.
Indemnification of Directors and Limitation of Liability
The Company's Bylaws provide that the Company may indemnify its directors,
officers and other employees and agents to the fullest extent permitted by law.
The Company has also entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in the
Company's Bylaws. The Company believes that these provisions and agreements are
necessary to attract and retain qualified directors and executive officers. At
present, there is no pending litigation or proceeding involving any director,
officer, employee or agent of the Company where indemnification will be required
or permitted. The Company is not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known to the Company
regarding beneficial ownership of the common stock as of November 30, 2000 by
(i) each person known by the Company to be the beneficial owner of more than
five percent of the outstanding shares of the common stock, (ii) each current
director of the Company, (iii) the Chief Executive Officer and each of the Named
Officers and (iv) all executive officers and directors of the Company as a
group. All shares are subject to the named person's sole voting and investment
power except where otherwise indicated.
Beneficial ownership is determined in accordance with the rules of the
Commission. Shares of common stock, which are issued and outstanding are deemed
to be beneficially owned by any person who has or shares voting or investment
power with respect to such shares. Shares of common stock which are issuable
upon exercise of options or warrants are deemed to be issued and outstanding and
beneficially owned by any person who has or shares voting or investment power
over such shares only if the options or warrants in question are exercisable
within 60 days of November 30, 2000 and, in any event, solely for purposes of
calculating that person's percentage ownership of the Company's common stock
(and not for purposes of calculating the percentage ownership of any other
person).
The number of shares of common stock deemed outstanding and used in the
denominator for determining percentage ownership for each person equals (i)
26,650,555 shares of common stock outstanding as of November 30, 2000 plus (ii)
such number of shares of common stock as are issuable pursuant to options,
warrants or convertible securities held by that person (and excluding options
held by other persons) which may be exercised within 60 days of November 30,
2000.
Number of Percentage of
Common Stock Outstanding
Shares Shares
Beneficially Beneficially
Name of Beneficial Owner Owned Owned
------------------------------------- -------------- --------------
Executive Officers and Directors:
Lawrence B. Brilliant (1) 456,093 1.7
Garrett J. Girvan (2) 174,061 *
Steven M. Harris (3) 78,707 *
Ronald I. Simon (4) 56,374 *
Edward A. Bennett (5) 132,395 *
George C. Chan (6) 20,000 -
Robert C. Harris, Jr. (7) 82,292 -
Jeffrey A. Bowden (6) 20,000 -
Atam Lalchandani (8) 95,326 *
Jonathan Marx (9) 35,681 -
Carol Sorrick (10) 21,458 -
As a Group (twelve): 1,172,387 4.4
5% Owners:
Pacific Century CyberWorks Limited 5,000,000 18.8
Mediacom LLC 3,500,000 13.1
* Less than 1%
(1) Includes 292,202 shares issuable pursuant to options exercisable within 60
days of November 30, 2000. Mr. Brilliant resigned as Chairman of the Board
and Chief Executive Officer in December 2000.
(2) Includes 114,061 shares issuable pursuant to options exercisable within 60
days of November 30, 2000.
(3) Includes 62,707 shares issuable pursuant to options exercisable within 60
days of November 30, 2000.
(4) Includes 31,416 shares issuable pursuant to options exercisable within 60
days of November 30, 2000.
(5) Includes 117,395 shares issuable pursuant to options exercisable within 60
days of November 30, 2000.
(6) Messrs. Chan and Bowden received options to purchase 20,000 shares of
common stock effective upon their election as directors, under the
automatic option grant program of the 1998 Plan. The options are
immediately exercisable for restricted shares of common stock that are
subject to certain repurchase rights by the Company.
(7) Includes 82,292 shares issuable pursuant to options exercisable within 60
days of November 30, 2000.
(8) Includes 30,000 shares issuable pursuant to options exercisable within 60
days of November 30, 2000.
(9) Includes 35,681 shares issuable pursuant to options exercisable within 60
days of November 30, 2000.
(10) Includes 21,458 shares issuable pursuant to options exercisable within 60
days of November 30, 2000.
<PAGE>
Item 13. Certain Relationships and Related Transactions
Mediacom, LLC
The Company's wholly-owned subsidiary, ISP Channel, Inc., has an Affiliate
Agreement with Medicom, LLC, a more than five percent stockholder of the
Company. Mediacom received the shares of the Company's common stock owned by it
in connection with, and as an inducement to enter into and perform under, the
Affiliate Agreement. The Affiliate Agreement grants ISP Channel the exclusive
right to provide Internet access and related services over Mediacom's cable
infrastructure for the next seven years and provides for a revenue split between
ISP Channel and Mediacom. As a result of this transaction, Mediacom has the
right to nominate members to the Board of Directors in proportion to its
ownership interest of the common stock, and has the right to nominate at least
one member to the Board of Directors if Mediacom owns more than 5% of the
outstanding common stock.
Strategic Investments
The Company's wholly-owned subsidiary, SoftNet Ventures, Inc, has made strategic
investments of $250,000 each in YourDay.com, Inc. and YourStuff.com, Inc., which
represents less than 5% of the voting power of each company. Edward A. Bennett,
a director of the Company, served on the Board of Directors of both YourDay.com
and YourStuff.com at the time of the investment. For the year ended September
30, 2000, YourDay.com was purchased by deltathree.com, Inc. and YourStuff was
purchased by SenseNet, Inc.
Investment Banking Services
Robert Harris, Jr., a director of the Company, is a senior managing director of
Bear, Stearns & Co., Inc., which, from time to time, provides the Company with
investment banking services. For the year ended September 30, 2000, the Company
paid to Bear, Stearns & Co. for such services approximately $522,000.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Under the securities laws of the United States, the Company's directors, its
executive (and certain other) officers, and any person holding more than ten
percent of the common stock are required to report their ownership of common
stock and any changes in that ownership to the Commission and any exchange or
quotation system on which the common stock is listed or quoted. Specific due
dates for these reports have been established and the Company is required to
report in this proxy statement any failure to file by these dates. For the year
ended September 30, 2000, to the knowledge of the Company, all of these filings
were satisfied by its directors and officers. In making this statement, the
Company has relied on the written representations of its directors and officers
and copies of the reports they have filed with the Commission. For the year
ended September 30, 2000, the Company did not have any ten percent stockholders.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Exhibits:
(1) Financial Statements. The following consolidated financial statements of the
registrant and its subsidiaries are included in Part II Item 8:
Page
----
Report of Independent Auditors KPMG LLP .................................. 33
Report of Independent Accountants PricewaterhouseCoopers LLP ............. 34
Consolidated Balance Sheets as of September 30, 2000 and 1999 ............ 35
Consolidated Statements of Operations for the three years
ended September 30, 2000 .............................................. 36
Consolidated Statements of Stockholders' Equity (Deficit) for
the three years ended September 30, 2000 .............................. 37
Consolidated Statements of Cash Flows for the three years
ended September 30, 2000 .............................................. 38
Notes to Consolidated Financial Statements ............................ 39-58
(2) Financial Statement Schedule. The following schedules for the three years
ended September 30, 1999 are submitted herewith:
Schedule II - Valuation and Qualifying Accounts........................... 71
All other schedules are omitted due to the required information is not
applicable or is shown in the financial statements or notes thereto.
(3) Exhibits. See Index to Exhibits included in this Form 10-K on pages 68 to
69.
(b) Reports on Form 8-K:
Current report on Form 8-K filed with the Commission on August 25, 2000
<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/ Garrett J. Girvan
-----------------------
Garrett J. Girvan
Chief Executive Officer
/s/ Susan Dolce
-----------------------
Susan Dolce
Controller
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
----------------------- -------------------------------- ------------------
Chairman of the Board of
/s/ Garrett J. Girvan Directors
----------------------- Chief Executive Officer January 16, 2001
Garrett J. Girvan
/s/ Ronald I. Simon Vice Chairman of the Board of
----------------------- Directors January 16, 2001
Ronald I. Simon
/s/ Edward A. Bennett
-----------------------
Edward A. Bennett Director January 16, 2001
/s/ George C. Chan
-----------------------
George C. Chan Director January 16, 2001
/s/ Robert C. Harris, J
-----------------------
Robert C. Harris, Jr. Director January 16, 2001
/s/ Atam Lalchandani
-----------------------
Atam Lalchandani Director January 16, 2001
/s/ Jeffrey A. Bowden
-----------------------
Jeffrey A. Bowden Director January 16, 2001
<PAGE>
SoftNet Systems, Inc. and Subsidiaries
Index to Exhibits
Item 14(a)(3)
Exhibit
No. Description of Document
-------- ----------------------------------------------------------------------
2.1 Agreement and Plan of Merger by and among SoftNet Systems, Inc., a
Delaware corporation, SSI Merger Sub, Inc., a Washington corporation
and a wholly-owned subsidiary of SoftNet, Laptop Lane Limited, a
Washington corporation, and R. Bruce Merrell and M. Grant Sharp.
Incorporated by reference to the Company's Current Report on Form 8-K,
dated May 9, 2000.
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999.
3.2 By-Laws of the Company. Incorporated by reference to the Company's
Registration Statement on Form S-3/A dated April 22, 1999.
4.1 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.
10.1 SoftNet Systems, Inc. 1995 Long Term Incentive Plan Incorporated by
reference to exhibit 10.3 to the Company's Annual Report on Form
10-KSB for the fiscal year ended September 30, 1995.
10.2 SoftNet Systems, Inc. 1998 Stock Incentive Plan. Incorporated by
reference to exhibit 99.1 to the Company's Registration Statement on
Form S-8, dated May 10, 1999.
10.3 SoftNet Systems, Inc. 1999 Supplemental Stock Incentive Plan.
Incorporated by reference to exhibit 99.1 to the Company's
Registration Statement on Form S-8, dated June 8, 1999.
10.4 $660,000 principal amount of Micrographic Technology Corporation 6%
Convertible Subordinated Secured Debentures due 2002 to R.C.W. Mauran.
Incorporated by reference to exhibit 10.10 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended September 30, 1995.
10.5 Securities Purchase Agreement dated as of January 12, 1999, by and
among the Company and the Buyers listed therein. Incorporated by
reference to exhibit 10.38 to the Company's Current Report on Form
8-K, dated January 26, 1999.
10.6 Registration Rights Agreement dated as of January 12, 1999 by and
among the Company and the Buyers listed therein. Incorporated by
reference to the Company's Current Report on Form 8-K dated January
26, 1999.
10.7 Form of Warrant to purchase shares of Common Stock, dated as of
January 12, 1999, issued by the Company to each of the Buyers listed
therein. Incorporation by reference to the Company's Current Report on
Form 8-K dated January 26, 1999.
10.8 Stock Purchase Agreement dated April 12, 1999 between SoftNet Systems,
Inc. and Hector R. Gonzalez. Incorporated by reference to the
Company's Current Report on Form 8-K, dated April 27, 1999.
10.9 Registration Rights Agreement dated April 12, 1999 between SoftNet
Systems, Inc. and Hector R. Gonzales. Incorporated by reference to the
Company's Current Report on Form 8-K, dated April 27, 1999.
<PAGE>
Exhibit
No. Description of Document
-------- ----------------------------------------------------------------------
10.10 Stock Purchase Agreement by and between SoftNet Systems, Inc and
Pacific Century Cyberworks Limited, dated October 12, 1999.
Incorporated by reference to the Company's Form 8-K, dated October 21,
1999.
10.11 Stock Purchase Agreement by and between SoftNet Systems, Inc. and
Mediacom, LLC, dated November 4, 1999. Incorporated by reference to
the Company's Form 10-K for the year ended September 30, 1999.
10.12 Registration Rights Agreement by and between SoftNet Systems, Inc.
and Mediacom, LLC, dated November 4, 1999. Incorporated by reference
to the Company's Form 10-K for the year ended September 30, 1999.
10.13 Stockholder Agreement by and between SoftNet Systems, Inc, and
Mediacom, LLC, date November 4, 1999. Incorporated by reference to the
Company's Form 10-K for the year ended September 30, 1999.
10.14 Letter confirming employment of Dr. Lawrence B. Brilliant, dated
April 7, 1998. Incorporated by reference to the Company's Form 10-Q
for the quarter ended June 30, 1998.
10.15 Separation and Release Agreement by and between SoftNet Systems, Inc.
and Dr. Lawrence B. Brilliant
21 Subsidiaries
23.1 Consent of KPMG LLP
23.2 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
<PAGE>
<TABLE>
<CAPTION>
SoftNet Systems, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
(In thousands)
Charged to
Balance at Charged to Other
Beginning of Costs and Accounts Deductions Balance at
Description Period Expenses Describe Describe End of Period
-------------------------------------- ------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended September 30, 2000...... $ 28 $ 233 $ - $ 193 (b)$ 68
Year ended September 30, 1999...... - 31 313 (a) 316 (b) 28
Year ended September 30, 1998...... - - - - -
Valuation Allowance on Deferred Tax
Asset:
Year ended September 30, 2000...... $ 22,465 $ (14,218) $ - $ - $ 8,247
Year ended September 30, 1999...... 7,277 15,188 - - 22,465
Year ended September 30, 1998...... 3,158 4,119 - - 7,277
Reserves in Connection with
Discontinued Operations:
Year ended September 30, 2000:
Estimated losses through closure. $ - $ 22,692 $ - $ - $ 22,692
Asset write downs................ - 89,234 - 82,805 (c) 6,429
Contract terminations............ - 16,143 - - 16,143
Retention and severance.......... - 10,318 - - 10,318
Other............................ - 1,013 - - 1,013
------------- -------------- ----------- ----------- --------------
$ - $ 139,400 $ - $ 82,805 $ 56,595
============= ============== =========== =========== ==============
<FN>
(a) Reserve acquired related to Intelligent Communications, Inc. acquisition.
(b) Amounts written off, net of recoveries.
(c) Net assets associated with discontinued operations written off.
</FN>
</TABLE>
