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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
-------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
650 Townsend Street, Suite 225, San Francisco, CA 94103
- ------------------------------------------------- --------------
(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
--------------------- -------------------------------------------
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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:
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.
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.
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.
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.
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.
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.
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
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
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
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
$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.
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.
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.
Year Ended September 30,
-----------------------------------------------------------------
------------- ------------ ------------ ------------ ------------
2000 (b) 1999 (c) 1998 1997 1996 (d)
-------- -------- ---- ---- --------
(In thousands, except per share data)
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
(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.
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.
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