SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No.: 1-5270
SOFTNET SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New York 11-1817252
-------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
717 Forest Avenue, Lake Forest, Illinois 60045
------------------------------------------ --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 266-8150
Not Applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 31, 1997
------------------------------- --------------------------------
Common stock, without par value 6,565,644
<PAGE>
SOFTNET SYSTEMS, INC.
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 31, 1997 and September 30, 1996 3
Condensed Consolidated Income Statements
for the Three and Six Months Ended
March 31, 1997 and March 31, 1996 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended
March 31, 1997 and March 31, 1996 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
<PAGE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Mar. 31, Sept. 30,
1996 1996
-------- --------
(unaudited)
ASSETS
Current assets:
Cash ............................................. $ 63 $ 426
Accounts Receivables, net ........................ 10,429 6,074
Inventories ...................................... 4,496 5,904
Prepaid expenses ................................. 182 340
-------- --------
Total current assets ...................... 15,170 12,744
Property and equipment, net ......................... 2,026 2,314
Costs in excess of fair value
of net assets acquired, net ....................... 7,494 8,101
Other assets ........................................ 2,974 2,427
-------- --------
$ 27,664 $ 25,586
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............ $ 8,457 $ 8,672
Current portion of long term debt ................ 694 744
Current portion of capital leases obligation...... 34 187
Deferred revenue ................................. 1,354 1,428
-------- --------
Total current liabilities ................. 10,539 11,031
-------- --------
Long term debt, net of current portion .............. 12,492 10,598
-------- --------
Capital Lease obligation,
net of current portion ............................ 58 164
-------- --------
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value,
25 million shares authorized,
6,565,644 and 6,540,065 shares
outstanding, respectively ...................... 66 65
Capital in excess of par value ...................... 33,760 33,517
Accumulated deficit ................................. (29,251) (29,789)
-------- --------
Total shareholders' equity ................ 4,575 3,793
-------- --------
$ 27,664 $ 25,586
======== ========
<PAGE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ............................................ $ 10,174 $ 12,190 $ 20,952 $ 22,062
Cost of sales ........................................ 6,192 7,811 12,840 14,241
-------- -------- -------- --------
Gross profit ...................................... 3,982 4,379 8,112 7,821
-------- -------- -------- --------
Operating expenses:
Selling ........................................... 1,072 1,318 2,366 2,454
Engineering ....................................... 564 435 1,114 838
General and administrative ........................ 1,407 1,785 2,781 3,308
Amortization of goodwill and transaction costs .... 346 370 708 689
-------- -------- -------- --------
Total operating expenses ................ 3,389 3,908 6,969 7,289
-------- -------- -------- --------
Income from operations ............................ 593 471 1,143 532
Interest expense ..................................... (320) (435) (576) (830)
Gain on sale of available-for-sale securities ........ -- 1,883 -- 1,883
Other income (expense) ............................... 10 5 (29) 16
-------- -------- -------- --------
Net income (loss) ................................. $ 283 $ 1,924 $ 538 $ 1,601
======== ======== ======== ========
Earnings per share:
Primary ........................................... $ 0.04 $ .31 $ 0.08 $ 0.25
======== ======== ======== ========
Fully diluted ..................................... -- $ .25 -- $ 0.21
======== ======== ======== ========
Weighted average shares outstanding:
Primary ........................................... 6,930 6,177 6,864 6,313
======== ======== ======== ========
Fully diluted ..................................... -- 7,551 -- 7,688
======== ======== ======== ========
</TABLE>
<PAGE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
March 31,
--------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net income .............................................. $ 538 $ 1,601
Adjustments to reconcile net income
to net cash used by operating activities:
Gain on sale of available-for-sale securities ...... - (1,883)
Depreciation and amortization ...................... 1,132 1,102
Provision for bad debts ............................ 15 37
Changes in operating assets
and liabilities, net of effect of
purchase transactions:
Accounts receivable ............................ (4,525) (1,820)
Inventories .................................... 766 (1,751)
Prepaid expenses ............................... 157 69
Accounts payable and accrued expenses .......... 106 (793)
Deferred revenue ............................... 178 1,321
-------- --------
Net cash used in operating activities ........ (1,633) (2,117)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ...................... (530) (580)
Additions to capitalized product design ................. (502) (155)
Acquisition of business, net of cash acquired ........... -- (1,860)
Proceeds from sale of available-for-sale securities ..... 2,410
Payment for acquisition costs ........................... -- (144)
Settlement of remaining obligations to owners of
discontinued operations ............................... -- (116)
Increase in other assets ................................ 5 (418)
-------- --------
Net cash used by investing activities ........ (1,027) (863)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt ............................. (71) (84)
Borrowings under revolving credit note .................. 5,068 7,767
Payments under revolving credit note .................... (2,547) (5,586)
Proceeds from exercise of warrants ...................... -- 14
Payment for put obligation .............................. -- (200)
Proceeds from settlement of related party receivable .... -- 819
Capitalized lease obligations paid ...................... (153) (126)
-------- --------
Net cash provided by financing activities .... 2,297 2,604
-------- --------
Net decrease in cash ...................................... (363) (376)
Cash, beginning of period ................................. 426 573
-------- --------
Cash, end of period ....................................... $ 63 $ 197
======== ========
Cash paid during the period for:
Interest .................................................. $ 504 $ 797
Supplemental non-cash transactions
Property acquired by capitalized leases ................... -- 108
Change in unrealized appreciation
in available-for-sale securities ........................ -- (798)
<PAGE>
SoftNet Systems, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 1997 and 1996
(unaudited)
1. Basis of Presentation
The financial information, except for the balance sheet as of September 30,
1996, included herein is unaudited; however, such information reflects all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the condensed
consolidated statements of financial position, results of operations and cash
flows as of and for the interim periods ended March 31, 1997 and 1996.
The Company's annual report on form 10-K for the fiscal year ended September 30,
1996, as filed with the Securities and Exchange Commission, should be read in
conjunction with the accompanying condensed consolidated financial statements.
The condensed consolidated balance sheet as of September 30, 1996 was derived
from the Company's audited Consolidated Financial Statements.
The results of operation for the six months ended March 31, 1997 are based in
part on estimates that may be subject to year-end adjustments and are not
necessarily indicative of the results to be expected for the full year.
2. Debt
Debt is summarized as follows (in thousands):
March 31, September 30,
1997 1996
------------- -------------
(unaudited)
Bank Debt $8,620 $6,649
Convertible subordinated notes 3,806 4,011
Other 760 682
------------ ------------
13,186 11,342
Less current portion (694) (744)
------------ ------------
$ 12,492 $ 10,598
============ ============
During the six months ended March 31, 1997, the Company received a temporary
increase in its borrowing facility whereby the Company was able to borrow $1.0
million in excess of available assets for the months of January and February
1997, $750,000 for March 1997, and $500,000 for April 1997. On May 1, 1997, the
amount of credit available under the revolving credit facility reverted to the
original amount available not to exceed $9.5 million. In addition, the Company
extended the maturity date of its revolving credit facility to April 15, 1998.
March 31, 1997 accounts receivable were subsequently reduced when $2.7 million
of accounts receivable owed by one customer were paid and the proceeds were used
to pay down the Company's bank debt.
<PAGE>
3. Stock Options and Warrants
Outstanding options and warrants to purchase shares of common stock at March 31,
1997 were as follows (in thousands, except price per option data):
Outstanding at October 1, 1996 1,569
Granted at prices ranging from $4.94 to $5.31 400
Exercised or canceled at prices ranging from $8.25 to $4.94 (50)
----------
Outstanding at March 31, 1997 1,919
==========
In November 1996 the Company repriced 312,167 employee stock options by reducing
the exercise price from $8.25 to $4.94 per share (the market price on the date
of such change).
4. Earnings per common share
At March 31, 1997, the computation of both primary and fully diluted earnings
per share were based on the weighted average number of shares outstanding. The
inclusion of additional shares assuming the exercise of stock options and
warrants and the conversion of all convertible subordinated notes had an
immaterial effect on the earnings per share computation.
<PAGE>
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This Form 10-Q contains "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, including (without limitation)
statements as to expectations, beliefs and future financial performance and
assumptions underlying the foregoing relating to the ability to meet working
capital requirements, capital expenditure and expected cash flow from
operations. The actual results or outcomes could differ materially from those
discussed in the particular forward looking statements. The risks and
uncertainties that may affect the operations, performance, developments and
results of the Company's business include the following: national and regional
economic conditions; market acceptance of the Company's products and services;
the Company's continued ability to provide integrated communications solutions
for customers in a dynamic industry, as well as competitive factors.
Results of operations for the three months ended March 31, 1997,compared to the
same period in 1996.
For the three months ended March 31, 1997, net sales decreased by $2.0 million
(or 16.5%) to $10.2 million compared to $12.2 million for the three months ended
March 31, 1996. Sales were unchanged in the Company's document management
segment in comparison with the same period in 1996. Sales in the Company's
telecommunications segment decreased $2.4 million (or 34.4%). The decrease in
sales in the telecommunications segment was primarily a result of the
disposition of substantially all of the operations of the Company's wholly owned
subsidiary, Communicate Direct, Inc. ("CDI") in October 1996 (with revenue of
$2.2 million for the three months ended March 31, 1996). This decrease was
offset in part by the June 1996 acquisition of MediaCity World, Inc., a provider
of internet services, which added $396,000 to revenue for the three months ended
March 31, 1997.
For the three months ended March 31, 1997, gross profit decreased $397,000 (or
9.1%) to $4.0 million from $4.4 million for the same period in 1996. For the
three months ended March 31, 1997, gross profit as a percentage of sales
increased from 35.9% in 1996 to 39.1% in 1997. The percentage increase relates
primarily to improving margins in the telecommunications segment as a result of
the disposition of substantially all of the operations of the Company's wholly
owned subsidiary CDI.
Selling, engineering, general and administrative expenses decreased $474,000 (or
13.8%) to $3.0 million for the three months ended March 31, 1997 from $3.5
million for the same period in 1996. The decrease in operating expenses caused
by the disposition of CDI ($677,000 for the three months ended March 31, 1996)
was offset in part by the acquisitions of Executone Information Systems, Inc.'s
Milwaukee operations ("Executone-Milwaukee") ($248,000 for the three months
ended March 31, 1997 compared to $201,000 for the same period in 1996) and
MediaCity ($202,000 for the three months ended March 31, 1997).
Amortization expense deceased $24,000 (or 6.6%) to $346,000 for the three months
ended March 31, 1997, from $370,000 for the same period in 1996. During the
three months ended March 31, 1996, the Company incurred amortization expense of
the goodwill which arose from the acquisition of CDI in October 1994. In June
1996, the Company wrote off the remaining goodwill of CDI in connection with the
disposition of certain assets. Accordingly, the three months ended March 31,
1997 did not include any goodwill amortization from CDI.
During the three months ended March 31, 1996, the Company sold
available-for-sale securities for net proceeds of $2.4 million. Accordingly, the
Company recorded a gain on the sale of available-for-sale securities of $1.9
million.
The Company's has made no provision for income taxes for the three months ending
March 31, 1997, as a result of the Company's net operating loss carry forward.
<PAGE>
Interest expense decreased $115,000 (or 26.5%) to $320,000 for the three months
ended March 31, 1997 from $435,000 for the same period in 1996. Interest expense
decreased as a result of lower debt outstanding during the three month period
ended March 31, 1997 compared to the same period in 1996. The decrease in
outstanding indebtedness was principally a result of the conversion of $4.1
million convertible subordinated notes in June 1996.
For the three months ended March 31, 1997, net income decreased $1,641,000 to
$283,000 and primary earnings per share decreased $.27 to $.04, compared to the
same period in 1996. This decrease was primarily the result of a second quarter
fiscal 1996 gain of $1.9 million on the sale of available for sales securities.
At March 31, 1997, the computation of both primary and fully diluted earnings
per share were based on the weighted average number of shares outstanding. The
inclusion of additional shares assuming the exercise of stock options and
warrants and the conversion of all convertible subordinated notes had an
immaterial effect on the earnings per share computation.
Results of operations for the six months ended March 31, 1997,compared to the
same period in 1996.
For the six months ended March 31, 1997, net sales decreased by $1,110,000 (or
5.0%) to $21.0 million compared to $22.1 million for the same period in 1996.
Sales increased in the Company's document management segment by $779,000 (or
7.8%) principally as a result of higher volume of units sold as compared to the
same period in the prior year. Sales in the Company's telecommunications segment
decreased $2.5 million (or 20.7%). The decrease in sales in the
telecommunications segment was primarily a result of the disposition of
substantially all of the operations of the Company's wholly owned subsidiary,
CDI in October 1996 (with revenue of $4.4 million for the six months ended March
31, 1996 compared to $142,000 for the same period in 1997). This decrease was
offset in part by the acquisition of Executone-Milwaukee in December 1995 (which
added $2.2 million to revenue for the six months ended March 31, 1997 compared
to $975,000 for the same period in 1996). In addition, MediaCity World, Inc.,
which provides internet services, acquired in June 1996, added $618,000 to
revenue for the six months ended March 31, 1997.
For the six months ended March 31, 1997, gross profit increased $291,000 (or
3.7%) to $8.1 million from $7.8 million for the same period in 1996. For the six
months ended March 31, 1997, gross profit as a percentage of sales increased
from 35.5% in 1996 to 38.7% in 1997. The percentage increase relates primarily
to improving margins in the telecommunications segment as a result of the
disposition of the operations of the Company's wholly owned subsidiary CDI.
Selling, engineering, general and administrative expenses decreased $339,000 (or
5.1%) to $6.3 million for the six months ended March 31, 1997 from $6.6 million
for the same period in 1996. The decrease in operating expenses caused by the
disposition of CDI ($1.1 million for the six months ended March 31, 1996) was
offset in part by the acquisitions of Executone-Milwaukee ($508,000 for the six
months ended March 31, 1997 compared to $201,000 for the same period in 1996)
and MediaCity ($425,000 for the six months ended March 31, 1997).
Amortization expense increased $19,000 (or 2.8%) to $708,000 for the six months
ended March 31, 1997, from $689,000 for the same period in 1996. The increase in
amortization expense was caused by the acquisitions of MediaCity World (in June
1996) and Executone-Milwaukee (in December 1995). During the six months ended
March 31, 1996, the Company incurred amortization expense of the goodwill which
arose from the acquisition of CDI in October 1994. In June 1996, the Company
wrote off the remaining goodwill of CDI in connection with the disposition of
certain assets. Accordingly, the six months ended March 31, 1997 did not include
any goodwill amortization from CDI.
During the six months ended March 31, 1996, the Company sold available-for-sale
securities for net proceeds of $2.4 million. Accordingly, the Company recorded a
gain on the sale of available-for-sale securities of $1.9 million.
The Company's has made no provision for income taxes for the six months ending
March 31, 1997, as a result of the Company's net operating loss carry forward.
<PAGE>
Interest expense decreased $254,000 (or 30.6%) to $576,000 for the six months
ended March 31, 1997 from $830,000 for the same period in 1996. Interest expense
decreased as a result of lower debt outstanding during the six month period
ended March 31, 1997 compared to the same period in 1996. The decrease in
outstanding indebtedness was principally a result of the conversion of $4.1
million convertible subordinated notes in June 1996.
For the six months ended March 31, 1997, net income decreased $1,063,000 to
$538,000 and primary earnings per share decreased $.17 to $.08, compared to the
same period in 1996. This decrease was primarily the result of a second quarter
fiscal 1996 gain of $1.9 million on the sale of available for sales securities.
At March 31, 1997, the computation of both primary and fully diluted earnings
per share were based on the weighted average number of shares outstanding. The
inclusion of additional shares assuming the exercise of stock options and
warrants and the conversion of all convertible subordinated notes had an
immaterial effect on the earnings per share computation.
Liquidity and Capital Resources
At March 31, 1997, the Company's current ratio was 1.44 to 1 with working
capital of $4.6 million. This compares with a current ratio of 1.16 to 1 and
working capital of $1.7 million at September 30, 1996.
For the six months ended March 31, 1997, cash flows used by operating activities
were $1.6 million compared to $2.1 million for the same period in 1996. The
primary cause for the use of cash by operating activities was the increase in
accounts receivable of $4.5 million. Cash flows used by investing activities
were $1.0 million for the six months ended March 31, 1997 compared to $863,000
for the same period in 1996. The increase in cash used in investing activities
was a primarily a result of an increase in net capital expenditures due to
significant investment by the Company's document management segment in lease
contracts with its customers. Cash flows provided by financing activities were
$2.3 million for the six months ended March 31, 1997 compared to $2.6 million
for the same period in 1996.
During the six months ended March 31, 1997, the Company received a temporary
increase in its borrowing facility whereby the Company was able to borrow $1.0
million in excess of available assets for the months of January and February
1997, $750,000 for March 1997, and $500,000 for April 1997. On May 1, 1997, the
amount of credit available under the revolving credit facility reverted to the
original amount available not to exceed $9.5 million. In addition, the Company
extended the maturity date of its revolving credit facility to July 15, 1998.
March 31, 1997 accounts receivable were subsequently reduced when $2.7 million
of accounts receivable owed by one customer were paid and the proceeds were used
to pay down the Company's bank debt.
The Company expects to be able to finance its working capital requirements and
capital expenditures from its operating income and existing line-of-credit
facility for the fiscal year ending September 30, 1997.
Adoption of New Accounting Standards
Effective for periods ending after December 15, 1997, the Company is required to
adopt Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
("SFAS 128"). SFAS 128 requires companies to calculate basic and diluted
earnings per share based upon standards designed to provide consistency and
compatibility with calculations of other countries and with that of the
International Accounting Standards Committee. The Company does not expect
earnings per share as reported to be materially different than basic or diluted
earnings per share to be reported upon adoption of the new accounting standard.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on March 26, 1997, the following
proposals were adopted by the margins indicated:
1. To elect a Board of Directors to hold office until the next annual meeting
of shareholders and until their successors are elected and qualified.
NUMBER OF SHARES
FOR WITHHELD
John J. McDonough 4,759,327 410,923
Ian B. Aaron 5,165,598 17,267
John G. Hamm 5,165,151 17,717
A.J.R. Oosthuizen 5,031,047 151,817
Ronald I. Simon 5,013,427 157,326
2. To authorize and approve the Amended SoftNet Systems, Inc. 1995 Long Term
Incentive Plan.
For 3,899,186
Against 87,939
Abstain 8,014
Broker Non-Votes 1,182,781
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1997.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SoftNet Systems, Inc.
/s/ John J. McDonough
------------------------------------
John J. McDonough
Chairman and Chief Executive Officer
/s/ Martin A. Koehler
------------------------------------
Martin A. Koehler
Vice President - Finance and
Chief Financial Officer
Dated: May 15, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<CIK> 0000097196
<NAME> SOFTNET SYSTEMS INC.
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> SEP-30-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 63
<SECURITIES> 0
<RECEIVABLES> 10,807
<ALLOWANCES> 378
<INVENTORY> 4,496
<CURRENT-ASSETS> 15,170
<PP&E> 3,333
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<CURRENT-LIABILITIES> 10,539
<BONDS> 12,550
0
0
<COMMON> 33,826
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<CGS> 12,840
<TOTAL-COSTS> 6,969
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</TABLE>
