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 December 31, 1996
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 December 31, 1996
------------------------------- --------------------------------
Common stock, without par value 6,564,455
<PAGE>
SOFTNET SYSTEMS, INC.
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
December 31, 1996 and September 30, 1996 3
Condensed Consolidated Statements of Operations
for the Three Months Ended
December 31, 1996 and December 31, 1995 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended
December 31, 1996 and December 31, 1995 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 10
<PAGE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
Dec. 31, Sept. 30,
1996 1996
-------- --------
(unaudited)
ASSETS
Current assets:
Cash ............................................. $ 60 $ 426
Receivables, net ................................. 7,808 6,074
Inventories ...................................... 5,130 5,904
Prepaid expenses ................................. 235 340
-------- --------
Total current assets ...................... 13,233 12,744
Property and equipment, net ......................... 1,840 2,314
Available-for-sale securities ....................... 4 4
Costs in excess of fair value
of net assets acquired, net ....................... 7,790 8,101
Other assets ........................................ 2,722 2,423
-------- --------
$ 25,589 $ 25,586
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............ $ 7,294 $ 8,672
Current portion of long term debt ................ 638 744
Current portion of capital leases ................ 103 187
Deferred revenue ................................. 1,710 1,428
-------- --------
Total current liabilities ................. 9,745 11,031
-------- --------
Long term debt, net of current portion .............. 11,610 10,598
-------- --------
Capital Lease obligation,
net of current portion ............................ 84 164
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.10 par value,
4 million shares authorized,
none outstanding ............................... -- --
Common stock, $.01 par value,
25 million shares authorized,
6,564,455 and 5,547,033 shares
outstanding, respectively ...................... 66 65
Capital in excess of par value ...................... 33,617 33,517
Accumulated deficit ................................. (29,533) (29,789)
-------- --------
Total shareholders' equity ................ 4,150 3,793
-------- --------
$ 25,589 $ 25,586
======== ========
<PAGE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
December 31,
---------------------
1996 1995
-------- --------
Net sales ............................................ $ 10,778 $ 9,872
Cost of sales ........................................ 6,648 6,402
-------- --------
Gross profit ...................................... 4,130 3,470
-------- --------
Operating expenses:
Selling ........................................... 1,294 1,124
Engineering ....................................... 550 404
General and administrative ........................ 1,374 1,424
Amortization of goodwill and transaction costs .... 362 457
-------- --------
Total operating expenses ................ 3,580 3,409
-------- --------
Income from continuing operations ................. 550 61
Interest expense ..................................... (256) (395)
Other income (expense) ............................... (39) 11
-------- --------
Income (loss) before income taxes ................. 255 (323)
Provision for income taxes -- --
-------- --------
Net income (loss) ................................. $ 255 $ (323)
======== ========
Earnings (Loss) per share ............................ $ 0.04 $ (0.06)
======== ========
Weighted average shares outstanding .................. 6,806 5,547
======== ========
<PAGE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
December 31,
--------------------
1996 1995
-------- --------
Cash flows from operating activities:
Net income (loss) ....................................... $ 255 $ (323)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and amortization ...................... 517 534
Provision for bad debts ............................ 8 14
Changes in operating assets
and liabilities, net of effect of
purchase transactions:
Receivables .................................... (1,895) 345
Inventories .................................... (87) (370)
Prepaid expenses ............................... 106 79
Accounts payable and accrued expenses .......... (311) (1,419)
Deferred revenue ............................... 535 450
-------- --------
Net cash used in operating activities ........ (872) (690)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ...................... (55) (181)
Additions to capitalized product design ................. (155) (64)
Increase in other assets ................................ 11 (242)
Net cash paid in connection with acquisitions ........... -- (99)
Settlement of remaining obligations to owners of
discontinued operations ............................... -- (116)
-------- --------
Net cash used by investing activities ........ (199) (702)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt ............................. (33) (41)
Borrowings under revolving credit note .................. 2,556 2,559
Payments under revolving credit note .................... (1,769) (1,000)
Payment for put obligation .............................. -- (200)
Capitalized lease obligations paid ...................... (49) (70)
-------- --------
Net cash provided by financing activities .... 705 1,248
-------- --------
Net decrease in cash ...................................... (366) (144)
Cash, beginning of period ................................. 426 573
-------- --------
Cash, end of period ....................................... $ 60 $ 429
======== ========
Cash paid during the period for:
Interest .................................................. $ 244 $ 340
Income taxes .............................................. -- --
Supplemental non-cash transactions
Businesses acquired with issuance of stock and notes ...... -- 1,761
Change in unrealized appreciation
in available-for-sale securities ........................ -- 661
<PAGE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
December 31, 1996 and 1995
(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 December 31, 1996 and 1995.
The Companys'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 three months ended December 31, 1996 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):
December 31, 1996 September 30, 1996
----------------- ------------------
(Unaudited)
Bank Debt $6,960 $6,649
Convertible subordinated notes 3,911 4,011
Other 1,377 682
------------------- ------------------
12,248 11,342
Less current portion (638) (744)
------------------- ------------------
$11,610 $10,598
=================== ==================
During the three months ended December 31, 1996, 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. Subsequent to December 31,
1996, the Company extended the temporary increase whereby the Company will be
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 the month
of April 1997. On May 1, 1997, the amount of credit available under the
revolving credit facility will revert 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 January 15, 1998.
<PAGE>
3. Stock Options and Warrants
Outstanding options and warrants to purchase shares of common stock at December
31, 1996 were as follows (in thousands, except price per option data):
Outstanding at beginning of year 1,569
Granted (at $4.94) 245
Exercised or canceled (at $8.25) (14)
--------
Outstanding at June 30, 1996 1,801
========
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. Reclassifications
The Company has reclassified certain general and administrative expenses as cost
of goods sold for the three months ended December 31, 1995 to conform with the
current year presentation.
<PAGE>
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of operations for the three months ended December 31, 1996 compared to
the same period in 1995.
For the three months ended December 31, 1996, net sales increased by $906,000
(or 9.2%) to $10.8 million compared to $9.9 million for the same period in 1995.
Sales increased in the Company's document management division by $836,000 (or
18.2%) 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
division decreased $152,000 (or 2.9%). The decrease was a result of the
disposition of the operations of the Company's wholly owned subsidiary,
Communicate Direct, Inc. ("CDI") (with revenue of $2.0 million for the three
months ended December 31, 1995), which was offset by the acquisition of
Executone Information Systems, Inc.'s Milwaukee operations
("Executone-Milwaukee") (which added $1.3 million to revenue for the three
months ended December 31, 1996). The Company's Internet Services division, which
was acquired in June 1996 (i.e. MediaCity World, Inc.) added $269,000 to revenue
for the three months ended December 31, 1996.
For the three months ended December 31, 1996, gross profit increased $660,000
(or 19.0%) to $4.1 million from $3.5 million for the same period in 1995. For
the three months ended December 31, 1996, gross profit as a percentage of sales
increased from 35.1% in 1995 to 38.3% in 1996. The percentage increase relates
primarily to increases in gross profit in the Company's document management
division due to increased productivity in the division's manufacturing
operations.
Selling, engineering, general and administrative expenses increased $266,000 (or
9.0%) to $3.2 million for the three months ended December 31, 1996 from $3.0
million for the same period in 1995. The decrease in operating expenses caused
by the disposition of CDI ($498,000 for the three months ended December 31,
1995) was offset in part by the acquisitions of Executone-Milwaukee ($260,000
for the three months ended December 31, 1996) and MediaCity ($224,000 for the
three months ended December 31, 1996). In addition, the Company increased its
sales force in both the document management and telecommunications divisions.
Amortization expense decreased $95,000 (or 21%) to $362,000 for the three months
ended December 31, 1996, from $457,000 for the same period in 1995. The decrease
in amortization expense was caused by the write-off of CDI goodwill in June
1996, which resulted from CDI's sale of the non-application oriented
interconnect business located in Chicago, Illinois.
Interest expense decreased $139,000 (or 35%) to $259,000 for the three months
ended December 31, 1996 from $395,000 in the three months ended December 31,
1996. Interest expense decreased as a result of lower debt outstanding during
the three months ended December 31, 1996 compared to the same period in 1995.
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 December 31, 1996, net income increased $578,000 to
$255,000 and income per share increased $.10 to $.04,
compared to the same period in 1995.
<PAGE>
Liquidity and Capital Resources
At December 31, 1996, the Company's current ratio was 1.36 to 1 with working
capital of $3.5 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 three months ended December 31, 1996, cash flows used by operating
activities were $872,000, compared to $690,000 for the same period in 1995. Cash
flows used by investing activities were $199,000 for the three months ended
December 31, 1996 compared to $702,000 for the same period in 1995. The decrease
in cash used in investing activities was primarily a result of amounts paid in
fiscal 1995 for settlement to owners of discontinued operations and others. Cash
flows provided by financing activities were $705,000 for the three months ended
December 31, 1996 compared to $1.2 million for the same period in 1995.
During the three months ended December 31, 1996, 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. Subsequent to December 31,
1996, the Company extended the temporary increase whereby the Company will be
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 the month
of April 1997. On May 1, 1997, the amount of credit available under the
revolving credit facility will revert 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 January 15, 1998.
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 ended September 30, 1997.
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 expenditures, and expected cash flow from
operations. The actual results of outcomes could differ materially from those
discussed in the particular forward looking statements based on a number of
factors, including (i) changes in economic conditions and (ii) pricing and other
actions taken by competitors.
<PAGE>
PART II. OTHER INFORMATION
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
December 31, 1996.
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: February 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<CIK> 0000097196
<NAME> SOFTNET SYSTEMS INC.
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</TABLE>
