SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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)
520 Logue Avenue, Mountain View, California 94043
------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 965-3700
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 July 31, 1998
------------------------------- --------------------------------
Common stock, par 8,157,756
value $.01 per share
<PAGE>
SOFTNET SYSTEMS, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1998 and
September 30, 1997
Condensed Consolidated Statements of Operations for the Three
Months and Nine Months Ended June 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II OTHER INFORMATION
Item 2. Changes in Securities
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
As of June 30, 1998 and September 30, 1997
(In thousands, except share data)
June 30, September 30,
1998 1997
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash $ 9,818 $ 37
Accounts receivables, net 5,459 5,135
Inventories 1,930 1,326
Prepaid expenses 411 319
-------- --------
Total current assets 17,618 6,817
Property and equipment, net 2,912 1,108
Costs in excess of fair value
of net assets acquired, net 4,327 5,141
Other assets 3,730 3,820
Net assets associated with discontinued operations 4,143 3,435
-------- --------
$ 32,730 $ 20,321
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 6,580 $ 4,969
Current portion of long term debt 1,577 1,384
Current portion of capital leases 157 23
Deferred revenue 343 143
-------- --------
Total current liabilities 8,657 6,519
-------- --------
Long term debt, net of current portion 10,757 11,727
-------- --------
Capital lease obligation, net of current portion 149 47
-------- --------
Shareholders' equity:
Preferred stock, $.10 par value,
4 million shares authorized,
Series A Convertible, 3,062.5 shares
outstanding at June 30, 1998 -- --
Series B Convertible, 10,000 shares
outstanding at June 30, 1998 1 --
Common stock, $.01 par value,
25 million shares authorized,
7,869,647 and 6,870,559 shares
outstanding, respectively 79 69
Capital in excess of par value 52,303 34,379
Accumulated deficit (39,216) (32,420)
-------- --------
Total shareholders' equity 13,167 2,028
-------- --------
$ 32,730 $ 20,321
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three Months and Nine Months
Ended June 30, 1998 and 1997 (In
thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 3,615 $ 5,490 $ 10,844 $ 16,825
Cost of sales 2,751 2,935 8,003 9,239
-------- -------- -------- --------
Gross profit 864 2,555 2,841 7,586
-------- -------- -------- --------
Operating expenses:
Selling 1,193 404 2,297 1,383
Engineering 547 576 1,772 1,691
General and administrative 1,834 959 4,119 2,673
Amortization of goodwill and transaction costs 322 322 965 965
-------- -------- -------- --------
Total operating expenses 3,896 2,261 9,153 6,712
-------- -------- -------- --------
Income (loss) from continuing operations (3,032) 294 (6,312) 874
Interest expense (319) (272) (915) (826)
Other income (expense) 41 (83) 211 3
-------- -------- -------- --------
Income (loss) from continuing operations before
income taxes (3,310) (61) (7,016) 51
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Income (loss) before discontinued operations (3,310) (61) (7,016) 51
Discontinued operations
Income (loss) from operations 253 (67) 368 360
-------- -------- -------- --------
Net income (loss) $ (3,057) $ (128) $ (6,648) $ 411
======== ======== ======== ========
Preferred dividends (85) -- (148) --
-------- -------- -------- --------
Net income (loss) applicable to common shares $ (3,142) $ (128) $ (6,796) $ 411
======== ======== ======== ========
Basic and diluted earnings (loss) per common share:
For continuing operations $ (0.45) $ (0.01) $ (1.00) $ 0.01
======== ======== ======== ========
For discontinued operations $ 0.03 $ (0.01) $ 0.05 $ 0.05
======== ======== ======== ========
Net income (loss) applicable
to common shares $ (0.42) $ (0.02) $ (0.95) $ 0.06
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended June 30, 1998 and 1997
(In thousands)
(Unaudited)
1998 1997
-------- --------
Cash flows from operating activities:
Net income (loss) $ (6,648) $ 411
Adjustments to reconcile net income (loss)
to net cash used in
operating activities:
Income from discontinued operations (368) (360)
Depreciation and amortization 1,504 1,315
Provision for bad debts 190 --
Gain on disposition of net assets -- (77)
Changes in operating assets and liabilities:
Receivables 589 (2,224)
Inventories (285) 1,108
Prepaid expenses (27) 155
Accounts payable and accrued expenses 1,896 411
Deferred revenue 200 94
-------- --------
Net cash provided by (used in)operating activities
of continuing operations (2,949) 833
-------- --------
Net cash used in operating activities
of discontinued operations (300) (392)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (2,028) (174)
Additions to capitalized product design -- (610)
Other (90) --
-------- --------
Net cash used in investing activities
of continuing operations (2,118) (784)
-------- --------
Net cash used in investing activities
of discontinued operations (72) (62)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (1,086) (76)
Borrowings under revolving credit note 8,647 7,973
Payments under revolving credit note (9,111) (8,284)
Proceeds from issuance of long-term debt 359 737
Proceeds from sale of preferred stock 14,100 --
Proceeds from exercise of warrants and options 2,721 --
Capitalized lease obligations paid (91) (88)
-------- --------
Net cash provided by financing activities
of continuing operations 15,539 262
-------- --------
Net cash used in financing activities
of discontinued operations (319) (268)
-------- --------
Increase (decrease) in cash 9,781 (411)
Cash, beginning of period 37 426
-------- --------
Cash, end of period $ 9,818 $ 15
======== ========
Cash paid during the period for:
Interest $ 1,029 $ 744
Income taxes -- --
Supplemental non-cash transactions
Convertible debt issued for
acquisition of equipment leases $ 1,444 $ --
Common stock issued for the conversion
of subordinated notes 1,046 381
Common stock issued for the conversion
of preferred stock 2,000 --
Common stock issued as dividends on preferred stock 6 --
Preferred stock issued as dividends on preferred stock 62 --
Note received in sale of net assets 110 --
Equipment acquired by capital lease 326 --
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The financial information, except for the consolidated balance sheet as of
September 30, 1997, 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 June 30, 1998
and 1997.
The Company's annual report on Form 10-K for the fiscal year ended
September 30, 1997, 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, 1997
was derived from the Company's audited Consolidated Financial Statements.
The results of operations for the three months and nine months ended June
30, 1998 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
Long-term debt is summarized as follows (in thousands):
June 30, September 30,
1998 1997
Bank Debt (See Note 3) $ 7,971 $ 8,973
Convertible subordinated notes 4,022 3,624
Other 341 514
---------- ----------
12,334 13,111
Less current portion (1,577) (1,384)
--------- ---------
$ 10,757 $ 11,727
========== ==========
On January 2, 1998, the Company issued $1,443,750 principal amount of its
5% Convertible Subordinated Debentures due September 30, 2002 to a single
investor in exchange for the assignment to the Company of certain equipment
leases and other consideration. The debentures are convertible into Common Stock
of the Company, at $8.25 per share, after December 31, 1998.
On April 20, 1998, the Company issued 120,000 shares of Common Stock
pursuant to the conversion of $810,000 of convertible debt by a single holder of
the Company's 9% convertible subordinated notes due September 15, 2000. These 9%
notes have a conversion price of $6.75 per share.
3. Preferred Stock
On December 31, 1997, the Company sold 5,000 shares of Series A Convertible
Preferred Stock, $0.10 par value per share ("Series A Convertible Preferred"),
for an aggregate purchase price of $5 million. The Series A Convertible
Preferred accrues dividends at a rate of 5% per annum, payable quarterly, at the
Company's option, in cash or additional shares of Series A Convertible
Preferred. In addition, the Company issued warrants to purchase 170,000 shares
of the Company's Common Stock at prices at or above the market price (20,000
shares at $6.625 expiring on December 31, 2000 and 150,000 shares at $7.95
expiring on December 31, 2001). On January 2, 1998, the Company used the net
proceeds of $4.6 million, after issuance costs of $400,000, to reduce the
balance of the bank revolving credit note.
<PAGE>
Each share of Series A Convertible Preferred is convertible, at the option
of the holder, into the number of shares of Common Stock as determined by
multiplying the stated value of the Series A Convertible Preferred by 5% per
annum, subtracting any dividends paid, and dividing such difference by the
conversion price. The stated value of the Series A Convertible Preferred is
$1,000 per share and the conversion price is the lower of $8.28 or a two day
average market price within a 20 day trading period prior to the conversion.
Pursuant to the Company's Articles of Incorporation, as amended, the holders of
the Series A Convertible Preferred may only convert their outstanding shares of
Series A Convertible Preferred into an aggregate amount of Common Stock that
does not exceed 19.99% of the outstanding Common Stock of the Company. Any
excess shares of Common Stock that are issuable upon conversion of outstanding
Series A Convertible Preferred that exceed this 19.99% limitation are subject to
mandatory redemption at the option of the holder of the Series A Convertible
Preferred, unless the Company either obtains stockholder approval for the
additional conversions, or the Company receives permission to allow such an
issuance from the American Stock Exchange. All outstanding shares of Series A
Convertible Preferred, subject to the aforementioned restrictions, automatically
convert to Common Stock on December 31, 2000.
Holders of Series A Convertible Preferred do not have voting rights, except
for certain protective provisions relating to changes in the rights of holders
of Series A Convertible Preferred. The Series A Convertible Preferred ranks
senior to the Company's Common Stock as to dividends, distributions and
distribution of assets upon liquidation, dissolution or winding up of the
Company. The Series A Convertible Preferred is subject to mandatory redemption
upon certain circumstances, including the Company's (i) failure to convert the
Series A Convertible Preferred when required (ii) bankruptcy, and (iii)
suspension of the Common Stock from trading on the American Stock Exchange. The
Company shall have the right to redeem the Series A Convertible Preferred on or
after December 31, 1998 at a price equal to the greater of 130% of the stated
value or the market price multiplied by the number of shares of Common Stock
into which the Series A Convertible Preferred can be converted.
On March 31, 1998, the Company issued an additional 62.5 shares of Series A
Convertible Preferred as payment for $62,500 of earned dividends on the
outstanding shares of Series A Convertible Preferred.
During the quarter ended June 30, 1998, the Company issued a combined total
of 299,946 shares of Common Stock, pursuant to the conversion of 2,000 shares of
the Company's outstanding Series A Convertible Preferred. The Series A
Convertible Preferred, including accrued dividends, was converted into common
shares at the conversion price of $6.69 per share.
On May 28, 1998, the Company issued 10,000 shares of Series B Convertible
Preferred Stock, $0.10 par value per share ("Series B Convertible Preferred"),
for an aggregate purchase price of $10 million. The Series B Convertible
Preferred accrues dividends at a rate of 5% per annum, payable quarterly, at the
Company's option, in cash or additional shares of Series B Convertible
Preferred. In addition, the Company issued warrants to purchase 200,000 shares
of the Company's Common Stock at $13.75 and warrants to purchase 50,000 shares
of the Company's Common Stock at $11.00, all of which expire on May 28, 2002.
Each share of Series B Convertible Preferred is convertible, at the option
of the holder, into the number of shares of common stock as determined by
multiplying the stated value of the Series B Convertible Preferred by 5% per
annum, subtracting any dividends paid, and dividing such difference by the
conversion price. The stated value of the Series B Convertible Preferred is
$1,000 per share. Prior to the ninth month anniversary of the issuance of the
Series B Convertible Preferred, the conversion price is $13.20. After the ninth
month anniversary, the conversion price is the lower of $13.20 (subject to an
escalation provision pending certain market conditions surrounding the nine
month anniversary) or a five day average market price within a 20-day trading
period prior to the conversion. Pursuant to the Company's Certificate of
Incorporation, as amended, the holders of the Series B Convertible Preferred may
only convert their outstanding shares of Series B Convertible Preferred into an
aggregate amount of Common Stock that does not exceed 19.99% of the outstanding
Common Stock of the Company. Any excess shares of Common Stock that are issuable
upon conversion of outstanding Series B Convertible Preferred that exceed this
19.99% limitation are subject to mandatory redemption at the option of the
holder of the Series B Convertible Preferred, unless the Company either obtains
shareholder approval for the additional conversions, or the Company receives
permission to allow such issuances from the American Stock Exchange. All
outstanding shares of Series B Convertible Preferred, subject to the
aforementioned restrictions, automatically convert to Common Stock on May 28,
2001.
Holders of Series B Convertible Preferred do not have voting rights,
except for certain protective provisions relating to changes in the rights of
holders of Series B Convertible Preferred. The Series B Convertible Preferred
ranks senior to the Company's Common Stock, and pari passu with the Series A
Convertible Preferred, as to dividends, distributions and distribution of assets
upon liquidation, dissolution or winding up of the Company. The Series B
Convertible Preferred is subject to redemption upon certain circumstances,
including the Company's (i) failure to convert the Series B Convertible
Preferred when required (ii) failure to fulfill obligations under that certain
Registration Rights Agreement among the Company and holders of the Series B
Convertible Preferred, and (iii) suspension of the Common Stock from trading on
the American Stock Exchange. The Company shall have the right to redeem the
Series B Convertible Preferred on or after November 28, 1998 at a price equal to
the greater of 120% of the stated value or the market price multiplied by the
number of shares of Common Stock into which the Series B Convertible Preferred
can be converted.
4. Stock Options and Warrants
Outstanding options and warrants to purchase shares of Common Stock at June
30, 1998 were as follows (in thousands, except price per option data):
Outstanding at September 30, 1997 1,435
Granted at exercise prices ranging
from $4.85 to $13.75 per share 1,510
Canceled (61)
Exercised at exercise prices ranging
from $1.75 to $8.25 per share (556)
Outstanding at June 30, 1998 2,328
=======
5. Earnings (Loss) per Share
The Company adopted Statement of Financial Accounting Standard (SFAS) No.
128, "Earnings Per Share," in the quarter ended December 31, 1997. SFAS 128
requires the computation of basic and diluted earnings per share. Basic earnings
(loss) per common share is computed using the weighted average number of common
shares outstanding. Diluted earnings (loss) per common share is computed using
the weighted average number of common shares outstanding and the dilutive common
stock equivalents (using the treasury stock method for warrants and options).
The computation of basic and diluted earnings per share for continuing
operations includes the effects of preferred dividends. Summarized below is the
reconciliation of basic and diluted earnings (loss) per common share for the
three months and the nine months ended June 30, 1998 and 1997 (in thousands
except per common share amounts):
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------- -----------------------------
Net Income Per Share Net Income Per Share
(Loss) Shares Amount (Loss) Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1998:
Basic loss $ (3,142) 7,502 $(0.42) $ (6,796) 7,144 $(0.95)
Effect of outstanding securities (a) -
Warrants and options - - - -
Convertible debt - - - -
Convertible preferred stock - - - -
-------- ----- -------- -----
Diluted loss $ (3,142) 7,502 $(0.42) $ (6,796) 7,144 $(0.95)
-------- ----- -------- -----
June 30, 1997:
Basic earnings (loss) $ (128) 6,592 $(0.02) $ 411 6,575 $ 0.06
Effect of outstanding securities (b) -
Warrants and options - - - 319
Convertible debt - - - -
Convertible preferred stock - - - -
-------- ----- -------- -----
Diluted earnings (loss) $ (128) 6,592 $(0.02) $ 411 6,894 $ 0.06
-------- ----- -------- -----
<FN>
(a) As the Company had a net loss, the outstanding securities were
antidilutive.
(b) The remaining outstanding securities were antidilutive.
</FN>
</TABLE>
<PAGE>
6. Subsequent Event
On July 3, 1998, the Company pledged $800,000 as collateral on a Letter of
Credit relating to certain leased office space. This amount will be classified
as restricted cash in subsequent balance sheet presentations.
On July 27, 1998, the Board of Directors of the Company approved a plan to
offer for sale its telecommunications segment. Accordingly, operating results
have been reclassified and reported in discontinued operations. The Company is
in the process of negotiating the sale of these operations and expects that the
sale will be completed within a twelve month period. Management does not
anticipate a loss on the sale and intends to use sale proceeds to reduce
outstanding indebtedness and provide additional working capital.
Operating results of discontinued telecommunications segment are as follows
(in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
Revenues $ 4,425 $ 3,631 $ 12,817 $ 13,248
Net income (loss) $ 253 $ (67) $ 368 $ 360
Assets and liabilities of the discontinued telecommunications segment are
as follows:
June 30, Sept. 30,
1998 1997
--------- ---------
Current assets:
Cash $ - $ -
Accounts receivable, net 2,455 1,848
Inventories 2,197 2,984
Prepaid expenses 143 154
--------- ---------
4,795 4,986
--------- ---------
Property, plant and equipment, net 402 529
Goodwill, net 1,687 1,759
Other noncurrent assets 132 217
--------- ---------
$ 7,016 $ 7,491
========= =========
Current liabilities:
Accounts payable $ 2,184 $ 2,295
Current portion, long term debt 31 328
Current portion, capital
lease obligation 23 23
Deferred revenue 600 1,336
--------- ---------
2,838 3,982
--------- ---------
Long-term debt, net of current portion - 20
Capital lease obligation,
net of current portion 35 54
--------- ---------
$ 2,873 $ 4,056
========= =========
Net assets associated with
discontinued operations $ 4,143 $ 3,435
========= =========
The financial statements have been restated for the effects of the
discontinued operations of the telecommunications segment.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. The actual results of SoftNet Systems, Inc. and its subsidiaries
could differ significantly from those set forth herein. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed in "Risk Factors" as set forth in the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission on July 28, 1998, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as well as those discussed elsewhere in this Quarterly Report.
Statements contained herein that are not historical facts are forward-looking
statements that are subject to the safe harbor created by the Private Securities
Litigation Reform Act of 1995. Words such as "believes", "anticipates",
"expects", "intends" and similar expressions are intended to identify
forward-looking statements, but are not the exclusive means of identifying such
statements. A number of important factors could cause the Company's actual
results for fiscal 1998 and beyond to differ materially from past results and
those expressed in any forward-looking statements made by, or on behalf of, the
Company. These factors include, without limitation, the following: limited
operating history; lack of profitable operations; fluctuations in quarterly
results; lack of backlog; rapid technological change; dependence on new
products; dependence on the Internet; ability to expand the Internet business;
risks associated with acquisitions; and competition. The Company undertakes no
obligation to release publicly the results of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
The Company's fiscal year ends September 30 and the third quarter of the fiscal
year ends June 30. "Fiscal 1998" refers to the twelve months ending September
30, 1998 with similar references to other twelve month periods ending September
30.
Results of operations for the Third Quarter of Fiscal 1998 as compared to the
same period in Fiscal 1997
Consolidated net sales decreased $1.9 million (or 34.2%) for the three months
ended June 30, 1998, as compared to the same period in 1997. Sales in the
document management segment decreased $2.1 million (or 39.1%), as compared to
the same period in 1997, primarily as a result of a decrease in the sale of
computer output microfiche equipment ("COM") and associated spare parts. Sales
in the Internet segment increased $194,000 (or 99.5%), as compared to the same
period in 1997, primarily due to an increase in sales for the segment's cable
services. The Company formally introduced these cable services to the market in
the third quarter of fiscal 1997.
Consolidated gross profit decreased $1.7 million in the three months ended June
30, 1998, with profit margins decreasing to 23.9% from 46.5% for the same period
in 1997. The percentage decrease is primarily related to the decrease in the
document management segment's COM sales. Profit margins in the document
management segment decreased for the three months ended June 30, 1998 to 33.5%
from 49.0% for the same period in 1997. Gross profit decreased $214,000 in the
Internet segment for the three months ended June 30, 1998, primarily as a result
of the expansion of the segment's technical and customer support infrastructure
related to the segment's cable service offering. In addition, certain web
development expenses have been reclassed entirely to cost of goods sold. Similar
web development expenses in prior year presentations have not been reclassified,
due to immateriality.
Operating expenses (selling, engineering, general and administrative) increased
$1.6 million to $3.6 million for the three months ended June 30, 1998 from $2.0
million for the same period in 1997. The increase in operating expenses is
primarily the result of an increase in the administrative, sales and marketing
efforts of the Company's Internet segment associated with the segment's cable
service offering. Operating expenses increased $1.3 million for the Internet
segment for the three months ended June 30, 1998, as compared to the same period
in 1997.
Consolidated interest expense increased $47,000 (or 17.2%) to $319,000 for the
three months ended June 30, 1998 as compared to $272,000 for the same period in
1997. Other income increased $124,000 to $41,000 for the three months ended June
30, 1998, as compared to an expense of $83,000 for the same period in 1997. This
increase is primarily the result of the interest income generated by the
document management segment's price per fiche, customer leasing alternative.
The Company made no provision for income taxes for the three months ended June
30, 1998, as a result of the Company's net operating loss carry-forward.
The Company recognized income from operations with respect to its discontinued
telecommunications segment of $253,000 for the three months ended June 30, 1998,
as compared to a loss from operations of $67,000 for the same period in 1997.
For the third quarter of fiscal 1998, the Company had a net loss applicable to
common shares of $3.1 million, or a basic loss per common share of $0.42, as
compared to a net loss of $128,000, or a basic loss per common share of $0.02
for the same period in fiscal 1997.
Results of operations for the first Nine Months of Fiscal 1998 as compared to
the same period in Fiscal 1997
Consolidated net sales decreased $6.0 million (or 35.6%) for the nine months
ended June 30, 1998, as compared to the same period in 1997. Sales in the
document management segment decreased $6.1 million (or 38.4%), primarily as a
result of a decrease in COM sales. COM sales decreased $4.0 million for the nine
months ended June 30, 1998, as compared to the same period in 1997. Decreases in
the segment's spare part sales and other ancillary products and services
accounted for the remaining shortfall. Sales in the Internet segment increased
$161,000 (or 19.7%) for the nine months ended June 30, 1998, as compared to the
same period in 1997. Sales related to the segment's cable services increased
approximately $350,000 for the nine months ended June 30 , 1998, as compared to
the same period in 1997, offsetting a decrease in the segment's one-time
miscellaneous sales. The Company formally introduced its cable services to the
market in the third quarter of fiscal 1997.
Consolidated gross profit decreased $4.7 million in the nine months ended June
30, 1998, with profit margins decreasing to 26.2% from 45.1% for the same period
in 1997. The percentage decrease is primarily related to the decrease in the
document management segment's COM sales. Profit margins in the document
management segment decreased for the nine months ended June 30, 1998 to 32.0%
from 46.5% for the same period in 1997. Gross profits decreased $4.3 million in
the document management segment in the nine months ended June 30, 1998, as
compared to the same period in 1997. Gross profit decreased $451,000 in the
Internet segment for the nine months ended June 30, 1998, primarily as a result
of the expansion of the segment's technical and customer support infrastructure
related to the segment's cable service offering. In addition, certain web
development expenses have been reclassed entirely to cost of goods sold. Similar
web development expenses in prior year presentations have not been reclassified,
due to immateriality.
Operating expenses (selling, engineering, general and administrative) increased
$2.4 million to $8.2 million for the nine months ended June 30, 1998, from $5.8
million for the same period in 1997. The increase in operating expenses is
partially the result of the consolidation and relocation of the Chicago based
operations to the Company's existing headquarters in Mountain View, California.
These activities resulted in the one time write-off of leasehold improvements
and moving expenses of $240,000. In addition, operating expenses increased in
the Internet segment by over $1.9 million for the nine months ended June 30,
1998, primarily as the result of an increase in the segment's administrative,
sales and marketing efforts associated with the segment's cable service
offering.
Consolidated interest expense increased $89,000 (or 10.8%) to $915,000 for the
nine months ended June 30, 1998, as compared to $826,000 for the same period in
1997. Other income increased $208,000 to $211,000 for the nine months ended June
30, 1998. This increase is primarily the result of the interest income generated
by the document management segment's price per fiche, customer leasing
alternative.
The Company made no provision for income taxes for the nine months ended June
30, 1998, as a result of the Company's net operating loss carry-forward.
The Company recognized income from operations with respect to its discontinued
telecommunications segment of $368,000 for the nine months ended June 30, 1998,
as compared to income from operations of $360,000 for the same period in 1997.
For the first nine months of fiscal 1998, the Company had a net loss applicable
to common shares of $6.8 million, or a basic loss per share of $0.95, as
compared to net income of $411,000, or basic earnings per share of $0.06 for the
same period in fiscal 1997.
Liquidity and Capital Resources
At June 30, 1998, the Company's current ratio was 2.04 to 1 with working capital
of $9.0 million. This compares with a current ratio of 1.05 to 1 and working
capital of $298,000 at September 30, 1997.
For the first nine months of fiscal 1998, cash flows used in operating
activities of continuing operations were $2.9 million, as compared to cash flows
provided by operating activities of continuing operations of $833,000 for the
same period in fiscal 1997. The Company used $2.1 million in investing
activities of continuing operations during the first nine months ended June 30,
1998, as compared to $784,000 used in the same period of 1997. This $1.3 million
increase in cash used in investing activities is primarily the result of the
acquisition of certain property and equipment used by the Company's Internet
segment to build up the infrastructure for its cable service offering. Cash
flows provided by financing activities were $15.5 million for the first nine
months of fiscal 1998, as compared to $262,000 for the same period in fiscal
1997.
On December 31, 1997, the Company sold 5,000 shares of Series A Convertible
Preferred Stock and warrants to purchase 150,000 shares of Common Stock for $5
million. On January 2, 1998, the net proceeds of this sale of $4.6 million were
used to reduce the balance of the Company's revolving credit note. On May 28,
1998, the Company sold 10,000 shares of Series B Convertible Preferred Stock and
warrants to purchase 200,000 shares of Common Stock for $10 million (See Note 3
of Notes to Condensed Consolidated Financial Statements). The Company has
extended the maturity of its revolving credit note, which has a maximum
borrowing capacity of $9.5 million, through July 15, 1999.
The Company expects to be able to finance its working capital requirements and
capital expenditures for its document management segment from its operating
income and existing line-of-credit facilities for the fiscal year ending
September 30, 1998. However, the Company believes it will need to raise
substantial additional capital to fund the Company's aggregate capital
expenditures and working capital requirements, including operating losses,
associated with achieving its market penetration objectives with respect to the
operations of its Internet segment. The Company's future cash requirements for
its business plan expansion will depend on a number of factors including (i) the
number of cable affiliate contracts, (ii) cable modem and associated costs of
equipment, (iii) the rate at which subscribers purchase the Company's Internet
service offering and (iv) the level of marketing required to acquire and retain
subscribers and to attain a competitive position in the marketplace. In
addition, the Company may wish to selectively pursue possible acquisitions of
businesses, technologies, content or products complementary to those of the
Company in the future in order to expand its Internet presence and achieve
operating efficiencies. The Company may seek to obtain additional funding
through the sale of public or private debt and/or equity securities or through a
bank credit facility. There can be no assurance as to the availability or terms
upon which such financing might be available.
Other - Year 2000 Issue
Many existing computer systems and related software applications, and other
control devices, use only two digits to identify a year in a date field, without
considering the impact of the upcoming change in the century. Such systems,
applications and/or devices could fail or create erroneous results unless
corrected so that they can process data related to the Year 2000. The Company
relies on such computer systems, applications and devices in operating and
monitoring all major aspects of its business, including, but not limited to, its
financial systems (such as general ledger, accounts payable and payroll
modules), customer services, internal networks and telecommunications equipment,
and end products. The Company also relies, directly and indirectly, on the
external systems of various independent business enterprises, such as its
customers, suppliers, creditors, financial organizations, and of governments,
both domestically and internationally, for the accurate exchange of data and
related information.
The Company is currently in the process of evaluating the potential impact of
the Year 2000 issue on its business and the related expenses that could likely
be incurred in attempting to remedy such impact (including testing and
implementation of remedial action). Management's current estimate is that the
costs associated with the Year 2000 issue should not have a material adverse
affect on the results of operations or financial position of the Company in any
given year. However, despite the Company's efforts to address the Year 2000
impact on its internal systems, the Company is not sure that it has fully
identified such impact or that it can resolve it without disruption of its
business and without incurring significant expenses. In addition, even if the
internal systems of the Company are not materially affected by the Year 2000
issue, the Company could be affected as a result of any disruption in the
operation of the various third-party enterprises with which the Company
interacts, such as cable affiliates, vendors and suppliers.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Not applicable.
Item 2. Changes in Securities.
On December 31, 1997, the Company issued 5,000 shares of Series A
Convertible Preferred, $0.10 par value, and warrants to purchase
150,000 shares of Common Stock, exercisable at $7.95 per share and
expiring on December 31, 2001, to RGC International Investors, LDC, for
an aggregate purchase price of $5 million. The sale of the Series A
Convertible Preferred and the warrants was arranged by Shoreline
Pacific Institutional Finance, the Institutional Division of Financial
West Group, which received a fee of $250,000 plus warrants to purchase
20,000 shares of Common Stock, exercisable at $6.625 per share and
expiring on December 31, 2000. (See Note 3 of Notes to Condensed
Consolidated Financial Statements).
During the quarter ended December 31, 1997, the Company issued 48,780
shares of Common Stock pursuant to the conversion of $200,000 of
convertible debt by a single holder of the Company's 10% convertible
subordinated notes due October 31, 1999. These 10% notes have a
conversion price of $4.10 per share. Additionally, the Company issued
1,120 shares of Common Stock pursuant to the conversion of $7,560 of
convertible debt by a single holder of the Company's 9% convertible
subordinated notes due September 15, 2000. These 9% notes have a
conversion price of $6.75 per share. These shares were issued pursuant
to an exemption under Section 3(a)(9) of the Securities Act.
During the quarter ended December 31, 1997, the Company issued a
combined total of 64,000 shares of Common Stock to three separate
warrant holders, upon the exercise of outstanding warrants (exercise
price of $1.75 per share). These shares were issued in a nonpublic
offering pursuant to transactions exempt under Section 3(a)(9) of the
Securities Act of 1933, as amended.
On January 2, 1998, the Company issued $1,443,750 principal amount of
its 5% Convertible Subordinated Debentures due September 30, 2002 to a
single investor in exchange for cash and the assignment to the Company
of certain equipment leases. The Debentures were issued without the use
of underwriters in a transaction exempt from registration under Section
4(2) of the Securities Act of 1933, as amended. The investor acquired
the securities for investment and without a view to distribution. The
debentures are convertible into Common Stock of the Company, at $8.25
per share, after December 31, 1998.
During the quarter ended March 31, 1998, the Company declared a
dividend on its outstanding Series A Convertible Preferred Stock,
payable on March 31, 1998 to stockholders of record at the close of
business on March 27, 1998. The dividend, payable at the rate of 5%,
was paid at the Company's option in the form of 62.5 additional shares
of the Company's Series A Convertible Preferred Stock (See Note 3 of
Notes to Condensed Consolidated Financial Statements).
During the quarter ended March 31, 1998, the Company issued 373 shares
of Common Stock pursuant to the conversion of $2,520 of convertible
debt by a single holder of the Company's 9% convertible subordinated
notes due September 15, 2000. These 9% notes have a conversion price of
$6.75 per share. These shares were issued pursuant to an exemption
under Section 3(a)(9) of the Securities Act.
Also during the quarter ended March 31, 1998, the Company issued a
combined total of 30,000 shares of Common Stock to four separate
warrant holders, upon the exercise of outstanding warrants (exercise
price of $1.75 per share). These shares were issued in a nonpublic
offering pursuant to transactions exempt under Section 3(a)(9) of the
Securities Act of 1933, as amended.
On May 28, 1998, the Company issued 9,000 shares of Series B
Convertible Preferred, $0.10 par value, and warrants to purchase
180,000 shares of Common Stock, exercisable at $13.75 per share and
expiring on May 28, 2002, to RGC International Investors, LDC, and
1,000 shares of Series B Convertible Preferred, $0.10 par value, and
warrants to purchase 20,000 shares of Common Stock, exercisable at
$13.75 per share and expiring on May 28, 2002, to Shoreline Associates
I, LLC for an aggregate purchase price of $10 million. The sale of the
Series B Convertible Preferred and the warrants was arranged by
Shoreline Pacific Institutional Finance, the Institutional Division of
Financial West Group, which received a fee of $500,000 plus warrants to
purchase 50,000 shares of Common Stock, exercisable at $11.00 per share
and expiring on May 28, 2002. (See Note 3 of Notes to Condensed
Consolidated Financial Statements).
During the quarter ended June 30, 1998, the Company issued a combined
total of 299,946 shares of Common Stock, pursuant to the conversion of
2,000 shares of the Company's outstanding Series A Convertible
Preferred. The Series A Convertible Preferred, including accrued
dividends, was converted into common shares at the conversion price of
$6.69 per share. These shares were issued pursuant to an exemption
under Section 3(a)(9) of the Securities Act.
In addition, during the quarter ended June 30, 1998, the Company issued
a combined total of 120,148 shares of Common Stock pursuant to the
conversion of $811,000 of convertible debt by two separate holders of
the Company's 9% convertible subordinated notes due September 15, 2000.
These 9% notes have a conversion price of $6.75 per share. In addition,
the Company issued 5,000 shares of Common Stock to the single holder of
the Company's 9% convertible subordinated notes due December 31, 1998,
pursuant to the conversion of the remaining $25,000 of this convertible
debt. These 9% notes had a conversion price of $5.00 per share. These
shares were issued pursuant to an exemption under Section 3(a)(9) of
the Securities Act.
Also during the quarter ended June 30, 1998, the Company issued a
combined total of 317,937 shares of Common Stock to nine separate
warrant holders, upon the exercise of outstanding warrants (exercise
prices ranging from $1.75 - $7.875 per share). These shares were issued
in a nonpublic offering pursuant to transactions exempt under Section
3(a)(9) of the Securities Act of 1933, as amended. Additionally, the
Company issued a combined total of 111,943 shares of Common Stock to
five separate individuals, upon the exercise of outstanding employee
stock options (exercise price of $4.94 per share).
Item 3. Defaults upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders. Not applicable.
Item 5. Other Information.
On June 19, 1998, the Company filed a Form S-3 Registration Statement
under the Securities Act of 1933 registering the resale of up to
2,495,309 shares of the Company's Common Stock, previously issued or
issuable upon the exercise of outstanding stock purchase warrants, the
conversion of the Company's 5% Convertible Subordinated Debenture due
September 30, 2002 and the conversion of the Company's Series B
Convertible Preferred Stock (See Note 3 of Notes to Condensed
Consolidated Financial Statements). This registration was declared
effective on July 31, 1998.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 10.1 - Letter confirming employment of Dr. Lawrence B.
Brilliant, dated April 7, 1998
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
On April 24, 1998, the Company filed a Form 8-K reporting the
resignation of Mr. A.J.R. Oosthuizen as President, CEO and as a
Director of the Company, effective as of April 4, 1998.
On June 1, 1998, the Company filed a Form 8-K reporting the designation
and issuance of 10,000 shares of Series B Convertible Preferred Stock
(See Note 3 of Notes to Condensed Consolidated Financial Statements).
On July 28, 1998, the Company filed a Form 8-K reporting both the
adoption of a Cable Affiliates Incentive Program and the Board of
Director's decision to account for the Company's Telecommunications
Division as a discontinued operation.
<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/ Garrett J. Girvan
-------------------------------
Garrett J. Girvan
Chief Operating Officer and
Chief Financial Officer
/s/ Mark A. Phillips
-------------------------------
Mark A. Phillips
Principal Accounting Officer
Dated: September 11, 1998
