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, 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 April 30, 1998
------------------------------- --------------------------------
Common stock, par 7,570,796
value $.01 per share
<PAGE>
SOFTNET SYSTEMS, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 31, 1998 and September 30, 1997
Condensed Consolidated Statements of Operations
for the Three Months and Six Months Ended
March 31, 1998 and March 31, 1997
Condensed Consolidated Statements of Cash Flows
for the Three Months and Six Months Ended
March 31, 1998 and March 31, 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 4. Submission of Matters to a Vote of Security Holders
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 December 31, 1997 and September 30, 1997
(In thousands, except share data)
Mar. 31, Sept. 30,
1998 1997
--------- ---------
(Unaudited)
ASSETS
Current assets:
Cash ................................................ $ 17 $ 37
Accounts receivables, net ........................... 7,591 6,983
Inventories ......................................... 5,206 4,310
Prepaid expenses .................................... 640 473
-------- --------
Total current assets ............................ 13,454 11,803
Property and equipment, net ............................ 1,519 1,637
Costs in excess of fair value of net
assets acquired, net ................................. 6,309 6,900
Other assets ........................................... 3,988 4,037
-------- --------
$ 25,270 $ 24,377
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............... $ 7,472 $ 7,264
Current portion of long term debt ................... 1,268 1,712
Current portion of capital leases ................... 32 46
Deferred revenue .................................... 1,141 1,479
-------- --------
Total current liabilities ....................... 9,913 10,501
-------- --------
Long term debt, net of current portion ................. 11,886 11,747
-------- --------
Capital Lease obligation, net of current portion ....... 84 101
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value,
4 million shares authorized,
Series A Convertible, 5,062.5 shares
outstanding at March 31, 1998.................... -- --
Common stock, $.01 par value,
25 million shares authorized,
7,014,673 and 6,870,559 shares
outstanding, respectively ....................... 70 69
Capital in excess of par value ...................... 39,391 34,379
Accumulated deficit ................................. (36,074) (32,420)
-------- --------
Total shareholders' equity ...................... 3,387 2,028
-------- --------
$ 25,270 $ 24,377
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<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,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ............................................ $ 8,751 $ 10,174 $ 15,621 $ 20,952
Cost of sales ........................................ 5,946 6,192 11,049 12,840
-------- -------- -------- --------
Gross profit ...................................... 2,805 3,982 4,572 8,112
-------- -------- -------- --------
Operating expenses:
Selling ........................................... 1,198 1,072 2,461 2,366
Engineering ....................................... 643 564 1,225 1,114
General and administrative ........................ 1,627 1,407 3,321 2,781
Amortization of goodwill and transaction costs .... 345 346 691 708
-------- -------- -------- --------
Total operating expenses ................ 3,813 3,389 7,698 6,969
-------- -------- -------- --------
Income (loss) from operations ..................... (1,008) 593 (3,126) 1,143
Interest expense ..................................... (268) (320) (596) (576)
Other income (expense) ............................... 63 10 131 (29)
-------- -------- -------- --------
Income (loss) before income taxes ................. (1,213) 283 (3,591) 538
-------- -------- -------- --------
Provision for income taxes ........................... -- -- -- --
-------- -------- -------- --------
Net income (loss).................................. $ (1,213) $ 283 $ (3,591) $ 538
======== ======== ======== ========
Preferred dividends .................................. (63) -- (63) --
-------- -------- -------- --------
Net income (loss) applicable to common shares ..... $ (1,276) $ 283 $ (3,654) $ 538
======== ======== ======== ========
Earnings(loss) per common share:
Basic ............................................. $ (0.18) $ 0.04 $ (0.52) $ 0.08
======== ======== ======== ========
Diluted ........................................... $ (0.18) $ 0.04 $ (0.52) $ 0.08
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
March 31,
--------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net income (loss) ....................................... $ (3,591) $ 538
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and amortization ...................... 1,086 1,132
Provision for bad debts ............................ 172 15
Loss on disposition of net assets .................. 35 --
Changes in operating assets
and liabilities:
Receivables .................................... 101 (4,525)
Inventories .................................... (578) 766
Prepaid expenses ............................... (101) 157
Accounts payable and accrued expenses .......... 326 106
Deferred revenue ............................... (338) 178
-------- --------
Net cash used in operating activities ........ (2,888) (1,633)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ...................... (319) (530)
Additions to capitalized product design ................. -- (502)
Decrease in other assets ................................ 16 5
-------- --------
Net cash used by investing activities ........ (303) (1,027)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt ............................. (1,058) (71)
Borrowings under revolving credit note .................. 4,953 5,068
Payments under revolving credit note .................... (5,434) (2,547)
Proceeds from sale of preferred stock ................... 4,600 --
Proceeds from exercise of warrants ..................... 141 --
Capitalized lease obligations paid ...................... (31) (153)
-------- --------
Net cash provided by financing activities .... 3,171 2,297
-------- --------
Increase (decrease) in cash ............................... (20) (363)
Cash, beginning of period ................................. 37 426
-------- --------
Cash, end of period ....................................... $ 17 $ 63
======== ========
Cash paid during the period for:
Interest .................................................. $ 671 $ 504
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 ........................ 210 --
Note received in sale of net assets ....................... 110 --
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The financial information, except for the 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 March 31, 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 six months ended March 31,
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):
March 31, September 30,
1998 1997
Bank Debt (See Note 3) $ 7,949 $ 9,026
Convertible subordinated notes 4,858 3,624
Other 347 809
---------- ----------
13,154 13,459
Less current portion (1,268) (1,712)
--------- ---------
$ 11,886 $ 11,747
======== ========
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.
Subsequent to March 31, 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, $0.01 par value per share ("Convertible Preferred"), for an
aggregate purchase price of $5 million. The Convertible Preferred shares accrue
dividends at a rate of 5% per annum, payable quarterly, at the Company's option,
in cash or additional Convertible Preferred shares. 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 Convertible Preferred is convertible, at the option of the holder,
into the number of shares of common stock as defined by the stated value of the
Convertible Preferred multiplied by 5% per annum, less any dividends paid,
divided by the conversion price. The stated value of the 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 Convertible Preferred stock may only convert their outstanding Convertible
Preferred stock 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 Convertible
Preferred, that exceed this 19.99% limitation, are subject to mandatory
redemption at the option of the holder of the Convertible Preferred stock,
unless the Company either obtains stockholder approval for the additional
conversions over 20%, or the Company receives permission to allow such an
issuance from the American Stock Exchange. All outstanding shares of Convertible
Preferred, subject to the aforementioned restrictions, automatically convert to
common stock on December 31, 2000.
Holders of Convertible Preferred do not have voting rights, except for certain
protective provisions relating to changes in the rights of holders of
Convertible Preferred. The 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 Convertible Preferred
is subject to mandatory redemption upon certain circumstances, including the
Company's (i) failure to convert the Convertible Preferred when required (ii)
bankruptcy, and (iii) suspension from trading on the American Stock Exchange.
The Company shall have the right to redeem the 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 Convertible Preferred can be converted.
On March 31, 1998, the Company issued an additional 62.5 shares of Convertible
Preferred as payment for $62,500 of earned dividends on the outstanding
Convertible Preferred stock.
Subsequent to March 31, 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 Stock. The Series A
Convertible Preferred Stock, including accrued dividends, was converted into
common shares at the conversion price of $6.69 per share.
4. Stock Options and Warrants
Outstanding options and warrants to purchase shares of common stock at March 31,
1998 were as follows (in thousands, except price per option data):
Outstanding at September 30, 1997 1,435
Granted at exercise prices
ranging from $6.625 to $7.95 per share 862
Canceled (18)
Exercised at exercise prices
ranging from $1.75 to $5.313 per share (103)
Outstanding at March 31, 1998 2,176
=======
<PAGE>
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).
Summarized below is the reconciliation of basic and diluted earnings (loss) per
common share for the three months and the six months ended March 31, 1998 and
1997 (in thousands except per common share amounts):
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
------------------------------- -------------------------------
Net Income Per Share Net Income Per Share
(Loss) Shares Amount (Loss) Shares Amount
---------- ------ --------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1998:
Basic earnings (loss) $ (1,276) 6,992 $ (0.18) $ (3,654) 6,966 $ (0.52)
Effect of outstanding securities (a)-
Warrants and options -- -- -- --
Convertible debt -- -- -- --
Convertible preferred stock -- -- -- --
-------- ----- -------- -----
Diluted earnings (loss) $ (1,276) 6,992 $ (0.18) $ (3,654) 6,966 $ (0.52)
-------- ----- -------- -----
March 31, 1997:
Basic earnings $ 283 6,580 $ 0.04 $ 538 6,567 $ 0.08
Effect of outstanding securities (b)-
Warrants and options -- 351 -- 297
Convertible debt -- -- -- --
Convertible preferred stock -- -- -- --
-------- ----- -------- -----
Diluted earnings $ 283 6,931 $ 0.04 $ 538 6,864 $ 0.08
-------- ----- -------- -----
<FN>
(a) As the Company had a net loss, the outstanding securities were
antidilutive.
(b) The remaining outstanding securities were antidilutive.
</FN>
</TABLE>
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 annual report on Form
10-K for the fiscal year ended September 30, 1997, as filed with the Securities
and Exchange Commission, 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.
<PAGE>
The Company's fiscal year ends September 30 and the second quarter of the fiscal
year ends March 31. "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 Second Quarter of Fiscal 1998 compared to the same
period in Fiscal 1997
Consolidated net sales decreased $1.4 million (or 14.0%) for the three months
ended March 31, 1998, as compared to the same period in 1997. Sales in the
document management segment decreased $1.3 million (or 24.6%), as compared to
the same period in 1997, primarily as a result of a decrease in the sale of
computer output microfiche equipment ("COM"). Sales in the telecommunications
segment decreased $52,000 (1.2%) when compared to the prior year. However,
tele-communication sales for the same period in the prior year included revenues
of $255,000 from the Company's Chicago-based telecommunications group, which was
dissolved on December 31, 1997 as part of the Company's consolidation and
relocation of all of its Chicago-based operations.
Consolidated gross profit decreased $1.2 million in the three months ended March
31, 1998, with profit margins decreasing to 32.1% from 39.1% for the same period
in 1997. The percentage decrease is primarily related to the decrease in the
document management segment's COM sales, which contributes the highest product
profit margins. As such, profit margins in the document management segment
decreased for the three months ended March 31, 1998 to 35.6% from 44.7% in the
same period in 1997. Gross profit decreased $130,000 in the telecommunications
segment for the three months ended March 31, 1998, primarily as a result of
additional expense associated with subcontracted labor used at specific
installations during the quarter. Gross profit decreased $102,000 in the
internet segment for the three months ended March 31, 1998, primarily as a
result of a reclassification of certain web development expenses being charged
entirely to cost of goods sold, as well as additional expenses related to the
expansion of the segment's technical support staff. Similar web development
expenses in prior year presentations have not been reclassified, due to
immateriality.
Operating expenses (selling, engineering, general and administrative) increased
$425,000 to $3.5 million for the three months ended March 31, 1998 from $3.0
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. Operating expenses increased $320,000
for the internet segment for the three months ended March 31, 1998, as compared
to the same period in 1997. In addition, the Company recorded approximately
$100,000 for legal and other professional fees associated with the registration
of certain securities of the Company in the second quarter ended March 31, 1998
(See Part II, Item 5).
The Company made no provision for income taxes for the three months ended March
31, 1998, as a result of the Company's net operating loss carry-forward.
Consolidated interest expense decreased $52,000 (or 16.3%) to $268,000 for the
three months ended March 31, 1998 compared to $320,000 for the same period in
1997. The decrease in interest expense was the result of the sale of $5.0
million of Convertible Preferred shares on December 31, 1997 and the subsequent
use of the net proceeds to reduce the level of outstanding indebtedness on the
Company's line of credit facility in the second quarter of fiscal 1998.
For the second quarter of fiscal 1998, the Company had a net loss applicable to
common shares of $1.3 million, or a basic loss per share of $0.18, compared to
net income of $283,000 in fiscal 1997, or basic earnings per share of $0.04.
Results of operations for the first Six Months of Fiscal 1998 compared to the
same period in Fiscal 1997
Consolidated net sales decreased $5.3 million (or 25.4%) for the six months
ended March 31, 1998, as compared to the same period in 1997. Sales in the
document management segment decreased $4.1 million (or 38.0%), primarily as a
result of a decrease in the sale of computer output microfiche equipment
("COM"). COM sales were affected in the first quarter of this year by the fact
that the document management segment entered the year with an order backlog of
$1.4 million, as compared to a backlog of $3.4 million entering the prior year.
However, sales in the document management segment increased $1.3 million in the
current quarter as compared to the previous quarter of this same fiscal year.
Sales in the telecommunications segment decreased by $1.2 million (12.8%),
primarily as the result of fewer healthcare and major system installations by
both the Milwaukee and Chicago divisions in the first quarter of this year.
However, telecommunication sales for the six months ended March 31, 1997
included revenues of $148,000 from the Company's
<PAGE>
wholly-owned subsidiary, Communicate Direct Inc. ("CDI"), which was completely
dissolved by the Company in fiscal 1997, as well as revenues of over $600,000
from the Company's Chicago-based telecommunications group which was dissolved in
December 1997.
Consolidated gross profit decreased $3.5 million in the six months ended March
31, 1998, with profit margins decreasing to 29.3% from 38.7% for the same period
in 1997. The percentage decrease is primarily related to the decrease in the
document management segment's COM sales, which contribute the highest product
profit margins. As such, profit margins in the document management segment
decreased for the six months ended March 31, 1998 to 31.2% from 45.3% in the
same period in 1997. Gross profit decreased $550,000 in the telecommunications
segment for the six months ended March 31, 1998, as compared to the same period
in 1997. Profit margins decreased to 30.9% from 32.7% for the same period in
1997. Gross profits in the telecommunications segment for the six months ended
March 31, 1997 included $35,000 from the operations of CDI, as well as $210,000
from the operations of the Chicago-based telecommunications group, both of which
were subsequently dissolved. Gross profit decreased $207,000 in the internet
segment for the six months ended March 31, 1998, primarily as a result of a
reclassification of certain web development expenses being charged entirely to
cost of goods sold, as well as additional expenses related to the expansion of
the segment's technical support staff. Similar web development expenses in prior
year presentations have not been reclassified, due to immateriality.
Operating expenses (selling, engineering, general and administrative) increased
$746,000 to $7.0 million for the six months ended March 31, 1998 from $6.3
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 $480,000 for the six months ended March 31, 1998,
primarily as the result of an increase in the segment's administrative, sales
and marketing efforts.
Amortization expense decreased $17,000 for the six months ended March 31, 1998,
to $691,000 as compared to $708,000 for the same period in 1997.
The Company made no provision for income taxes for the six months ended March
31, 1997, as a result of the Company's net operating loss carry-forward.
Consolidated interest expense increased $20,000 (or 3.5%) to $596,000 for the
six months ended March 31, 1998 compared to $576,000 for the same period in
1997.
For the first six months of fiscal 1998, the Company had a net loss applicable
to common stock of $3.7 million, or a basic loss per share of $0.52 compared to
net income of $538,000 in fiscal 1997, or basic earnings per share of $0.08.
Liquidity and Capital Resources
At March 31, 1998, the Company's current ratio was 1.36 to 1 with working
capital of $3.5 million. This compares with a current ratio of 1.12 to 1 and
working capital of $1.3 million at September 30, 1997.
For the first six months of fiscal 1998, cash flows used by operating activities
were $2.9 million compared to $1.6 million for the same period in fiscal 1997.
Cash flows used by investing activities were $303,000 for the first six months
of fiscal 1998 compared to $1.0 million for the same period in fiscal 1997. Cash
flows provided by financing activities were $3.2 million for the first six
months of fiscal 1998 compared to $2.3 million for the same period in fiscal
1997.
On December 31, 1997, the Company sold $5 million of Convertible Preferred
stock. On January 2, 1998, the net proceeds of this sale of $4.6 million were
used to reduce the balance of the bank revolving credit note (See Note 3 of
Notes to Condensed Consolidated Financial Statements for additional
information).
The Company expects to be able to finance its working capital requirements and
capital expenditures for its document management and telecommunications segments
from its operating income and existing line-of-credit facilities for the fiscal
year ending September 30, 1998. However, the Company is currently considering
various product offering expansion plans with respect to its Internet segment,
for which it will need to pursue additional financing.
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 would
foreseeably 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.
<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 Stock, $0.01 par value, ("Convertible Preferred")
and warrants to purchase 150,000 shares of common stock, exercisable at
$7.95 per share and expiring on December 31, 2001 ("RGC Warrants"), to
RGC International Investors, LDC, for an aggregate purchase price of $5
million. The sale of the Convertible Preferred and the RGC Warrants was
arranged by Shoreline Pacific Institutional Finance, the Institutional
Division of Financial West Group, who 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.
Each share of Convertible Preferred is convertible, at the option of
the holder, into the number of shares of common stock as defined by the
stated value of the Convertible Preferred multiplied by 5% per annum,
less any dividends paid, divided by the conversion price. The stated
value of the 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. All
outstanding shares of Convertible Preferred automatically convert to
common stock on December 31, 2000. Depending on market conditions at
the time of conversion, the number of common shares issuable could
prove to be significantly greater in the event of a decrease in the
trading price of the common stock. Purchasers of common stock could
therefore experience substantial dilution upon conversion of the
Convertible Preferred (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.
Subsequent to the quarter ended March 31, 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 Stock. The Series A Convertible Preferred Stock,
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, subsequent to the quarter ended March 31, 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. These shares
were issued pursuant to an exemption under Section 3(a)(9) of the
Securities Act.
Item 3. Defaults upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of the Shareholders held on February 26, 1998,
the following matter was adopted:
1. The election of a Board of Directors to hold office until the next
annual meeting of shareholders and until their successors are elected
and qualified.
Number of Votes
For Withheld
Ronald I. Simon 5,219,410 23,070
Ian B. Aaron 5,219,910 22,570
Edward A. Bennett 5,219,010 23,470
Lawrence B. Brilliant 5,219,010 23,470
John G. Hamm 5,219,510 22,970
A. J. R. Oosthuizen 5,219,910 22,570
On April 24, 1998, the Company filed a Form 8-K reporting the
resignation of Mr. A.J.R. Oosthuizen as a Director of the Company,
effective as of April 4, 1998.
Item 5. Other Information.
On January 30, 1998, the Company filed a Form S-3 Registration
Statement under the Securities Act of 1933 registering the resale of up
to 2,697,320 shares of the Company's Common Stock, previously issued or
issuable upon the exercise of outstanding stock purchase warrants and
the conversion of the Company's Series A Convertible Preferred Stock
(See Note 3 of Notes to Condensed Consolidated Financial Statements).
This registration was declared effective on February 13, 1998.
On February 4, 1998, the Company filed a Form S-8 Registration
Statement under the Securities Act of 1933 registering 1,525,952 shares
of the Company's Common Stock issuable under both the Company's Amended
1995 Long Term Incentive Plan and the Company's Employee Stock Option
Plan.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
On January 12, 1998, the Company filed a Form 8-K reporting the
designation and issuance of 5,000 shares of Series A Convertible
Preferred Stock (See Note 3 of Notes to Condensed Consolidated
Financial Statements). On February 12, 1998, the Company filed a Form
8-K reporting the description of the Company's capital stock. 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.
<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: May 15, 1998
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
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<NAME> SOFTNET SYSTEMS INC.
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