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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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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 JUNE 30, 2002.
----------------
OR
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the transition period from __________________ to __________________.
Commission File Number: 001-05270
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SOFTNET SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 11-1817252
--------------------------- ---------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
650 TOWNSEND STREET, SUITE 225, SAN FRANCISCO, CALIFORNIA 94103
- --------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 354-3900
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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, 2002
----- ----------------------------
COMMON STOCK, $0.01 PAR VALUE 25,183,487
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SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2002, and
September 30, 2001 . . . . . . . . . . . . . . . . . . . . . . 2
Condensed Consolidated Statements of Operations for the three and
nine months ended June 30, 2002 and 2001 . . . . . . . . . . . 3
Condensed Consolidated Statements of Cash Flows for the nine
months ended June 30, 2002 and 2001. . . . . . . . . . . . . . 4
Notes to Condensed Consolidated Financial Statements . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 24
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . 24
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . 24
Item 4 Submission of Matters to a Vote of Security Holders. . . . . . . 24
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . 24
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 25
-1-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
JUNE 30, SEPTEMBER 30,
2002 2001
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 28,186 $ 14,960
Short-term investments, available-for-sale. . . . . . . . . . . . . . 41,117 60,494
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . 2,336 2,018
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . 429 1,266
--------------- ---------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . 72,068 78,738
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800 800
Property and equipment, net of accumulated depreciation of $397
and $375, respectively. . . . . . . . . . . . . . . . . . . . . . . . 121 691
Accounts receivable, non-current portion. . . . . . . . . . . . . . . . 59 1,566
Long-term equity investments. . . . . . . . . . . . . . . . . . . . . . 1,013 1,484
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,203 1,221
--------------- ---------------
$ 75,264 $ 84,500
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 69 $ 273
Net liabilities associated with discontinued operations.. . . . . . . 3,698 2,757
Restructuring accrual . . . . . . . . . . . . . . . . . . . . . . . . 1,449 1,240
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . 1,249 2,340
Current portion of long-term debt . . . . . . . . . . . . . . . . . . 1,444 1,444
--------------- ---------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 7,909 8,054
--------------- ---------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.10 par value, 3,970,000 shares designated,
no shares issued and outstanding. . . . . . . . . . . . . . . . . . - -
Common stock, $0.01 par value, 100,000,000 shares
authorized; 27,473,987 and 27,461,775
shares issued; 25,183,487 and 25,171,275 shares outstanding,
respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . 275 275
Additional-paid-in capital. . . . . . . . . . . . . . . . . . . . . . 477,613 477,680
Deferred stock compensation . . . . . . . . . . . . . . . . . . . . . (345) (1,645)
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . (22) (480)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (401,029) (390,247)
Treasury stock, at cost, 2,290,500 and 2,290,500 shares, respectively (9,137) (9,137)
--------------- ---------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . 67,355 76,446
--------------- ---------------
$ 75,264 $ 84,500
=============== ===============
The accompanying notes are an integral part of these condensed consolidated financial statements.
-2-
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Operating expenses:
Selling and marketing. . . . . . . . . . . . . . . . $ - $ 9 $ - $ 196
Engineering. . . . . . . . . . . . . . . . . . . . . - 71 - 529
General and administrative, exclusive of non-cash
compensation expense (benefit) of $400, $483, $1,200
and $(1,087), respectively . . . . . . . . . . . . 1,265 1,612 4,347 6,403
Depreciation . . . . . . . . . . . . . . . . . . . . 34 78 160 282
Non-cash compensation expense (benefit) related to
stock options. . . . . . . . . . . . . . . . . . . 400 483 1,200 (1,087)
Provision for impaired assets. . . . . . . . . . . . - - 352 -
Restructuring expense. . . . . . . . . . . . . . . . - - 502 3,900
------------- ------------- ------------- -------------
Total operating expenses . . . . . . . . . . . . . . . 1,699 2,253 6,561 10,223
------------- ------------- ------------- -------------
Loss from continuing operations before other income
(expense), income taxes, discontinued operations and
extraordinary item . . . . . . . . . . . . . . . . . (1,699) (2,253) (6,561) (10,223)
Other income (expense):
Interest income. . . . . . . . . . . . . . . . . . . 391 1,223 1,423 5,533
Interest expense . . . . . . . . . . . . . . . . . . (18) (4) (54) (89)
Loss on disposition of equity investments, net . . . - (3,684) (701) (17,445)
Equity in net losses of investee companies . . . . . - - - (394)
Miscellaneous income (expense), net. . . . . . . . . 3 (50) - (153)
------------- ------------- ------------- -------------
Loss from continuing operations before income taxes,
discontinued operations and extraordinary item . . . (1,323) (4,768) (5,893) (22,771)
Provision for income taxes . . . . . . . . . . . . . . - - - -
------------- ------------- ------------- -------------
Loss from continuing operations before discontinued
operations and extraordinary item. . . . . . . . . . (1,323) (4,768) (5,893) (22,771)
Discontinued operations:
Loss from operations . . . . . . . . . . . . . . . . - (3,913) (1,829) (26,625)
Loss on disposition, net . . . . . . . . . . . . . . (70) (4,100) (3,060) (6,828)
Extraordinary item:
Gain on settlements of outstanding obligations . . . - - - 1,326
------------- ------------- ------------- -------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . $ (1,393) $ (12,781) $ (10,782) $ (54,898)
============= ============= ============= =============
Basic and diluted loss per common share:
Loss from continuing operations. . . . . . . . . . . $ (0.05) $ (0.19) $ (0.23) $ (0.91)
Discontinued operations. . . . . . . . . . . . . . . - (0.32) (0.19) (1.34)
Extraordinary item . . . . . . . . . . . . . . . . . - - - 0.05
------------- ------------- ------------- -------------
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (0.05) $ (0.51) $ (0.42) $ (2.20)
============= ============= ============= =============
Shares used to compute basic
and diluted loss per common share. . . . . . . . . . 25,183 25,157 25,178 24,974
============= ============= ============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
-3-
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED JUNE 30,
------------- -------------
2002 2001
------------- -------------
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (10,782) $ (54,898)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . 1,829 26,625
Loss on disposition of discontinued operations. . . . . . . . . . . . . . . . . . . . 3,060 6,828
Extraordinary item - gain on settlements of outstanding obligations . . . . . . . . . - (1,326)
Provision for impaired assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352 -
Provision for restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . . 502 3,900
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 282
Non-cash compensation expense (benefit) related to stock options. . . . . . . . . . . 1,200 (1,087)
(Gain) loss on disposition of property and equipment. . . . . . . . . . . . . . . . . 51 30
Equity in net losses of investee companies. . . . . . . . . . . . . . . . . . . . . . - 394
Loss on disposition of equity investments, net. . . . . . . . . . . . . . . . . . . . 701 17,445
Gain on disposition of other short-term investments . . . . . . . . . . . . . . . . . (6) (2)
Changes in operating assets and liabilities (net of effect of acquisitions and
discontinued operations):
Decrease in accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . 1,189 1,235
(Increase) decrease in other current assets . . . . . . . . . . . . . . . . . . . . 837 (640)
Decrease in other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 43
Decrease in accounts payable and accrued expenses . . . . . . . . . . . . . . . . . (1,587) (9,234)
------------- -------------
Net cash used in operating activities of continuing operations. . . . . . . . . . . . . . (2,476) (10,405)
Net cash used in operating activities of discontinued operations. . . . . . . . . . . . . (3,838) (67,536)
------------- -------------
Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . (6,314) (77,941)
------------- -------------
Cash flows from investing activities:
Proceeds from maturities and sales of short-term investments, net . . . . . . . . . . . 19,595 51,648
Proceeds from sale of property and equipment. . . . . . . . . . . . . . . . . . . . . . 7 5
Payments for purchase of equity investments . . . . . . . . . . . . . . . . . . . . . . - (766)
Payment for purchase of property and equipment. . . . . . . . . . . . . . . . . . . . . - (675)
------------- -------------
Net cash provided by investing activities of continuing operations. . . . . . . . . . . . 19,602 50,212
Net cash provided by (used in) investing activities of discontinued operations. . . . . . (2) 9,419
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Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . 19,600 59,631
------------- -------------
Cash flows from financing activities:
Proceeds from purchase by employee stock purchase plan. . . . . . . . . . . . . . . . . - 77
Payment for purchase of treasury stock. . . . . . . . . . . . . . . . . . . . . . . . . - (6,858)
Payment of long-term debt and liability related to anniversary issuance of common stock
to former Intelligent Communications, Inc. stockholders. . . . . . . . . . . . . . . . - (2,490)
Principal payments of long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . - (660)
------------- -------------
Net cash used in financing activities of continuing operations. . . . . . . . . . . . . . - (9,931)
Net cash used in financing activities of discontinued operations. . . . . . . . . . . . . (60) (4,467)
------------- -------------
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . (60) (14,398)
Foreign exchange effect on cash and cash equivalents. . . . . . . . . . . . . . . . . . . - (24)
------------- -------------
Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . . . . . . 13,226 (32,732)
Cash and cash equivalents, beginning of period. . . . . . . . . . . . . . . . . . . . . . 14,960 44,731
------------- -------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . . . . . . . . . . . $ 28,186 $ 11,999
============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
-4-
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial information included herein is unaudited, however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments, except as otherwise noted) which are, in the opinion of
management, necessary for a fair presentation of the condensed consolidated
balance sheet as of June 30, 2002, and condensed consolidated statements of
operations and cash flows for the interim periods ended June 30, 2002 and
2001.
SoftNet Systems, Inc.'s annual report on Form 10-K for the fiscal year
ended September 30, 2001, as amended and 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, 2001 was derived from SoftNet Systems,
Inc. and subsidiaries (the "Company") audited consolidated financial
statements.
The results of operations for the three months and nine months ended June
30, 2002 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.
The condensed consolidated balance sheet as of September 30, 2001, the
condensed consolidated statements of operations for the three months and
nine months ended June 30, 2001, and the condensed consolidated statements
of cash flows for the nine months ended June 30, 2001, have been
reclassified for the effects of the discontinued operations of Intelligent
Communications, Inc. Additionally, certain reclassifications have been made
to prior period financial statements in order to conform to the current
period presentation.
2. DISCONTINUED OPERATIONS
Discontinued Operations of Intelligent Communications, Inc. ("Intellicom")
On March 29, 2002, the Company and its wholly-owned subsidiary, Intellicom,
entered into an agreement to sell its operating business and certain assets
to Loral Cyberstar, Inc. Following the sale of its operating business and
certain assets to Loral Cyberstar, Inc., the Company's Board of Directors
unanimously agreed to cease the operations of Intellicom on April 3, 2002.
Subsequently on April 22, 2002, Intellicom entered into an agreement to
sell certain assets to Native Intellicom, Inc., a wholly-owned subsidiary
of the Pinoleville Band of Pomo Indians, for cash, subject to the
termination of Intellicom's lease for its facility in Livermore,
California. The operating results of Intellicom have been segregated from
continuing operations and are reported as a loss from discontinued
operations on the condensed consolidated statements of operations. Although
it is difficult to predict the final results, the loss on disposition from
discontinued operations includes management's estimates of costs to wind
down the business, costs to settle its outstanding liabilities, and the
proceeds from the sale of assets. The actual results could differ
materially from these estimates. The Company recorded an estimated loss on
disposition of Intellicom of $3,120,000 for the nine months ended June 30,
2002. The Company initially recognized an estimated loss on disposal
provision of Intellicom of $3,300,000 for the three months ended March 31,
2002, and subsequently reduced it by $180,000 for the three months ended
June, 30, 2002. The assets and liabilities of such operations are reflected
in net liabilities associated with discontinued operations of the
accompanying condensed consolidated balance sheets as of June 30, 2002, and
September 30, 2001.
Operating results of Intellicom are as follows (in thousands):
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2002 2001 2002 2001
------------ ------------- ------------ ------------
Revenues . . . . . . . . . $ - $ 811 $ 1,463 $ 3,211
============ ============= ============ ============
Loss before income taxes . $ - $ (3,913) $ (1,829) $ (26,625)
Provision for income taxes - - - -
------------ ------------- ------------ ------------
Net loss . . . . . . . . . $ - $ (3,913) $ (1,829) $ (26,625)
============ ============= ============ ============
-5-
Net assets (liabilities) associated with discontinued operations of
Intellicom at June 30, 2002, and September 30, 2001, are as follows (in
thousands):
JUNE 30, SEPTEMBER 30,
2002 2001
--------------- --------------
Current assets:
Accounts receivable, net. . . . . . . . . . . . . . $ 53 $ 91
Inventory, net. . . . . . . . . . . . . . . . . . . - 537
Other current assets. . . . . . . . . . . . . . . . 2 66
--------------- --------------
Total current assets. . . . . . . . . . . . . . . . . 55 694
Property, plant and equipment, net. . . . . . . . . . - 1,644
Restricted cash . . . . . . . . . . . . . . . . . . . - 639
Accounts receivable, non current portion. . . . . . . 12 -
Other assets. . . . . . . . . . . . . . . . . . . . . 39 49
--------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . $ 106 $ 3,026
=============== ==============
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . $ 25 $ 423
Estimated closure costs . . . . . . . . . . . . . . 1,223 -
Restructuring accrual . . . . . . . . . . . . . . . 4 512
Other accrued expenses. . . . . . . . . . . . . . . 22 689
--------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . $ 1,274 $ 1,624
=============== ==============
Net assets (liabilities) associated with discontinued
operations. . . . . . . . . . . . . . . . . . . . . $ (1,168) $ 1,402
=============== ==============
In an effort to bring Intellicom to profitability, the Company initiated an
overall cost cutting program and organizational restructuring during May
2001. As a result of the organizational restructuring, the Company
established a $1,290,000 restructuring reserve, which consisted of
severance costs for affected employees and shut down costs for certain
offices, and is reflected in net liabilities associated with discontinued
operations of the condensed consolidated balance sheet as of June 30, 2002,
and September 30, 2001. Through June 30, 2002, $1,286,000 of severance
payments, and write offs of leasehold improvements and office furniture
related to the various offices have been applied to this reserve. The
remaining $4,000 will be utilized for severance of an identified former
employee.
Discontinued Operations of Aerzone Corporation ("Aerzone")
On December 19, 2000, the Company decided to discontinue the Aerzone
business in light of significant long-term capital needs and the difficulty
of securing the necessary financing because of the current state of the
financial markets. The loss from disposition of discontinued operations
includes management's estimates of the remaining costs to wind down the
business and costs to settle its outstanding liabilities. As of June 30,
2002, Aerzone had substantially wound down its activities. For the three
and nine months ended June 30, 2002, the Company increased the estimated
loss on disposition of Aerzone by $250,000, as a result of a superior court
decision related to a breach of contract. The assets and liabilities of
such operations are reflected in net liabilities associated with
discontinued operations of the accompanying condensed consolidated balance
sheets as of June 30, 2002, and September 30, 2001.
-6-
Net liabilities associated with discontinued operations of Aerzone as of
June 30, 2002, and September 30, 2001, are as follows (in thousands):
JUNE 30, SEPTEMBER 30,
2002 2001
-------------- --------------
Current assets:
Other current assets. . . . . . . . . . . . . . . . . $ - $ 22
-------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . - 22
Other assets. . . . . . . . . . . . . . . . . . . . . . 5 2
-------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . $ 5 $ 24
============== ==============
Current liabilities:
Estimated closure costs . . . . . . . . . . . . . . . $ 1,556 $ 2,039
Accrued expenses. . . . . . . . . . . . . . . . . . . 53 54
Laptop Lane Limited acquisition reserve . . . . . . . 27 27
-------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . $ 1,636 $ 2,120
============== ==============
Net liabilities associated with discontinued operations $ 1,631 $ 2,096
============== ==============
Discontinued Operations of ISP Channel, Inc. ("ISP Channel")
On December 7, 2000, the Company's Board of Directors approved a plan to
discontinue providing cable-based Internet services through its ISP Channel
subsidiary by December 31, 2000, because of (1) consolidation in the cable
television industry made it difficult for ISP Channel to achieve the
economies of scale necessary to provide such services profitably, and (2)
the Company was no longer able to bear the costs of maintaining the ISP
Channel. The loss from discontinued operations includes management's
estimates of the remaining costs to wind down the business, costs to settle
its outstanding liabilities, and the proceeds from the sale of assets. As
of June 30, 2002, ISP Channel had substantially wound down its activities.
For the nine months ended June 30, 2002, the Company reduced the estimated
loss on disposition reserve of ISP Channel by $900,000, primarily as a
result of the Company experiencing better than previously estimated
contract settlements. The assets and liabilities of such operations are
reflected in net liabilities associated with discontinued operations of the
accompanying condensed consolidated balance sheets as of June 30, 2002, and
September 30, 2001.
Net liabilities associated with discontinued operations of ISP Channel as
of June 30, 2002, and September 30, 2001, are as follows (in thousands):
JUNE 30, SEPTEMBER 30,
2002 2001
-------------- --------------
Current assets:
Short-term investments, available-for-sale. . . . . . $ - $ 20
Other current assets. . . . . . . . . . . . . . . . . 1 2
-------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . $ 1 $ 22
============== ==============
Current liabilities:
Accrued expenses. . . . . . . . . . . . . . . . . . . $ 314 $ 422
Estimated closure costs . . . . . . . . . . . . . . . 144 1,663
-------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . $ 458 $ 2,085
============== ==============
Net liabilities associated with discontinued operations $ 457 $ 2,063
============== ==============
Discontinued Operations of Micrographic Technology Corporation ("MTC")
As a result of a preliminary arbitration decision related to a dispute with
Applications Informatiques Multimedia and a dispute related to the sale of
MTC to Global Information Distribution GmbH ("GID"), the Company recorded a
$590,000 estimated loss on disposition reserve of MTC for the nine months
ended June 30, 2002. MTC was previously owned by the Company, and was sold
to GID on September 30, 1999. The estimated loss on disposition reserve of
MTC is reflected in net liabilities associated with discontinued operations
of the condensed consolidated balance sheet as of June 30, 2002, and the
corresponding charge is reflected in loss on disposition of discontinued
-7-
operations of the condensed consolidated statement of operations for the
nine months ended June 30, 2002.
Net liabilities associated with discontinued operations of MTC as of June
30, 2002, and September 30, 2001, are as follows (in thousands):
JUNE 30, SEPTEMBER 30,
2002 2001
-------------- --------------
Current liabilities:
Estimated closure costs. . . . . . . . . . $ 442 $ -
-------------- --------------
Net liabilities associated with discontinued
operations . . . . . . . . . . . . . . . . $ 442 $ -
============== ==============
3. RESTRUCTURING CHARGE
On December 28, 2000, the Company's Board of Directors approved a plan to
reduce its corporate headquarters staff in conjunction with discontinuing
the Aerzone and ISP Channel businesses. As a result of this plan, the
Company established a $3,900,000 restructuring reserve, which consisted
primarily of severance costs for affected employees. Subsequently, for the
nine months ended June 30, 2002, the Company increased the restructuring
reserve by $502,000 for additional estimated lease termination costs
associated with Company headquarters. The restructuring reserve is
reflected in restructuring accrual on the condensed consolidated balance
sheet as of June 30, 2002, and September 30, 2001. Through June 30, 2002,
$2,953,000 of severance payments have been applied to this reserve. The
remaining $1,449,000 will be utilized primarily for lease termination costs
associated with Company headquarters.
4. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS, AVAILABLE-FOR-SALE
Cash equivalents consist of securities with maturities of three months or
less from date of purchase. Short-term investments, available-for-sale are
carried at fair value based on quoted market prices. Net unrealized holding
losses amounted to $22,000, which is based on market value as of June 30,
2002, and is reflected in accumulated other comprehensive loss on the
condensed consolidated balance sheet as of June 30, 2002.
Short-term investments, available-for-sale as of June 30, 2002, consist of
$41,100,000 of debt securities that mature between one to five years, and
$17,000 of common stock. Cash, cash equivalents and short-term investments,
available-for-sale consist of the following as of June 30, 2002 (in
thousands):
UNREALIZED UNREALIZED
COST GAIN LOSS MARKET
----------- ----------- ------------ -----------
Cash and cash equivalents:
Cash. . . . . . . . . . . . . . . . . . . $ 2,867 $ - $ - $ 2,867
Money market funds. . . . . . . . . . . . 25,319 - - 25,319
----------- ----------- ------------ -----------
$ 28,186 $ - $ - $ 28,186
=========== =========== ============ ===========
Short-term investments, available-for-sale:
Market auction securities . . . . . . . . $ 41,100 $ - $ - $ 41,100
Common stock. . . . . . . . . . . . . . . 39 - (22) 17
----------- ----------- ------------ -----------
$ 41,139 $ - $ (22) $ 41,117
=========== =========== ============ ===========
5. EQUITY INVESTMENTS
The Company recognized a loss of $230,000 related to the 1,000,000 SkyNet
Global Limited common stock shares and $471,000 related to the 400,000
SkyNet Global Limited preference stock shares for the nine months ended
June 30, 2002. The loss is reflected in loss on disposition of equity
investments in the accompanying condensed consolidated statements of
operations for the nine months ended June 30, 2002.
6. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
On September 26, 2001, Lucent Technologies Inc. ("Lucent") brought an
action in San Francisco Superior Court against the Company, alleging that
the Company breached a contract by failing to purchase Lucent's shares in
-8-
Freewire Networks, Inc. ("Freewire") and claiming damages of approximately
$3.5 million, which may increase over time. On December 31, 2001, the San
Francisco Superior Court issued an order to deny Lucent's application for
writ of attachment, finding that Lucent had not shown a substantial
probability that it will prevail on its claim. The Company continues to
believe that Lucent's claims are without merit and will contest these
claims vigorously.
On November 9, 2001, Nokia, Inc. ("Nokia") commenced an action in San
Francisco Superior Court against the Company and Aerzone, alleging breach
of contract arising out of the Aerzone's proposed operations in certain
airports. Nokia seeks approximately $2.1 million in damages. The Company
believes that Nokia's claims are without merit and intends to contest these
claims vigorously. Additionally, the Company deposited security collateral
of $1,053,000 as required by the performance bond indemnity agreement with
the surety company. In the event that the Company prevails, any balance on
the collateral will be returned by the surety company to the Company. The
security collateral is reflected in other assets of the accompanying
condensed consolidated balance sheets as of June 30, 2002, and September
30, 2001.
On October 30, 2001, GID commenced a demand for arbitration against the
Company, alleging breach of contract and warranties relating to the sale of
MTC to GID on September 30, 1999. GID claims approximately $2.1 million in
damages. The Company believes GID's claims are without merit and intends to
contest these claims vigorously.
The Company is also involved in other legal proceedings and claims, which
arise in the ordinary course of its discontinued businesses. The Company
believes the results of the above noted legal proceedings, other pending
legal proceedings and claims are not expected to have a material adverse
effect on its results of operations, financial condition or cash flows.
7. COMPREHENSIVE LOSS
The components of comprehensive loss for the three months and nine months
ended June 30, 2002 and 2001, are as follows (in thousands):
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net loss . . . . . . . . . . . . . . $ (1,393) $ (12,781) $ (10,782) $ (54,898)
Unrealized gain (loss) on securities (16) 3,589 442 272
Foreign currency translation
adjustments. . . . . . . . . . . . - (15) 16 (25)
------------ ------------ ------------ ------------
Comprehensive loss . . . . . . . . . $ (1,409) $ (9,207) $ (10,324) $ (54,651)
============ ============ ============ ============
8. SUPPLEMENTAL CASH FLOW INFORMATION
The supplemental cash flow information for the nine months ended June 30,
2002 and 2001, is as follows (in thousands):
NINE MONTHS ENDED JUNE 30,
--------------------------
2002 2001
---------- ----------
Cash paid:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 72 $ 355
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Non-cash investing and financing activities:
Common stock issued for-
Acquisition of Laptop Lane Limited . . . . . . . . . . . . . . . . . . . . - 332
Payment of promissory note and related interest, and business acquisition
Liability to former Intelligent Communications, Inc. stockholders. . . . - 199
Payment of affiliate contract termination fees with Mediacom LLC . . . . . - 1,500
Decrease in additional-paid-in capital associated with termination of common
stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (65) (25,644)
Unrealized gain on short-term investments. . . . . . . . . . . . . . . . . . 442 272
-9-
9. SEGMENT INFORMATION
As a result of the April 3, 2002, unanimous consent by the Company's Board
of Directors to cease the operations of Intellicom, the Company
discontinued its last business segment. Accordingly, no segment information
is disclosed in the accompanying notes to these condensed consolidated
financial statements.
10. SUBSEQUENT EVENTS
On July 29, 2002, the Company entered into an agreement to acquire First
Security Holdings Corporation ("FSHC") from Independence Holding Company
("IHC") for $31.9 million in cash. FSHC and its wholly-owned subsidiaries
are engaged in the insurance and reinsurance business. Upon closing of the
transaction, the Company will become an insurance holding company, the
employment of all of the Company's current employees will terminate, and
substantially all of the Company's operations will be directed by IHC
management and employees pursuant to a services agreement between the
Company and IHC. Consummation of this acquisition is subject to
satisfaction of certain conditions, including approval by insurance
regulators and the Company's stockholders. The Company anticipates the
completion of the transaction by December 31, 2002.
In a separate transaction, IHC acquired Pacific Century Cyberworks
Limited's ("PCCW") entire interest in the Company consisting of 5,000,000
common stock shares at $3.00 per share for a total value of $15,000,000. As
a result of this transaction, Pacific Century Cyberworks Limited appointees
Linus W.L. Cheung and Jeffrey A. Bowden have resigned from the Company's
Board of Directors, and Edward Netter, Chairman of IHC, and Roy Thung,
Chief Executive Officer of IHC, have been appointed to the Company's Board
of Directors. Additionally, upon closing of the transaction, IHC has agreed
to make a cash tender offer at $3.00 per share for at least 3,000,000
outstanding common stock shares of the Company, subject to certain
limitations.
Separately, the Company's Board of Directors also approved a shareholder
rights plan (the "Plan"). Pursuant to the Plan's approval, the Company's
Board of Directors declared a dividend distribution of one Preferred Share
Purchase Right (the "Rights") on each outstanding common stock share. The
dividend distribution of the Rights will be payable to common stock
stockholders of record on August 14, 2002. The Rights distribution is not
taxable to stockholders. Subject to limited exceptions, the Rights will be
exercisable if a person or group acquires or announces a tender offer for
4.99% or more of the Company's common stock. Under certain circumstances,
each Right will entitle shareholders to buy one one-hundredth of a share of
newly created Series A Junior Participating Preferred Stock of the Company
at an exercise price of $3.00. The Company's Board of Directors will be
entitled to redeem the Rights at $0.01 per Right at any time before a
person has acquired 4.99% or more of the outstanding common stock.
The Rights designed to inhibit some acquisitions of the Company's common
stock shares that could result in the imposition of limitations on the use
of its Federal net operating loss carryforwards and certain income tax
credits. The Rights are also intended to enable all stockholders to realize
the long-term value of their investment in the Company. The Rights are not
being distributed in response to any specific effort to acquire control of
the Company. The Rights are designed to help protect the tax benefits
associated with the Company's net operating loss carryforwards.
If a person becomes an Acquiring Person, each Right will entitle its holder
to purchase, at the Right's then-current exercise price, a number of the
Company's common shares having a market value at that time of twice the
Right's exercise price. The Rights held by the Acquiring Person will become
void and will not be exercisable to purchase shares at the bargain purchase
price. If Company is acquired in a merger or other business combination
transaction which has not been approved by the Company's Board of
Directors, each Right will entitle its holder to purchase, at the Right's
then-current exercise price, a number of the acquiring company's common
shares having a market value at that time of twice the Right's exercise
price.
The Plan will expire on the close of business on the earliest date that (a)
a vote of Company's stockholders does not approve an amendment or an
amendment and restatement of the Company's Certificate of Incorporation
proposed by the Company's Board of Directors providing for limitations on
the acquisition of the Company's common stock in excess of certain
percentage amounts, (b) such restated Certificate of Incorporation is filed
with the Secretary of State of the State of Delaware or (c) the Company's
stock purchase agreement with SSH Corp. and IHC is terminated, subject to
the Company's right to extend such date and the Company's earlier
redemption or exchange of such rights or termination of the Plan.
-10-
On May 17, 2002, the Company received a NASDAQ Staff Determination Letter
stating that the Company's common stock is no longer eligible for continued
listing on the NASDAQ National Market, as a result of the Company ceasing
the operations of its last business segment, Intellicom, and that the
Company therefore does not meet the requirements for continued listing set
forth in Marketplace Rules 4300 and 4330. Subsequently, the Company
requested and was granted an oral hearing before a NASDAQ Listing
Qualifications Panel to appeal the NASDAQ Staff Determination Letter, which
stayed the delisting of the Company's common stock pending the outcome of
the hearing. On July 12, 2002, the Company appeared before the NASDAQ
Listing Qualifications Panel to present the Company's plan to acquire FSHC,
which would allow the Company to comply with the Marketplace Rules 4300 and
4330. The Company is awaiting a decision from the NASDAQ Listing
Qualifications Panel.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. The actual consolidated results of SoftNet Systems, Inc. and
Subsidiaries (the "Company") 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 "Factors Affecting the Company's
Operating Results" as set forth in the Company's annual report on Form 10-K for
the fiscal year ended September 30, 2001, 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", "estimates", "likelihood",
"unlikelihood", "assessment", and "foreseeable" and other 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 the year ending September 30, 2002, and beyond
to differ materially from past results and those expressed or implied in any
forward-looking statements made by the Company, or on its behalf. 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 following discussion of the financial condition and results of operations of
the Company should be read in conjunction with, and is qualified in its entirety
by reference to, the Consolidated Financial Statements of the Company and the
related Notes thereto appearing in our annual report on Form 10-K for the fiscal
year ended September 30, 2001, as filed with the Securities and Exchange
Commission and our Condensed Consolidated Financial Statements and related Notes
thereto appearing elsewhere in this quarterly report.
OVERVIEW
On July 29, 2002, the Company entered into an agreement to acquire First
Security Holdings Corporation ("FSHC") from Independence Holding Company ("IHC")
for $31.9 million in cash. FSHC and its wholly-owned subsidiaries are engaged
in the insurance and reinsurance business. Upon closing of the transaction, the
Company will become an insurance holding company, the employment of all of the
Company's current employees will terminate, and substantially all of the
Company's operations will be directed by IHC management and employees pursuant
to a services agreement between the Company and IHC. Consummation of this
acquisition is subject to satisfaction of certain conditions, including approval
by insurance regulators and the Company's stockholders. The Company anticipates
the completion of the transaction by December 31, 2002.
In a separate transaction, IHC acquired Pacific Century Cyberworks Limited's
("PCCW") entire interest in the Company consisting of 5,000,000 common stock
shares at $3.00 per share for a total value of $15,000,000. As a result of this
transaction, Pacific Century Cyberworks Limited appointees Linus W.L. Cheung and
Jeffrey A. Bowden have resigned from the Company's Board of Directors, and
Edward Netter, Chairman of IHC, and Roy Thung, Chief Executive Officer of IHC,
have been appointed to the Company's Board of Directors. Additionally, upon
closing of the transaction, IHC has agreed to make a cash tender offer at $3.00
per share for at least 3,000,000 outstanding common stock shares of the Company,
subject to certain limitations.
Separately, the Company's Board of Directors also approved a shareholder rights
plan (the "Plan"). Pursuant to the Plan's approval, the Company's Board of
Directors declared a dividend distribution of one Preferred Share Purchase Right
(the "Rights") on each outstanding common stock share. The dividend
distribution of the Rights will be payable to common stock stockholders of
record on August 14, 2002. The Rights distribution is not taxable to
stockholders. Subject to limited exceptions, the Rights will be exercisable if
a person or group acquires or announces a tender offer for 4.99% or more of the
Company's common stock. Under certain circumstances, each Right will entitle
shareholders to buy one one-hundredth of a share of newly created Series A
Junior Participating Preferred Stock of the Company at an exercise price of
$3.00. The Company's Board of Directors will be entitled to redeem the Rights
at $0.01 per Right at any time before a person has acquired 4.99% or more of the
outstanding common stock.
The Rights designed to inhibit some acquisitions of the Company's common stock
shares that could result in the imposition of limitations on the use of its
Federal net operating loss carryforwards and certain income tax credits. The
Rights are also intended to enable all stockholders to realize the long-term
value of their investment in the Company. The Rights are not being distributed
in response to any specific effort to acquire control of the Company.
-12-
The Rights are designed to help protect the tax benefits associated with the
Company's net operating loss carryforwards.
If a person becomes an Acquiring Person, each Right will entitle its holder to
purchase, at the Right's then-current exercise price, a number of the Company's
common shares having a market value at that time of twice the Right's exercise
price. The Rights held by the Acquiring Person will become void and will not be
exercisable to purchase shares at the bargain purchase price. If Company is
acquired in a merger or other business combination transaction which has not
been approved by the Company's Board of Directors, each Right will entitle its
holder to purchase, at the Right's then-current exercise price, a number of the
acquiring company's common shares having a market value at that time of twice
the Right's exercise price.
The Plan will expire on the close of business on the earliest date that (a) a
vote of Company's stockholders does not approve an amendment or an amendment and
restatement of the Company's Certificate of Incorporation proposed by the
Company's Board of Directors providing for limitations on the acquisition of the
Company's common stock in excess of certain percentage amounts, (b) such
restated Certificate of Incorporation is filed with the Secretary of State of
the State of Delaware or (c) the Company's stock purchase agreement with SSH
Corp. and IHC is terminated, subject to the Company's right to extend such date
and the Company's earlier redemption or exchange of such rights or termination
of the Plan.
On May 17, 2002, the Company received a NASDAQ Staff Determination Letter
stating that the Company's common stock is no longer eligible for continued
listing on the NASDAQ National Market as a result of the Company ceasing the
operations of its last business segment, Intellicom, and that the Company
therefore does not meet the requirements for continued listing set forth in
Marketplace Rules 4300 and 4330. Subsequently, the Company requested and was
granted an oral hearing before a NASDAQ Listing Qualifications Panel to appeal
the NASDAQ Staff Determination Letter, which stayed the delisting of the
Company's common stock pending the outcome of the hearing. On July 12, 2002,
the Company appeared before the NASDAQ Listing Qualifications Panel to present
the Company's plan to acquire FSHC, which would allow the Company to comply with
the Marketplace Rules 4300 and 4330. The Company is awaiting a decision from
the NASDAQ Listing Qualifications Panel.
On December 7, 2000, the Company's Board of Directors approved a plan to
discontinue its ISP Channel, Inc. ("ISP Channel") operations because of (1) the
consolidation in the cable industry made it difficult for ISP Channel to achieve
the economies of scale necessary to provide such services profitably, and (2)
the Company was no longer able to bear the costs of maintaining the ISP Channel.
Subsequently on December 19, 2000, the Company's Board of Directors approved a
plan to discontinue its Aerzone Corporation ("Aerzone") business in light of,
among other things, significant long-term capital needs and the difficulty of
securing the necessary financing because of the financial markets. In
conjunction with discontinuing the ISP Channel and Aerzone businesses, the
Company's Board of Directors on December 28, 2000, approved a plan to reduce its
corporate headquarters staff.
As a result of the Company's Board of Directors decisions, the Company wound
down the ISP Channel and Aerzone businesses, and reduced its corporate
headquarters staff. As of June 30, 2002, the ISP Channel and Aerzone
businesses, including Laptop Lane Limited, were substantially wound down.
On March 29, 2002, the Company and its wholly-owned subsidiary, Intelligent
Communications, Inc. ("Intellicom"), entered into an agreement to sell its
operating business and certain assets to Loral Cyberstar, Inc. Following the
sale of its operating business and certain assets to Loral Cyberstar, Inc., the
Company's Board of Directors unanimously agreed to cease the operations of
Intellicom on April 3, 2002. Subsequently on April 22, 2002, Intellicom entered
into an agreement to sell certain assets to Native Intellicom, Inc., a
wholly-owned subsidiary of the Pinoleville Band of Pomo Indians, for cash,
subject to the termination of Intellicom's lease for its facility in Livermore,
California.
The Company reports operating expenses in several categories: (i) selling and
marketing; (ii) engineering; and (iii) general and administrative costs. Also
included in operating expenses are depreciation and non-cash compensation
expense related to stock options. Non-cash compensation expense related to
stock options relates primarily to the amortization of deferred stock
compensation resulting from below market value stock options granted between
October 1998 and March 1999.
The results of operations for the three months and nine months ended June 30,
2001, have been reclassified for the effects of discontinued operations of
Intellicom.
-13-
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements and related disclosures in
conformity with generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of the revenues and expenses during the reporting period. Actual results could
differ from those estimates. The Company believes the following critical
accounting policies are significantly affected by judgments, assumptions and
estimates used in preparation of its condensed consolidated financial
statements. For a detailed discussion on the application of these and other
accounting policies, see Note 2 to the consolidated financial statements in the
Company's annual report on Form 10-K for the fiscal year ended September 30,
2001.
Discontinued Operations
The Company accounts for discontinued operations in accordance to Accounting
Principles Board Opinion No. 30 ("APB 30"), Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. Under APB 30, the
Company accrued estimates of expected liabilities related to discontinued
operations through its eventual discharge. The estimated remaining liabilities
related to discontinued operations include contract terminations, litigation and
loss from operations subsequent to June 30, 2002. The Company reviews the
estimated closure costs liability on a quarterly basis to determine changes in
the costs of the discontinued operations activities.
Restructuring Expense
The Company recorded restructuring expenses related to an approved plan to
reduce corporate headquarters staff and to relocate its corporate offices in
conjunction with discontinuing the Aerzone, ISP Channel and Intellicom
businesses. These restructuring expenses are based on estimates of the expected
costs associated with employee severance, lease terminations, and facility
relocation. The Company reviews the estimated restructuring costs accrual on a
quarterly basis to determine changes in the costs of the restructuring
activities.
Impairment of Long-lived Assets
The Company evaluates long-lived assets for impairment whenever current events
or changes in circumstances, as defined in Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, indicate that the carrying
value of an asset may not be recoverable based on expected undiscounted cash
flows attributable to that asset. The amount of any impairment is measured as
the difference between the carrying value and the fair value of the impaired
asset.
Short-term Investments
The Company accounts for its short-term investments in debt and equity
securities under Statement of Financial Accounting Standards No. 115 ("SFAS
115"), Accounting for Certain Investments in Debt and Equity Securities.
Short-term investments generally consist of highly liquid securities with
original maturities in excess of three months. The Company has classified its
short-term investments as available-for-sale securities. These short-term
investments are carried at fair value based on quoted market prices with
unrealized gains and losses reported in accumulated other comprehensive loss in
the accompanying condensed consolidated balance sheets. Realized gains and
losses on short-term investments are computed using the specific identification
method and are reported in miscellaneous income (expense), net in the
accompanying condensed consolidated statements of operations. Declines in value
judged to be other-than-temporary is determined based on the specific
identification method and are reported in loss in disposition of equity
investments in the accompanying condensed consolidated statements of operations.
-14-
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002, COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 2001
Selling and Marketing. The Company incurred no selling and marketing expenses
- -----------------------
for the three months ended June 30, 2002, compared to $9,000 for the three
months ended June 30, 2001, as a result of eliminating the public relations
department associated with the December 28, 2000, corporate restructuring plan.
Engineering. The Company incurred no engineering expenses for the three months
- -----------
ended June 30, 2002, compared to $71,000 for the three months ended June 30,
2001, as a result of eliminating the corporate technology department associated
with the December 28, 2000, corporate restructuring plan.
General and Administrative. Consolidated general and administrative expenses
- ----------------------------
decreased $347,000, or 22%, to $1,265,000 for the three months ended June 30,
2002, compared to $1,612,000 for the three months ended June 30, 2001, primarily
due to reduced expenses resulting from staff reductions associated with the
December 28, 2000, corporate restructuring plan.
Depreciation. Consolidated depreciation expense decreased $44,000, or 56%, to
- ------------
$34,000 for the three months ended June 30, 2002, compared to $78,000 for the
three months ended June 30, 2001, primarily due to reduced depreciation expense
resulting from sales and disposal of property.
Non-Cash Compensation Expense Related to Stock Options. The Company recognized
- -------------------------------------------------------
a non-cash compensation expense related to stock options of $400,000 for the
three months ended June 30, 2002, compared to non-cash compensation expense
related to stock options of $483,000 for the three months ended June 30, 2001.
For the three months ended June 30, 2002 and 2001, non-cash compensation expense
related to stock options issued to employees relates primarily to the
amortization of deferred stock compensation resulting from below market value
stock options granted between October 1998 and March 1999.
Non-cash compensation expense related to stock options should continue to
decrease as the Company continues to reduce its staff due to its discontinued
operations and corporate restructuring.
Interest Income. Consolidated interest income decreased $832,000, or 68%, to
- ----------------
$391,000 for the three months ended June 30, 2002, compared to $1,223,000 for
the three months ended June 30, 2001, as a result of lower interest rates, and
decrease in cash, cash equivalents, and short-term investments,
available-for-sale.
Interest Expense. Consolidated interest expense increased $14,000 to $18,000
- -----------------
for the three months ended June 30, 2002, compared to $4,000 for the three
months ended June 30, 2001.
Loss on Disposition of Equity Investments. For the three months ended June 30,
- -------------------------------------------
2001, the Company recognized a charge of $3,684,000 related to its China
Broadband Corporation investment in anticipation of the Company's July 13, 2001,
agreement to sell its interest in China Broadband Corporation to Canaccord
International Limited.
Miscellaneous Income/Expense, Net. Consolidated miscellaneous income increased
- ----------------------------------
$53,000 to $3,000 for the three months ended June 30, 2002, compared to
consolidated miscellaneous expense of $50,000 for the three months ended June
30, 2001. This increase is primarily due to losses incurred from the disposal
of property for the three months ended June 30, 2001.
Income Taxes. The Company made no provision for income taxes for the three
- -------------
months ended June 30, 2002 and 2001, as a result of the Company's continuing
losses.
Loss Attributed to Discontinued Operations. The Company recognized a $70,000
- ----------------------------------------------
loss attributed to discontinued operations for the three months ended June 30,
2002, compared to a loss of $8,013,000 for the three months ended June 30, 2001.
For the three months ended June 30, 2002, the loss attributed to discontinued
operations consisted of a $180,000 gain on disposition of Intellicom, resulting
from a lower than anticipated costs of closing Intellicom, and a $250,000 loss
on disposition of Aerzone, resulting from a superior court decision related to a
breach of contract. For the three months ended June 30, 2001, the loss
attributed to discontinued operations consisted of a $3,913,000 loss from
operations of Intellicom, a $3,000,000 gain on the disposition of ISP Channel,
resulting from lower than anticipated costs of closing ISP Channel, and a
$7,100,000 loss on the disposition of Aerzone, resulting primarily from the
reduction of the anticipated sales price of Laptop Lane Limited.
Net Loss. The Company had a net loss of $1,393,000, or a net loss per share of
- ---------
$0.05, for the three months ended June 30, 2002, compared to a net loss of
$12,781,000, or a net loss per share of $0.51, for the three months ended June
30, 2001.
-15-
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2002, COMPARED TO THE
NINE MONTHS ENDED JUNE 30, 2001
Selling and Marketing. The Company incurred no selling and marketing expenses
- -----------------------
for the nine months ended June 30, 2002, compared to $196,000 for the nine
months ended June 30, 2001, as a result of eliminating the public relations
department associated with the December 28, 2000, corporate restructuring plan.
Engineering. The Company incurred no engineering expenses for the nine months
- -----------
ended June 30, 2002, compared to $529,000 for the nine months ended June 30,
2001, as a result of eliminating the corporate technology department associated
with the December 28, 2000, corporate restructuring plan.
General and Administrative. Consolidated general and administrative expenses
- ----------------------------
decreased $2,056,000, or 32%, to $4,347,000 for the nine months ended June 30,
2002, compared to $6,403,000 for the nine months ended June 30, 2001, primarily
due to reduced expenses resulting from staff reductions associated with the
December 28, 2000, corporate restructuring plan.
Depreciation. Consolidated depreciation expense decreased $122,000, or 43%, to
- ------------
$160,000 for the nine months ended June 30, 2002, compared to $282,000 for the
nine months ended June 30, 2001, primarily due to reduced depreciation expense
resulting from sales and dispoal of property.
Non-Cash Compensation Expense/Benefit Related to Stock Options. The Company
- ------------------------------------------------------------------
recognized a non-cash compensation expense related to stock options of
$1,200,000 for the nine months ended June 30, 2002, compared to non-cash
compensation benefit related to stock options of $1,087,000 for the nine months
ended June 30, 2001. For the nine months ended June 30, 2002 and 2001, non-cash
compensation expense/benefit related to stock options issued to employees
relates primarily to the amortization of deferred stock compensation resulting
from below market value stock options granted between October 1998 and March
1999.
Non-cash compensation benefits are recognized following the reversal of
previously recognized expenses related to terminated unvested stock options with
a cliff vesting feature. Non-cash compensation expense related to stock options
should continue to decrease as the Company continues to reduce its staff due to
its discontinued operations and corporate restructuring.
Provision for Impaired Assets. The Company recognized a charge of $352,000 for
- -------------------------------
the nine months ended June 30, 2002, as a result of writing off its accounting
software. The Company migrated to an off-the-shelf accounting software.
Restructuring Expense. The Company recognized a restructuring charge for the
- -----------------------
nine months ended June 30, 2001, related to a plan to downsize its corporate
headquarters staff. The charge in the amount of $3,900,000 was recognized as
restructuring expense and consisted primarily of termination payments for
affected employees. The Company increased the restructuring reserve by $502,000
for the nine months ended June 30, 2002, as a result of additional estimated
lease termination costs associated with Company headquarters. At June 30, 2002,
a restructuring accrual of $1,449,000 remained outstanding.
Interest Income. Consolidated interest income decreased $4,110,000, or 74%, to
- ----------------
$1,423,000 for the nine months ended June 30, 2002, compared to $5,533,000 for
the nine months ended June 30, 2001, as a result of lower interest rates, and
decrease in cash, cash equivalents, and short-term investments,
available-for-sale.
Interest Expense. Consolidated interest expense decreased $35,000, or 39%, to
- -----------------
$54,000 for the nine months ended June 30, 2002, compared to $89,000 for the
nine months ended June 30, 2001. This decrease is primarily due to the
reduction of interest expense resulting from the payment of the 8.5% promissory
note to the former Intellicom stockholders.
Loss on Disposition of Equity Investments. The Company recognized a loss on
- ----------------------------------------------
disposition of equity investments of $701,000 for the nine months ended June 30,
2002, consisting of $230,000 related to the 1,000,000 SkyNet Global Limited
common stock shares and $471,000 related to the 400,000 SkyNet Global Limited
preference stock shares. For the nine months ended June 30, 2001, the Company
recognized a charge of $17,445,000, consisting of a $768,000 write down of a
note receivable and related interest, and $16,677,000 of write-downs and
realized losses related to various short-term and long-term equity investments.
Equity in Net Losses of Investee Companies. The Company recognized equity in
- ----------------------------------------------
net losses of investee companies of $394,000 for the nine months ended June 30,
2001. The Company did not incur any equity in net losses of investee companies
-16-
for the nine months ended June 30, 2002, as a result of the sale and write offs
of investee companies accounted for under the equity method for the year ended
September 30, 2001.
Miscellaneous Expense, Net. The Company incurred no consolidated miscellaneous
- ---------------------------
expense for the nine months ended June 30, 2002, compared to consolidated
miscellaneous expense of $153,000 for the nine months ended June 30, 2001,
primarily resulting from the write off of costs associated with a failed
business acquisition.
Income Taxes. The Company made no provision for income taxes for the nine
- -------------
months ended June 30, 2002 and 2001, as a result of the Company's continuing
losses.
Loss Attributed to Discontinued Operations. The Company recognized a $4,889,000
- -------------------------------------------
loss attributed to discontinued operations for the nine months ended June 30,
2002, compared to a loss of $33,453,000 for the nine months ended June 30, 2001.
For the nine months ended June 30, 2002, the loss attributed to discontinued
operations consisted of a $3,120,000 loss on disposition of Intellicom, a
$1,829,000 loss from operations of Intellicom, a $590,000 loss on disposition of
Micrographic Technology Corporation ("MTC"), as a result of a preliminary
arbitration decision related to a dispute with Applications Informatiques
Multimedia and a dispute related to the sale of MTC to Global Information
Distribution GmbH ("GID"), a $900,000 gain on disposition of ISP Channel,
resulting from the lower than anticipated costs of closing ISP Channel, and a
$250,000 loss on disposition of Aerzone, resulting from a superior court
decision related to a breach of contract. For the nine months ended June 30,
2001, the loss attributed to discontinued operations consisted of a $26,625,000
loss from operations of Intellicom, a $9,008,000 gain on the disposition of ISP
Channel, resulting from lower than anticipated costs of closing ISP Channel, and
a $15,836,000 loss on the disposition of Aerzone, resulting primarily from the
reduction of the anticipated sales price of Laptop Lane Limited.
Extraordinary Item-Gain on Settlement of Obligation. The Company recognized a
- ------------------------------------------------------
gain of $1,326,000 for the nine months ended June 30, 2001, resulting from the
cash payment made in lieu of the Company's obligation to pay off the 8.5%
promissory note and interest, and to settle business acquisition liability to
former Intellicom stockholders with common stock.
Net Loss. The Company had a net loss of $10,782,000, or a net loss per share of
- --------
$0.42, for the nine months ended June 30, 2002, compared to a net loss of
$54,898,000, or a net loss per share of $2.20, for the nine months ended June
30, 2001.
-17-
LIQUIDITY AND CAPITAL RESOURCES
Since September 1998, the Company has funded the significant negative cash flows
from its subsidiary operating activities and the associated capital expenditures
through a combination of public and private equity sales, convertible debt
issues and equipment leases. As of June 30, 2002, the Company had $69,303,000
in cash, cash equivalents, and short-term investments compared with $75,454,000
as of September 30, 2001.
Net cash used in operating activities of continuing operations for the nine
months ended June 30, 2002, was $2,476,000. This results from a net loss of
$5,893,000 from continuing operations and a net decrease in operating
liabilities of $1,587,000, offset by several non-cash items including loss on
write down of impaired assets of $352,000, loss on disposition of equity
investments of $701,000, provision for restructuring costs of $502,000,
amortization of deferred stock compensation expense of $1,200,000, depreciation
expense of $160,000, and a net decrease in operating assets of $2,044,000. Net
cash used in operating activities of discontinued operations was $3,838,000.
Net cash provided by investing activities of continuing operations for the nine
months ended June 30, 2002, was $19,602,000, and was provided by proceeds from
maturities and sales of short-term investments, net of purchases. Net cash used
in investing activities of discontinued operations was $2,000.
No cash was provided by or used in financing activities for the nine months
ended June 30, 2002. Net cash used in financing activities of discontinued
operations was $60,000.
The Company believes it has sufficient cash to meet its presently anticipated
business requirements over the next twelve months including the funding of
operating losses, discontinued operations, working capital requirements, and
capital investments. The Company expects continued reductions in cash usages
from its discontinued operating activities for the year ending September 30,
2002.
-18-
FACTORS AFFECTING THE COMPANY'S OPERATING RESULTS
The risks and uncertainties described below are not the only ones that the
Company faces. Additional risks and uncertainties not presently known to the
Company or that the Company currently deems immaterial may also impair the
Company's business operations. If any of the following risks actually occur,
the Company's business, financial condition or results of operations could be
materially adversely affected. In such case, the trading price of the Company's
common stock could decline, and you may lose all or part of your investment.
COMPANY RISKS
THE COMPANY'S ACQUISITION OF FSHC SUBJECTS THE COMPANY TO RISKS IN A NEW MARKET
On July 29, 2002, the Company entered into an agreement to acquire First
Security Holdings Corporation ("FSHC") from Independence Holding Company ("IHC")
for $31.9 million in cash. FSHC and its wholly-owned subsidiaries are engaged
in the insurance and reinsurance business. Upon closing of the transaction, the
Company will become an insurance holding company, the employment of all of the
Company's current employees will terminate, and substantially all of the
Company's operations will be directed by IHC management and employees pursuant
to a services agreement between the Company and IHC. Consummation of this
acquisition is subject to satisfaction of certain conditions, including approval
by insurance regulators and the Company's stockholders. The Company anticipates
the completion of the transaction by December 31, 2002, although the Company
cannot assure that it will complete the transaction on schedule, if at all. The
Company will rely on new management to operate the business. As such, the
Company is faced with risks that are new to the Company and which may adversely
affect the Company's business, financial condition, and prospects.
THE COMPANY'S ACQUISITION OF FSHC MAY ADVERSELY AFFECT THE COMPANY'S FINANCIAL
CONDITION
The acquisition of FSHC involve other risks including potential negative effects
on the Company's reported results of operations from acquisition-related charges
and amortization of other intangible assets. As a result of the FSHC
acquisition, the Company may record additional intangible assets. Such recording
of intangible assets may adversely affect the Company's earnings and
profitability for the foreseeable future. If the amount of such recorded
intangible assets is increased or if the Company has future losses and is unable
to demonstrate the Company's ability to recover the amount of intangible assets
recorded during such time periods, the intangible asset can be written down or
the period of amortization could be shortened, which may further increase annual
amortization charges. In such event, the Company's business and financial
condition could be materially and adversely affected. In addition, the
acquisition of all of the outstanding stock of FSHC was structured as a purchase
by the Company. As a result, the Company could be adversely affected by direct
and contingent liabilities of FSHC. It is possible that the Company is not aware
of all of the liabilities of FSHC and that FSHC has greater liabilities than the
Company expected.
THE COMPANY HAS A HISTORY OF LOSSES AND EXPECTS TO INCUR LOSSES IN THE FUTURE
The Company has sustained substantial losses over the last five fiscal years and
expects to continue to report net losses for the foreseeable future. For the
nine months ended June 30, 2002, the Company had a net loss of $10,782,000. As
of June 30, 2002, the Company had an accumulated deficit of $401,029,000. The
Company expects to incur additional losses and experience negative cash flows
related to process of winding down the Intellicom, ISP Channel and Aerzone
businesses. These efforts may be more expensive than the Company currently
anticipates.
THE COMPANY MAY NOT GENERATE SUFFICIENT CASH FLOWS TO SUPPORT ITS EXPENSES
The Company's current expense levels are based on the resources necessary to
complete the process of winding down the Intellicom, ISP Channel and Aerzone
Businesses. Depending upon the costs to complete the process of winding down
Intellicom, ISP Channel and Aerzone, the Company is unlikely to be able to
generate sufficient interest income to cover expenses.
-19-
IF THE COMPANY IS UNABLE TO SUCCESSFULLY INTEGRATE FUTURE ACQUISITIONS INTO THE
COMPANY'S OPERATIONS, THEN THE COMPANY'S RESULTS AND FINANCIAL CONDITION MAY BE
ADVERSELY AFFECTED
The Company may acquire other businesses. The Company cannot predict if or when
any prospective acquisitions will occur or the likelihood that they will be
completed on favorable terms. Acquiring a business involves many risks,
including:
- Diversion of resources and management time;
- Dilution to existing stockholders if the Company uses equity
securities to finance acquisitions;
- Incurrence of unforeseen obligations or liabilities;
- Inability of management to maintain uniform standards, controls,
procedures and policies;
- Difficulty assimilating the acquired operations and personnel;
- Risks of entering markets in which the Company has little or no direct
prior experience; and
- Impairment of relationships with employees as a result of changes in
management.
The Company cannot assure that it will make any acquisitions or that it will be
able to obtain additional financing for such acquisitions, if necessary. If any
acquisitions are made, the Company cannot assure that it will be able to
successfully integrate the acquired business into its operations or that the
acquired business will perform as expected.
THE COMPANY'S EQUITY INVESTMENTS IN OTHER COMPANIES MAY NOT YIELD ANY RETURNS
The Company has made equity investments in Internet-related companies. In most
instances, these investments are in the form of unregistered securities of
private companies. These companies typically are in an early stage of
development and may be expected to incur substantial losses. The Company's
investments in these companies may not yield any return. Furthermore, if these
companies are not successful, the Company could incur and have incurred charges
related to the write-down or write-off of these investments. For example, the
Company wrote down equity investments by $701,000 for the nine months ended June
30, 2002. The Company also records and continues to record a share of the net
losses in these companies, up to the Company's cost basis. The Company may make
additional investments in the future. Losses or charges resulting from these
investments could harm the Company's operating results.
THE COMPANY'S STOCK PRICE IS VOLATILE
The volatility of the Company's stock price may make it difficult for holders of
the common stock to transfer their shares at the prices they want. The market
price for the Company's common stock has been volatile in the past, and several
factors could cause the price to fluctuate substantially in the future. These
factors include:
- Announcements of developments related to the Company's business;
- Fluctuations in the Company's results of operations;
- Sales of substantial amounts of the Company's securities in the
marketplace;
- General conditions in the Company's industries or the worldwide
economy;
- An outbreak of war or hostilities;
- A shortfall in earnings compared to securities analysts' expectations;
- Changes in analysts' recommendations or projections; and
- Changes in the Company's relationships with the Company's suppliers.
The market price of the Company's common stock may fluctuate significantly in
the future, and these fluctuations may be unrelated to the Company's
performance. General market price declines or market volatility in the future
could adversely affect the price of the Company's common stock, and thus, the
current market price may not be indicative of future market prices.
On May 17, 2002, the Company received a NASDAQ Staff Determination Letter
stating that the Company's common stock is no longer eligible for continued
listing on the NASDAQ National Market as a result of the Company ceasing the
operations of its last business segment, Intellicom, and that the Company
therefore does not meet the requirements for continued listing set forth in
Marketplace Rules 4300 and 4330. Subsequently, the Company requested and was
granted an oral hearing before a NASDAQ Listing Qualifications Panel to appeal
the NASDAQ Staff Determination Letter, which stayed the delisting of the
Company's common stock pending the outcome of the hearing. On July 12, 2002,
the Company appeared before the NASDAQ Listing Qualifications Panel to present
the Company's plan to acquire FSHC, which would allow the Company to comply with
the Marketplace
-20-
Rules 4300 and 4330. The Company is awaiting a decision from the NASDAQ Listing
Qualifications Panel. There can be no assurance that the NASDAQ Listing
Qualifications Panel will grant the Company's request for continued listing.
Delisting from the NASDAQ National Market could result in a lower average
trading volume of the Company's common stock, which in turn could lead to an
increase in stock price volatility.
PROSPECTIVE ANTI-TAKEOVER PROVISIONS COULD NEGATIVELY IMPACT THE COMPANY'S
STOCKHOLDERS
The Company is a Delaware corporation. Delaware General Corporation Law
contains certain provisions that may discourage, delay or make a change in
control of the Company more difficult or prevent the removal of incumbent
directors. In addition, the Company's certificate of incorporation and bylaws
contain certain provisions that have the same effect. These provisions may have
a negative impact on the price of the Company's common stock and may discourage
third-party bidders from making a bid for the Company or may reduce any premiums
paid to stockholders for their common stock.
The Company's Board of Directors also approved a shareholder rights plan (the
"Plan"). Pursuant to the Plan's approval, the Company's Board of Directors
declared a dividend distribution of one Preferred Share Purchase Right (the
"Rights") on each outstanding common stock share. The dividend distribution of
the Rights will be payable to common stock stockholders of record on August 14,
2002. The Rights distribution is not taxable to stockholders. Subject to
limited exceptions, the Rights will be exercisable if a person or group acquires
or announces a tender offer for 4.99% or more of the Company's common stock.
Under certain circumstances, each Right will entitle shareholders to buy one
one-hundredth of a share of newly created Series A Junior Participating
Preferred Stock of the Company at an exercise price of $3.00. The Rights are
designed to inhibit some acquisitions of the Company's common stock shares that
could result in the imposition of limitations on the use of its Federal net
operating loss carryforwards and certain income tax credits. The Rights are
also intended to enable all stockholders to realize the long-term value of their
investment in the Company. The Rights are not being distributed in response to
any specific effort to acquire control of the Company. The Rights are designed
to help protect the tax benefits associated with the Company's net operating
loss carryforwards. If a person becomes an Acquiring Person, each Right will
entitle its holder to purchase, at the Right's then-current exercise price, a
number of the Company's common shares having a market value at that time of
twice the Right's exercise price. The Rights held by the Acquiring Person will
become void and will not be exercisable to purchase shares at the bargain
purchase price. If Company is acquired in a merger or other business
combination transaction which has not been approved by the Company's Board of
Directors, each Right will entitle its holder to purchase, at the Right's
then-current exercise price, a number of the acquiring company's common shares
having a market value at that time of twice the Right's exercise price. The
Company's Board of Directors will be entitled to redeem the Rights at $0.01 per
Right at any time before a person has acquired 4.99% or more of the outstanding
common stock. The issuance of rights could have the effect of delaying or
preventing a change in control of the Company.
INTELLICOM RISKS
THE COMPANY MAY FACE UNEXPECTED LIABILITIES IN WINDING DOWN THE BUSINESS OF
INTELLICOM
The Company has determined that it is in the best interests of the Company and
its shareholders to wind down the business of Intellicom. While the Company
expects the process of winding down Intellicom to be substantially complete by
September 30, 2002, there can be no assurances that it will be able to do so.
The Company expects to incur significant costs related to terminating contracts,
reducing the workforce and recovering and disposing of deployed assets. In
addition, the Company may face litigation with respect to the wind down of its
activities.
ISP CHANNEL RISKS
THE COMPANY MAY FACE UNEXPECTED LIABILITIES IN WINDING DOWN THE BUSINESS OF ISP
CHANNEL
While the business of ISP Channel has been substantially wound down, there can
be no assurance that all claims and issues have been resolved. In addition, the
Company may face litigation with respect to the wind down of its activities.
-21-
AERZONE RISKS
THE COMPANY MAY FACE UNEXPECTED LIABILITIES IN WINDING DOWN THE BUSINESS OF
AERZONE
While the business of Aerzone has been substantially wound down, there can be no
assurance that all claims and issues have been resolved. In addition, the
Company may face litigation with respect to the wind down of its activities.
-22-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the increase or decrease in the amount of interest income the
Company can earn on its investment portfolio, and on the increase or decrease in
the amount of interest expense the Company must pay with respect to its various
outstanding debt instruments. The risk associated with fluctuating interest
expense is limited, however, to the exposure related to those debt instruments
and credit facilities, which are tied to market rates. The Company does not use
derivative financial instruments or engage in hedging activities in its
investment portfolio. The Company ensures the safety and preservation of its
invested principal funds by limiting default risks, market risk and reinvestment
risk. The Company mitigates default risk by investing in safe and high-credit
quality securities.
The Company had short-term investments of $41,117,000 at June 30, 2002. Except
for investments in common and preferred stock, these short-term investments
consist of highly liquid investments with original maturities at the date of
purchase of between thirteen and twenty-five months. These investments are
subject to interest rate risk and will fall in value if market interest rates
increase. The Company believes a hypothetical increase in market interest rates
by 10% from levels at June 30, 2002, would cause the fair value of these
short-term investments to fall by an immaterial amount. Since the Company is
not required to sell these investments before maturity, it has the ability to
avoid realizing losses on these investments due to a sudden change in market
interest rates. On the other hand, declines in the interest rates over time
will reduce its interest income.
The Company had outstanding convertible debt of approximately $1,444,000 at June
30, 2002. This instrument has a fixed interest rate of 5.0%. Because the
interest rate of this instrument is fixed, a hypothetical 10% increase in
interest rates will not have a material effect on the Company. Interest rate
increases, however, will increase interest expense associated with future
borrowings by the Company, if any. The Company does not hedge against interest
rate fluctuations.
CURRENCY EXCHANGE RISK
The Company has historically had very low exposure to changes in foreign
currency exchange rates, and as such, has not used derivative financial
instruments to manage foreign currency fluctuation risk.
-23-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 26, 2001, Lucent Technologies Inc. ("Lucent") brought an action in
San Francisco Superior Court against SoftNet Systems, Inc. and subsidiaries (the
"Company"), alleging that the Company breached a contract by failing to purchase
Lucent's shares in Freewire Networks, Inc. ("Freewire") and claiming damages of
approximately $3.5 million, which may increase over time. On December 31, 2001,
the San Francisco Superior Court issued an order to deny Lucent's application
for writ of attachment, finding that Lucent had not shown a substantial
probability that it will prevail on its claim. The Company continues to believe
that Lucent's claims are without merit and will contest these claims vigorously.
On November 9, 2001, Nokia Inc. ("Nokia") commenced an action in San Francisco
Superior Court against the Company and Aerzone Corporation ("Aerzone"), alleging
breach of contract arising out of the Aerzone's proposed operations in certain
airports. Nokia seeks approximately $2.1 million in damages. The Company
believes that Nokia's claims are without merit and intends to contest these
claims vigorously. Additionally, the Company deposited security collateral of
$1,053,000 as required by the performance bond indemnity agreement with the
surety company. In the event that the Company prevails, any balance on the
collateral will be returned by the surety company to the Company.
On October 30, 2001, Global Information Distribution GmbH ("GID") commenced a
demand for arbitration against the Company, alleging breach of contract and
warranties relating to the sale of Micrographic Technology Corporation ("MTC")
to GID on September 30, 1999. GID claims approximately $2.1 million in damages.
The Company believes GID's claims are without merit and intends to contest these
claims vigorously.
The Company is also involved in other legal proceedings and claims, which arise
in the ordinary course of its discontinued businesses. The Company believes the
results of the above noted legal proceedings, other pending legal proceedings
and claims are not expected to have a material adverse effect on its results of
operations, financial condition or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
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
Not Applicable
-24-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Not Applicable
(b) REPORTS ON FORM 8-K:
Current Report on Form 8-K filed with the Commission on April 11, 2002
Current Report on Form 8-K filed with the Commission on May 30, 2002
-25-
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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/ Edward A. Bennett Date: August 14, 2002
- ------------------------------------- -------------------
Edward A. Bennett
Acting Chairman of the Board of Directors
/s/ George L. Hernandez Date: August 14, 2002
- ------------------------------------- -------------------
George L. Hernandez
Acting Chief Operating Officer; Vice President,
Finance and Administration; and Secretary
-26-