SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
________________________________________
FORM 10-QSB/AA
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended: December 31, 1994 Commission File No.: 1-5270
SOFTNET SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New York 11-1817252
(State of incorporation) (I.R.S. employer identification no.)
One Overlook Place, Lincolnshire, Illinois 60069
(Address of principal executive office)
Registrant's telephone number, including area code: (708) 793-2000
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 and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
As of December 31, 1994, 2,834,919 common shares were outstanding
which includes 29,630 shares of common stock subject to put options.
PART 1. FINANCIAL STATEMENTS
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1994 1994
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash $ 212,348 $ 176,538
Trade receivables, net of allowance for doubtful accounts of
$7,500 as of December 31, 1994 2,207,577 88,986
Other receivables 220,158 -
Inventories 1,164,494 -
Prepaid expenses 110,037 96,060
Total current assets 3,914,614 361,584
Other assets:
Property and equipment, net of accumulated depreciation of
$139,134 and $102,152, respectively 700,517 225,450
Other assets 187,081 -
Investment in Imnet, at cost 1,989,379 1,989,379
Intangible assets, net of accumulated amortization of $79,783 and
$5,018, respectively 4,528,872 224,394
Total other assets 7,405,849 2,439,223
Total Assets $11,320,463 $ 2,800,807
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 2,682,371 $ 738,775
Stock put liability 200,000 -
Revolving bank loan 1,000,000 -
Deferred revenue 121,892 -
Senior Notes payable 745,000 770,000
Current portion of long-term liabilities 730,602 82,226
Total current liabilities 5,479,865 1,591,001
Long-term liabilities:
Capitalized lease obligations 133,087 53,577
Long-term debt 2,502,727 -
Total long-term liabilities 2,635,814 53,577
Common stock subject to put options, 29,630 shares - 200,000
Redeemable Series A Preferred stock outstanding, 290,858 shares 1,745,148 -
Shareholders' Equity:
Preferred stock, $.10 par value, 4 million share authorized - -
Common stock, $.01 par value, 10 million shares authorized,
2,805,289 and 2,602,598 shares outstanding, respectively,
net of treasury shares of 1,906 28,053 26,026
Capital in excess of par value 17,155,794 16,428,886
Accumulated deficit ( 15,724,211) ( 15,498,683)
Total shareholders' equity 1,459,636 956,229
Total Liabilities and Shareholders' Equity $11,320,463 $ 2,800,807
</TABLE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1994 1993
(Unaudited)
<S> <C> <C>
Sales $ 2,405,500 $ 138,704
Cost of sales 1,302,466 103,066
Gross profit 1,103,034 35,638
Expenses:
Selling, general and administrative 970,640 121,960
Amortization of goodwill and depreciation of property 111,747 15,168
Corporate 139,210 107,361
Total expenses 1,221,597 244,489
Income (loss) from operations ( 118,563) ( 208,851)
Interest expense, including a non-cash charge of $368,539 relating to Senior
Note discount in 1993, and amortization of deferred debt issuance costs ( 111,019) ( 393,069)
Other income 4,054 -
Net income (loss) ($ 225,528) ($ 601,920)
Net income (loss) per share ($ .08) ($ .26)
Weighted average common shares outstanding 2,742,101 2,321,090
</TABLE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1994 1993
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ($ 225,528) ($ 601,920)
Adjustments to reconcile net income (loss) to net cash used by operations:
Amortization of goodwill and depreciation of property 111,747 15,168
Amortization of deferred debt issuance costs 8,637 -
Provision for losses on trade receivables 7,500 -
Non-cash charge of interest expense related to amortization of Senior
Notes payable discount - 368,539
Changes in operating assets and liabilities, net of operating assets and
liabilities acquired in acquisition of consolidated subsidiaries:
(Increase) decrease in receivables ( 306,626) 1,297
(Increase) in inventory ( 257,001) -
(Increase) decrease in prepaid expenses 2,038 ( 13,157)
Increase (decrease) in accounts payable and accrued liabilities ( 1,116,873) 62,415
Increase in deferred revenues 36,644 -
Increase in long-term interest payable - long-term 27,641 -
Net cash used by operating activities ( 1,711,821) ( 167,658)
INVESTING ACTIVITIES
Net cash paid in connection with acquisition of consolidated subsidiaries ( 128,338) ( 24,670)
Purchase of office furniture and equipment ( 82,465) ( 3,154)
Cash paid for investment in Imnet - ( 462,924)
Increase in other assets ( 37,205) -
Net cash used by investing activities ( 248,008) ( 490,748)
FINANCING ACTIVITIES
Proceeds from issuance of Convertible Subordinated notes 1,250,000 -
Proceeds from sale of common stock 726,250 -
Borrowings under new revolving credit facility, net 1,000,000 -
Repayment of prior revolving credit facility ( 825,000) -
Repayment of notes payable ( 200,000) -
Capital contribution - 850,000
Proceeds from issuance of Senior Notes 25,000 700,000
Repayment of Senior Notes ( 50,000) ( 550,000)
Capitalized lease obligations incurred on existing equipment 93,000 -
Capitalized lease obligations paid ( 23,611) ( 15,223)
Net cash provided by financing activities 1,995,639 984,777
Increase in cash 35,810 326,371
Cash at beginning of period 176,538 62,856
Cash at end of period $ 212,348 $ 389,227
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 19,165 $ 31,492
Cash paid during the period for income taxes $ - $ -
Property acquired by capitalized leases $ 57,511 $ -
Investment in Imnet acquired with issuance of common stock $ - $ 735,083
Consolidated subsidiaries acquired with issuance of stock and notes $3,571,219 $ 200,000
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRESENTATION OF STATEMENT OF OPERATIONS:
In connection with the acquisition of Communicate Direct, Inc. (CDI) on
October 31, 1994, the Company has restated the statement of operations for
the prior fiscal year to conform to the presentation used in the quarter
ended December 31, 1994. In addition, the Company originally reported the
receipt of $850,000 in December 1993 as a reduction of a prior year
provision for bad debts. Following a review of the accounting treatment
for this transaction by the Securities and Exchange Commission, it was
agreed that it should have been recorded as a capital contribution and
no income recognized.
2. SUMMARY OF CERTAIN ACCOUNTING POLICIES:
INTANGIBLE ASSETS Cost in excess of fair value of net assets acquired
incurred in connection with the acquisition of CDI is being amortized on a
straight-line basis over ten years. Cost in excess of fair value of net
assets acquired incurred in connection with the acquisitions of Utilization
Management Associates, Inc. (UMA) is being amortized on a straight-line
basis over forty years. Additional costs resulting from the obligation to
pay a portion of the pretax earnings to the former owners of UMA are being
amortized over the period from the determination of the amount to the
expiration of the original forty years.
NET INCOME (LOSS) PER SHARE Net income (loss) per share is based
on the weighted average number of common shares (including common stock
subject to put options) outstanding during the periods. During the quarter
ended December 31, 1994, the 29,630 shares subject to a put option have
been considered outstanding until this obligation is resolved (see Note 8).
Common stock equivalents were not included in the computation of income
(loss) per share since their effect was anti-dilutive. In addition, no
effect has been given to the possible conversion of the preferred shares
to common shares (which is subject to shareholder approval) as this
would also be anti-dilutive.
3. ACQUISITION OF CDI:
On October 31, 1994, by merger with and into its wholly-owned subsidiary,
the Company acquired CDI, a Chicago-based privately owned company which sells,
installs and services telephone systems. CDI specializes in implementing
application oriented peripheral products such as voice mail, automated
attendant systems, interactive voice response, video conferencing and call
accounting products. CDI also markets communication products targeted to
small businesses, home office and mobile users, through its retail operation.
The Company acquired all of the outstanding common stock of CDI for an
adjusted (see below) purchase price of $3,836,606 consisting of 290,858
shares of SoftNet preferred stock (valued at $1,745,148), Series B Note
of $98,993, a capital contribution of $1,575,000, cash of $100,000 and
acquisition costs of $317,465. The Preferred shares, which are non-voting
and have the same dividend rights as the Company's common stock, will be
converted into common shares on a one-to-one basis subject to approval of
the Company's shareholders. The Series B notes, bearing interest at prime,
are due in varying amounts on September 30, 1996 and 1997 in an aggregate
amount of $98,993. Additional Preferred shares may be issued under the
same terms described above, if CDI's operations exceed an earnings level,
as defined, of $1.5 million in each of the three fiscal years ending
September 30, 1997. The Company's capital contribution of $1.575 million,
was used to repay certain of CDI's liabilities and increase its working
capital. In addition, each of CDI's shareholders, who is also an executive
of CDI, received an employment contract through September 1997. CDI obtained,
with the Company's assistance, a new bank line-of-credit, maturing on March 1,
1996, in the amount of $2.5 million collateralized by the assets of CDI, the
outstanding loan balance being limited to certain percentages of CDI's eligible
receivables and inventories. The outstanding loan balance bears interest at
1% above the bank's prime rate (8.5% on December 31, 1994), such interest
being payable monthly and the loan is guaranteed by the Company.
The Preferred shares issued (and any adjustments to the number of shares
issued as discussed above) in connection with this acquisition are redeemable
on the fifth anniversary of their issuance if their conversion into common
shares is not approved by the Company's shareholders. The redemption price
is the greater of (a) the number of Preferred shares outstanding times the
then current market price of the Company's common stock or (b) $4 million.
The CDI Merger Agreement granted SoftNet the right to make certain
post-closing purchase price adjustments. In accordance with
the CDI Merger Agreement, the CDI purchase price was reduced by
$1,732,997. The resulting goodwill, amounting to $4,376,613 and
recorded as of the acquisition date, will be adjusted for any payments
required under the earnout agreement as these amounts are determined.
Pro forma consolidated statements of operations revised and restated
to give effect to the adjusted purchase price described above for the
quarters ended December 31, 1994 and 1993 for the Company and CDI (as
if CDI had been acquired October 1, 1993) are as follows:
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1994 1993
<S> <C> <C>
Sales $3,308,532 $2,786,538
Cost of sales 1,804,281 1,765,231
Gross profit 1,504,251 1,021,307
Expenses:
Selling, general and administrative 1,424,315 1,363,310
Amortization and depreciation 155,488 133,583
Corporate 139,210 107,361
Total expenses 1,719,013 1,604,254
Income (loss) from operations ( 214,762) ( 582,947)
Interest expense ( 133,318) ( 485,612)
Other income 4,054 -
Net income (loss) ($ 344,026) ($1,068,559)
Net income (loss) per share ($ .11) ($ .38)
</TABLE>
The pro forma statement for 1994 includes the operating results for CDI
for the month of October, 1994 (prior to the acquisition) and reflects
amortization of goodwill and interest expense for that period. The 1993
pro forma statement adds CDI's results and goodwill amortization and
interest expense for the entire quarter. No adjustment was made for the
possible issuance of additional Preferred shares based on CDI performance
levels. The weighted average number of common shares outstanding used in
computing the above income (loss) per share includes an additional 290,858
shares to reflect the assumed conversion to common stock of the Preferred
shares issued in connection with the acquisition.
4. ADDITIONAL FINANCING:
On October 26, 1994, the Company sold 200,000 shares of its common stock
in a Regulation S offering at $4 per share. In addition, 10% Convertible
Subordinated Notes, in the aggregate amount of $1.25 million, due in five
years were issued in October and November 1994. Such notes (which bear
interest at 10% for the first two years only and no interest thereafter)
are subordinate to all other liabilities of the Company and are convertible
into the Company's common shares at $4.10 per share. In connection
with the sale of common stock and the issuance of the 10% Convertible
Subordinated Notes, the Company incurred fees of $142,108 and issued
warrants to purchase 522,500 shares of its common stock exercisable
for five years at an exercise price of $6.875 per share.
5. SENIOR NOTES PAYABLE:
In October and November 1994, the Company repaid $50,000 of the
outstanding Senior Notes and issued an additional $25,000 note
resulting in an adjusted balance of outstanding Senior Notes of
$745,000. (A) The maturity of $450,000 of notes was extended to
March 31, 1995. The note holders will receive additional warrants
expiring in five years to purchase a total of 54,000 shares of
the Company's common stock at $6.50 per share (market price at
October 1, 1994) if the notes are held to maturity. These note
holders also received the right to convert their notes and any
unpaid interest thereon to common stock of the Company (at $1.75 a
share) if the notes are not repaid at maturity. The Company intends
to repay these notes on or before maturity. (B) The maturity
of $295,000 of notes was extended to October 1, 1995 for which
the note holders will receive additional warrants expiring in five
years to purchase a total of 70,800 shares of the Company's common
stock at $6.50 per share if the notes are held to maturity.
6. LONG-TERM DEBT:
At December 31, 1994, long-term debt consisted of the
following (see Notes 3 and 4 for terms of the debt instruments):
Series A Notes $ 1,512,071
Series B Notes 314,000
Accrued interest on Series A & B Notes due at
maturity 27,641
10% Convertible Subordinated Notes 1,250,000
3,103,712
Less: current maturities ( 600,985)
$ 2,502,727
7. EXECUTIVE COMPENSATION:
During 1994, the Board of Directors revised the compensation
arrangements of the Chairman of the Board, the President and John
G. Hamm, a Director. The Chairman's compensation was reduced from
$120,000 to $60,000 per year effective May 1, 1994, the
President's compensation was set at $110,000 per year effective
with his taking office on July 1, 1993 and Mr. Hamm, a Director of
the Company since 1985, was given a fixed compensation amount of
$150,000 for his substantial prior services to the Company. These
individuals have not been receiving this compensation on a regular
monthly basis and at December 31, 1994, their aggregate unpaid
compensation was $413,000. A portion of each individual's
compensation, aggregating $182,500 at December 31, 1994, is to be paid
in shares of the Company's common stock or 10 year warrants to
purchase shares of the Company's common stock. The choice to
receive shares or warrants is to be made by each individual on
December 31, 1994 or at specified dates thereafter. Each individual
would receive additional shares or warrants until the shares to be
received or the shares under warrant are freely tradable. In
addition, at December 31, 1994 or at the specified dates thereafter,
each individual may elect to receive any unpaid cash compensation
in shares or warrants or receive interest on his unpaid compensation.
The Chairman and Mr. Hamm have each elected to receive 24,000
shares of the Company's common stock for $120,000 of the above
mentioned compensation and to receive the additional common
shares (4,000 shares) due them through September 30, 1994. Further,
they have elected to receive their remaining unpaid compensation
as of September 30, 1994 in the form of cash.
At December 31, 1994, additional compensation relating to the
payment of compensation in shares or warrants aggregated $36,836
of which $20,000 will be paid when the above 4,000 common shares
are issued.
8. COMMON STOCK SUBJECT TO PUT OPTIONS:
In connection with the acquisition of UMA, the former shareholders
of UMA received 29,630 shares of the Company's common stock
together with the right to sell such shares back to the Company
at $6.75 per share or a total of $200,000 during a period
commencing on November 14, 1994 and ending January 27, 1995.
The former shareholders of UMA have exercised their right to sell
such shares back to the Company but negotiations are continuing
as to the means of the settlement of this obligation. Accordingly,
as of December 31, 1994, this obligation has been classified as a
current liability in the accompanying consolidated balance sheet.
9. POTENTIAL ACQUISITION:
On December 21, 1994, the Company announced that it had
entered into an agreement in principle to acquire Kansas
Communications, Inc., a distributor of business telecommunications
products, which also serves as an agent for Southwestern Bell
and MCI. Terms of the proposed acquisition are still being
negotiated subject to completion of due diligence.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL POSITION
1994 COMPARED TO 1993
RESULTS OF OPERATIONS The substantial increases in sales, cost
of sales and selling, general and administrative expenses reflect
the inclusion of the results of Communicate Direct, Inc.'s (CDI)
operations from the date of its acquisition by the Company on
October 31, 1994. Included in the consolidated results for the
first quarter are CDI's sales ($2,080,000), cost of sales
($1,076,000) and selling, general and administrative expenses
($755,000). In addition, the results of operations of UMA are
included for the full quarter in 1994 as compared to only the
period after UMA's acquisition on November 12, 1993 in the prior
year. Amortization of goodwill in 1994 increased $75,000 while
CDI added $15,000 to depreciation expense. Corporate expenses
increased primarily due to additional legal and accounting fees.
Interest expense increased (after deducting the non-cash charge
relating to Senior Note discount in 1993) due to the additional
debt incurred in connection with the acquisition of CDI and the
issuance of the Convertible Subordinated notes in 1994 (See Notes
3 and 4 of Notes to Consolidated Financial Statements).
MATERIAL CHANGES IN FINANCIAL POSITION During the quarter ended
December 31, 1994, the Company's working capital position changed
as follows:
Working capital deficit at September 30, 1994 ($1,229,417)
Working capital deficit acquired in acquisition of CDI ( 905,420)
Reclassification of stock put obligation ( 200,000)
Increase in working capital during the quarter 769,586
Working capital deficit at December 31, 1994 ($1,565,251)
The increase in working capital during the quarter was primarily
generated by the sale of common stock and the issuance of
Convertible Subordinated notes (See Note 4 of Notes to
Consolidated Financial Statements), the proceeds of which were used, in
part, to repay certain of CDI's liabilities.
Currently, management is anticipating that any shortfall in
its cash flow from operations will be provided for by additional
short-term borrowings. In addition, cash flow may be enhanced by
possible future acquisitions and additional sales of the
Company's common stock. No assurances can be made that these
sources of funds will be available or sufficient.
1993 COMPARED TO 1992
RESULTS OF OPERATIONS:
1993 1992
Revenues $138,704 $ 6,770
Costs and expenses ( 347,555) ( 159,198)
Interest expense ( 393,069) -
Net loss ($601,920) ($152,428)
The increase in revenues for the quarter ended December 31, 1993
over the prior year resulted from the acquisition of UMA which
had revenues of approximately $130,000 for the period from acquisition
(November 12, 1993) to the end of the quarter. Costs, general and
administrative expenses in 1993 include new costs resulting from
the acquisition of UMA (approximately $105,000) and additional
compensation costs and other operating costs relating to the
health care code review activities. A non-cash interest charge
relating to the Senior Note discount of approximately $369,000
and cash interest on the Senior Notes are the main components
of interest expense in the quarter ended December 31, 1993.
MATERIAL CHANGES IN FINANCIAL POSITION During the quarter ended
December 31, 1993, the Company's working capital increased
$236,777. During this period the Company acquired UMA in
exchange for 29,630 shares of the Company's common stock. In addition,
the Company received a capital contribution ($850,000), issued
additional Senior Notes payable ($700,000) and repaid a portion on
the Senior Notes outstanding on December 30, 1993 ($550,000).
Also, the Company increased its investment in Imnet Systems, Inc.
through additional cash payments of $462,924 and the issuance of
196,022 shares of the Company's common stock.
_______________________
It is suggested that this report be read in conjunction with the
financial statements and footnotes appearing in the September 30,
1994 Form 10-KSB which has been previously filed with the Commission.
The information furnished reflects all adjustments (consisting of
only normal recurring adjustments) which are, in the opinion of
management, necessary to a fair statement of the results for the
interim period.
PART II. OTHER INFORMATION
Items 1 to 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K:
Exhibits - 27 - Financial Data Schedule
Reports - On November 15, 1994, the Company filed a Form
8-K reporting the acquisition of Communicate Direct,
Inc. (CDI). On January 11, 1995, the Company filed
a Form 8-K/A containing audited financial statements
for CDI as of and for the year ended December 31,
1993 and as of and for the nine months ended September
30, 1994. Pro forma information for the Company and
CDI was also included.
SIGNATURES
Pursuant to 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.
(Registrant)
/S/ John Jellinek
_______________________________
John Jellinek
President and Chief Executive
Officer
/S/ Martin A Koehler
_______________________________
Martin A. Koehler
Vice President - Finance and
Chief Financial Officer
Dated: August 8, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SoftNet
Systems, Inc.'s Form 10-QSB/A and is qualified in its entirety by reference to
such Form 10-QSB/A filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> DEC-31-1994
<CASH> 212,538
<SECURITIES> 1,989,379
<RECEIVABLES> 2,427,735
<ALLOWANCES> 7,500
<INVENTORY> 1,164,494
<CURRENT-ASSETS> 3,914,614
<PP&E> 700,517
<DEPRECIATION> 139,134
<TOTAL-ASSETS> 11,320,463
<CURRENT-LIABILITIES> 5,479,865
<BONDS> 2,635,814
<COMMON> 17,183,848
1,745,148
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,320,463
<SALES> 2,405,500
<TOTAL-REVENUES> 2,405,500
<CGS> 1,302,466
<TOTAL-COSTS> 1,221,597
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 111,019
<INCOME-PRETAX> (225,528)
<INCOME-TAX> 0
<INCOME-CONTINUING> (225,528)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (225,528)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
