SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended: June 30, 1995 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.)
717 Forest Avenue, Lake Forest, Illinois 60045
(Address of principal executive office)
One Overlook Point, Lincolnshire, Illinois 60069
(Former name, former address and former fiscal year if changed)
Registrant's telephone number, including area code: (708) 735.7150
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 June 30, 1995, 3,221,770 common shares were outstanding which includes
29,630 shares of common stock subject to put options.
PART 1. FINANCIAL INFORMATION
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
1995 1994
(unaudited)
ASSETS
Current assets:
Cash $361,195 $176,538
Receivables, net 1,643,603 88,986
Inventories 1,191,009 -
Prepaid expenses 168,105 96,060
__________ __________
Total current assets 3,363,912 361,584
Property and equipment, net 1,447,092 225,450
Long-term investment, at cost 1,989,379 1,989,379
Intangible assets, net 4,348,658 224,394
Other assets 433,122 -
__________ __________
$11,582,163 $2,800,807
__________ __________
__________ __________
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses $3,100,598 $738,775
Line-of-credit 1,429,000 -
Current portion of long-term debt 501,651 852,226
Deferred revenue 389,955 -
Stock put liability 200,000 -
__________ __________
Total current liabilities 5,621,204 1,591,001
__________ __________
Long-term debt, net of
current portion 4,095,423 53,577
__________ __________
Common stock subject to
put option, 29,630 shares - 200,000
__________ __________
Shareholders' equity:
Preferred stock, $.10 par value,
4 million shares authorized - -
Common stock, $.10 par value,
10 million shares authorized,
3,192,147 and 2,602,598
shares outstanding,
respectively, net of
treasury shares of 1,906 31,921 26,026
Capital in excess of par value 19,109,211 16,428,886
Accumulated deficit (17,275,596) (15,498,683)
__________ __________
Total shareholders' equity 1,865,536 956,229
__________ __________
$11,582,163 $2,800,807
__________ __________
__________ __________
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Nine months ended
June 30, June 30,
1995 1994 1995 1994
(Unaudited) (Unaudited)
Sales $2,293,602 $370,126 $8,285,031 $697,396
Cost of sales 1,240,282 172,704 4,483,017 436,285
__________ __________ __________ __________
Gross profit 1,053,320 197,422 3,802,014 261,111
__________ __________ __________ __________
Expenses:
Selling, general
and
administrative 1,819,239 486,582 4,711,840 1,033,610
Depreciation and
amortization 172,175 22,012 449,075 56,751
__________ __________ __________ __________
Total
expenses 1,991,414 508,594 5,160,915 1,090,361
__________ __________ __________ __________
Loss from
operations (938,094) (311,172) (1,358,901) (829,250)
__________ __________ __________ __________
Other (income)
expense
Interest expense,
including
amortization of
deferred debt
issuance costs 159,350 21,051 370,191 63,884
Amortization of
Senior Note
discount - - 51,875 514,164
Miscellaneous - - (4,054) -
__________ __________ __________ __________
Total other
(income)
expense 159,350 21,051 418,012 578,048
__________ __________ __________ __________
Net loss ($1,097,444) ($332,223) ($1,776,913) ($1,407,298)
__________ __________ __________ __________
__________ __________ __________ __________
Net loss per share ($0.35) ($0.13) ($0.61) ($0.57)
__________ __________ __________ __________
__________ __________ __________ __________
Weighted average
common shares
outstanding 3,100,970 2,538,134 2,904,212 2,450,434
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
June 30,
1995 1994
(unaudited)
Cash flows from operating activities:
Net loss ($1,776,913) ($1,407,298)
Adjustments to reconcile net loss to net cash
used by operating activities
Depreciation and amortization 449,075 56,751
Debt discount and deferred financing
amortization 87,004 514,164
Provision for bad debts 22,922 -
Changes in operating assets and
liabilities, net of effect of
purchase transactions -
Receivables (560,707) (85,989)
Inventories (506,487) -
Prepaid expenses (56,030) (14,047)
Accounts payable and accrued
expenses (1,203,535) 328,103
Deferred revenue 304,707 -
___________ __________
Net cash used in operating
activities (3,239,964) (608,316)
___________ __________
Cash flows from investing activities:
Net cash paid in connection with acquisition
of consolidated subsidiaries (167,271) (26,498)
Purchase of property and equipment (787,539) (69,886)
Purchase of long-term investments - (462,924)
Increase in other assets (309,738) -
___________ __________
Cash used in investing
activities (1,264,548) (559,308)
___________ __________
Cash flows from financing activities:
Proceeds from issuance of long-term debt 3,248,000 920,000
Repayment of long-term debt (700,000) (550,000)
Borrowings under bank credit faciliy, net 2,193,341 -
Repayment of prior revolving credit facility (825,000) -
Proceeds from the sale of common stock 720,341 -
Capital contribution - 850,000
Proceeds for the exercise of warrants 166,172 8,750
Capitalized lease obligations paid (113,685) (49,060)
___________ __________
Net cash used in financing
activities 4,689,169 1,179,690
___________ __________
Net increase (decrease) in cash 184,657 12,066
Cash, beginning of period 176,538 62,856
___________ __________
Cash, end of period $361,195 $74,922
___________ __________
___________ __________
Cash paid during the period for:
Interest $252,643 $54,437
Income taxes - -
Supplemental non-cash transactions
Property acquired by capitalized leases 212,863 49,601
Long-term investments acquired with the
issuance of common stock - 735,083
Consolidated subsidiaries acquired with
issuance of stock and notes 1,810,401 216,875
___________ __________
___________ __________
SOFTNET SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1995
(unaudited)
1. BASIS OF PRESENTATION
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the consolidated statements of financial position, results of
operations and cash flows as of, and for the interim period ended, June 30,
1995.
The results of operation for the nine months ended June 30, 1995 are not
necessarily indicative of the results to be expected for the full year.
2. ACQUISITION
On October 31, 1994, the Company acquired CDI in a business combination
accounted for as a purchase. CDI is a Chicago-based company which sells and
services telephone systems, third party computer hardware and application
oriented peripheral products like voice mail, automated attendant systems,
interactive voice response (IVR) and video conferencing systems. The
operations of CDI have been included with the results of the Company since
November 1, 1994.
The Company acquired all of the outstanding stock of CDI for $1.9
million, such consideration consisting of 290,858 shares of the Company's
Series A Convertible Preferred Stock (Preferred Shares) valued at $6.00 per
share, cash and notes. In April 1995, the Preferred Shares were converted
into common shares on a one-to-one basis following the approval of the
Company's shareholders. Additional common shares of the Company's may be
issued to the former CDI shareholders if CDI's operating earnings, as
defined, exceed $1.5 million in each of the three fiscal years ending
September 30, 1995, 1996 and 1997. Any additional shares issued as a result
of meeting the specified earnings targets are expected to result in an
increase to the purchase price and a corresponding increase in goodwill.
The costs 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.
The following pro forma financial data are presented to reflect
consolidated operations of the Company as if the purchase of CDI had occurred
as of October 1, 1993:
NINE MONTHS ENDED
JUNE 30,
1995 1994
Sales $ 9,154,323 $ 8,506,125
Loss from continuing (1,929,236) (2,178,038)
operations
Net loss (1,929,236) (2,178,038)
Net loss per share $ (.62) $ (.79)
3. LINE-OF-CREDIT FACILITY
In October, 1994 CDI obtained a bank line-of-credit facility whereby CDI
can borrow up to $2.5 million based upon eligible receivables and
inventories. The line-of-credit facility is collateralized by the assets of
CDI and bears interest at the bank's prime rate plus 1% (prime rate at June
30, 1995 was 9%). The outstanding balance on the line-of-credit was $1.429
million at June 30, 1995.
4. DEBT
Debt is summarized as follows:
9% Convertible Subordinated Notes due
December 1998, bearing interest, payable
quarterly, at 9%, subordinated to all
other liabilities of the Company,
convertible into the Company's common
shares at $4.10 per share $2,189,499
10% Convertible Subordinated Notes due
October 1999, bearing interest, payable
quarterly, at 10% for the first two years
only and no interest thereafter,
subordinated to all other liabilities of
the Company, convertible into the
Company's common shares at $5.00 per share 1,250,000
Bank loans dated May 8, 1995, bearing
interest at prime plus 1%, principal and
interest due in 60 monthly payments with
final payment due May 2000 394,581
Bank loans dated March 30, 1995, bearing
interest at prime plus 1% payable monthly,
principal due September 30, 1995 250,000
Bank loans dated April 13, 1995, bearing
interest at prime plus 1%, principal and
interest due in 48 monthly installments
with final payment due April 1999 119,760
Series B Notes dated October 31, 1994,
bearing interest at prime with principal
and interest due September 1997 65,253
Capitalized lease obligations 327,981
4,597,074
Less current portion of debt (501,651)
Total long-term debt $4,095,423
In connection with the issuance of the 10% Convertible Subordinated
Notes, the Company issued warrants to purchase 297,750 shares of the
Company's common stock exercisable for five years at an exercise price of
$6.875 per share. With respect to the 9% Convertible Subordinated Notes, the
Company may prepay the notes in whole after April 1, 1996 provided the market
price of the Company's common stock is at least 200% of the conversion price
on any 20 trading days within a period of 30 consecutive trading days ending
on the trading day prior to the date of the notice of prepayment.
In October 1994, the Company issued an additional $25,000 Senior Note,
along with a warrant to purchase 2,500 shares of the Company's common stock
at the then current market price of $6.375 per share. Also, in order to
extend the maturity of $745,000 of Senior Subordinated notes, the Company
issue warrants to purchase 89,400 shares of the Company's common stock at
prices ranging from $6.125 to $7.875 (market price at the end of each month
during the period the notes were extended). As of April 1, 1995, the
$450,000 of notes were repaid and the remaining $295,000 were exchanged for
the 9% Convertible Subordinated Notes described above.
5. COMMON STOCK SUBJECT TO PUT OPTION
In connection with the acquisition of Utilization Management
Association, Inc. ("UMA"), the former shareholders of UMA received 29,630
shares of the Company's common stock together with the right to sell such
stock 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 June 30, 1995, this
obligation has been classified as a current liability in the accompanying
consolidated balance sheet.
6. SALE OF COMMON STOCK
On October 26, 1994, the Company sold 200,000 shares of its common stock
in a Regulation S offering at $4.00 per share. In connection with the sale
of common stock, the Company incurred fees of $90,000 and issued warrants to
purchase 249,750 shares of its common stock exercisable for five years at an
exercise price of $6.875 per share.
7. RELATED PARTY TRANSACTION
As more fully disclosed in the Company's annual report on Form 10-
KSB/AA for the year ended September 30, 1994, the Company is owed $4,150,000
plus accrued interest by Ozite Corporation (Ozite). A Director of the
Company and the former Chairman of the Board held and a substantial interests
in Ozite and continue to hold a substantial interest in Pure Tech
International ("Pure Tech" - see below). Due to uncertainties about
collecting these funds, the receivable from Ozite was written off and charged
against earnings in 1991, and, accordingly no amount related to this
receivable is recorded on the Company's consolidated financial statements.
On July 26, 1995, Ozite shareholders approved a merger of Ozite with
Pure Tech with Pure Tech being the surviving corporation. As a condition of
the merger, Ozite was required to secure a general release from the Company
and to surrender certain securities in satisfaction of the amount owed to the
Company. As a result, the Company will receive 311,025 shares of Pure Tech
common stock (such shares are currently listed on NASDAQ), 267,203 shares of
Artra Group Incorporated (Artra) Common Stock (such shares are currently
listed on the New York Stock Exchange, however such shares being received are
not currently registered) and 932.05 shares of Artra Preferred Stock (such
shares are not listed on any exchange and have no currently ready market).
On the date of the merger, Pure Tech and the Artra Common shares had a per
share market price of $5.5625 and $5.50, respectively. The Company expects
to receive these securities during August 1995, and will attempt to sell the
Pure Tech securities as market conditions warrant. No amount has been
recorded in the accompanying consolidated financial statements to reflect
this settlement. As such shares are sold, the Company will record the
proceeds as a capital contribution.
8. EXECUTIVE COMPENSATION
As of September 30, 1994, the President and Chief Executive Officer, the
Chairman of the Board and a director were owed an aggregate of $392,000 for
unpaid compensation. In July, 1995, the Chairman of the Board resigned as a
director of the Company and was paid all of his accrued and unpaid
compensation of $196,000. In addition, the President and Chief Executive
Officer was paid all of his accrued and unpaid compensation. The remaining
amount of $171,000 due to a director accrues interest at 10% per annum and
can be paid in a combination of cash and common stock of the Company.
9. POTENTIAL ACQUISITIONS
On March 24, 1995, the Company entered into agreements to acquire
Micrographic Technology Corporation ("MTC") and Kansas Communications, Inc.
("KCI"). The Company has scheduled a special shareholders' meeting on
September 15, 1995, to vote on these potential transactions.
KCI is an information technology company which provides communication
solutions through the design, implementation, maintenance and integration of
voice, data and video communications equipment and services. The equipment,
which is manufactured by others, includes telephone systems and call
processing systems (including call centers, voice messaging, interactive
voice response and computer telephone integration). Services include
maintenance contracts for its existing customers, installation of local and
long distance network services, cabling and data communications. The KCI
shareholders will receive 1,300,000 shares of the Company's common stock in
exchange for all of the outstanding shares of KCI in a transaction that will
be accounted for as a pooling of interest.
MTC is a designer, developer, manufacturer and integrator of
comprehensive, non-paper based systems and components that enable MTC to
deliver to its customers cost-effective solutions for storage, indexing
and/or distribution of high-volume output data streams. These systems, which
include both hardware and software products, are based on an open system
architecture providing flexibility to connect to a wide variety of
information systems. The hardware manufactured by MTC includes a family of
computer output microfilm printers. MTC software is principally related to
the capture of data and information from a variety of sources, its
intelligent indexing and the ultimate output of that information to a variety
of storage media including optical disk, magnetic disk and tape, CD-ROM,
microfilm and microfiche.
The MTC shareholders' will receive up to 777,778 shares of the Company's
common stock, $1,050,000 in cash and $2,800,000 principal amount of the
Company's debentures. The purchase price consideration is subject to a
possible reduction in the event that MTC's income from operations before
interest, taxes, certain legal and audit fees and certain development
expenses for its fiscal year ending June 30, 1995 is less than $2,273,000.
As of August 14, 1995, the audit of MTC's financial statements for the year
ended June 30, 1995 had not been completed, but unaudited results indicate
that the MTC shareholders will receive the maximum purchase price
consideration.
In connection with the merger of MTC, the Company will incur a one time
charge in the fourth quarter of fiscal 1995 of $5.0 million for the write-off
of certain intangible assets. This transaction will be accounted for as a
purchase.
10. RECLASSIFICATION
In connection with the acquisition of Communicate Direct, Inc. (CDI) on
October 31, 1994, the Company has reclassified the financial statements for
the prior fiscal year to conform to the presentation used in 1995.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is continuing its efforts to improve the operations of the
currently existing businesses and it is producing noticeable returns. In
addition, the Company is in the process of completing two major acquisitions
which will significantly improve the Company's ability to meet its strategic
objectives. As discussed in the Company's Proxy Statement relating to the
Special Meeting of Shareholders to be held on September 15, 1995, consumation
of both acquisitions are subject to certain conditions.
While preparing for the integration of these new companies, the Company
has made significant improvements in its existing business which, in the long
run, are expected to improve the overall operations of the Company. CDI
recently completed a move of its operations to a new location in Buffalo
Grove, Illinois. The new facility will allow CDI to expand its operations
and provide greatly improved customer support. In addition, the CDI recently
opened new operations in Milwaukee, Wisconsin. This new market is expected
to provide tremendous oportunities for expansion. Also, CDI undertook a
revamping of its current sales force in order to ensure that the most
qualified individuals were in place. Where all of these changes had a
negative impact on third quarter results, management believes that the short
term investment made today will have a positive impact in the future.
The acquisition of Kansas Communications, Inc. ("KCI") is a strategic
extension of the Company's telecommunication operations. Like Communicate
Direct, Inc. ("CDI"), KCI is a privately owned information technology company
which provides communication solutions through the design, implementation,
maintenance and integration of voice, data and video communications equipment
and services. The equipment, which is manufactured by others, includes
telephone systems and call processing systems (including call centers, voice
messaging, interactive voice response and computer telephone integration).
Services include maintenance contracts for its existing customers,
installation of local and long distance network services, cabling and data
communications.
Micrographic Technology Corporation ("MTC") is a designer, developer,
manufacturer and integrator of comprehensive, non-paper based systems and
components that enable MTC to deliver to its customers cost-effective
solutions for storage, indexing and/or distribution of high-volume output
data streams. These systems, which include both hardware and software
products, are based on an open system architecture providing flexibility to
connect to a wide variety of information systems. The hardware manufactured
by MTC includes a family of computer output microfilm printers. MTC software
is principally related to the capture of data and information from a variety
of sources, its intelligent indexing and the ultimate output of that
information to a variety of storage media including optical disk, magnetic
disk and tape, CD-ROM, microfilm and microfiche.
The integration of these new companies into the existing core business
will position the Company to develop, market, install and service electronic
information and document management systems that allows customers to
electronically request and electronically receive information. The Company's
fully integrated information storage and retrieval systems allow users to re-
engineer their information processes to access information on a cost-
effective basis and to achieve immediate cost savings through productivity
increases.
RESULTS OF OPERATIONS
Results of operation for the nine months ended June 30, 1995 compared to 1994
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 1995 are CDI's sales ($7,346,000), cost of sales ($3,779,000) and
selling, general and administrative expenses ($3,293,000).
Depreciation and amortization expense increase to $449,000 for the nine
months ended June 30, 1995 from $57,000 for the same period in 1994. The
increase was caused by the additional goodwill amortization resulting from
the acquisition of CDI.
Interest expense increased $306,000 to $370,000 for the nine months
ended June 30, 1995, from $64,000 for the same period in 1994. The increase
in interest expense was caused by the overall increase in debt. During the
nine months ended June 30, 1995, the Company had a net increase in long-term
debt of $3,691,000.
Liquidity and Capital Resources
In October and November, 1994, the Company issued 10% Convertible
Subordinated Notes, in the aggregate amount of $1,250,000, due in October
1999. Such notes (which bear interest, payable quarterly, at 10% per annum
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 issuance of the
10% Convertible Subordinated Notes, the Company issued warrants to purchase
297,750 shares of its common stock exercisable for five years at an exercise
price of $6.875 per share.
During 1995, the Company issued 9% Convertible Subordinated Notes due
December 31, 1998 in the aggregate amount of $2,189,499 which includes the
conversion of $295,000 of Senior Notes and accured interest thereon of
$14,499. Interest is payable quartlerly on the first of April, July,
October, and January. Such notes are subordinated to all other liabilities
of the Company and are convertible into the Company's common shares at $5 per
share. These notes may be prepaid by the Company in whole after April 1,
1996 provided the market price of the Company's common stock is at least 200%
of the conversion price (presently $5 per share) over a defined period of
time.
In October, 1994 CDI obtained a bank line-of-credit facility whereby the
CDI can borrow up to $2.5 million based upon eligible receivables and
inventories. The line-of-credit facility is collateralized by the assets of
CDI and bears interest at the banks prime rate plus 1% (prime rate at June
30, 1995 was 9%). The outstanding balance on the line-of-credit was $1.429
million at June 30, 1995. In connection with the mergers with KCI and MTC,
the Company has received a committment from its bank for a new line-of-credit
facility which will allow the Company to borrow up to $6.5 million based upon
eligible receivables, inventories and long-term investments. The new line-of-
credit facility will be collateralized by the assets of the Company and bears
interest at the banks prime rate plus 1%.
At June 30, 1995, the Company's current ratio was .62 to 1 with a
working capital deficit of $2.1 million. This compares with a current ratio
of .23 to 1 and a working capital deficit of $1.2 million at September 30,
1994.
The Company expects to be able to finance its working capital
requirements, including capital expenditures and the anticipated mergers with
KCI and MTC from its existing and future line-of-credit facilities.
For the nine months ended June 30, 1995, cash flows used by operating
activities were $3.2 million, compared to $608,000 for the nine months ended
June 30, 1994. The increase in cash used by operating activities was mainly
due to the inclusion of CDI's results of operations from the date of
acquisition (October 31, 1994).
PART II. OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
IMNET
On July 13, 1995, Imnet Systems, Inc., a company of which SoftNet owns
approximately 386,000 shares of common stock, completed its initial public
offering at an initial offering price of $12 per share. As result of this
offering, the Company owns 4.8% of the outstanding capital of IMNET.
THIS COMMUNICATION IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OF IMNET.
CHANGE IN GOODWILL AMORTIZATION
The Company changed the amortization period for the goodwill that arose
from the acquisition of CDI from forty years to ten years. As a result of
the change, SoftNet's results for the previously reported six months ended
March 31, 1995 have been revised to increase amortization expense by $137,000
(or $.05 per share). The previously reported net loss for the period of
$543,000 (or $.20 per share) has been increased to $679,000 (or $.25 per
share).
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1995.
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.
/S/ Martin A. Koehler
Martin A. Koehler
Vice President - Finance and
Chief Financial Officer
Dated: August 14, 1995<PAGE>
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<LEGEND>
This schedule contains summary financial information extracted from
SoftNet Systems, Inc.'s Form 10-QSB and is qualified in its entirety by
reference to such Form 10-Q filing.
</LEGEND>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> JUN-30-1995
<CASH> 361,195
<SECURITIES> 1,989,379
<RECEIVABLES> 1,643,603
<ALLOWANCES> 23,000
<INVENTORY> 1,191,009
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<BONDS> 4,095,423
<COMMON> 19,141,132
0
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