U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
________________________________________
FORM 10-KSB/AA
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended: September 30, 1994
Commission File No.: 1-5270
SOFTNET SYSTEMS, INC.
(Name of Small Business Issuer 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: (708) 793-2000
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered:
Common Stock, Par American Stock Exchange
Value $.01 per share
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) 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 _____
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [X]
SoftNet Systems, Inc. and Subsidiaries's consolidated revenues for the
fiscal year ended September 30, 1994 are $885,319.
As of September 30, 1994, 2,632,228 common shares (including common stock
subject to put options) were outstanding and the aggregate market value
(based on the September 30, 1994 closing price of such shares on the American
Stock Exchange) of the common shares of SoftNet Systems, Inc. held by non-
affiliated entities was approximately $10.1 million.
Documents Incorporated by Reference in Item 13
1983 Form 10-K
1993 Form 10-KSB
Form 8-K dated October 31, 1994
PART I
ITEM 1. BUSINESS
SoftNet Systems, Inc. ("SoftNet", "Company" and "Registrant"), was
incorporated in New York in 1956. In 1993, the Company changed its name from
The Vader Group Inc. to its present name.
The Company's operations include telecommunications (with the acquisition
of Communicate Direct, Inc. in October 1994, subsequent to the fiscal year-
end), health care cost containment and image processing, with a major
emphasis in the medical field.
ACQUISITION OF CDI On October 31, 1994, by merger with and into its
wholly-owned subsidiary, the Company acquired Communicate Direct, Inc. (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.
As a distributor of products produced by Panasonic, Fujitsu, Ameritech and
AT&T, among others, CDI focuses its sales effort on providing it clients with
the best possible choice of telecommunications equipment at cost effective
prices. CDI has been servicing customers in the Chicago area since 1987 and
currently has approximately 85 employees. The Company believes the
telecommunications industry is very fragmented and CDI has competitors who
are larger and may be better financed.
HEALTH CARE COST CONTAINMENT The Company uses the Code Review(R) software
developed by Boston-based Health Payment Review, Inc. (HPR) in the United
States for Taft-Hartley multi-employer trust funds and third party
administrators. The software evaluates medical bills to determine if the
charges are coded properly within American Medical Association guidelines.
HPR licenses the Code Review software to insurance companies for their own
use and other software packages are available to perform similar services
and, accordingly, the extent of the Company's competition is not altogether
known to the Company.
On November 12, 1993, the Company acquired Utilization Management
Associates, Inc. (UMA), a Boston-based privately owned company engaged in the
medical cost containment business. UMA develops scientifically valid systems
for identifying inefficient or avoidable hospital utilization. Such systems
are used by health maintenance organizations, insurance companies and
hospitals. In its simplest description, these systems contain the accepted
medical procedures and schedules to be followed for the treatment of
specified medical conditions incurred by patients and may be used on a
prospective, concurrent or retrospective basis to reduce the average length
of a hospital stay. They are also used to identify systemic causes of
inappropriate hospitalization.
IMAGE PROCESSING The Company holds an interest in Imnet Systems, Inc.
(Imnet), a privately owned company located in Atlanta, Georgia. The original
investment in Imnet facilitated the Company's obtaining a distributorship of
Imnet imaging systems. Imnet is a pioneer in imaging technology utilizing
multi-media, especially micro-film. It designs, manufactures, markets and
services state of the art document image processing systems that improve the
productivity and customer service capabilities of organizations in the United
States, Canada and Europe that process, file and retrieve large volumes of
paper documents and micro-film.
NEW FINANCING In October and November 1994, the Company obtained
additional funding to be used in connection with its acquisition of CDI (see
above) and for working capital purposes. Such funding came from the sale of
200,000 shares of its common stock at $4 per share in a Regulation S offering
and the sale of $1.25 million of five year 10% Convertible Subordinated Notes
(Subordinated Notes). These subordinated notes bear interest for the first
two years only, are convertible into common shares of the Company and are
subordinated to all other liabilities of the Company. The Company used part
of the proceeds from the sale of stock and Subordinated Notes, to make a
capital contribution to CDI. In addition, CDI with the Company's assistance
has obtained a $2.5 million revolving line of credit from a commercial bank.
CDI used the capital contribution and a portion of the revolving line of
credit to pay certain of its existing liabilities and to increase its working
capital. In connection with the sale of the stock and Subordinated Notes,
the Company issued warrants to purchase 547,500 shares of the Company's
common stock exercisable for five years at exercise prices ranging from
$6.875 to $7.50 per share.
See Notes 2 and 3 of Notes to Consolidated Financial Statements for
additional information on the above operations and acquisitions.
EMPLOYEES As of September 30, 1994, the Company and its subsidiaries had
15 employees.
ITEM 2. PROPERTIES
The Company and its subsidiaries rent office space in Lincolnshire,
Illinois, Glendale, New York and Wellesley, Massachusetts. The Company and
its subsidiaries lease computer equipment to perform its health care cost
containment operations and have sufficient equipment in place to process the
expected level of business in 1995. In addition, the Company has leased
equipment used as a demonstration unit for prospective clients of the Imnet
imaging system.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of shareholders, held August 16, 1994, the
entire Board of Directors was elected unopposed and the appointment of
Coopers & Lybrand L.L.P. as the Company's independent public accountants was
ratified. Holders of 2,023,728 shares of the Company's common stock were
present or represented by proxies at the meeting.
The directors, all of whom were reelected, received the following votes -
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
Peter R. Harvey 2,022,928 800
John G. Hamm 2,023,128 600
John Jellinek 2,023,128 600
Phillip Kenny 2,023,128 600
Alfred J. Ziegler 2,023,128 600
</TABLE>
The ratification of the appointment of Coopers & Lybrand L.L.P. received
2,023,028 votes for, 600 votes against and 100 votes abstaining.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The stock of the Company is principally traded on the American Stock
Exchange (Amex). The Company currently does not meet certain of the
requirements for maintaining its listing on the Amex and the Amex is
continuing its review of the status of the Company's listing on the exchange.
The high and low sales prices for the stock reported on the Amex for each
quarterly period during the past two years were as follows:
<TABLE>
<CAPTION>
Quarter High sale Low sale Quarter High sale Low sale
ending price price ending price price
<S> <C> <C> <C> <C> <C>
Dec 1993 $7-1/8 $3-3/4 Dec 1992 $3-7/8 $1-13/16
Mar 1994 7-3/4 5-1/8 Mar 1993 4-5/8 2-5/ 8
Jun 1994 7-7/8 5-5/8 Jun 1993 4-1/2 2-7/8
Sep 1994 9 6-1/8 Sep 1993 4-1/8 3-1/4
</TABLE>
There were approximately 700 holders of the stock as of September 30, 1994.
The closing price for the stock on September 30, 1994 was $6.50. The Company
paid no dividends during the period October 1, 1992 to September 30, 1994.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
1994 COMPARED TO 1993
RESULTS OF OPERATIONS The Company purchased Utilization Management
Associates, Inc. (UMA) on November 12, 1993 and its operations have been
included in the consolidated results of operations since that date. The
respective contributions of SoftNet and UMA to the consolidated results of
operations are set forth below (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
Consolidated UMA SoftNet SoftNet
<S> <C> <C> <C> <C>
Revenues $ 885 $ 695 $ 190 $ 47
Expenses -
Costs and general and
administrative 2,082 803 1,279 721
Amortization and depreciation 78 10 68 116
Interest 603 - 603 38
Subtotal 2,763 813 1,950 875
Net loss ($1,878) ($ 118) ($1,760) ($ 828)
</TABLE>
SoftNet's 1994 revenues increased primarily as a result of the sale of
imaging processing equipment. Its code review business increased
approximately 10% over 1993, the first year of that operation. Costs and
general and administrative expenses in 1994 increased because of additional
compensation and benefit costs of approximately $420,000 and other operating
costs relating to the document imaging and health care code review
activities. Equipment additions during the 1993 fiscal year (and to a lesser
extent in the 1994 fiscal year) resulted in increased depreciation expense of
approximately $39,000 in 1994 while there was no amortization of license fee
pertaining to the Code Review software in fiscal year 1994 ($87,000 in fiscal
1993). Non-cash interest expense relating to the Senior Note discount of
approximately $514,000 and cash interest payments on the Senior Notes are the
main components of interest expense in 1994.
UMA's 1994 results include (A) non-compete payments of $110,000 which are
expected to continue at $10,000 per month through 1996 and $5,000 per month
through 1997 and (B) amortization of goodwill of $5,000 resulting from the
acquisition.
Due to the Company's tax loss carryforwards, no income tax benefit was
recognized in connection with the Company's 1994 and 1993 pre-tax losses.
The Company currently has substantial net operating loss carryforwards for
financial reporting and tax purposes.
LIQUIDITY AND CAPITAL RESOURCES At September 30, 1994 and 1993, the
Company's current liabilities exceeded its current assets by $1,229,417 and
$514,055, respectively. This situation resulted from losses from operations
incurred in each year (see Results of Operations above), additional cash
investments of $462,927 (1994) and $381,373 (1993) in Imnet, equipment
purchases and lease payments of $143,569 (1994) and $46,199 (1993) and the
increased level of Senior Notes outstanding at each year end of $770,000
(1994) and $357,086 (1993). The funding for these activities was provided by
cash on hand at the beginning of 1993, new borrowings (Senior Notes), the
leasing of a substantial portion of the equipment additions, a capital
contribution of $850,000 (see below) and the sale of 88,000 shares of the
Company's common stock. In October and November 1994, the Company obtained
additional funding to be used in connection with an acquisition (see Item I -
Acquisition of CDI) and for working capital purposes. The Company sold
200,000 shares of its common stock at $4 per share. Also, the Company issued
$1.25 million of 10% Convertible Subordinated Notes due in five years.
Interest at 10% per annum is payable on the first day of February, May,
August and November until November 1, 1996 after which the note accrues no
interest. The Notes are subordinate to all current and future outstanding
indebtedness of the Company. The note and any unpaid accrued interest
thereon may be converted at any time into shares of the Company's common
stock at a rate equal to $4.10 per share.
Currently, management is anticipating that any shortfall in its cash flow
from operations will be provided for by additional short-term borrowings in
the form of additional Senior Notes. 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.
In 1987 and 1988 a subsidiary of Ozite Corporation (Ozite) regularly
purchased products from a subsidiary of the Company. The assets of this
operation were sold in 1988, except for a trade account receivable due from
Ozite of $2,612,000 and certain inventory which was subsequently sold to
Ozite for $1,235,807. In addition, the Company in 1990 made a cash advance
to Ozite of $1,100,000. Peter R. Harvey, Chairman and Chief Operating
Officer of the Company and John G. Hamm, a Director of the Company, had
substantial interests in Ozite at the time of these transactions. In 1991,
the amounts due the Company were considered uncollectible and the Company
recorded a provision for bad debts for the amounts due. Subsequently, Ozite
repaid $850,000 (recorded as a capital contribution) and owes a renegotiated
balance of $4,150,000 payable on demand at any time on or after January 1,
1995. However, Ozite's ability to repay is uncertain and therefore, the
Company is not relying on the Note repayments as a means of funding its
future cash requirements. The obligation is due from Ozite Corporation, the
parent company. Disclosure in Ozite's Form 10-K states that the parent
corporation has a deficiency in assets, significant overdue liabilities -
principally to private placement investors and related parties, and no
continuing operations or cash flow, raising substantial doubt about whether
the parent corporation will be able to continue as a going concern. There
are certain restrictions on Ozite's majority-owned subsidiary, Plastic
Specialties & Technologies, Inc. (PST) restricting its ability to pay
dividends to Ozite and, accordingly, the parent corporation (Ozite) can not
rely solely on PST to satisfy its existing liabilities and resolve its
deficiency in assets.
1993 COMPARED TO 1992
The Company had no revenues from operations in the 1992 fiscal year.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the index to financial statements on page 12 for all
financial statements filed as part of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS The following table lists the name and age of each director, his
positions with the Company, his business experience during the past five
years and certain directorships. Each director's term of office expires at
the next annual meeting.
<TABLE>
<CAPTION>
Name and age Positions and Experience
<S> <C>
Peter R. Harvey (60) Director since 1981 and Chairman of the Board since
September, 1985, Chief Executive Officer from 1981
to June 1993. Chief Operating Officer since June
1993. President of the Company from August, 1983 to
September, 1985 and from April, 1988 to June 1993.
Mr. Harvey is the President, Chief Operating Officer
and a director since 1968 of ARTRA GROUP
Incorporated (fashion jewelry and flexible
packaging), a director of the Lori Corporation
(fashion jewelry) since 1984, a director of Emerald
Acquisition Corporation (cellulosic casing and
plastic cutlery) from 1983 to 1992, a director and
Chairman of the Executive Committee of Rymer Foods,
Inc. (food processing) from 1981 to 1993, a director
of Ozite Corporation (textiles, hose and tubing)
since 1984 and Vice President since 1987, and a
director of Plastic Specialties and Technologies,
Inc. (textiles, hose and tubing) since 1993.
John Jellinek (49) Director since 1993. President and Chief Executive
Officer since June 1993. Manager of the Company's
data services operation since August 1992.
President of Jelco Ventures, Inc. (diversified
holding company) since 1971. Director of Imnet
Systems, Inc. (image processing) since October 1992.
John G. Hamm (56) Director since 1985. Executive Vice President since
1988 and Vice President-Finance of ARTRA GROUP
Incorporated (fashion jewelry and flexible
packaging) from 1975 to 1988. Director, from 1984
to 1994, and Vice President - Finance, from 1990 to
1994, of Ozite Corporation (textiles, hose and
tubing), and a director of Plastic Specialties and
Technologies, Inc. (textiles, hose and tubing) since
1993.
Philip Kenny (41) Director since 1993. President of Northgate
Investments Corp. (a wholly-owned subsidiary of
Kenny Industries, Inc.) since 1991 and President of
Seven K Construction Co. from 1987 to 1991.
Director of Kenny Industries, Inc. since 1980 and
Summitt Golf Corporation of Tallahassee, Florida
since 1993 and member of the Board of Advisors at
Northern Illinois University School of Technology
and Engineering since 1989.
Alfred J. Ziegler (56) Director since 1977, Vice President since 1978,
Secretary since 1985 and Chief Accounting Officer
since 1988.
</TABLE>
EXECUTIVE OFFICERS Messrs. Harvey, Jellinek and Ziegler, members of the
Board of Directors, are the only executive officers of the Company and are
referred to in the table above. Officers are appointed annually by the Board
of Directors at the organization meeting of the Directors immediately
following the annual meeting of shareholders and serve, at the pleasure of
the Board, until the appointment of their successors.
There are no family relationships among the officers nor is there any
arrangement or understanding between any officer and other person pursuant to
which he was elected to office.
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS The following tables show the aggregate
compensation for Mr. John Jellinek, President and Chief Executive Officer of
the Company at September 30, 1994, and Mr. Peter R. Harvey, Chairman of the
Board of Directors and Chief Operating Officer, the only two executive
officers of the Company whose compensation exceeded $100,000 during the year
ended September 30, 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-term
Name and Principal Annual Compensation <F2> Compensation
Position <F1> Year Salary Other Annual Options Other
<S> <C> <C> <C> <C> <C>
John Jellinek - CEO 1994 $137,500 $ 8,335 <3> 0
1993 0 <3> 0
1992 0 0
Peter R. Harvey 1994 95,000 11,665 0
Chairman & COO 1993 120,000 1,564 <4> 0
1992 120,000 0
_______________
<FN>
<F1> Mr. Jellinek became President and CEO effective June 30, 1993. During
the prior portion of fiscal 1993 and for 1992, Mr. Harvey held the
position of President and CEO. During the three year period ended
September 30, 1994, Mr. Harvey has been Chairman of the Board of
Directors.
<F2> On July 21, 1994, the Board of Directors retroactively revised the
compensation of the President and the Chairman of the Board. The
President's compensation was set at $110,000 per year effective July 1,
1993, and the Chairman's compensation was reduced from $120,000 to
$60,000 per year effective May 1, 1994. Neither individual had been
receiving cash payments on a regular basis. As at September 30, 1994,
the President was owed $117,500 in back pay and the Chairman was owed
$125,000, Beginning September 30, 1993, $50,000 of the President's
annual compensation and $70,000 of the Chairman's unpaid compensation
will be paid in shares of the Company's common stock or 10 year warrants
to purchase shares of the Company's common stock at $5.00 per share, as
the prospective recipient elects. The President will receive 10,000
shares or warrants to purchase 16,667 shares. The Chairman will receive
14,000 shares or warrants to purchase 23,333 shares. 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 at the rate of 20% of the
outstanding shares or warrants theretofore granted hereunder per annum
until the shares to be received or the shares received upon exercise of
the warrants, as the case may be, are freely tradeable or saleable under
Rule 144 or 144k. In addition, at December 31, 1994 or at the specified
dates thereafter, each individual may elect to receive any unpaid cash
compensation in such shares or warrants or receive interest on his
unpaid compensation at 10% per annum. At September 30, 1994, additional
compensation relating to the payment of compensation in shares was
$8,335 for the President and $11,665 for the Chairman.
<F3> The Company pays Jelco Ventures $4,000 per month ($48,000 in 1994 and
$40,000 in 1993) which is used, in part, for shared costs of office
support personnel and equipment. Mr. Jellinek is the President of and
controls Jelco Ventures.
<F4> During the fiscal year 1993, the shareholders of the Company approved
the extension of the expiration date of the Common Stock Purchase
Warrant for 1,564 shares owned by Mr. Harvey until February 18, 1998,
and a reduction in the exercise price to $1.75 per share. The proxy
statement in connection with the solicitation of the shareholders
approval states that the reason for the extension of and reduction in
exercise price of the warrant was "to compensate the officers and
directors for their efforts on behalf of the Company and for the risk
they took in acting for the Company without any insurance protection.
</FN>
</TABLE>
AGGREGATE OPTIONS EXERCISED AND OPTION VALUES AT SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
Unexercised Options Value of in the
Name Exercised at September 30, 1994 Money Options (A)
<S> <C> <C> <C>
John Jellinek 0 250,000 (B) $1,187,500
Peter R. Harvey 0 1,564 7,429
(A) Equal to the market price of the Company's common stock at September 30,
1994 of $6.50 per share less the exercise price times the number of
unexercised options.
(B) Held by Jelco Ventures.
</TABLE>
COMPENSATION OF DIRECTORS Directors who are not officers or employees of the
Company, or of a subsidiary, receive a director's fee of $1,000 per month.
In addition, in 1994, the Board of Directors compensated Mr. Jack Hamm for
uncompensated services rendered over the past ten years in the amount of
$150,000. Such amount (plus $8,335 of additional compensation if a portion
is paid in stock) is to be paid in cash and stock or warrants in the same
manner as described in Note 2 to the Summary Compensation Table above. The
compensation payable to Mr. Hamm has not been paid and is included in current
liabilities in the Company's consolidated balance sheet as of September 30,
1994.
SEVERANCE AGREEMENTS Mr. Ziegler has an agreement with the Board of
Directors that he be given one year's salary as severance pay upon
termination of his employment.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
For the year ended September 30, 1994, from the Company records, it does
not appear that any director, officer or 10% shareholder failed to report
timely in accordance with the requirements of Section 16(a) of the Securities
and Exchange Act.
The security ownership of certain beneficial owners and management as of
September 30, 1994 is shown on the following two pages.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AS OF SEPTEMBER 30, 1994
The following table sets forth the number of shares of common stock of the
Company ($.01 par value common stock) beneficially owned and the percent of
the outstanding shares of common stock attributable to such ownership for
persons or entities known to the Company to be the beneficial owner of more
than five percent (5%) of the Company's common stock:
<TABLE>
<CAPTION>
Name and address Amount and nature of Approximate
of beneficial owner beneficial ownership percentage of class
<S> <C> <C>
Peter R. Harvey 503,928 <F1> 19.1
500 Central Avenue
Northfield, IL 60093
John Jellinek 378,000 <F2> 12.6
660 LaSalle Street
Highland Park, IL 60035
Barry Rymer Life
Insurance Trust 323,435 12.3
Barry Rymer, Trustee
4600 So. Packers Ave.
Chicago, IL 60609
Philip Kenny 240,602 <F3> 9.0
c/o 7K Construction
144 Green Bay Road
Winnetka, IL 60493
E. Forbes Gordon 147,346 <F4> 5.6
P.O. Box 1227
5851 San Felipe, Ste. 714
Houston, TX 77251
___________________
<FN>
<F1> Mr. Harvey is deemed to be in control of the Company by virtue of his
ownership of 19.1% of the common stock. Mr. Harvey has pledged certain
of his SoftNet shares as collateral for a loan and upon a default, a
change of control could occur. Included in Mr. Harvey's total are 1,564
shares which are issueable upon exercise of a Common Stock Purchase
Warrant at $1.75 per share, which warrant expires February 18, 1998.
<F2> John Jellinek is listed because he controls Jelco Ventures, Inc. which
has an option to purchase 250,000 of the Company's common stock at $1.75
per share, which option expires July 31, 1997. In addition, Mr.
Jellinek has shared voting power in Jelken Corp. which owns 80,000
shares of the Company's common stock and has rights to acquire 34,000
shares which are issueable upon exercise of Common Stock Purchase
Warrants at prices ranging from $5.50 to $1.75 per share, such warrants
expiring between August 12, 1998 and March 1, 1999. The percentage
ownership set forth above is the percentage if the options were all
exercised. Also included are 2,000 shares held in trust for Mr.
Jellinek's minor children.
<F3> Mr. Kenny has shared voting power over 126,602 shares held by Kenny
family interests. In addition, Mr. Kenny has shared voting power in
Jelken Corp. which owns 80,000 shares of the Company's common stock and
has rights to acquire 34,000 shares which are issueable upon exercise of
Common Stock Purchase Warrants at prices ranging from $5.50 to $1.75 per
share, such warrants expiring between August 12, 1998 and March 1,
1999., These shares are also included in Mr. Jellinek's ownership (see
note 2).
<F4> Included in Mr. Gordon's total are 38,748 shares owned by Tartan Group,
Inc., formerly Tartan Energy Corporation (owned 38.5% by Mr. Gordon,
such ownership representing 51.33% of the voting stock) and 20,000
shares which are issueable upon exercise of a Common Stock Purchase
Warrant at $1.75 per share, which warrant expires February 18, 1998.
Not included are 14,500 shares held by a trust of which Mr. Gordon is an
income beneficiary but in which he has no voting rights.
</FN>
</TABLE>
SECURITY OWNERSHIP OF MANAGEMENT AS OF SEPTEMBER 30, 1994
The following table contains information regarding the beneficial ownership
of shares of common stock of the Company ($.01 par value common stock) of
each of the individual directors and officers, and of directors and officers
as a group:
<TABLE>
<CAPTION>
Amount and nature of Approximate
Name of beneficial owner beneficial ownership percentage of class
<S> <C> <C>
Peter R. Harvey 503,928 <F1> 19.1
John Jellinek 378,000<F2><F3> 12.6
Philip Kenny 240,602 <F3> 9.0
John G. Hamm 52,031 <F4> 2.0
Alfred Ziegler 40,317 <F5> 1.5
All directors and officers
as a group (five) 1,088,878 36.6
______________
<FN>
<F1> See Note 1 under "Security Ownership of Certain Beneficial Owners",
above.
<F2> See Note 2 under "Security Ownership of Certain Beneficial Owners",
above.
<F3> See Note 3 under "Security Ownership of Certain Beneficial Owners",
above.
<F4> Of Mr. Hamm's shares, 37,031 are held jointly with his wife Shirl
Hamm. Included in the total are 15,000 shares which are issueable
upon exercise of a Common Stock Purchase Warrant at $1.75 per
share, which warrant expires February 18, 1998.
<F5> Included are 40,000 shares which are issueable upon exercise of a
Common Stock Purchase Warrant at $1.75 per share, which warrant
expires February 18, 1998. His wife, Isolde Ziegler, owns 300
shares of common stock to which Mr. Ziegler disclaims ownership.
</FN>
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note 4 of Notes to Consolidated Financial Statements for disclosure of
the information required by this Item.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Listed below are all financial statements and exhibits filed as a
part of this report:
(1) Financial Statements. Reference is made to the index to financial
statements on page 12.
(2) Exhibits.
(2a) Agreement and Plan of Reorganization dated
October 28, 1994 regarding the acquisition
of Communicate Direct, Inc. including additional
exhibits covering the preferred shares, various
notes and warrants, etc. issued in connection
with this acquisition (3)
(3)(i) Certificate of Incorporation (1)
(3)(i) Amendment to Certificate of Incorporation (2)
(3)(ii) By-Laws (2)
(10a) HPR License Agreement (2)
(10b) Imnet Distributor Agreement (2)
(10c) Utilization Management Associates, Inc. Stock
Purchase Agreement (2)
(21) List of Subsidiaries as of September 30, 1994
(27) Financial Data Schedule
(1) From 1983 Form 10-K
(2) From 1993 Form 10-K
(3) From Form 8-K dated October 31, 1994
(b) No reports on Form 8-K have been filed in the last quarter of the
period covered by this report.
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.
By: /S/ John Jellinek
John Jellinek
President and Chief Executive Officer
By: /S/ Martin A. Koehler
Martin A. Koehler
Vic President - Finance and Chief
Financial Officer
Dated:
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/S/ John J. McDonough /S/ John Jellinek
John J. McDonough John Jellinek
Chairman of the Board of Directors Director
Dated: Dated:
/S/ Ian B. Aaron /S/ John G. Hamm
Ian B. Aaron John G. Hamm
Director Director
Dated: Dated:
/S/ Philip Kenny _______________________________
Philip Kenny Alfred J. Ziegler
Director Director
Dated: Dated:
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
REPORT OF INDEPENDENT ACCOUNTANTS 13
SOFTNET SYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 1994 and 1993 14
Consolidated Statements of Operations for the years ended
September 30, 1994 and 1993 15
Consolidated Statements of Shareholders' Equity for the
years ended September 30, 1994 and 1993 16
Consolidated Statements of Cash Flows for the years ended
September 30, 1994 and 1993 17
Notes to Consolidated Financial Statements 18-27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
SoftNet Systems, Inc.:
We have audited the consolidated financial statements of SoftNet Systems,
Inc. (formerly The Vader Group Inc.) and Subsidiaries listed in the Index on
page 12 of this Form 10-KSB. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SoftNet
Systems, Inc. and Subsidiaries as of September 30, 1994 and 1993 and the
consolidated results of their operations and their cash flows for each of the
years then ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
January 6, 1995
Chicago, Illinois
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 30, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
ASSETS
Current assets:
Cash $ 176,538 $ 62,856
Accounts receivable 88,986 6,836
Prepaid expenses 96,060 6,069
Total current assets 361,584 75,761
Other assets:
Office furniture and equipment, net of
accumulated depreciation
of $102,152 in 1994 and $28,622 in 1993 225,450 172,652
Investment in Imnet, at cost 1,989,379 791,373
Intangible assets, net of amortization of
$5,018 224,394 -
Total other assets 2,439,223 964,025
Total Assets $ 2,800,807 $ 1,039,786
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Professional fees payable $ 208,710 $ 115,367
Accrued expenses and accounts payable 530,065 57,358
Current portion of capitalized equipment
lease obligations 82,226 60,005
Senior Notes payable,
net of discount of $42,914 in 1993 770,000 357,086
Total current liabilities 1,591,001 589,816
Capitalized equipment lease obligations 53,577 95,070
Common Stock Subject to Put Options
(29,630 shares) 200,000 -
Shareholders' Equity :
Preferred stock, $.10 par value,
4 million shares authorized, none issued - -
Common stock, $.01 par value,
10 million shares authorized, 2,602,598 and
2,306,076 shares outstanding in 1994 and 1993,
respectively, net of treasury shares
of 1,906 in 1994 and 4,406 in 1993 26,026 23,061
Capital in excess of par value 16,428,886 13,952,143
Accumulated deficit ( 15,498,683) ( 13,620,304)
Total shareholders' equity 956,229 354,900
Total Liabilities and Shareholders' Equity $ 2,800,807 $ 1,039,786
See notes to consolidated financial statements.
</TABLE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended September 30, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Revenues:
Data services $ 883,352 $ 43,682
Interest and other income 1,967 3,372
Total revenues 885,319 47,054
Expenses:
Costs and general and administrative 2,081,888 721,659
Amortization and depreciation 78,548 115,722
Interest expense, including non-cash
charges of $514,164 and $18,961
relating to Senior Note discount 603,262 37,754
Total expenses 2,763,698 875,135
NET LOSS ($1,878,379) ($828,081)
Net loss per common share ($ .75) ($ .37)
Weighted average common shares outstanding 2,488,208 2,254,709
See notes to consolidated financial statements.
</TABLE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended September 30, 1994 and 1993
<TABLE>
<CAPTION>
Capital in
Common Stock excess of Accumulated
Shares Amount par value deficit
<S> <C> <C> <C> <C>
Balance, October 1, 1992 2,202,229 $220,223 $13,404,739 ($12,792,223)
Common stock used to settle
Liability related to
discontinued operations 23,847 2,385 45,309 -
Common stock issued for
investment in Imnet 80,000 8,000 202,000 -
Change in par value of
common stock to $.01
per share - ( 207,547) 207,547 -
Compensation relating to
warrants - - 30,673 -
Value assigned warrants
issued with Senior
Notes payable - - 61,875 -
Net loss - - - ( 828,081)
Balance, September 30, 1993 2,306,076 23,061 13,952,143 ( 13,620,304)
Common stock issued for
investment in Imnet 196,022 1,960 733,123 -
Common stock issued for
finder's fee relating
to UMA acquisition 2,500 25 16,850 -
Capital contribution - - 850,000 -
Value assigned warrants
issued with Senior
Notes payable - - 471,250 -
Sale of common stock 88,000 880 388,120
Exercise of warrants 10,000 100 17,400 -
Net loss - - - ( 1,878,379)
Balance, September 30, 1994 2,602,598 $ 26,026 $16,428,886 ($15,498,683)
See notes to consolidated financial statements.
</TABLE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 30, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Operating Activities
Net loss ($1,878,379) ($ 828,081)
Adjustments to reconcile net
loss to net cash used by operations:
Amortization and depreciation 78,548 115,722
Non-cash charge for compensation related
to change in exercise price of certain
warrants and certain warrants issued at
exercise prices less than market - 30,673
Non-cash charge of interest expense related
to amortization of Senior Note
payable discount 514,164 18,961
Changes in operating assets and liabilities:
Increase in accounts receivable ( 22,275) ( 6,836)
Increase in prepaid expenses ( 86,784) ( 6,069)
Increase in current liabilities 514,899 27,085
Net cash used by operating activities ( 879,827) ( 648,545)
Investing Activities
Cash paid for investment in Imnet ( 462,924) ( 381,373)
Net cash paid in connection with acquisition
of consolidated subsidiary ( 26,498) -
Purchase of equipment and office furniture ( 74,696) ( 12,261)
Net cash used by investing activities ( 564,118) ( 393,634)
Financing Activities
Capital contribution 850,000 -
Proceeds of Senior Notes payable 920,000 400,000
Repayment of Senior Notes payable ( 550,000) -
Sale of common stock 389,000 -
Exercise of warrants 17,500 -
Capitalized equipment lease
obligations paid ( 68,873) ( 33,938)
Net cash provided by financing activities 1,557,627 366,062
Increase (decrease) in cash and cash
equivalents 113,682 ( 676,117)
Cash and cash equivalents at beginning of year 62,856 738,973
Cash at end of year $ 176,538 $ 62,856
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 59,974 $ 31,831
Equipment and office furniture acquired
by capitalized leases $ 49,601 $ 189,013
See notes to consolidated financial statements.
</TABLE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NAME CHANGE AND PRINCIPLES OF CONSOLIDATION In 1993, the name of the
Company was changed to SoftNet Systems, Inc. from The Vader Group Inc. The
consolidated financial statements include the accounts of SoftNet Systems,
Inc. (SoftNet) and its subsidiaries (Company). All intercompany transactions
have been eliminated in the consolidated financial statements.
OFFICE FURNITURE AND EQUIPMENT Office furniture and equipment (primarily
computers and related equipment) is stated at cost and depreciated by the
straight-line method over the useful lives of the related assets. The
estimated useful lives range from three to five years for equipment to seven
years for office furniture. Repairs and maintenance are charged to expense
as incurred.
INVESTMENT IN IMNET The Company currently carries its investment in Imnet
Systems, Inc. at cost. There is no readily determinable fair market value of
the investment in Imnet at this time. Imnet is currently incurring operating
losses (see Note 3). No valuation reserve against the carrying value of this
investment has been provided since management believes there has been no
other than temporary impairment in the value of the Company's investment.
INTANGIBLE ASSETS Costs in excess of fair value of net assets acquired
incurred in connection with the acquisition of Utilization Management
Associates, Inc. (UMA) (see Note 3) are 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. The Company assesses the
recoverability of unamortized goodwill by reviewing the sufficiency of
estimated future operating income and undiscounted cash flows of the related
entity to cover the amortization during the remaining amortization period.
REVENUE RECOGNITION The Company recognizes health care cost containment
revenue upon completion of services. Revenue from image processing is
generated from three sources, systems sales and installations, document
imaging, and on-going maintenance. Revenue from document imaging and on-
going maintenance is recognized as services are completed. Revenue from the
sale and installation of imaging systems is recognized on a percentage-of-
completion.
INCOME TAXES Statement of Financial Accounting Standards No. 109 -
Accounting for Income Taxes which revised certain financial accounting and
reporting standards for income taxes was adopted by the Company effective
October 1, 1993. The adoption of Statement No. 109 did not have a material
impact on the Company's financial statements. In accordance with this
financial accounting standard, the Company recognizes the amount of taxes
payable or refundable for the current year and recognizes deferred tax
liabilities and assets for the future tax consequences of events that have
been recognized in the Company's financial statements or tax returns. The
Company currently has substantial net operating loss carryforwards. No
deferred tax assets are recorded due to the losses the Company has reported
in the recent years.
LOSS PER SHARE Loss per share is based on the weighted average number of
common shares (including common stock subject to put options) outstanding
during the periods. Common stock equivalents (outstanding options and
warrants) are not included in the computation of loss per share since their
effect is anti-dilutive.
CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows,
the Company considers all highly liquid debt instruments purchased with an
initial maturity of three months or less to be cash equivalents.
2 EVENTS OCCURRING SUBSEQUENT TO SEPTEMBER 30, 1994:
ACQUISITION OF CDI On October 31, 1994, by merger with and into its
wholly-owned subsidiary, the Company acquired Communicate Direct, Inc. (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 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 SoftNet 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. Additional shares of SoftNet preferred stock 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 in the
period ending September 30, 1997. In addition, each of CDI's shareholders,
who are also executives of CDI, received employment contracts 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 will bear interest at 1% above the bank's prime
rate (8.5% on October 31, 1994), such interest being payable monthly and the
loan is guaranteed by the Company.
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.
An unaudited pro forma consolidated balance sheet for the Company as of
September 30, 1994 and CDI as of October 31, 1994 (closing date) revised and
restated to give effect to the adjusted purchase price described above and
also reflecting the additional financing outlined below (as if it had
occurred on September 30, 1994) is as follows:
Pro Forma Consolidated Balance Sheet (Unaudited)
<TABLE>
<CAPTION>
Company CDI Entries Pro Forma
<S> <C> <C> <C> <C>
Current assets $ 361,584 $ 2,079,988 $ 1,793,965 $ 4,235,537
Property and
equipment, net 225,450 372,074 597,524
Other assets - 107,827 40,686 148,513
Investment in Imnet 1,989,379 - 1,989,379
Intangible assets, net 224,394 - 4,376,613 4,601,007
Total assets $ 2,800,807 $ 2,559,889 $ 6,211,264 $11,571,960
Current liabilities $ 1,591,001 $ 4,674,896 $ 282,538 $ 6,548,435
Long-term debt and
lease obligations 53,577 - 1,348,993 1,402,570
Common stock subject
to put options 200,000 - 200,000
Preferred stock 1,745,148 1,745,148
Shareholders' equity -
Common stock 26,026 1,000 1,000 28,026
Capital in excess
of par value 16,428,886 - 717,578 17,146,464
Accumulated
earnings
(deficit) ( 15,498,683) ( 2,116,007) 2,116,007 ( 15,498,683)
Total
Shareholders'
equity 956,229 ( 2,115,007) 2,834585 1,675,807
Total liabilities
and
shareholders'
equity $ 2,800,807 $ 2,559,889 $ 6,211,264 $11,571,960
</TABLE>
The entries reflected above to arrive at the pro forma consolidated balance
sheet consist of the issuance of SoftNet's preferred shares ($1,745,148), the
issuance of SoftNet's Series B Notes ($98,993), the cash payment of $100,000,
the reclassification and accrual of legal, accounting and other fees incurred
in connection with the acquisition ($317,465) and the offsetting investment
in CDI ($2,261,607). The investment in CDI is eliminated against the equity
of CDI with the balance being goodwill and added to intangible assets
($4,376,613).
In addition, the entries reflected in the pro forma consolidated balance
sheet also reflect the additional financing disclosed below. The cash
proceeds of the sale of 200,000 common shares ($800,000) and the issuance of
10% convertible subordinated notes by SoftNet ($1,250,000) are recorded net
of the related fees incurred (a total of $121,108).
Not included in the above pro forma consolidated balance sheet are the
capital contribution by SoftNet to CDI of $1,575,000 and an initial draw down
under the new CDI bank line-of-credit, the proceeds of which were used to pay
existing current liabilities of CDI and to add to their working capital.
A pro forma consolidated statement of operations for the fiscal year ended
September 30, 1994 for the Company and CDI (as if CDI had been acquired
October 1, 1993) is as follows:
Pro Forma Consolidated Statement of Operations
For the year ended September 30, 1994 (Unaudited)
<TABLE>
<CAPTION>
Company CDI Entries Pro Forma
<S> <C> <C> <C> <C>
Sales $ 885,319 $ 11,577,220 $ - $ 12,462,539
Cost of sales - 6,763,943 6,763,943
885,319 4,813,277 5,698,596
Expenses -
Selling, general
and administrative 2,081,888 4,846,531 6,928,419
Amortization and
depreciation 78,548 70,637 437,661 586,846
Interest expense 603,262 105,921 184,246 893,429
Total expenses 2,763,698 5,023,089 621,907 8,408,694
Net loss ($1,878,379)($ 209,812) ($621,907) ($ 2,710,098)
Loss per share ($.75) ($.98)
</TABLE>
The entries reflected above to arrive at the pro forma consolidated
statement of operations consist of the amortization of goodwill ($437,661)
over a ten year period from acquisition and additional interest expense
incurred in connection with the issuance of (a) SoftNet's Series B notes
($7,425) and (b) SoftNet's 10% convertible subordinated notes ($125,000) and
(c) amortization of debt issuance costs ($51,821). The Series B notes bear
interest at prime which was assumed to average 7.5% for fiscal year 1994.
There were no intercompany transactions between the Company and CDI during
the year ended September 30, 1994. In addition, no adjustment was made for
the possible issuance of additional preferred shares based on CDI performance
levels.
The weighted average common shares outstanding used in computing the above
loss per share has been increased by 290,858 shares to reflect the common
stock equivalent status of the preferred shares issued in connection with the
acquisition.
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 $121,108 and
issued warrants to purchase 547,500 shares of its common stock exercisable
for five years at exercise prices ranging from $6-7/8 to $7.50 per share.
ADDITIONAL 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 and serves as an agent for Southwestern Bell and MCI. Terms of the
proposed acquisition involve the distribution of 1.2 million shares of the
Company's common stock or a combination of common and preferred stock. The
transaction is subject to several contingencies including completion of due
diligence, SoftNet board of director and shareholder approval and
governmental, regulatory and other third party approvals. Kansas
Communications, Inc. reported net earnings of $441,000 on revenues exceeding
$8 million for its most recent fiscal year ended March 31, 1994.
3. DESCRIPTION OF EXISTING BUSINESS:
The Company operates in the health care cost containment and image
processing industry. Image processing systems capture, index, store,
retrieve and print images of documents.
HEALTH CARE CODE REVIEW The Company uses the Code Review(R) software
developed by Boston-based Health Payment Review, Inc. (HPR) in the United
States for Taft-Hartley multi-employer trust funds and third party
administrators. The software evaluates medical bills to determine if the
charges are coded properly within American Medical Association guidelines. A
portion of any savings identified by Code Review from this evaluation are to
be paid to the Company.
INVESTMENT IN IMNET The Company holds an interest in Imnet Systems, Inc.
(Imnet), a privately owned company located in Atlanta, Georgia. The original
investment in Imnet facilitated the Company's obtaining a distributorship of
Imnet imaging systems. Imnet is the successor to the former Imnet, Inc. (now
called Imge, Inc.) and is a pioneer in imaging technology utilizing multi-
media, especially micro-film. It designs, manufactures, markets and services
state of the art document image processing systems that improve the
productivity and customer service capabilities of organizations in the United
States, Canada and Europe that process, file and retrieve large volumes of
paper documents and micro-film.
As of September 30, 1993, the Company had acquired 74,809.5 common shares
and 5,169 shares of Series A Preferred and 1,854 shares of Series B Preferred
stock of Imnet in exchange for cash of $569,837 and 80,000 shares of the
Company's common stock, valued at $210,000 or $2.625 per share (market price
at date agreement signed to acquire Imnet shares in exchange for the
Company's shares). The Company's investment at that time totaled $791,373
(including $11,536 of legal fees). In November 1993, the Company acquired
from Imnet an additional 11,684 shares of Imnet common stock and 935 shares
of Imnet Series A Preferred stock for cash of $140,209 (pursuant to a private
offering to existing Imnet shareholders). Also, in November, the Company
loaned Imge, Inc. (Imge) $319,361 in exchange for a convertible and
redeemable promissory note. Imge used such funds to purchase an additional
26,612.1 shares of Imnet common stock and 2,129 shares of Imnet Series A
Preferred stock in response to a capital call. Subsequent to September 30,
1994, the note was converted into 95% of the shares Imge acquired. The note
was canceled and the Company received an additional 25,281 shares of Imnet
common stock and 2,023 shares of Imnet Series A Preferred stock. In December
1993, the Company acquired from certain Imnet shareholders an additional
34,524.78 shares of Imnet common stock and 2,263.92 shares of Series A
Preferred and 1,131.96 shares of Series B Preferred stock for 196,022 shares
of the Company' s common stock, valued at $735,083 or $3.75 per share (market
price at date agreement signed to acquire Imnet shares in exchange for the
Company's shares). There are no outstanding capital calls to the Company and
the Company is not obligated to fund any future capital calls. At September
30, 1994, the cost (including $14,889 of legal fees and other costs) of the
Company's investment is $1,989,379.
Imnet's financial data is separately audited and reported on by independent
accountants whose audit report expressed an unqualified opinion. Imnet's
condensed balance sheets as of June 30, 1994 and 1993 and statements of loss
for the year ended June 30, 1994 and for the period October 5, 1992
(inception) through June 30, 1993 are as follows (in thousands of dollars):
Imnet Systems, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Assets:
Current assets $ 5,351 $ 3,312
Property and equipment, net of amortization 798 567
Acquired Technology, net of amortization 2,265 2,962
Total Assets $ 8,414 $ 6,841
Liabilities and Stockholders' Equity:
Current Liabilities $ 2,651 $ 2,952
Long-term Debt 2 4
Stockholders' Equity 5,761 3,885
Total Liabilities and Stockholders Equity $ 8,414 $ 6,841
Condensed Statements of Loss
Revenues $ 4,130 $ 1,961
Expenses:
Costs of products and services 3,663 1,918
Research and development 1,394 525
Sales and marketing 2,880 1,360
General and administrative 2,149 1,345
Other (income) expense, net ( 10) ( 9)
10,076 5,139
Net Loss ($ 5,946) ($ 3,178)
</TABLE>
ACQUISITION OF UMA On November 12, 1993, the Company acquired Utilization
Management Associates, Inc. (UMA), a Boston-based privately owned company
engaged in the medical cost containment business. UMA develops
scientifically valid systems for identifying inefficient or avoidable
hospital utilization. Such systems are used by health maintenance
organizations, insurance companies and hospitals. In its simplest
description, these systems contain the accepted medical procedures and
schedules to be followed for the treatment of specified medical conditions
incurred by patients and may be used on a prospective, concurrent or
retrospective basis to reduce the average length of a hospital stay. They
are also used to identify systemic causes of inappropriate hospitalization.
The Company acquired all of the outstanding common stock of UMA for shares
of the Company worth approximately $200,000 and certain other considerations.
The $200,000 was paid by the Company's issuing to the former shareholders of
UMA 29,630 shares of the Company's common stock (valued at $6.75 per share --
market price on date of acquisition) with the UMA shareholders receiving the
right to sell such shares back to the Company, at $6.75 per share, during a
period commencing on November 14, 1994 and subsequently extended to January
27, 1995. In addition, the UMA shareholders and their investment advisor
received options, expiring on September 30, 1998, to purchase 125,000 shares
of the Company's common stock at $4.0429 per share (Option Price). The
Option Price is the average market price per share during the period July 19,
1993 (date of the signing of the original letter of intent) to November 12,
1993. The acquisition agreement also contains an earnout agreement whereby
the UMA shareholders, who are and will remain the principal employees of UMA,
receive 25% of the UMA pretax profits (as defined) through September 30,
1996. The earnout obligation is payable in cash or may, at option of the
recipients, be partially received in shares of the Company's common stock at
the Option Price up to a maximum of $575,000. The acquisition agreements
includes non-compete agreements and employment agreements with the principal
employees and a provision that the Company provide UMA a $300,000 revolving
line of credit, bearing interest at prime plus 1.5%, through September 30,
1996. It is anticipated the revolving line of credit will be funded by cash
advances from the Company as requested by UMA. SoftNet's (the parent
company) investment in UMA, at cost, consists of $200,000 assigned to the
shares issued at the closing and fees totaling $57,550 (legal fees, finders
fee and listing application fees). UMA's net assets at November 12, 1993
totaled $28,137 including $51,151 of current liabilities. The resulting
goodwill, amounting to $229,413 and recorded as of the acquisition date, will
be increased by the amount of the earnout obligation as the amount is
determined. There was no earnout obligation incurred for the period from
November 12, 1993 through September 30, 1994.
Pro forma consolidated results of operations for the Company, as if UMA had
been acquired at the beginning of 1994, are as follows:
<TABLE>
<CAPTION>
1994 Entries Pro forma
<S> <C> <C> <C>
Revenues $ 885,319 $ 45,103 $ 930,422
Costs and general and
administrative expenses 2,081,888 101,297 2,183,185
Amortization and
depreciation expense 78,548 717 79,265
Interest expense 603,262 603,262
Income tax expense - - -
Total costs and expenses 2,763,698 102,014 2,865,712
Net loss ($1,878,379) ($ 56,911) ($1,935,290)
Loss per share ($ .75) ($ .78)
</TABLE>
The combined net loss of the Company and UMA has been increased on a pro
forma basis by adding the results of operations of UMA for the period from
October 1, 1993 to November 11, 1993 (a loss of $46,194), additional general
and administrative costs (non-compete payment of $10,000) and additional
amortization of goodwill of $717 for the period of October 1, 1993 to
November 11, 1993. The weighted average shares outstanding used in computing
the above loss per share has been adjusted to assume the shares were issued
on October 1, 1993.
4. RELATED PARTY TRANSACTIONS:
In 1987 and 1988 a subsidiary of Ozite Corporation (Ozite) regularly
purchased products from a subsidiary of the Company. The assets of this
operation were sold in 1988, except for a trade account receivable due from
Ozite of $2,612,000 and certain inventory which was subsequently sold to
Ozite for $1,235,807. In addition, the Company in 1990 made a cash advance
to Ozite of $1,100,000. Peter R. Harvey, Chairman and Chief Operating
Officer of the Company and John G. Hamm, a Director of the Company, had
substantial interests in Ozite at the time of these transactions. In 1991,
the amounts due the Company were considered uncollectible and the Company
recorded a provision for bad debts for the amounts due. Subsequently, Ozite
repaid $850,000 (recorded as a capital contribution) and owes a renegotiated
balance of $4,150,000 payable on demand at any time on or after January 1,
1995. However, Ozite's ability to repay is uncertain and therefore, the
Company is not relying on the Note repayments as a means of funding its
future cash requirements. The obligation is due from Ozite Corporation, the
parent company. Disclosure in Ozite's Form 10-K states that the parent
corporation has a deficiency in assets, significant overdue liabilities -
principally to private placement investors and related parties, and no
continuing operations or cash flow, raising substantial doubt about whether
the parent corporation will be able to continue as a going concern. There
are certain restrictions on Ozite's majority-owned subsidiary, Plastic
Specialties & Technologies, Inc. (PST) restricting its ability to pay
dividends to Ozite and, accordingly, the parent corporation (Ozite) can not
rely solely on PST to satisfy its existing liabilities and resolve its
deficiency in assets.
On July 6, 1994, Ozite Corporation and Pure Tech International, Inc. signed
a definitive merger agreement subject to shareholder approval. It is not
known at this time, if the proposed merger is consummated, how it will affect
Ozite's financial condition.
5. 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 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 September 30,
1994, their aggregate unpaid compensation was $392,500. A portion of each
individual's compensation, aggregating $170,000 at September 30, 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. At
September 30, 1994, additional compensation relating to the payment of
compensation in shares or warrants aggregated $28,335. Recently cash was
received through private placements of the Company's securities which should
allow the Company to stay current with future executive compensation payments
beginning in October 1994.
6. DISCONTINUED OPERATIONS:
A liability of $67,747 relating to discontinued operations at September 30,
1992 consisted of the unpaid balance of a 9-1/2% convertible note payable
(plus accrued interest) issued in lieu of severance pay to a former officer
who terminated employment with the Company in April 1988. Portions of the
note were paid in prior years. Pursuant to an agreement reached in October,
1992, the Company satisfied this obligation by issuing the former officer
23,847 shares of the Company's common stock from its treasury shares and
paying him $20,000 in cash in December 1992.
7. SENIOR NOTES PAYABLE:
During 1993, the Company issued Senior Notes in the aggregate amount of
$400,000 and the proceeds were added to the working capital of the Company.
The Senior Notes matured December 31, 1993, interest at 10% per annum was
payable quarterly and at maturity. The note holders received warrants
(expiring in 1998) to purchase a total of 35,000 shares of the Company's
common stock at exercise prices ranging from $1.75 to $3.75 per share. Since
the exercise prices were less than the market price of the Company's common
stock at the time of issuance of the warrants, a discount was applied to the
face value of the notes equal to the aggregate of the difference between the
warrants' market and exercise prices. The discount totaled $61,875 for the
notes outstanding at September 30, 1993 and was charged against earnings as
additional interest expense in the period ending December 31, 1993. $18,961
of such discount was applicable to fiscal 1993.
During the two months ended November 30, 1993, the Company issued
additional Senior Notes on similar terms in the aggregate amount of $700,000,
the applicable discount being $325,625. These note holders received warrants
to purchase 70,000 shares of the Company's common stock at an exercise price
of $1.75 per share. The discount was expensed in fiscal 1994.
On December 30, 1993, the Company used a portion of the cash proceeds from
Ozite (see Note 4) to repay $550,000 of the Senior Notes. The maturity of
the balance of the notes was automatically extended to February 28, 1994 in
accordance with their terms, for which the note holders received an
additional 55,000 warrants with exercise prices ranging from $1.75 to $3.75
per share. A discount of $145,625 was involved which was also expensed in
1994. The maturity of the outstanding Senior Notes at February 28, 1994
($550,000) was further extended to October 1, 1994 for which the note holders
received additional warrants to purchase 77,000 shares of the Company's
common stock at an exercise price of $5.50 per share (the market price on
February 28, 1994).
Subsequent to February 28, 1994, the Company issued $220,000 additional
Senior Notes due October 1, 1994, bearing interest at 10% per annum. The
note holders also received warrants expiring in 1999 to purchase a total of
29,500 shares of the Company's common stock with exercise prices ranging from
$5.75 to $6.125 per share (market price at the time of issuance of the
warrants).
Interest on the outstanding Senior Notes was paid for the period ended
March 31, 1994 and accrued interest of $36,086 on the outstanding Senior
Notes for the quarters ended June 30 and September 30, 1994 is included in
accrued expenses in the accompanying consolidated balance sheet.
Subsequent to September 30, 1994, the Company repaid $50,000 of the
outstanding 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.
8. CAPITALIZED LEASE OBLIGATIONS AND OTHER LEASE COMMITMENTS:
The Company leases computer equipment and certain other office equipment
under leases which are capital in nature expiring at various times during the
period December 31, 1995 to April 30, 1997. Lease principal payments in 1994
aggregated $68,873 leaving a balance to be paid of $135,803 including buyouts
at the end of each lease. Future monthly principal payments under these
leases aggregate $82,226 in 1995, $37,269 in 1996 and $6,224 in 1997 and the
buyouts total $10,084 if the Company retains the equipment.
SoftNet leases office space at Lincolnshire, Illinois under a lease
beginning December 20, 1993 and expiring March 31, 1998. The Company is
responsible for its share of real estate taxes and operating expenses
pertaining to this building. The base rent escalates at a fixed rate of 3%
per year. Rent expense under this lease was $41,996 in 1994. SoftNet also
leases office space in New York on a month to month basis at $200 per month,
a total of $2,400 for 1994. UMA leases office space in Wellsley,
Massachusetts under a lease beginning February 1, 1994 and expiring January
31, 1997. The lease covers all operating costs related to the office space.
Rent expense under this lease was $30,392 in 1994. The aggregate amount of
the lease payments for each of the five fiscal years ending September 30 is
as follows:
1995 $ 100,055
1996 100,935
1997 71,564
1998 57,359
1999 14,399
$ 344,312
9. INCOME TAXES:
Due to the Company's tax loss carryforwards, no income tax benefit was
recognized in connection with the Company's 1994 and 1993 pre-tax losses.
Net operating loss carryforwards of approximately $6.5 million, expiring in
1999 through 2009, are available as of September 30, 1994 to be applied
against future taxable income, if any.
The types of temporary differences between the tax basis of assets and
liabilities and their financial reporting amounts that give rise to the
deferred taxes at September 30, 1994 and the approximate tax effects are as
follows:
<TABLE>
<CAPTION>
Temporary Tax
Difference Effect
<S> <C> <C>
Receivable from Ozite Corporation $ 4,150,000 $ 1,411,000
Value assigned to warrants issued
with Senior Notes 533,000 181,000
Net operating loss carryforwards 6,500,000 2,210,000
Total deferred tax asset 11,183,000 3,802,000
Costs in excess of fair value of
net assets acquired - UMA ( 24,000) ( 76,000)
Total deferred tax liability ( 224,000) ( 76,000)
Valuation allowance ( 3,726,000)
Net deferred tax asset $ -
</TABLE>
A valuation allowance was recorded as a reduction to the deferred tax
assets due to the uncertainty of the ultimate realization of their future
benefit.
10. COMMON STOCK SUBJECT TO PUT OPTIONS:
In connection with the acquisition of UMA (see note 3), 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.
11. STOCK OPTIONS AND WARRANTS:
The Company does not have a stock option plan. Outstanding warrants and
options granted prior to 1993 were originally granted at exercise prices
equal to the then current market prices. Outstanding warrants and options
(all are currently exercisable) to purchase shares of common stock at
September 30, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Issued in 1994 in connection with the acquisition
of UMA at $4.0429 per share
(See Note 3) expiring in 1998 125,000 -
Issued in 1994 to Senior Note holders (115,000 at
$1.75 per share, 10,000 at $3.75 per share)
expiring in 1999 (market prices at date of
grant ranged from $3.50 to $6.63 per share)
(See Note 7), warrants for 5,000 shares
exercised in 1994 120,000 -
Issued in 1994 to Senior Note holders (at market
price at date of grant - 77,000 at $5.50 per
share, 5,000 at $5.75 per share and 24,500 at
$6.125 per share) expiring in 1999 (See Note 7) 106,500 -
Issued in 1993 to Senior Note holders (5,000 at
$3.75 per share, 30,000 at $1.75 per share)
expiring in 1998 (market prices at date of
grant ranged from $3.50 to $4.00 per share)
(See Note 7), warrants for 5,000 shares
exercised in 1994 30,000 35,000
Issued in 1993 to certain directors for past
services at $1.75 per share, expiring in 1998,
as approved by the Company's shareholders
(market prices at date of grant ranged from
$2.00 to $2.50 per share) 39,000 39,000
Issued in 1992 to Jelco Ventures, Inc.
(controlled by the President of the Company)
in connection with the acquisition of HPR
software at $1.75 per share expiring in 1997 250,000 250,000
Issued in 1990 to directors and outside counsel
for services at $4 per share, expiring in 1995.
In 1993, the exercise price was reduced to
$1.75 per share and the expiration date was
extended to 1998, as approved by the Company's
shareholders 57,000 57,000
Issued in 1988 (in connection with short-term
loans to the Company) to the Chairman of the
Board at $5 per share, expiring in fiscal year
1993. In 1993, the exercise price was reduced
to $1.75 per share and the expiration date was
extended to 1998, as approved by the Company's
shareholders 1,564 1,564
729,064 382,564
</TABLE>
The above 1993 changes in the exercise prices of warrants issued to the
directors and approved by the Company's shareholders resulted in a new
exercise price ($1.75 per share) which was less than the then current market
price ($2.00 to $2.50 per share) resulting in a non-cash charge to earnings
of $30,673.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SoftNet
Systems, Inc.'s Form 10-KSB/AA and is qualified in its entirety by refrence to
such form 10-KSB/AA filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1994
<CASH> 176,538
<SECURITIES> 1,989,379
<RECEIVABLES> 88,986
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 361,584
<PP&E> 225,450
<DEPRECIATION> 102,152
<TOTAL-ASSETS> 2,800,807
<CURRENT-LIABILITIES> 1,591,001
<BONDS> 53,577
<COMMON> 16,454,912
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,800,807
<SALES> 883,352
<TOTAL-REVENUES> 885,319
<CGS> 0
<TOTAL-COSTS> 2,763,698
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 603,262
<INCOME-PRETAX> (1,878,379)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,878,379)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,878,379)
<EPS-PRIMARY> (0.75)
<EPS-DILUTED> (0.75)
</TABLE>
