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: March 31, 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.)
One Overlook Place, Lincolnshire, Illinois 60069
(Address of principal executive office)
Registrant's telephone number, including area code: (708) 793-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
As of March 31, 1995, 2,834,919 common shares were outstanding which
includes 29,630 shares of common stock subject to put options.
PART 1. FINANCIAL STATEMENTS
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, September 30,
1995 1994
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash $ 405,504 $ 176,538
Trade receivables, net of allowance for
doubtful accounts of $16,000 at
March 31, 1995 1,729,866 88,986
Other receivables 197,487 -
Inventories 850,514 -
Prepaid expenses 141,684 96,060
Total current assets 3,325,055 361,584
Other assets:
Property and equipment, net of accumulated
depreciation of $193,260 and $102,152,
respectively 866,990 225,450
Other assets 404,699 -
Investment in Imnet, at cost 1,989,379 1,989,379
Intangible assets, net of accumulated amortization
of $54,041 and $5,018, respectively 4,568,432 224,394
Total other assets 7,829,500 2,439,223
Total Assets $11,154,555 $ 2,800,807
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 3,331,453 $ 738,775
Stock put liability 200,000 -
Bank loans 1,500,000 -
Deferred revenue 165,900 -
Senior Notes payable 295,000 770,000
Current portion of long-term liabilities 156,438 82,226
Total current liabilities 5,648,791 1,591,001
Long-term liabilities:
Capitalized lease obligations 158,631 53,577
Long-term debt 2,407,646 -
Total long-term liabilities 2,566,277 53,577
Common stock subject to put options, 29,630 shares - 200,000
Redeemable Series A Preferred stock
outstanding, 290,858 shares 1,745,148 -
Shareholders' Equity:
Preferred stock, $.10 par value, 4 million
share authorized - -
Common stock, $.01 par value, 10 million
shares authorized, 2,805,289 and
2,602,598 shares outstanding, respectively,
net of treasury shares of 1,906 28,053 26,026
Capital in excess of par value 17,207,669 16,428,886
Accumulated deficit ( 16,041,383) ( 15,498,683)
Total shareholders' equity 1,194,339 956,229
Total Liabilities and Shareholders' Equity $11,154,155 $ 2,800,807
</TABLE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1995 1994 1995 1994
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 3,585,929 $ 188,566 $ 5,991,429 $ 327,270
Cost of sales 1,940,269 160,515 3,242,735 263,581
Gross profit 1,645,660 28,051 2,748,694 63,689
Expenses:
Selling, general and
administrative 1,577,941 208,596 2,548,581 330,556
Amortization of goodwill
and depreciation
of property 82,750 19,571 140,131 34,739
Corporate 204,810 109,111 344,020 216,472
Total expenses 1,865,501 337,278 3,032,732 581,767
Income (loss) from operations ( 219,841) ( 309,227)( 284,038)( 518,078)
Interest expense:
Interest expense, including
amortization of deferred
debt issuance cost ( 99,822) ( 18,303)( 210,841)( 42,833)
Non-cash charges relating to Senior
Note discount ( 51,875) ( 145,625)( 51,875)( 514,164)
Total interest expense ( 151,697) ( 163,928)( 262,716)( 556,997)
Other income - - 4,054 -
Net income (loss) ($ 371,538) ($ 473,155) ($ 542,700) ($1,075,075)
Net income (loss) per share ($ .13) ($ .19) ($ .20) ($ .45)
Weighted average common shares
outstanding 2,834,919 2,534,289 2,781,880 2,412,826
</TABLE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
March 31,
1995 1994
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ($ 542,700) ($1,075,075)
Adjustments to reconcile net income (loss)
to net cash used by operations:
Amortization of goodwill and depreciation
of property 140,131 34,739
Amortization of deferred debt issuance costs 21,592 -
Provision for losses on trade receivables 16,000 -
Non-cash charge of interest expense related
to amortization of Senior
Notes payable discount 51,875 514,164
Changes in operating assets and liabilities,
net of operating assets and
liabilities acquired in acquisition of
consolidated subsidiaries:
Increase in receivables ( 803,795)( 5,376)
Increase in inventory ( 165,992) -
Increase in prepaid expenses ( 29,609) ( 38,407)
Increase (decrease) in accounts
payable and accrued liabilities ( 985,024) 53,938
Increase in deferred revenues 80,652 -
Increase in long-term interest
payable - long-term 3,653 -
Net cash used by operating activities ( 2,213,217) ( 516,017)
INVESTING ACTIVITIES
Net cash paid in connection with acquisition
of consolidated subsidiaries ( 139,980) ( 26,498)
Purchase of office furniture and equipment( 206,354) ( 52,921)
Cash paid for investment in Imnet - ( 462,924)
Increase in other assets ( 267,778) -
Net cash used by investing activities ( 614,112) ( 542,343)
FINANCING ACTIVITIES
Proceeds from issuance of Convertible
Subordinated notes 2,305,000 -
Proceeds from sale of common stock 726,250 -
Borrowings under new revolving bank loans, net 1,500,000 -
Repayment of prior revolving credit facility ( 825,000) -
Repayment of notes payable ( 200,000) -
Capital contribution - 850,000
Proceeds from issuance of Senior Notes 25,000 775,000
Repayment of Senior Notes ( 500,000) ( 550,000)
Exercise of warrants - 6,563
Capitalized lease obligations incurred on
existing equipment 93,000 -
Capitalized lease obligations paid ( 67,955) ( 30,901)
Net cash provided by financing activities 3,056,295 1,050,662
Increase in cash 228,966 ( 7,698)
Cash at beginning of period 176,538 62,856
Cash at end of period $ 405,504 $ 55,158
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 134,907 $ 31,492
Cash paid during the period for income taxes $ - $ -
Property acquired by capitalized leases $ 154,221 $ -
Investment in Imnet acquired with issuance
of common stock $ - $ 735,083
Consolidated subsidiaries acquired with issuance
of stock and notes $ 1,844,141 $ 216,875
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRESENTATION OF STATEMENT OF OPERATIONS:
In connection with the acquisition of Communicate Direct, Inc. (CDI) on
October 31, 1994, the Company has reclassified the statement of operations
for the prior fiscal year to conform to the presentation used in 1995. In
addition, the Company originally reported the receipt of $850,000 in December
1993 as a reduction of a prior year provision for bad debts. Following a
review of the accounting treatment for this transaction by the Securities and
Exchange Commission, it was agreed that it should have been recorded as a
capital contribution and no income recognized.
2. SUMMARY OF CERTAIN ACCOUNTING POLICIES:
INTANGIBLE ASSETS Costs in excess of fair value of net assets acquired
incurred in connection with the acquisitions of Utilization Management
Associates, Inc. (UMA) and CDI 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.
NET INCOME (LOSS) PER SHARE Net income (loss) per share is based on the<PAGE>
weighted average number of common shares (including common stock subject to
put options) outstanding during the periods. During the periods presented,
the 29,630 shares subject to a put option have been considered outstanding
until this obligation is resolved (see Note 8). Common stock equivalents
were not included in the computation of income (loss) per share since their
effect was anti-dilutive. In addition, no effect has been given to the
pending conversion of the preferred shares to common shares (which was
approved by the shareholders in April 1995) as this would also be anti-
dilutive.
3. ACQUISITION OF CDI:
On October 31, 1994, the Company acquired CDI pursuant to a merger of CDI
into a wholly-owned subsidiary of the Company in accordance with a certain
Agreement and Plan of Reorganization dated October 28, 1994 (the CDI Merger
Agreement). CDI is a Chicago-based company which sells and services
telephone systems and computer hardware manufactured by others including
application oriented peripheral products like voice mail, automated attendant
systems, interactive voice response (IVR) and video conferencing systems.
Additionally, CDI develops application software for IVR and computer
telephone integration applications. CDI also sells and installs local and
long distance network services.
The Company acquired all of the outstanding common stock of CDI for a
consideration initially valued at $5,252,138 consisting of:
a. 290,858 shares of SoftNet Series A Preferred Stock (Preferred shares)
valued at $6.00 per share (reflecting a discount from the market price
of the common shares due to the fact that they are restricted) for a
total of $1,745,148;
b. Series A Notes in the original principal amount of $1,517,990;
c. Series B Notes in the original principal amount of $314,000;
d. $100,000 in cash; and
e. A capital contribution by SoftNet of $1,575,000.
In April 1995, the Preferred shares were converted into common shares on a
one-to-one basis following approval by the Company's shareholders (See Part
II, Item 5). The Preferred shares issued in connection with this acquisition
had been redeemable at certain prices on the fifth anniversary of their
issuance if their conversion into common shares had not been approved by the
Company's shareholders. The approval of the Company's shareholders
eliminated the redeemable feature of the Preferred shares as of April 5,
1995.
Additional common shares may be issued to the former CDI shareholders if
CDI's operations exceed an earnings level, as defined in the CDI Merger
Agreement, of $1.5 million in each of the three fiscal years ending September
30, 1995, 1996 and 1997. In addition, each of the former CDI shareholders
received an employment contract through September 1997.
The CDI Merger Agreement granted to 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 by eliminating
the Series A Notes ($1,517,990) and reducing the amount of the Series B Notes
from $314,000 to $98,993. The Series B Notes, bearing interest at the prime<PAGE>
rate, are due in part on September 30, 1996 ($4,993) and in part on September
30, 1997 ($94,000).
The Company's adjusted investment in CDI, at cost, is $3,836,606 consisting
of the items, as adjusted, outlined above plus professional fees of $317,465.
The resulting goodwill, amounting to $4,376,613 and recorded as of the
acquisition date, will be adjusted for any payments required under the
earnout agreement as these amounts are determined.
Pro forma consolidated statements of operations for the six months ended
March 31, 1995 and 1994 and for the year ended September 30, 1994 for the
Company and CDI (as if CDI had been acquired October 1, 1993) are as follows:
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
March 31, September 30,
1995 1994 1994
<S> <C> <C> <C>
Sales $6,894,461 $5,541,942 $12,460,572
Cost of sales 3,744,550 3,453,316 7,406,733
Gross profit 3,149,911 2,088,626 5,053,839
Expenses:
Selling, general
and administrative 3,002,256 2,633,604 5,583,852
Amortization and
depreciation 156,518 107,696 258,600
Corporate 344,020 216,472 701,776
Total expenses 3,502,794 2,957,772 6,544,228
Income (loss) from
operations ( 352,883)( 869,146) ( 1,490,389)
Interest expense ( 285,015)( 693,742) ( 893,428)
Other income 4,054 - 1,967
Net income (loss) ($ 633,844)($1,562,888) ($2,381,850)
Net income (loss)
per share ($ .21) ($ .58) ($ .86)
The six month pro forma statement for 1995 includes the operating results for
CDI for the month of October, 1994 (prior to the acquisition) and reflects
amortization of goodwill and interest expense for that period. The six month
1994 pro forma statement adds CDI's results and goodwill amortization and
interest expense for the six months and the fiscal year 1994 pro forma
statement adds CDI's results and goodwill amortization and interest expense
for the full year. No adjustment was made to the amount of notes outstanding
which are subject to adjustment based on CDI performance levels nor was any
adjustment made for the possible issuance of additional shares based on CDI
performance levels. The weighted average number of common shares outstanding
used in computing the above income (loss) per share includes an additional
290,858 shares to reflect the assumed conversion to common stock of the
Preferred shares issued in connection with the acquisition.
</TABLE>
4. BANK LOANS:
CDI obtained on October 31, 1994, with the Company's assistance and the
payment of a loan fee of $25,000, a new bank line-of-credit, maturing on
March 1, 1996, in the amount of $2.5 million. This loan is collateralized by
the assets of CDI and the outstanding loan balance is limited to certain
percentages of CDI's eligible receivables and inventories. The outstanding
loan balance at March 31, 1995 of $1.25 million bears interest at 1% above
the bank's prime rate (9% on March 31, 1995). Interest is payable monthly
and the loan is guaranteed by the Company.
On March 30, 1995, SoftNet borrowed $250,000 from the same bank with the
note maturing on September 30, 1995. The loan bears interest at 1% above the
bank's prime rate with interest payable monthly and the balance of the loan
at maturity. The bank note is secured by a lien on SoftNet's assets.
5. SENIOR NOTES PAYABLE:
In October and November 1994, the Company repaid $50,000 of the outstanding
Senior Notes and issued an additional $25,000 note resulting in an adjusted
balance of outstanding Senior Notes of $745,000. The note holder of the
additional $25,000 note also received a warrant to purchase 2,500 shares of
the Company's common stock at the then current market price of $6.375 per
share. (A) The maturity of $450,000 of notes was extended to March 31, 1995
at which time the notes were repaid. The note holders received additional
warrants expiring in five years to purchase a total of 54,000 shares of the
Company's common stock at prices ranging from $6.125 to $7.875 (market prices
at the end of each month during the period the notes were extended). (B) The
maturity of $295,000 ($125,000 of which is owned by an affiliate of John
Jellinek, President of the Company) of notes was extended to October 1, 1995.
On April 1, 1995, the notes were exchanged for 9% Convertible Subordinated
Notes (see Note 6 below). The note holders received additional warrants
expiring in five years to purchase a total of 35,400 shares of the Company's
common stock at prices ranging from $6.125 to $7.875 (market prices at the
end of each month during the period the notes were extended). As of April 1,
1995, all Senior Notes have been repaid.
Two outstanding warrants previously issued to Senior note holders for 2,500
shares each exercisable at $3.75 per share were reissued for 5,000 shares
each exercisable at $1.75 per share to conform to the terms of warrants
issued to other note holders at that time. In addition, two additional
warrants issued to the same Senior note holders contained exercise prices of
$3.75 per share and were reissued with an exercise price of $1.75 per share.
The reissuance of these warrants at prices less than market resulted in
additional Senior Note discount of $51,875 which was expensed in the quarter
ended March 31, 1995.
6. LONG-TERM DEBT:
At March 31, 1995, long-term debt consisted of the following:
10% Convertible Subordinated Notes $ 1,250,000
9% Convertible Subordinated Notes 1,055,000
Series B Notes (see Note 3 above) 98,993
Accrued interest on Series B Notes
due at maturity 3,653
$ 2,407,646
In October and November 1994, the Company issued 10% Convertible
Subordinated Notes, in the aggregate amount of $1.25 million, 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 incurred fees of $55,936 and
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 the quarter ended March 31, 1995, the Company issued 9% Convertible
Subordinated Notes due December 31, 1998 in the aggregate amount of
$1,055,000. Interest is payable quarterly on the first of April, July,
October, January and at maturity. Such notes are subordinate 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) on any 20
trading days within a period of 30 consecutive trading days ending on the
trading date prior to the date of the notice of prepayment.
7. COMMON STOCK SUBJECT TO PUT OPTIONS:
In connection with the acquisition of UMA, the former shareholders of UMA
received 29,630 shares of the Company's common stock together with the right
to sell such shares back to the Company at $6.75 per share or a total of
$200,000 during a period commencing on November 14, 1994 and ending January
27, 1995. The former shareholders of UMA have exercised their right to sell
such shares back to the Company but negotiations are continuing as to the
means of the settlement of this obligation. Accordingly, as of March 31,
1995, this obligation has been classified as a current liability in the
accompanying consolidated balance sheet.
8. 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 per share. In connection with the sale of
common stock, the Company incurred fees of $90,172 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.
9. RELATED PARTY TRANSACTION:
As more fully disclosed in the Company's annual report on Form 10-KSB for
the year ended September 30, 1994, the Company is owed $4,150,000 plus
accrued interest by Ozite Corporation (Ozite). Peter Harvey, Chairman of the
Company, and John Hamm, a Director of the Company, have held and continue to
hold substantial interests in Ozite. Due to uncertainties about collecting
these funds, the receivable, which would be recorded as a capital
contribution, has not been recorded in the Company's consolidated financial
statements. In July 1994, Ozite and Pure Tech International, Inc., among
others, signed a merger agreement subject to shareholder approval and certain
other conditions. This merger agreement has been modified, most recently in
March 1995, and provides that the obligations of Ozite be performed in all
material respects as of the merger's effective date. Subject to final
approval of all of the parties and certain other conditions imposed by the
Company, the Company has agreed to accept common and preferred shares of
Artra Group Incorporated held by Ozite and common shares of Pure Tech Newco,
Inc. in settlement of the Ozite obligation to the Company.
10. EXECUTIVE COMPENSATION:
During 1994, the Board of Directors revised the compensation arrangements
of Peter Harvey, Chairman of the Board, John Jellinek, President, and John G.
Hamm, a Director. Mr. Harvey's compensation was reduced from $120,000 to
$60,000 per year effective May 1, 1994, Mr. Jellinek's compensation was set
at $110,000 per year effective with his taking office on July 1, 1993 and Mr.
Hamm, a Director of the Company since 1985, was given a one-time 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 March 31, 1995, their aggregate unpaid compensation was<PAGE>
$380,000. A portion of each individual's compensation, aggregating $195,000
at March 31, 1995, 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
specified dates. Each individual would receive additional shares or warrants
equal to 10% of the amount originally granted until the shares to be received
or the shares under warrant are freely tradable. In addition, at the
specified dates, each individual may elect to receive any unpaid cash
compensation in shares or warrants or receive interest on his unpaid
compensation.
Mr. Harvey and Mr. Hamm have each elected to receive collectively 24,000
shares of the Company's common stock for $120,000 of the above mentioned
compensation and to receive the additional common shares (4,000 shares) due
them through September 30, 1994. Further, they elected to receive their
remaining unpaid compensation as of September 30, 1994 in the form of cash.
At March 31, 1995, additional compensation relating to the payment of
compensation in shares or warrants aggregated $46,796 of which $20,000 will
be paid when the above 4,000 common shares are issued.
11. STOCK OPTIONS AND WARRANTS:
Outstanding warrants and options (all are currently exercisable) to
purchase shares of common stock at March 31, 1995 were as follows:
Issued in 1995 to 10% Convertible Subordinated note holders
at $6.875 per share, expiring in October 1999 272,500
Issued in 1995 in connection with the sale of common stock
and the issuance of the 10% Convertible Subordinated notes
at $6.875 per share, expiring in 1999 275,000
Issued in 1995 to Senior Note holders in connection with
extensions of Senior Note maturity dates at exercise
prices ranging from $6.125 to $7.875 per share, expiring
between October 31, 1999 and March 31, 2000 89,400
Issued in 1995 to a Senior Note holder in connection with
a new Senior Note issued in 1995 at an exercise price of
$6.375 per share expiring in October 1999 2,500
Issued in 1994 in connection with the acquisition of UMA
at $4.0429 per share expiring in 1998. In 1995 warrants
for 6,250 shares were exercised in a cashless transaction
and 2,691 shares were issued 118,750
Issued in 1994 to Senior Note holders (110,000 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). In 1995, the exercise price for the 10,000
warrants was revised from $3.75 to $1.75 per share (see
Note 5). 120,000
Issued in 1994 to Senior Note holders (at market price at
date of grant - 82,000 at $5.50 per share, 5,000 at $5.75
per share and 24,500 at $6.125 per share) expiring in 1999 111,500
Issued in 1993 to Senior Note holders (5,000 at $3.75 per
share, 25,000 at $1.75 per share) expiring in 1998 (market
prices at date of grant ranged from $3.50 to $4.00 per
share) In 1995, the 5,000 warrants at $3.75 per share
were reissued as 10,000 warrants at $1.75 per share (see
Note 5). 35,000
Issued in 1993 to certain directors for past services at
$1.75 per share, expiring in 1998, (market prices at date
of grant ranged from $2.00 to $2.50 per share) 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
Issued in 1990 to directors and outside counsel for services at
$1.75 per share, expiring in 1998. In 1993, the exercise
price and the expiration date were modified. 57,000
Issued in 1988 (in connection with short-term loans to the
Company) to the Chairman of the oard at $1.75 per share,
expiring in fiscal year 1998. In 1993, the exercise price
and the expiration date were modified. 1,564
1,372,214
12. POTENTIAL ACQUISITIONS:
On March 27, 1995, the Company announced that it had entered into an
agreement to acquire Micrographic Technology Corporation (MTC) and an
agreement to acquire Kansas Communications, Inc. (KCI).
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 the 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 systems
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's 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 medias including optical disk, magnetic disk and tape, CD-ROM,
microfilm and microfiche.
KCI is an information technology company which provides communications
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
POSITION
RESULTS OF OPERATIONS FOR THE SIX MONTHS OF FY 1995 COMPARED TO THE SIX
MONTHS OF FY 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 ($5,342,000), cost of sales ($2,775,000) and selling, general
and administrative expenses ($2,088,000). In addition, the results of
operations of UMA are included for the full quarter in 1994 as compared to
only the period after UMA's acquisition on November 12, 1993 in the prior
year. UMA's sales increased 69% to $487,000 and added an additional $104,000
to the Company's gross profit. Amortization of goodwill in 1995 increased
$47,000 while CDI added $39,000 to depreciation expense. Corporate expenses
increased primarily due to additional legal, accounting and public relations
fees. Interest expense increased (after deducting the non-cash charges
relating to Senior Note discount) due to the issuance of Convertible
Subordinated notes and new bank loans (see Notes 4 and 6 of Notes to
Consolidated Financial Statements) and the amortization of debt issuance
costs in 1995.
MATERIAL CHANGES IN FINANCIAL POSITION FROM SEPTEMBER 30, 1994 TO MARCH 31,
1995
During the six months, the Company's working capital position changed as
follows:
Working capital deficit at September 30, 1994 ($1,229,417)
Working capital deficit acquired in acquisition
of CDI ( 2,632,498)
Reclassification of stock put obligation ( 200,000)
Increase in working capital during the quarter 1,738,179
Working capital deficit at March 31, 1995 ($2,323,736)
The increase in working capital during the period was primarily generated by
the sale of common stock and the issuance of long-term Convertible
Subordinated notes (See Note 6 of Notes to Consolidated Financial
Statements), the proceeds of which were used, in part, to repay certain of
the Company's current liabilities.
Currently, management is anticipating that any shortfall in its cash flow
from operations will be provided for by additional borrowings. In addition,
cash flow may be enhanced by 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.
_______________________
It is suggested that this report be read in conjunction with the financial
statements and footnotes appearing in the September 30, 1994 Form 10-KSB
which has been previously filed with the Commission.
The information furnished reflects all adjustments (consisting of only normal
recurring adjustments) which are, in the opinion of management, necessary to
a fair statement of the results for the interim period.
PART II. OTHER INFORMATION
Items 1 to 4. Not applicable.
Item 5. Other Information.
IMNET
IMNET Systems, Inc. (IMNET) filed a Registration Statement with the
Securities and Exchange Commission on Form S-1 on May 10, 1995 pursuant to
which IMNET intends to sell 2,750,000 shares of Common Stock, $.01 par value
(assuming no exercise of the underwriters' over-allotment option to acquire
up to 412,500 additional shares from IMNET solely to cover over-allotments),
to the public at an estimated price of from $10 to $12 per share. Based on
the outstanding capital stock of IMNET at March 31, 1995, and after
adjustment for (i) a 1.88-for-1 stock split to be effected on May 19, 1995,
(ii) the issuance of shares of Common Stock upon conversion of all
outstanding shares of IMNET's Series I and II Convertible Preferred Stock and
Series A Preferred Stock including accrued dividends at an assumed public
offering price of $11 per share of IMNET Common Stock immediately prior to
completion of the offering, and (iii) the exercise of outstanding warrants to
acquire 39,168 shares Common Stock immediately prior to completion of the
offering, SoftNet will own 385,588 shares of Common Stock of IMNET. After
such adjustment, and assuming (i) no exercise of the underwriters' over-
allotment option, and (ii) an initial public offering price of $11 per share,
the shares of capital stock of IMNET owned by SoftNet would represent
approximately 5.1% of the outstanding shares of IMNET after the offering,
based on the outstanding capital stock of IMNET at March 31, 1995.
THIS COMMUNICATION IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OF IMNET.
SIGNING OF LEASES
Communicate Direct Inc. (CDI) recently signed a lease for approximately
24,777 square feet of lease space in Buffalo Grove, Illinois for an initial
term of five years. CDI intends to relocate its principal office from
Chicago, Illinois to the new lease space in Buffalo Grove, Illinois on or
about June 26, 1995. Philip Kenny, a Director of the Company, indirectly
owns 4.7% of the owner of such real property leased by CDI.
CONVERSION OF SERIES A PREFERRED STOCK AND 10% CONVERTIBLE SUBORDINATED NOTES
At the SoftNet Annual Meeting of Shareholders held on April 5, 1995, the
shareholders approved a proposal to convert the 290,858 outstanding shares of
Series A Preferred Stock of SoftNet into 290,858 shares of SoftNet Common
Stock. The Series A Preferred Stock was held by the shareholders of the
former Communicate Direct, Inc. On October 31, 1994, Communicate Direct,
Inc. was merged into a wholly-owned subsidiary of SoftNet pursuant to an
Agreement and Plan of Reorganization dated October 28, 1994 (CDI Plan).
Pursuant to the CDI Plan, the shareholders of the former Communicate Direct,
Inc. received 290,858 shares of SoftNet's newly created Series A Preferred
Stock, $ .10 par value, and the right to receive additional shares of Series
A Preferred Stock based on an earnout arrangement for the three years ended
September 30, 1995, 1996 and 1997. The term of the Series A Preferred Stock
provided that upon approval of SoftNet's shareholders (which was required by
the rules of the AMEX due to the number of shares of common stock to be
issued) all of the Series A Preferred Stock issued or to be issued pursuant
to the CDI Plan would be converted in shares of SoftNet Common Stock.
Upon approval of this prop[osal, the Series A Preferred Stock was converted
into 290,858 shares of SoftNet Common Stock and the right to receive shares
of Series A Preferred Stock pursuant to the earnout arrangement was converted
into the right to receive shares of SoftNet Common Stock. There are no more
shares of Series A Preferred Stock outstanding.
The SoftNet shareholders also approved a proposal to allow conversion of
the $1,250,000 in principal amount of 10% Convertible Subordinated Notes of
SoftNet (the "10% Notes") into SoftNet Common Stock. The terms of the 10%
Notes state that the 10% Notes would be convertible into SoftNet Common Stock
at $4.10 per share upon approval of the SoftNet shareholders. If the holders
of the 10% Notes choose to convert the entire principal amount of the 10%
Notes, 304,878 shares of SoftNet Common Stock would be issued.
Item 6. Exhibits ad Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SoftNet Systems, Inc.
(Registrant)
/S/ John Jellinek
John Jellinek
President and Chief Executive
Officer
/S/ Alfred J. Ziegler
Alfred J. Ziegler
Vice President and
Chief Accounting Officer
(Principal Financial Officer)
Date: May 18, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SoftNet
Systems, Inc.'s Form 10-Q and is qualified in its entirety by reference to such
Form 10-Q filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> MAR-31-1995
<CASH> 405,504
<SECURITIES> 1,989,379
<RECEIVABLES> 1,927,353
<ALLOWANCES> 16,000
<INVENTORY> 850,514
<CURRENT-ASSETS> 3,325,055
<PP&E> 886,990
<DEPRECIATION> 193,260
<TOTAL-ASSETS> 11,154,555
<CURRENT-LIABILITIES> 5,648,791
<BONDS> 2,566,277
<COMMON> 17,235,722
1,745,148
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,154,155
<SALES> 3,585,929
<TOTAL-REVENUES> 3,585,929
<CGS> 1,940,269
<TOTAL-COSTS> 1,865,501
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 151,697
<INCOME-PRETAX> (371,538)
<INCOME-TAX> 0
<INCOME-CONTINUING> (371,538)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (371,539)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
