SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
________________________________________
FORM 10-QSB/A
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended: December 31, 1994 Commission File No.: 1-5270
SOFTNET SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New York 11-1817252
(State of incorporation) (I.R.S. employer identification no.)
One Overlook Place, Lincolnshire, Illinois 60069
(Address of principal executive office)
Registrant's telephone number, including area code: (708) 793-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
As of December 31, 1994, 2,834,919 common shares were outstanding which
includes 29,630 shares of common stock subject to put options.
PART 1. FINANCIAL STATEMENTS
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1994 1994
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash $ 212,348 $ 176,538
Trade receivables, net of allowance for
doubtful accounts of $7,500 as of
December 31, 1994 2,207,577 88,986
Other receivables 220,158 -
Inventories 1,164,494 -
Prepaid expenses 110,037 96,060
Total current assets 3,914,614 361,584
Other assets:
Property and equipment, net of accumulated
depreciation of $139,134 and $102,152,
respectively 700,517 225,450
Other assets 187,081 -
Investment in Imnet, at cost 1,989,379 1,989,379
Intangible assets, net of accumulated
amortization of $25,417 and
$5,018, respectively 4,583,238 224,394
Total other assets 7,460,215 2,439,223
Total Assets $11,374,829 $ 2,800,807
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 2,682,371 $ 738,775
Stock put liability 200,000 -
Revolving bank loan 1,000,000 -
Deferred revenue 121,892 -
Senior Notes payable 745,000 770,000
Current portion of long-term liabilities 730,602 82,226
Total current liabilities 5,479,865 1,591,001
Long-term liabilities:
Capitalized lease obligations 133,087 53,577
Long-term debt 2,502,727 -
Total long-term liabilities 2,635,814 53,577
Common stock subject to put options,
29,630 shares - 200,000
Redeemable Series A Preferred stock outstanding,
290,858 shares 1,745,148 -
Shareholders' Equity:
Preferred stock, $.10 par value, 4 million
share authorized - -
Common stock, $.01 par value, 10 million
shares authorized, 2,805,289 and 2,602,598
shares outstanding, respectively,
net of treasury shares of 1,906 28,053 26,026
Capital in excess of par value 17,155,794 16,428,886
Accumulated deficit ( 15,669,845) ( 15,498,683)
Total shareholders' equity 1,514,002 956,229
Total Liabilities and Shareholders' Equity $11,374,829 $ 2,800,807
</TABLE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1994 1993
(Unaudited)
<S> <C> <C>
Sales $ 2,405,500 $ 138,704
Cost of sales 1,302,466 103,066
Gross profit 1,103,034 35,638
Expenses:
Selling, general and administrative 970,640 121,960
Amortization of goodwill and depreciation
of property 57,381 15,168
Corporate 139,210 107,361
Total expenses 1,167,231 244,489
Income (loss) from operations ( 64,197) ( 208,851)
Interest expense, including a non-cash charge
of $368,539 relating to Senior Note discount
in 1993, and amortization of deferred debt
issuance costs ( 111,019) ( 393,069)
Other income 4,054 -
Net income (loss) ($ 171,162) ($ 601,920)
Net income (loss) per share ($ .06) ($ .26)
Weighted average common shares outstanding 2,742,101 2,321,090
</TABLE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1994 1993
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ($ 171,162) ($ 601,920)
Adjustments to reconcile net income (loss) to
net cash used by operations:
Amortization of goodwill and depreciation of
property 57,381 15,168
Amortization of deferred debt issuance costs 8,637 -
Provision for losses on trade receivables 7,500 -
Non-cash charge of interest expense related
to amortization of Senior Notes payable
discount - 368,539
Changes in operating assets and liabilities,
net of operating assets and liabilities
acquired in acquisition of consolidated
subsidiaries:
(Increase) decrease in receivables ( 306,626) 1,297
(Increase) in inventory ( 257,001) -
(Increase) decrease in prepaid expenses 2,038 ( 13,157)
Increase (decrease) in accounts payable
and accrued liabilities ( 1,116,873) 62,415
Increase in deferred revenues 36,644 -
Increase in long-term interest
payable - long-term 27,641 -
Net cash used by operating activities ( 1,711,821)( 167,658)
INVESTING ACTIVITIES
Net cash paid in connection with acquisition of
consolidated subsidiaries ( 128,338)( 24,670)
Purchase of office furniture and equipment ( 82,465)( 3,154)
Cash paid for investment in Imnet - ( 462,924)
Increase in other assets ( 37,205) -
Net cash used by investing activities ( 248,008)( 490,748)
FINANCING ACTIVITIES
Proceeds from issuance of Convertible
Subordinated notes 1,250,000 -
Proceeds from sale of common stock 726,250 -
Borrowings under new revolving credit
facility, net 1,000,000 -
Repayment of prior revolving credit facility ( 825,000) -
Repayment of notes payable ( 200,000) -
Capital contribution - 850,000
Proceeds from issuance of Senior Notes 25,000 700,000
Repayment of Senior Notes ( 50,000)( 550,000)
Capitalized lease obligations incurred on
existing equipment 93,000 -
Capitalized lease obligations paid ( 23,611)( 15,223)
Net cash provided by financing activities 1,995,639 984,777
Increase in cash 35,810 326,371
Cash at beginning of period 176,538 62,856
Cash at end of period $ 212,348 $ 389,227
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 19,165 $ 31,492
Cash paid during the period for income taxes $ - $ -
Property acquired by capitalized leases $ 57,511 $ -
Investment in Imnet acquired with issuance
of common stock $ - $ 735,083
Consolidated subsidiaries acquired with
issuance of stock and notes $ 3,571,219 $ 200,000
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRESENTATION OF STATEMENT OF OPERATIONS:
In connection with the acquisition of Communicate Direct, Inc. (CDI) on
October 31, 1994, the Company has restated the statement of operations for the
prior fiscal year to conform to the presentation used in the quarter ended
December 31, 1994. In addition, the Company originally reported the receipt of
$850,000 in December 1993 as a reduction of a prior year provision for bad
debts. Following a review of the accounting treatment for this transaction by
the Securities and Exchange Commission, it was agreed that it should have been
recorded as a capital contribution and no income recognized.
2. SUMMARY OF CERTAIN ACCOUNTING POLICIES:
INTANGIBLE ASSETS 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
weighted average number of common shares (including common stock subject to put
options) outstanding during the periods. During the quarter ended December 31,
1994, the 29,630 shares subject to a put option have been considered outstanding
until this obligation is resolved (see Note 8). Common stock equivalents were
not included in the computation of income (loss) per share since their effect
was anti-dilutive. In addition, no effect has been given to the possible
conversion of the preferred shares to common shares (which is subject to
shareholder approval) as this would also be anti-dilutive.
3. ACQUISITION OF CDI:
On October 31, 1994, by merger with and into its wholly-owned subsidiary, the
Company acquired CDI, a Chicago-based privately owned company which sells,
installs and services telephone systems. CDI specializes in implementing
application oriented peripheral products such as voice mail, automated attendant
systems, interactive voice response, video conferencing and call accounting
products. CDI also markets communication products targeted to small businesses,
home office and mobile users, through its retail operation.
The Company acquired all of the outstanding common stock of CDI for an
adjusted (see below) purchase price of $3,836,606 consisting of 290,858 shares
of SoftNet preferred stock (valued at $1,745,148), Series B Note of $98,993, a
capital contribution of $1,575,000, cash of $100,000 and acquisition costs of
$317,465. The Preferred shares, which are non-voting and have the same dividend
rights as the Company's common stock, will be converted into common shares on a
one-to-one basis subject to approval of the Company's shareholders. The Series
B notes, bearing interest at prime, are due in varying amounts on September 30,
1996 and 1997 in an aggregate amount of $98,993. Additional Preferred shares
may be issued under the same terms described above, if CDI's operations exceed
an earnings level, as defined, of $1.5 million in each of the three fiscal years
ending September 30, 1997. The Company's capital contribution of $1.575
million, was used to repay certain of CDI's liabilities and increase its working
capital. In addition, each of CDI's shareholders, who is also an executive of
CDI, received an employment contract through September 1997. CDI obtained, with
the Company's assistance, a new bank line-of-credit, maturing on March 1, 1996,
in the amount of $2.5 million collateralized by the assets of CDI, the
outstanding loan balance being limited to certain percentages of CDI's eligible
receivables and inventories. The outstanding loan balance bears interest at 1%
above the bank's prime rate (8.5% on December 31, 1994), such interest being
payable monthly and the loan is guaranteed by the Company.
The Preferred shares issued (and any adjustments to the number of shares
issued as discussed above) in connection with this acquisition are redeemable on
the fifth anniversary of their issuance if their conversion into common shares
is not approved by the Company's shareholders. The redemption price is the
greater of (a) the number of Preferred shares outstanding times the then current
market price of the Company's common stock or (b) $4 million.
The CDI Merger Agreement granted SoftNet the right to make certain post-
closing purchase price adjustments. In accordance with the CDI Merger
Agreement, the CDI purchase price was reduced by $1,732,997. The resulting
goodwill, amounting to $4,376,613 and recorded as of the acquisition date, will
be adjusted for any payments required under the earnout agreement as these
amounts are determined.
Pro forma consolidated statements of operations revised and restated to give
effect to the adjusted purchase price described above for the quarters ended
December 31, 1994 and 1993 for the Company and CDI (as if CDI had been acquired
October 1, 1993) are as follows:
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1994 1993
<S> <C> <C>
Sales $3,308,532 $2,786,538
Cost of sales 1,804,281 1,765,231
Gross profit 1,504,251 1,021,307
Expenses:
Selling, general and
administrative 1,424,315 1,363,310
Amortization and depreciation 73,768 51,350
Corporate 139,210 107,361
Total expenses 1,637,293 1,522,021
Income (loss) from operations ( 133,042)( 500,714)
Interest expense ( 133,318)( 485,612)
Other income 4,054 -
Net income (loss) ($ 262,306)($ 986,326)
Net income (loss) per share ($ .09) ($ .38)
</TABLE>
The pro forma statement for 1994 includes the operating results for CDI for
the month of October, 1994 (prior to the acquisition) and reflects amortization
of goodwill and interest expense for that period. The 1993 pro forma statement
adds CDI's results and goodwill amortization and interest expense for the entire
quarter. No adjustment was made for the possible issuance of additional
Preferred shares based on CDI performance levels. The weighted average number
of common shares outstanding used in computing the above income (loss) per share
includes an additional 290,858 shares to reflect the assumed conversion to
common stock of the Preferred shares issued in connection with the acquisition.
4. ADDITIONAL FINANCING:
On October 26, 1994, the Company sold 200,000 shares of its common stock in a
Regulation S offering at $4 per share. In addition, 10% Convertible
Subordinated Notes, in the aggregate amount of $1.25 million, due in five years
were issued in October and November 1994. Such notes (which bear interest at
10% for the first two years only and no interest thereafter) are subordinate to
all other liabilities of the Company and are convertible into the Company's
common shares at $4.10 per share. In connection with the sale of common stock
and the issuance of the 10% Convertible Subordinated Notes, the Company incurred
fees of $142,108 and issued warrants to purchase 522,500 shares of its common
stock exercisable for five years at an exercise price of $6.875 per share.
5. SENIOR NOTES PAYABLE:
In October and November 1994, the Company repaid $50,000 of the outstanding
Senior Notes and issued an additional $25,000 note resulting in an adjusted
balance of outstanding Senior Notes of $745,000. (A) The maturity of $450,000
of notes was extended to March 31, 1995. The note holders will receive
additional warrants expiring in five years to purchase a total of 54,000 shares
of the Company's common stock at $6.50 per share (market price at October 1,
1994) if the notes are held to maturity. These note holders also received the
right to convert their notes and any unpaid interest thereon to common stock of
the Company (at $1.75 a share) if the notes are not repaid at maturity. The
Company intends to repay these notes on or before maturity. (B) The maturity of
$295,000 of notes was extended to October 1, 1995 for which the note holders
will receive additional warrants expiring in five years to purchase a total of
70,800 shares of the Company's common stock at $6.50 per share if the notes are
held to maturity.
6. LONG-TERM DEBT:
At December 31, 1994, long-term debt consisted of the following (see Notes 3
and 4 for terms of the debt instruments):
Series A Notes $ 1,512,071
Series B Notes 314,000
Accrued interest on Series A & B
Notes due at maturity 27,641
10% Convertible Subordinated Notes 1,250,000
3,103,712
Less: current maturities ( 600,985)
$ 2,502,727
7. EXECUTIVE COMPENSATION:
During 1994, the Board of Directors revised the compensation arrangements of
the Chairman of the Board, the President and John G. Hamm, a Director. The
Chairman's compensation was reduced from $120,000 to $60,000 per year effective
May 1, 1994, the President's compensation was set at $110,000 per year effective
with his taking office on July 1, 1993 and Mr. Hamm, a Director of the Company
since 1985, was given a fixed compensation amount of $150,000 for his
substantial prior services to the Company. These individuals have not been
receiving this compensation on a regular monthly basis and at December 31, 1994,
their aggregate unpaid compensation was $413,000. A portion of each
individual's compensation, aggregating $182,500 at December 31, 1994, is to be
paid in shares of the Company's common stock or 10 year warrants to purchase
shares of the Company's common stock. The choice to receive shares or warrants
is to be made by each individual on December 31, 1994 or at specified dates
thereafter. Each individual would receive additional shares or warrants until
the shares to be received or the shares under warrant are freely tradable. In
addition, at December 31, 1994 or at the specified dates thereafter, each
individual may elect to receive any unpaid cash compensation in shares or
warrants or receive interest on his unpaid compensation.
The Chairman and Mr. Hamm have each elected to receive 24,000 shares of the
Company's common stock for $120,000 of the above mentioned compensation and to
receive the additional common shares (4,000 shares) due them through September
30, 1994. Further, they have elected to receive their remaining unpaid
compensation as of September 30, 1994 in the form of cash.
At December 31, 1994, additional compensation relating to the payment of
compensation in shares or warrants aggregated $36,836 of which $20,000 will be
paid when the above 4,000 common shares are issued.
8. COMMON STOCK SUBJECT TO PUT OPTIONS:
In connection with the acquisition of UMA, the former shareholders of UMA
received 29,630 shares of the Company's common stock together with the right to
sell such shares back to the Company at $6.75 per share or a total of $200,000
during a period commencing on November 14, 1994 and ending January 27, 1995.
The former shareholders of UMA have exercised their right to sell such shares
back to the Company but negotiations are continuing as to the means of the
settlement of this obligation. Accordingly, as of December 31, 1994, this
obligation has been classified as a current liability in the accompanying
consolidated balance sheet.
9. POTENTIAL ACQUISITION:
On December 21, 1994, the Company announced that it had entered into an
agreement in principle to acquire Kansas Communications, Inc., a distributor of
business telecommunications products, which also serves as an agent for
Southwestern Bell and MCI. Terms of the proposed acquisition are still being
negotiated subject to completion of due diligence.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
POSITION
1994 COMPARED TO 1993
RESULTS OF OPERATIONS The substantial increases in sales, cost of sales and
selling, general and administrative expenses reflect the inclusion of the
results of Communicate Direct, Inc.'s (CDI) operations from the date of its
acquisition by the Company on October 31, 1994. Included in the consolidated
results for the first quarter are CDI's sales ($2,080,000), cost of sales
($1,076,000) and selling, general and administrative expenses ($755,000). In
addition, the results of operations of UMA are included for the full quarter in
1994 as compared to only the period after UMA's acquisition on November 12, 1993
in the prior year. Amortization of goodwill in 1994 increased $20,000 while CDI
added $15,000 to depreciation expense. Corporate expenses increased primarily
due to additional legal and accounting fees. Interest expense increased (after
deducting the non-cash charge relating to Senior Note discount in 1993) due to
the additional debt incurred in connection with the acquisition of CDI and the
issuance of the Convertible Subordinated notes in 1994 (See Notes 3 and 4 of
Notes to Consolidated Financial Statements).
MATERIAL CHANGES IN FINANCIAL POSITION During the quarter ended December 31,
1994, the Company's working capital position changed as follows:
Working capital deficit at September 30, 1994 ($1,229,417)
Working capital deficit acquired in
acquisition of CDI ( 905,420)
Reclassification of stock put obligation ( 200,000)
Increase in working capital during the quarter 769,586
Working capital deficit at December 31, 1994 ($1,565,251)
The increase in working capital during the quarter was primarily generated by
the sale of common stock and the issuance of Convertible Subordinated notes (See
Note 4 of Notes to Consolidated Financial Statements), the proceeds of which
were used, in part, to repay certain of CDI's liabilities.
Currently, management is anticipating that any shortfall in its cash flow
from operations will be provided for by additional short-term borrowings. In
addition, cash flow may be enhanced by possible future acquisitions and
additional sales of the Company's common stock. No assurances can be made that
these sources of funds will be available or sufficient.
1993 COMPARED TO 1992
RESULTS OF OPERATIONS:
1993 1992
Revenues $138,704 $ 6,770
Costs and expenses ( 347,555) ( 159,198)
Interest expense ( 393,069) -
Net loss ($601,920) ($152,428)
The increase in revenues for the quarter ended December 31, 1993 over the
prior year resulted from the acquisition of UMA which had revenues of
approximately $130,000 for the period from acquisition (November 12, 1993) to
the end of the quarter. Costs, general and administrative expenses in 1993
include new costs resulting from the acquisition of UMA (approximately $105,000)
and additional compensation costs and other operating costs relating to the
health care code review activities. A non-cash interest charge relating to the
Senior Note discount of approximately $369,000 and cash interest on the Senior
Notes are the main components of interest expense in the quarter ended December
31, 1993.
MATERIAL CHANGES IN FINANCIAL POSITION During the quarter ended December 31,
1993, the Company's working capital increased $236,777. During this period the
Company acquired UMA in exchange for 29,630 shares of the Company's common
stock. In addition, the Company received a capital contribution ($850,000),
issued additional Senior Notes payable ($700,000) and repaid a portion on the
Senior Notes outstanding on December 30, 1993 ($550,000). Also, the Company
increased its investment in Imnet Systems, Inc. through additional cash payments
of $462,924 and the issuance of 196,022 shares of the Company's common stock.
_______________________
It is suggested that this report be read in conjunction with the financial
statements and footnotes appearing in the September 30, 1994 Form 10-KSB which
has been previously filed with the Commission.
The information furnished reflects all adjustments (consisting of only normal
recurring adjustments) which are, in the opinion of management, necessary to a
fair statement of the results for the interim period.
PART II. OTHER INFORMATION
Items 1 to 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K:
Exhibits - 27 - Financial Data Schedule
Reports - On November 15, 1994, the Company filed a Form 8-K reporting the
acquisition of Communicate Direct, Inc. (CDI). On January 11,
1995, the Company filed a Form 8-K/A containing audited
financial statements for CDI as of and for the year ended
December 31, 1993 and as of and for the nine months ended
September 30, 1994. Pro forma information for the Company and
CDI was also included.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SoftNet Systems, Inc.
(Registrant)
Date: July 7, 1995 /S/ Martin A. Koehler
______________________________
Martin A. Koehler
Vice President - Finance and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SoftNet
Systems, Inc.'s Form 10-QSB/A and is qualified in its entirety by reference to
such Form 10-QSB/A filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> DEC-31-1994
<CASH> 212,538
<SECURITIES> 1,989,379
<RECEIVABLES> 2,427,735
<ALLOWANCES> 7,500
<INVENTORY> 1,164,494
<CURRENT-ASSETS> 3,914,614
<PP&E> 700,517
<DEPRECIATION> 139,134
<TOTAL-ASSETS> 11,374,829
<CURRENT-LIABILITIES> 5,479,865
<BONDS> 2,635,814
<COMMON> 17,183,848
1,745,148
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,374,829
<SALES> 2,405,500
<TOTAL-REVENUES> 2,405,500
<CGS> 1,302,466
<TOTAL-COSTS> 1,167,231
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 111,019
<INCOME-PRETAX> (171,162)
<INCOME-TAX> 0
<INCOME-CONTINUING> (171,162)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (171,162)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
