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: December 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.)
717 Forest Avenue, Lake Forest, Illinois 60045
(Address of principal executive office)
Registrant's telephone number, including area code: (847) 266-8150
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, 1995, 5,547,033 common shares were outstanding.
PART I. FINANCIAL INFORMATION
<TABLE> SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, September 30,
1995 1995
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash $ 428,193 $ 572,758
Available-for-sale securities 2,400,000 2,575,000
Accounts receivable, net 5,999,696 6,128,348
Inventories 5,438,517 4,785,326
Prepaid expenses 342,321 270,223
Total current assets 14,608,727 14,331,655
Property and equipment, net 2,671,259 2,619,474
Available-for-sale securities 6,670,540 7,156,638
Costs in excess of fair value of net assets
acquired, net 11,430,822 9,910,354
Other assets 1,418,948 1,378,180
$ 36,800,296 $ 35,396,301
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 6,549,135 $ 7,733,652
Current portion of long-term debt 3,523,360 1,788,012
Deferred revenue 1,642,957 1,031,672
Net liabilities of business disposed of in 1996 100,000 453,746
Total current liabilities 11,815,452 11,007,082
Long-term debt, net of current portion 14,287,924 12,704,117
Shareholders' equity:
Preferred stock, $.10 par value, 4 million shares
authorized, none outstanding - -
Common stock, $.01 par value, 10 million
shares authorized, 5,547,033 outstanding 55,470 55,470
Capital in excess of par value 27,579,773 27,583,696
Accumulated deficit (24,015,424) (23,692,263)
Unrealized appreciation in available-for-sale
securities 7,077,101 7,738,199
Total stockholders' equity 10,696,920 11,685,102
$ 36,800,296 $ 35,396,301
</TABLE>
<TABLE> SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended
December 31,
1995 1994
(unaudited)
<S> <C> <C>
Net sales $ 9,872,062 $ 4,601,146
Cost of sales 5,811,169 2,899,756
Gross profit 4,060,893 1,701,390
Operating expenses:
Selling 1,119,261 436,051
Engineering 403,771 -
General and administrative 1,966,131 989,507
Depreciation and amortization 511,214 126,995
Total operating expenses 4,000,377 1,552,553
Income from continuing operations 60,516 148,837
Interest expense (395,068) (113,244)
Other income 11,391 6,473
Income (loss) from continuing operations
before income taxes (323,161) 42,066
Provision for income taxes - 113,000
Net loss from continuing operations (323,161) (70,934)
Discontinued operations - 13,510
Net loss $ (323,161) $ (57,424)<PAGE>
Earnings per share:
Continuing operations (0.06) (0.02)
Discontinued operations - 0.01
Net loss $ (0.06) $ (0.01)
Weighted average shares outstanding 5,547,033 4,042,101
</TABLE>
<TABLE> SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Three months ended
December 31,
1995 1994
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (323,161) $ (57,424)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 534,406 137,318
Provision for bad debts 13,500 12,000
Changes in operating assets and liabilities, net
of effect of purchase transaction-
Receivables 344,948 (550,724)
Inventories (369,894) (370,096)
Prepaid expenses 78,831 (97,951)
Accounts payable and accrued expenses (1,419,345) (885,487)
Deferred revenue 449,721 102,538
Net cash used in operating activities (690,994) (1,709,826)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (180,716) (82,465)
Acquisition of business, net of cash acquired (98,900) -
Settlement of remaining obligations to owners of
discontinued operations (116,575) -
Payment for acquisition costs (63,944) (144,271)
Increase in other assets (241,704) (37,408)
Cash used in investing activities (701,839) (264,144)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - 1,368,000
Repayment of long-term debt (41,462) (250,000)
Borrowings under bank credit facility, net 1,559,121 1,000,000
Proceeds from sale of common stock - 726,250
Payment of put obligation (200,000) -
Repayment of prior revolving credit facility - (825,000)
Capitalized lease obligations paid (69,391) (32,413)
Net cash provided by financing activities 1,248,268 1,986,837
NET INCREASE (DECREASE) IN CASH (144,565) 12,867
CASH, beginning of period 572,758 487,597
CASH, end of period $ 428,193 $ 500,464
CASH PAID DURING THE PERIOD FOR:
Interest $ 339,915 $ 21,390
Income taxes - 97,000
SUPPLEMENTAL NON-CASH TRANSACTIONS
Property acquired by capitalized leases - 57,511
Businesses acquired with issuance of stock and
notes 1,760,932 3,584,219
Change in unrealized appreciation in available-
for-sale securities 661,098 -
</TABLE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(UNAUDITED)
1. BASIS OF PRESENTATION
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the consolidated statements of financial position, results of
operations and cash flows as of, and for the interim periods ended December 31,
1995 and 1994.
The Company's annual report on form 10-KSB for the fiscal year ended
September 30, 1995, as filed with the Securities and Exchange Commission, should
be read in conjunction with the accompanying condensed consolidated financial
statements. The condensed consolidated balance sheet as of September 30, 1995
was derived from the Company's audited Consolidated Financial Statements.
The results of operations for the three months ended December 31, 1995 are
based in part on estimates which may be subject to year-end adjustments and are
not necessarily indicative of the results to be expected for the full year.
On September 15, 1995, a wholly owned subsidiary of the Company merged with
Kansas Communications, Inc. ("KCI"), which was the surviving corporation in the
merger, pursuant to an Agreement and Plan of Reorganization dated March 24,
1995, by and between the Company and KCI. The transaction was accounted for as a
pooling of interests for financial reporting purposes and, accordingly, the
financial statements of the merged companies relating to all periods represented
have been restated and are presented on a combined basis.
During fiscal 1995, the Company adopted a formal plan to dispose of
Utilization Management Association, Inc., a medical cost containment business.
Accordingly, the results of discontinued operations for the three months ended
December 31, 1994, have been reported separately from the continuing operations
of the Company.
2. ACQUISITION
On December 29, 1995, the Company acquired the Milwaukee operations of
Executone Information Systems, Inc., in a business combination accounted for as
a purchase. Executone's Milwaukee operations sells and services proprietary
voice processing systems. The purchase price of approximately $1.9 Million
consisted of $100,000 of cash and a note payable for $1.8 million. The note
bears interest at 9.5% per annum and matures on February 29, 1996.
The costs in excess of fair value of net assets acquired that were incurred
in connection with this acquisition are being amortized on a straight line basis
over twenty years.
The following unaudited pro forma summary presents information as if the
acquisitions of Micrographics Technology Corporation in September 1995,
Communicate Direct, Inc. in November 1994 and Executone's Milwaukee operations
in December 1995, which were accounted for as purchases, had occurred at the
beginning of each fiscal year. The pro forma information is provided for
informational purposes only. It is based upon historical information and does
not necessarily reflect the actual results that would have occurred nor is it
necessarily indicative of future results of operations of the combined
enterprises:
<TABLE>
<CAPTION>
Three months ended
December 31,
1995 1994
(unaudited)
<S> <C> <C>
Net sales from continuing operations $10,403,000 $9,740,000
Income from continuing operations 8,000 532,000
Net income (loss) (376,000) 69,000
Net income (loss) per share $ (.07) $ .02
</TABLE>
3. DISCONTINUED OPERATIONS
During September 1995, the Company's Board of Directors approved a plan to
rescind its November 1993 acquisition of Utilization Management Associates,
Inc. ("UMA"). The plan provided for the exchange of the Company's interest in
UMA, including related put options, and the cancellation of SoftNet stock
options held by the former shareholders of UMA.
Effective November 20, 1995, the plan was executed such that the Company
paid the former shareholders of UMA $200,000 in satisfaction of its common stock
put obligation and received in exchange 29,630 shares of SoftNet common stock.
In addition, the Company paid approximately $300,000 in cash and notes for the
termination of non-compete, employment, and earn-out agreements and an
irrevocable and unconditional release of the Company from any outstanding
obligations and liabilities to UMA or the shareholders of UMA.
4. DEBT
Debt is summarized as follows:
<TABLE>
<CAPTION>
December 31, 1995 September 30, 1995
<S> <C> <C>
Bank debt $ 7,463,865 $ 5,936,250
Convertible subordinated notes 8,095,449 8,095,499
Seller note 1,760,932 -
Capitalized leases & other 491,038 460,380
17,811,284 14,492,129
Less current portion 3,523,360 1,788,012
$14,287,924 $12,704,117
</TABLE>
5. POTENTIAL ACQUISITION
On November 30, 1995, the Company signed a letter of intent to purchase
Hyland Software, Inc. The acquisition is contingent on, and the form of
consideration and final purchase price will be determined based on, the
completion of the Company's due diligence review.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Results of operations for the three months ended December 31, 1995
compared to the same period in 1994.
For the three months ended December 31, 1995, net sales increased by
$5,271,000 (or 115%) to $9,872,000 in 1995 compared to $4,601,000 for the same
period in 1994. The increase in sales was principally a result of the
acquisition of Micrographics Technology Corporation ("MTC") in September 1995,
and Communicate Direct, Inc. ("CDI") in November 1994, and higher sales volume
by the Company's telecommunications and document management divisions. The
Company's acquisition of MTC and CDI added approximately $5,071,000 in net sales
in the three months ended December 31, 1995.
For the three months ended December 31, 1995, gross profit increased
$2,360,000 (or 139%) to $4,061,000 in 1995 from $1,701,000 for the same period
in 1994. For the three months, gross profit as a percentage of sales increased
from 37.0% in 1994 to 41.1% in 1995. The percentage increase relates primarily
to inclusion of MTC's results for the three months ended December 31, 1995.
Selling, engineering, general and administrative expenses increased
$2,063,000 (or 145%) to $3,489,000 for the three months ended December 31, 1995
from $1,426,000 for the same period in 1994, largely as a result of the
inclusion of MTC's results for the quarter ended December 31, 1995 ($1,053,000),
the increase in sales and marketing activities in the telecommunications
division ($334,000) and the increase of the corporate operations to accommodate
the acquisitions of KCI and MTC ($298,000). Depreciation and amortization
increased $384,000 from $127,000 for the three months ended December 31, 1994,
compared to $511,000 for the three months ended December 31, 1995, primarily as
a result of the inclusion of MTC's results for the three months ended December
31, 1995, and CDI's results for the month of October 1995, and the amortization
of deferred acquisition costs resulting from the acquisitions of MTC and CDI.
Interest expense increased $274,000 or 242% to $387,000 for the three
months ended December 31, 1995 from $113,000 in the three months ended
December 31, 1994. Interest expense increased as a result of increased debt
outstanding during the three months ended December 31, 1995.
The Company's provision for income taxes relates exclusively to the
operation of KCI for tax liabilities incurred prior to the merger with the
Company. No provision for income taxes was incurred for the three months ended
December 31, 1995, as a result of the loss from continuing operations. A
provision for income taxes of $113,000 was recorded for the three months ended
December 31, 1994.
For the three months ended December 31, 1995, the net loss from continuing
operations increased $252,000 and the loss per share of common stock from
continuing operations increased $.04 compared to the same period in 1994.
Liquidity and Capital Resources
During the three months ended December 31, 1995, the Company restructured
$1,330,000 of the revolving credit note into a term note which matured on
February 1, 1996. The maturity date of this note has been extended to February
29, 1996. Also, in connection with the acquisition of certain assets of
Executone Information Systems, Inc. the Company signed a $1,760,000 note with
the seller which is scheduled to mature on February 29, 1996.
During the three months ended December 31, 1995, the Company agreed to
include 100,000 shares of common stock of IMNET Systems, Inc. owned by the
Company in an underwritten offering that is scheduled for completion in the
second quarter of fiscal 1996. The Company anticipates using the proceeds from
the secondary offering to retire certain bank loans and to retire the seller
note issued in connection with the Executone acquisition. Accordingly, the
Company has classified $2,400,000 as a current asset in the Company's
consolidated financial statements.
At December 31, 1995, the Company's current ratio was 1.24 to 1 with
working capital of $2.8 million. This compares with a current ratio of 1.30 to 1
and working capital of $3.3 million at September 30, 1995.
The Company expects to be able to finance its working capital requirements,
including capital expenditures, from its existing line-of-credit facility and
through sale of available-for-sale securities.
For the three months ended December 31, 1995, cash flows used by operating
activities were $691,000 compared to $1,710,000 for the three months ended
December 31, 1994. The decrease was principally due to higher depreciation and
amortization, higher deferred revenue and a decrease in accounts receivable.
PART II. OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SoftNet Systems, Inc.
/s/ Martin A. Koehler
Martin A. Koehler
Vice President - Finance and
Chief Financial Officer
Dated: February 14, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SoftNet
Systems, Inc.'s Form 10-QSB and is qualified in its entirety by reference to
such Form 10-QSB filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> DEC-31-1995
<CASH> 428,193
<SECURITIES> 9,070,540
<RECEIVABLES> 6,131,494
<ALLOWANCES> (131,796)
<INVENTORY> 5,438,517
<CURRENT-ASSETS> 14,608,727
<PP&E> 3,510,700
<DEPRECIATION> (839,441)
<TOTAL-ASSETS> 36,800,296
<CURRENT-LIABILITIES> 11,815,452
<BONDS> 14,387,924
0
0
<COMMON> 27,635,243
<OTHER-SE> 7,077,101
<TOTAL-LIABILITY-AND-EQUITY> 10,696,920
<SALES> 9,872,062
<TOTAL-REVENUES> 9,872,062
<CGS> 5,811,169
<TOTAL-COSTS> 4,000,377
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 395,068
<INCOME-PRETAX> (323,161)
<INCOME-TAX> 0
<INCOME-CONTINUING> (323,161)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (323,161)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
