SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended: Commission File No.: 1-5270
March 31, 1996
SOFTNET SYSTEMS, INC.
(Exact name of small business issuer 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)
Issuer's telephone number, including area code: (847) 266-8150
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
as of March 31, 1996, 5,555,033 shares of common stock were outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, September 30,
1996 1995
ASSETS (unaudited)
Current assets:
<S> <C> <C>
Cash $ 197,197 $ 572,758
Available-for-sale securities - 2,575,000
Accounts receivable, net 8,141,284 6,128,348
Inventories 6,819,466 4,785,326
Prepaid expenses 364,900 270,223
Total current assets 15,522,847 14,331,655
Property and equipment, net 2,903,128 2,619,474
Available-for-sale securities 8,406,603 7,156,638
Costs in excess of fair value of net assets acquired, net 11,178,271 9,910,354
Other assets 1,687,584 1,378,180
$39,698,433 $35,396,301
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 7,247,534 $ 7,733,652
Current portion of long-term debt 476,033 1,788,012
Deferred revenue 2,352,658 1,031,672
Net liabilities of business disposed of in 1996 - 453,746
Total current liabilities 10,076,225 11,007,082
Long-term debt, net of current portion 16,306,103 12,704,117
Shareholders' equity:
Preferred stock, $.10 par value, 4 million shares
authorized, none outstanding - -
Common stock, $.01 par value, 25 million shares authorized,
5,555,033 and 5,547,033 outstanding, respectively 55,550 55,470
Capital in excess of par value 28,412,279 27,583,696
Accumulated deficit (22,091,499) (23,692,263)
Unrealized appreciation in available-for-sale securities 6,939,775 7,738,199
Total shareholders' equity 13,316,105 11,685,102
$39,698,433 $35,396,301
</TABLE>
<TABLE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
March 31, March 31,
<CAPTION>
1996 1995 1996 1995
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 12,190,060 $ 5,732,803 $ 22,062,122 $ 10,333,950
Cost of sales 7,811,278 3,894,094 14,240,839 6,991,509
Gross profit 4,378,782 1,838,709 7,821,283 3,342,441
Operating expenses:
Selling 1,317,818 719,448 2,453,606 1,159,239
Engineering 434,531 - 838,302 -
General and administrative 1,785,350 1,119,813 3,307,832 1,960,150
Amortization of goodwill and transaction 370,275 107,594 690,220 182,359
costs
Total operating expenses 3,907,974 1,946,855 7,289,960 3,301,748
Income (loss) from continuing 470,808 (108,146) 531,323 40,693
operations
Interest expense (434,797) (154,085) (829,864) (267,329)
Gain on sale of available-for-sale securities 1,883,389 - 1,883,389 -
Other income (expense) 4,525 (29,393) 15,916 (22,920)
Income (loss) from continuing
operations before income taxes 1,923,925 (291,624) 1,600,764 (249,556)
Provision for income taxes - 27,809 - 140,809
Net income (loss) before 1,923,925 (319,433) 1,600,764 (390,365)
discontinued operations
Discontinued operations - (130,836) - (117,326)
Net income (loss) $ 1,923,925 $ (450,269) $ 1,600,764 $ (507,691)
Primary earnings per share:
Continuing operations $ 0.31 $ (0.08) $ 0.25 $ (0.09)
Discontinued operations - (0.03) - (0.03)
Net income (loss) $ 0.31 $ (0.11) $ 0.25 $ (0.12)
Fully diluted earnings per share:
Continuing operations $ 0.25 $ - $ 0.21 $ -
Discontinued operations - - - -
Net income (loss) $ 0.25 $ - $ 0.21 $ -
Weighted average shares outstanding:
Primary 6,176,563 4,134,919 6,312,780 4,081,880
Fully diluted 7,551,379 - 7,687,596 -
</TABLE>
<TABLE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Six months ended
March 31,
1996 1995
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 1,600,764 $ (507,691)
Adjustments to reconcile net income (loss)
to net cash used in operating activities
Gain on sale of available for sale
securities (1,883,389) -
Depreciation and amortization 1,101,881 394,418
Provision for bad debts 37,000 25,000
Changes in operating assets and liabilities,
net of effect of purchase transaction -
Accounts receivable (1,820,138) (1,168,701)
Inventories (1,750,844) (559,083)
Prepaid expenses 69,461 173,214
Accounts payable and accrued
expenses (792,515) (721,161)
Deferred revenue 1,320,986 15,158
Net cash used in operating
activities (2,116,794) (2,348,846)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (579,543) (245,211)
Acquisition of business, net of cash
acquired (1,859,832) (139,980)
Proceeds from sale of available-for-sale
securities 2,410,000 -
Payment for acquisition costs (143,530) -
Settlement of remaining obligations to
owners of discontinued operations (116,575) -
Increase in other assets (573,542) (267,778)
Net cash used in investing
activities (863,022) (652,969)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - 2,423,000
Repayment of long-term debt (83,592) (700,000)
Borrowings under bank credit facility, net 2,181,424 1,500,000
Proceeds from sale of common stock - 726,250
Proceeds from exercise of warrants 14,000 -
Payment of put obligation (200,000) -
Proceeds from settlement of related party
receivable 818,686 -
Repayment of prior revolving credit
facility - (825,000)
Capitalized lease obligations paid (126,263) (85,393)
Net cash provided by
financing activities 2,604,255 3,038,857
NET INCREASE (DECREASE) IN CASH (375,561) 37,042
CASH, beginning of period 572,758 487,597
CASH, end of period $ 197,197 $ 524,639
CASH PAID DURING THE PERIOD FOR:
Interest $ 796,605 $ 137,132
Income taxes - 97,000
SUPPLEMENTAL NON-CASH TRANSACTIONS
Property acquired by capitalized leases 108,113 154,221
Businesses acquired with issuance of
stock and notes - 1,844,141
Change in unrealized appreciation in
available-for-sale securities (798,424) -
Exercise of cashless common stock
options - 19,107
Change in valuation of senior note
discount - 51,875
</TABLE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
(UNAUDITED)
1. BASIS OF PRESENTATION
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the consolidated statements of financial position, results of
operations and cash flows as of, and for the interim period ended, March 31,
1996 and 1995.
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 operation for the six months ended March 31, 1996 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 Associates, Inc. ("UMA"), 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 sell and service 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 was paid in
February, 1996. The operations of Executone's Milwaukee office have been
included in the results of the Company since December 29, 1995.
As a result of the acquisition , the Company recorded costs in excess of
fair value of net assets acquired of $1,754,567, being amortized on a straight
line basis over twenty years.
The following unaudited pro forma summary presents information as if the
acquisitions of Micrographic Technology Corporation ("MTC") in September 1995,
Communicate Direct, Inc. ("CDI") 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>
Six months ended March 1,
1996 1995
unaudited
<S> <C> <C>
Net sales from continuing operations $ 22,59,000 $ 1,787,000
Income (loss) from continuing operations 1,505,000 (438,000)
Net income (loss) 1,505,000 (555,000)
Net income (loss) per share $ 0.24 $ (0.10)
</TABLE>
3. DISCONTINUED OPERATIONS
During September 1995, the Company's Board of Directors approved the
rescission of the November 1993 acquisition of UMA.
Effective November 20, 1995, the Company paid the former shareholders of
UMA $200,000 in satisfaction of their common stock put rights 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 the release of the Company from any
outstanding obligations and liabilities to UMA or the shareholders of UMA.
4. DEBT
<TABLE>
<CAPTION>
Debt is summarized as follows:
March 31, Setember 30,
1996 1995
<S> <C> <C>
Bank debt $ 8,044,409 $ 5,936,250
Covertibles subordnated notes 8,095,499 8,095,499
Capitalized leases & other 642,228 460,380
16,782,136 14,492,129
Less current portion (476,033) (1,788,012)
$ 16,306,103 $ 12,704,117
</TABLE>
5. STOCK OPTIONS AND WARRANTS
Outstanding options and warrants to purchase shares of common stock at
March 31, 1996 were as follows:
Outstanding at beginning of year 1,594,650
Granted (prices ranging from $8.50 to $12.75) 424,615
Exercised or cancelled (prices ranging from $1.75 to
$12.75) (204,991)
Outstanding at March 3, 1996 1,814,274
In February, 1996 the Company repriced 274,615 Employee Stock Options by
reducing the exercise price from $12.75 to $8.25 (the market price on the date
the option were approved). On the same date, 150,000 additional employee stock
options originally granted at $6.50 were priced at $8.25 at the request of the
optionee when approval of these options occurred.
6. RECLASSIFICATIONS
During the six months ended March 31, 1996, in order to conform with
industry practices, the Company classified certain expenses as costs of goods
sold which under prior presentations would have been classified as general and
administrative expenses. Consistent with this presentation, the Company has
reclassified certain general and administrative expenses as cost of goods sold
for the six months ended March 31, 1995.
7. SALE OF SECURITIES
IMNET Systems, Inc.
During the six months ended March 31, 1996, the Company sold
100,000 shares of Common Stock of IMNET Systems, Inc. for net proceeds of
$2.4 million. Accordingly, the Company recorded a gain on the sale of the
securities of $1.8 million.
Artra Group, Inc.
During the six months ended March 31, 1996, the Company sold all
of its holdings in Artra Group, Inc. for net proceeds of $819,000, which
was recorded as a capital contribution.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Results of operation for the six months ended March 31, 1996 compared to the
same period in 1995.
For the six months ended March 31, 1996 net sales increased by $11,728,000
(or 113%) to $22,062,000 compared to $10,334,000 for the same period in 1995.
The increase in sales was principally a result of the acquisition of MTC in
September 1995, and higher sales of the Company's telecommunications and
document management divisions. The Company's acquisition of MTC added
approximately $8,849,000 in net sales in the six months ended March 31, 1996.
For the six months ended March 31, 1996, gross profit increased $4,479,000
(or 134%) to $7,821,000 from $3,342,000 for the same period in 1995. For the
six months, gross profit as a percentage of sales increased from 32.3% in 1995
to 35.5% in 1996. The percentage increase relates primarily to inclusion of
MTC's results for the six months ended March 31, 1996 and the increased
profitability for sales in the document management division. During the six
months ended March 31, 1996, in order to conform with industry practices, the
Company classified certain expenses as costs of goods sold which under prior
presentations would have been classified as general and administrative expenses.
Consistent with this presentation, the Company has reclassified certain general
and administrative expenses as cost of goods sold for the six months ended March
31, 1995.
Selling, engineering, general and administrative expenses increased
$3,480,000 (or 112%) to $6,600,000 for the six months ended March 31, 1996 from
$3,119,000 for the same period in 1995, largely as a result of the inclusion of
MTC's results for the period ended March 31, 1996 ($2,344,000), the increase in
sales and marketing activities in the Telecommunications division ($534,000) and
the increase administrative expenses associated with expanded operation
($602,000). Amortization of goodwill and transaction costs increased $508,000
to $690,000 for the six months ended March 31, 1996, compared to $182,000 for
the six months ended March 31, 1995, primarily as a result of the acquisition of
MTC in September 1995, and the amortization of deferred acquisition costs
resulting from the acquisitions of MTC and CDI.
Interest expense increased $563,000 (or 210%) to $830,000 for the six
months ended March 31, 1996 from $267,000 in the six months ended March 31,
1995. Interest expense increased as a result of increased debt outstanding
during the six months ended March 31, 1996, compared to the same period in 1995.
The increase in outstanding indebtedness was principally a result of acquisition
debt and borrowings to fund working capital.
During the six months ended March 31, 1996 the Company realized a gain of
$1,883,000 from the sale of a portion of its investment in Imnet Systems, Inc.
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 six months ended
March 31, 1996, as a result of the utilization of net operating loss
carryforwards. A provision for income taxes of $141,000 was recorded for the
six months ended March 31, 1995.
For the six months ended March 31, 1996, net income from continuing
operations increased $1,991,000 to $1,601,000 and income per share of common
stock from continuing operations increased $.34 to $.25, compared to the same
period in 1995.
Liquidity and Capital Resources
DEBT RESTRUCTURING
During the six months ended March 31, 1996, the Company restructured its
credit facility increasing the total availability under the facility to $9.5
million from $6.5 million. The credit facility matures on April 1, 1997. Funds
available under the facility are subject to adjustment on a monthly basis based
upon available assets (as defined). During the same period, indebtedness under
the credit facility increased from $5,936,000 to $8,044,000.
SALE OF SECURITIES
IMNET System, Inc.
During the six months ended March 31, 1996, the Company sold 100,000
shares of Common Stock of Imnet Systems, Inc. for net proceeds of $2.4
million. Accordingly, the Company recorded a gain on the sales of the
securities of $1.8 million.
Artra Group, Inc.
During the six months ended March 31, 1996, the Company sold all of
its holdings in Artra Group, Inc. for net proceeds of $819,000, which was
recorded as a capital contribution.
OTHER
At March 31, 1996, the Company's current ratio was 1.55 to 1 with a working
capital of $5.4 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. However, the Company's
available-for-sale securities are subject to a lock-up agreement until July 18,
1996.
For the six months ended March 31, 1996, cash flows used by operating
activities were $2,172,000 compared to $2,349,000 for the six months ended March
31, 1995. The decrease was principally due to higher depreciation and
amortization and a decrease in accounts receivable.
PART II. OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of Shareholders of the Company held on February 28,
1996, the following items, along with the number of votes cast for, against and
abstentions were approved:
<TABLE>
SHARES FOR SHARES AGAINST ABSTENTIONS
<S> <C> <C> <C>
Approval of the Amendment to
the Certificate of Incorporation
of the Company to increase the
authorized shares from 10 million
to 25 million 4,697,667 128,990 10,712
Approval of the Company's 1995
Long Term Incentive Plan 4,229,455 40,140 12,762
Approval of the Company's Stock
Option Plan for employees of
Micrographic Technology
Corporation 3,972,312 54,469 255,576
Approval of the 150,000 share stock
option granted to John J. McDonough 2,948,993 920,123 413,241
Approval of the 25,000 share stock
option grant to Martin A. Koehler 3,950,286 68,759 263,312
</TABLE>
The following directors were reelected:
VOTES FOR VOTES WITHHELD
John J. McDonough 4,236,539 97,240
John I. Jellinek 4,236,539 97,240
Ian B. Aaron 3,536,505 797,328
James A. Gordon 4,235,393 98,440
John G. Hamm 7,566,355 1,299,269
Philip Kenny 4,236,539 97,240
A.J.R. Oostuizen 4,212,719 121,114
Ronald I. Simon 4,211,519 122,314
C. William Vatz 4,235,393 8,440
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 March 31, 1996.
SIGNATURES
In accordance with 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.
John I. Jellinek
President and
Chief Executive Officer
Martin A. Koehler
Vice President - Finance and
Chief Financial Officer
Dated: May 15, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains six months summary financial information extracted from
Softnet Systems, Inc. and subsidiary 1996 second quarter 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-31-1996
<CASH> 197,197
<SECURITIES> 0
<RECEIVABLES> 8,239,445
<ALLOWANCES> 98,161
<INVENTORY> 6,819,466
<CURRENT-ASSETS> 15,522,847
<PP&E> 3,896,787
<DEPRECIATION> 993,659
<TOTAL-ASSETS> 2,903,128
<CURRENT-LIABILITIES> 10,076,225
<BONDS> 0
55,550
0
<COMMON> 0
<OTHER-SE> 13,260,555
<TOTAL-LIABILITY-AND-EQUITY> 39,698,433
<SALES> 22,062,122
<TOTAL-REVENUES> 22,062,122
<CGS> 14,240,839
<TOTAL-COSTS> 14,240,839
<OTHER-EXPENSES> (1,899,305)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 829,864
<INCOME-PRETAX> 1,600,764
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,600,764
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,600,764
<EPS-PRIMARY> .25
<EPS-DILUTED> .21
</TABLE>
