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: June Commission File No.: 1-5270
30, 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 June 30, 1996, 6,537,565 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>
June 30, September 30,
1996 1995
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash $ 1,337,014 $ 572,758
Available-for-sale securities 8,471,985 2,575,000
Accounts receivable, net 7,634,524 6,128,348
Inventories 6,596,994 4,785,326
Prepaid expenses 253,766 270,223
Total current assets 24,294,283 14,331,655
Property and equipment, net 3,188,705 2,619,474
Available-for-sale securities 4,060 7,156,638
Costs in excess of fair value of net assets acquired, net 8,236,170 9,910,354
Other assets 3,561,182 1,378,180
$39,284,400 $35,396,301
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 8,408,748 $ 7,733,652
Current portion of long-term debt 3,448,430 1,788,012
Deferred revenue 2,041,522 1,031,672
Net liabilities of business disposed of in 1996 - 453,746
Total current liabilities 13,898,700 11,007,082
Long-term debt, net of current portion 14,222,730 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,
6,537,565 and 5,547,033 outstanding, respectively 65,376 55,470
Capital in excess of par value 33,512,452 27,583,696
Accumulated deficit (29,424,075) (23,692,263)
Unrealized appreciation in available-for-sale securities 7,009,217 7,738,199
Total shareholders' equity 11,162,970 11,685,102
$39,284,400 $35,396,301
</TABLE>
<TABLE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended June Nine Months Ended June 30,
30,
1996 1995 1996 1995
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 9,806,289 $ 4,805,279 $31,868,411 $15,139,229
Cost of sales 6,364,354 3,532,463 20,605,193 10,523,972
Gross profit 3,441,935 1,272,816 11,263,218 4,615,257
Operating expenses:
Selling 1,346,180 560,107 3,799,786 1,719,346
Engineering 469,674 - 1,307,976 -
General and administrative 2,025,365 1,269,365 5,333,197 3,229,515
Cost associated with change in product and 1,301,946 - 1,301,946 -
other
Amortization of goodwill and transaction costs 240,243 110,187 930,463 292,546
Total operating expenses 5,383,408 1,939,659 12,673,368 5,241,407
Loss from continuing operations (1,941,473) (666,843) (1,410,150) (626,150)
Interest expense (419,624) (163,591) (1,249,488) (430,920)
Gain on sale of available-for-sale securities - - 1,883,389 -
Loss on sale of business (4,960,828) - (4,960,828) -
Other income (expense) (10,651) 1,200 5,265 (21,720)
Loss from continuing
operations before income taxes (7,332,576) (829,234) (5,731,812) (1,078,790)
Provision for income taxes - 55,000 - 195,809
Net loss before discontinued operations (7,332,576) (884,234) (5,731,812) (1,274,599)
Discontinued operations - (129,755) - (247,081)
Net loss $(7,332,576) $(1,013,989) $(5,731,812) $(1,521,680)
Earnings per share:
Continuing operations $ (1.29) $ (0.20) $ (1.03) $ (0.30)
Discontinued operations - (0.03) - (0.06)
Net loss $ (1.29) $ (0.23) $ (1.03) $ (0.36)
Weighted average shares outstanding 5,702,350 4,400,970 5,575,936 4,204,212
</TABLE>
<TABLE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Nine months ended June 30,
1996 1995
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(5,731,812) $(1,521,680)
Adjustments to reconcile net loss to net cash used in
operating activities
Gain on sale of available for sale securities (1,883,389) -
Loss from sale of business 4,960,828 -
Depreciation and amortization 1,477,606 516,361
Debt discount and deferred financing amortization 78,556 87,004
Provision for bad debts 69,578 36,422
Changes in operating assets and liabilities, net of effect of
purchase transaction -
Accounts receivable (2,062,786) (1,087,089)
Inventories (2,368,749) (1,118,561)
Prepaid expenses 182,775 141,223
Accounts payable and accrued expenses 175,587 (724,370)
Deferred revenue 1,009,850 313,300
Net cash used in operating activities (4,091,956) (3,357,390)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (913,791) (836,334)
Acquisition of business, net of cash acquired (2,006,984) (167,271)
Proceeds from sale of available-for-sale securities 2,410,000 -
Payment for acquisition costs (83,169) -
Settlement of remaining obligations to owners of discontinued operations (116,575) -
Increase in other assets (1,893,809) (309,738)
Net cash used in investing activities (2,604,328) (1,313,343)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 2,909,627 3,450,467
Repayment of long-term debt (143,050) (700,000)
Borrowings under bank credit facility, net 4,245,113 2,193,341
Proceeds from sale of common stock - 720,341
Proceeds from exercise of warrants 17,500 166,172
Payment of put obligation (200,000) -
Proceeds from settlement of related party receivable 818,586 -
Repayment of prior revolving credit facility - (825,000)
Capitalized lease obligations paid (187,236) (140,322)
Net cash provided by financing activities 7,460,540 4,864,999
NET INCREASE IN CASH 764,256 194,266
CASH, beginning of period 572,758 487,597
CASH, end of period $ 1,337,014 $ 681,863
CASH PAID DURING THE PERIOD FOR:
Interest $ 1,125,229 $ 254,868
Income taxes - 1,562
SUPPLEMENTAL NON-CASH TRANSACTIONS
Property acquired by capitalized leases 160,851 212,863
Businesses acquired with issuance of stock and notes 1,022,000 1,810,401
Conversion of senior notes to convertible notes - 309,499
Change in unrealized appreciation in available-for-sale securities (728,981) -
Conversion of debt for common stock 4,084,499 -
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
JUNE 30, 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 condensed consolidated
statements of financial position, results of operations and cash flows
as of and for the interim periods ended June 30, 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 nine months ended June 30, 1996 are
based in part on estimates that 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"), with the subsidiary
surviving 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 year 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-month and nine-month periods ended June 30,
1995 have been reported separately from the continuing operations of
the Company.
2. ACQUISITION
MILWAUKEE OPERATION OF EXECUTONE MANAGEMENT SYSTEMS, INC.
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 $1.8 million, an amount
which is being amortized on a straight-line basis over twenty years.
MEDIACITY WORLD, INC.
On June 21, 1996, the Company acquired MediaCity World, Inc., in
a business combination accounted for as a purchase. MediaCity World,
Inc. is an Internet Service Provider with operations in the San
Francisco Bay Area, Reno, NV, Boston, MA, and Munich, Germany. The
purchase price consisted of 200,000 shares of the Company's common
stock valued at $5.11 per share. The operations of MediaCity World,
Inc. have been included in the results of the Company since June 21,
1996.
As a result of the acquisition of MediaCity World, Inc., the Company
recorded costs in excess of fair value of net assets acquired of $1.2
million, being amortized on a straight line basis over three 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,
Executone's Milwaukee operations in December, 1995 and MediaCity
World, Inc. in June, 1996, 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 for the combined
enterprises:
<TABLE>
Nine Months Ended June 30,
1996 1995
(unaudited)
<S> <C> <C>
Net sales from continuing operations $32,399,000 $30,268,000
Income (loss) from continuing (1,468,000) 626,000
operations
Net loss (5,828,000) (1,109,000)
</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 the 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. RELATED PARTY
In June, 1996, the Company signed an agreement with IMNET Systems,
Inc. that granted the Company exclusive worldwide manufacturing
rights, new non-exclusive, non-healthcare distribution rights for the
MegaSAR Microfilm Jukebox and its associated technology and amended
its previous distribution agreement. The Company has recorded a note
payable to IMNET for $2.9 million, with interest payable monthly at
the prime rate, for prepaid license fees, the manufacturing rights,
and certain other payable items. The note matures in June, 1997 and,
accordingly, has been classified as a current liability on the
accompanying condensed consolidated balance sheet.
5. DEBT
Debt is summarized as follows:
<TABLE>
June 30, September 30,
1996 1995
(unaudited)
<S> <C> <C>
Bank debt $10,094,943 $ 5,936,250
Convertible subordinated notes 4,011,000 8,095,499
Related party 2,977,627 -
Capitalized leases & other 587,590 460,380
17,671,160 14,492,129
Less current portion (3,448,430) (1,788,012)
$14,222,730 $12,704,117
</TABLE>
In June, 1996, the Company converted $4.1 million of 6%, 9%, and
10% convertible subordinated notes into 780,532 shares of the
Company's common stock.
Subsequent to June 30, 1996, the Company signed a loan agreement with
its bank for a $500,000 note, which matures on August 31, 1996.
6. STOCK OPTIONS AND WARRANTS
Outstanding options and warrants to purchase shares of common
stock at June 30, 1996 were as follows:
<TABLE>
<S> <C>
Outstanding at beginning of year 1,594,650
Granted (prices ranging from $8.125 to $12.75) 574,000
Exercised or canceled (prices ranging from $1.75 to
$12.75) (212,689)
Outstanding at June 30, 1996 1,955,961
</TABLE>
In February, 1996 the Company repriced 292,706 Employee Stock Options
by reducing the exercise price from $12.75 to $8.25 (the market price
on the date the plan under which the option were granted was
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 the plan occurred.
7. RECLASSIFICATIONS
During the nine months ended June 30, 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 nine months
ended June 30, 1995.
8. SALE OF SECURITIES
IMNET SYSTEMS, INC.
During the nine months ended June 30, 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 nine months ended June 30, 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.
9. SALE OF BUSINESS
On June 15, 1996, the Company sold its non-application oriented
interconnect business located in the Chicago, IL metropolitan area for
a $600,000 note receivable. The Company incurred a one-time charge of
$4.9 million as a loss on the sale of this business. In connection
with the sale, the Company agreed to lend the buyer up to $1 million
to fund operating losses, as defined, for the first twelve months of
operations. After the first twelve months, any amount still
outstanding from the buyer shall be forgiven. As of June 30, 1996,
the Company has not made any loans pursuant to this agreement.
10.
In June, 1996, the Company signed an agreement to distribute Lucent
Technologies, Inc. products in the Chicago, IL metropolitan area. In
connection with this distribution agreement and the repositioning of
its Chicago operations, the Company incurred one-time charges of $1.3
million for the write-down of inventory, severance, warranty reserves
and other.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company entered took a number of strategic steps in the third
quarter that had a significant impact on the results for the quarter.
In June, 1996, the Company signed an agreement with Inacom
Corporation and Lucent Technologies, Inc. to become the only
distributor of Lucent Technology's Definity Private Branch Exchange
products in the Chicago, IL metropolitan area other than Inacom and
Lucent. In connection with the change in product line, the Company
repositioned its Chicago operations to focus on higher-end, technology
driven companies and sold its Chicago area non-application oriented
interconnect business.
The immediate impact of these changes was a $6.3 million one-time
charge against third quarter earnings for the write-off of goodwill,
deferred acquisition costs associated with the purchase of Communicate
Direct, Inc. in October, 1994, severance payments, inventory write-
downs, warranty reserve and other. As a result of these write-offs,
future amortization expense for goodwill and deferred acquisition
costs will be reduced by $535,000 annually on a pretax basis.
The Company expects to focus on building and increasing its customer
base in each of its markets, but in particular, to develop a customer
profile that more closely aligned with the Company's overall product
strategy. This effort, as well as the introduction of the new
product, some of which the Company will develop internally, will
require substantial investment in new sales personnel and retraining
of current technical personnel, which the Company believes will have
an adverse effect on short-term operating results.
In June, 1996, the Company acquired the exclusive worldwide
manufacturing rights to IMNET Systems, Inc.' s MegaSAR Microfilm
Jukebox and its associated technology, and amended its previous
distribution agreement. In addition to becoming the exclusive
manufacturer of the MegaSAR for IMNET, the Company will further
integrate the device into its current product offering. The Company
issued a note payable of $2.9 million for prepaid license fees, the
manufacturing rights, and certain other payables.
In June, 1996, the Company acquired MediaCity World, Inc. in a
business combination accounted for as a purchase. MediaCity World,
Inc. is an Internet Service Provider with operations in the San
Francisco Bay Area, CA., Reno, NV., Boston, MA., and Munich, Germany.
The purchase price consisted of 200,000 shares of the Company's common
stock valued at $5.11 per share. The Company recorded costs in excess
of fair value of net assets acquired of $1.2 million, which will be
amortized on a straight line basis over three years. The Company
plans to focus in the near term on building and increasing its
subscriber base, which will require it to increase significantly its
expenses for marketing, network infrastructure and point of presence
locations, and may adversely impact short-term operating results.
RESULTS OF OPERATIONS
Results of operation for the nine months ended June 30, 1996 compared
to the same period in 1995.
For the nine months ended June 30, 1996 net sales increased by $16.8
million (or 111 %) to $31.9 million compared to $15.1 million for the
same period in 1995. The increase in sales was principally a result
of the acquisitions of MTC in September, 1995 and the Milwaukee, WI
operation of Executone Management Systems, Inc. in December, 1995. The
Company's acquisition of MTC and the Milwaukee operation of Executone
added approximately $14.9 million in net sales in the nine months
ended June 30, 1996.
For the nine months ended June 30, 1996, gross profit increased $6.7
million (or 146%) to $11.3 million from $4.6 million for the same
period in 1995. For the nine months, gross profit as a percentage of
sales increased from 30.49% in 1995 to 35.34% in 1996. The percentage
increase relates primarily to inclusion of MTC's results for the nine
months ended June 30, 1996 and the increased profitability for sales
in the document management division. During the nine months ended
June 30, 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 nine months ended June 30, 1995.
Selling, engineering, general and administrative expenses
increased $5.5 million (or 112%) to $10.4 million for the nine months
ended June 30, 1996 from $4.9 million for the same period in 1995,
largely as a result of the inclusion of MTC's results for the period
ended June 30, 1996 ($3.6 million), the increase in sales and
marketing activities in the Telecommunications division ($871,000) and
the increase administrative expenses associated with expanded
operation ($125,000). Amortization of goodwill and transaction costs
increased $638,000 to $930,000 for the nine months ended June 30,
1996, compared to $292,000 for the nine months ended June 30, 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 $819,000 (or 190%) to $1.2 million for
the nine months ended June 30, 1996 from $431,000 in the nine months
ended June 30, 1995. Interest expense increased as a result of
increased debt outstanding during the nine months ended June 30,
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 nine months ended June 30, 1996 the Company realized a
gain of $1.9 million 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 made for the nine
months ended June 30, 1996, as a result of net operating losses. A
provision for income taxes of $196,000 was recorded for the nine
months ended June 30 , 1995.
For the nine months ended June 30, 1996, net loss before
discontinued operations increased $4.2 million to $5.7 million and
loss per share of common stock before discontinued operations
increased $.67 to $1.03, compared to the same period in 1995.
Liquidity and Capital Resources
DEBT RESTRUCTURING
During the nine months ended June 30, 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 July 1, 1997. During the same period, indebtedness
under the credit facility increased from $5.3 million to $9.4 million.
In addition, the Company signed a loan agreement with its bank for a
$500,000 note payable in July, 1996 due August 31, 1996. Funds
available under the facility are subject to adjustment on a monthly
basis based upon available assets (as defined).
During the quarter ending June 30, 1996, the Company converted $4.1
million of convertible subordinated notes into 780,532 shares of its
common stock. As a result of this conversion, the Company expects an
annual interest expense savings of approximately $346,000.
The Company expects to be able to finance its working capital
requirements, including capital expenditures, from its existing cash
balance, credit facility and through sale of available-for-sale
securities.
SALE OF SECURITIES
IMNET SYSTEM, INC.
During the nine months ended June 30, 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 nine months ended June 30, 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 June 30, 1996, the Company's current ratio was 1.75 to 1 with a
working capital of $10.4 million. This compares with a current ratio
of 1.30 to 1 and working capital of $3.3 million at September 30,
1995.
For the nine months ended June 30, 1996, cash flows used by
operating activities were $4.1 million compared to $3.4 million for
the nine months ended June 30, 1995. The increase was principally due
to higher losses from operations and increases in accounts receivable
and inventory
PART II. OTHER INFORMATION
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 June 30, 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: August 14, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains nine month summary financial information extracted from
SoftNet Systems, Inc. and subsidary 1996 third quarter Form 10-Q and is
qualified in its entirety by reference to such Form 10-Q filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
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0
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</TABLE>