SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) February 9, 1999
----------------
SoftNet Systems, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
New York 1-5270 11-1817252
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
650 Townsend Street, Suite 225, San Francisco, CA 94103
-----------------------------------------------------------------
(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code (415) 365-2500
N/A
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
AMENDMENT NO. 1
The undersigned Registrant hereby amends the following items
to its Current Report on Form 8-K, originally filed with the Securities and
Exchange Commission on February 24, 1999, as set forth below:
Item 7. FINANCIAL STATEMENTS OF BUSINESS ACQUIRED, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired. Attached hereto
are the following financial statements of Intelligent Communications, Inc.
("Intellicom"): (i) the audited balance sheets as of December 31, 1997 and 1996
and the unaudited balance sheet as of December 31, 1995, the related audited
statements of income and comprehensive income, changes in stockholders' equity
and cash flows for each of the two years ended December 31, 1997, and the
unaudited statement of income and comprehensive income, changes in stockholders'
equity and cash flow for the year ended December 31, 1995; and (ii) the audited
balance sheet as of September 30, 1998 and the unaudited balance sheet as of
December 31, 1998, the related audited statement of operations, shareholders'
deficit and cash flow for the nine month period ended September 30, 1998 and the
related unaudited statements of operations and cash flows for each of the three
months ended December 31, 1998 and 1997.
(b) Pro Forma Financial Information. Pro forma financial
information for SoftNet Systems, Inc. is included at the end of this Report.
(c) Exhibits. The following documents are filed as exhibits to
this report:
1. Exhibit 23.1 - Consent of PricewaterhouseCoopers
LLP.
2. Exhibit 23.2 - Consent of Blanding, Boyer &
Rockwell LLP.
<PAGE>
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 hereunto duly authorized.
SoftNet Systems, Inc.
(Registrant)
Date: February 26, 1999 By: /s/ Douglas S. Sinclair
------------------------------
Douglas S. Sinclair
Chief Financial Officer
<PAGE>
SoftNet Systems, Inc.
Exhibit Index
to Form 8-K/A
Exhibit No. Description
----------- -----------
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Blanding, Boyer & Rockwell LLP.
<PAGE>
Item 7. FINANCIAL STATEMENTS OF BUSINESS ACQUIRED, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired. Attached hereto
are the following financial statements of Intelligent Communications, Inc.
("Intellicom"): (i) the audited balance sheets as of December 31, 1997 and 1996
and the unaudited balance sheet as of December 31, 1995, the related audited
statements of income and comprehensive income, changes in stockholders' equity
and cash flows for each of the two years ended December 31, 1997, and the
unaudited statement of income and comprehensive income, changes in stockholders'
equity and cash flow for the year ended December 31, 1995; and (ii) the audited
balance sheet as of September 30, 1998 and the unaudited balance sheet as of
December 31, 1998, the related audited statement of operations, shareholders'
deficit and cash flow for the nine month period ended September 30, 1998 and the
related unaudited statements of operations and cash flows for each of the three
months ended December 31, 1998 and 1997.
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
(doing business as INTELLICOM, INC.)
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Intelligent Communications, Inc.
DBA Intellicom, Inc.
We have audited the accompanying balance sheets of Intelligent Communications,
Inc., as of December 31, 1997 and 1996 and the related statements of income and
comprehensive income/changes in stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 1997 and 1996 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 1997 and 1996 financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1997 and 1996 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Our audit was conducted for the purpose of forming an opinion on the basic 1997
and 1996 financial statements taken as a whole. The supplementary 1997 and 1996
schedules are presented for purposes of additional analysis and are not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic 1997 and
1996 financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
<PAGE>
The 1995 basic financial statements and accompanying supplementary schedules of
the Company were reviewed by other accountants. A review consists primarily of
inquiries of Company personnel and analytical procedures applied to financial
data. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
the other accountants did not express such an opinion. In their report dated
March 28, 1996, they stated that they were not aware of any material
modifications that should be made to those statements in order for them to be in
conformity with generally accepted accounting principles.
/s/Blanding, Boyer & Rockwell, LLP
May 28, 1998
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
dba INTELLICOM, INC
BALANCE SHEETS
(See independent accountants' report.)
ASSETS
December 31,
------------------------------------
1997 1996 1995
-------- -------- ----------
(reviewed)
CURRENT ASSETS
Cash and equivalents ............ $ 56,287 $ 11,817 $ 89,738
Investments ..................... 34,684 50,569 70,977
Accounts receivable ............. 216,000 214,811 48,977
Accounts receivable -
employees ...................... 15,980 4,060 25,048
Prepaid expenses ................ 23,213 23,213 7,707
-------- -------- --------
Total ....................... 346,164 304,470 242,447
-------- -------- --------
NOTES RECEIVABLE -
SHAREHOLDERS ........................ 239,144 160,621 --
-------- -------- --------
PROPERTY AND EQUIPMENT, net .......... 337,960 84,396 94,938
-------- -------- --------
OTHER ASSETS
Deposits ........................ 49,500 49,000 49,000
Advanced rentals ................ 17,410 40,624 --
Unamortized costs ............... 109 436 763
-------- -------- --------
Total ....................... 67,019 90,060 49,763
-------- -------- --------
$990,287 $639,547 $387,148
======== ======== ========
See notes to financial statements.
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
dba INTELLICOM, INC
BALANCE SHEETS
(See independent accountants' report.)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
------------------------------------
1997 1996 1995
(reviewed)
--------- --------- ---------
CURRENT LIABILITIES
Lines of credit .............. $ 27,201 $ 25,163 $ --
Current portion of long-term
debt ........................ 69,959 -- --
Accounts payable ............. 272,373 293,925 265,869
Advances from shareholders ... 22,787 -- --
Accrued vacation ............. 24,401 24,401 32,466
Accrued taxes ................ -- 3,300 --
Notes payable-shareholders ... -- 62,891 53,918
--------- --------- ---------
Total .................... 416,721 409,680 352,253
--------- --------- ---------
NON-CURRENT LIABILITIES
Long-term debt, net of current
portion ..................... 211,291 -- --
Customer deposits ............ 63,994 21,926 700
--------- --------- ---------
Total .................... 275,285 21,926 700
--------- --------- ---------
Total liabilities ........ 692,006 431,606 352,953
--------- --------- ---------
STOCKHOLDERS' EQUITY
Common stock ................. 1,000 1,000 1,000
Retained earnings ............ 304,913 222,873 46,754
Accumulated other
comprehensive income ........ (7,632) (15,932) (13,559)
--------- --------- ---------
Total .................... 298,281 207,941 34,195
--------- --------- ---------
$ 990,287 $ 639,547 $ 387,148
========= ========= =========
See notes to financial statements.
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
dba INTELLICOM, INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997,1996 AND 1995
(See independent accountants' report.)
1997 1996 1995
----------- ----------- -----------
(reviewed)
REVENUES ........................... $ 2,646,717 $ 2,482,779 $ 2,718,286
COST OF REVENUES ................... 1,330,508 1,372,083 1,629,356
----------- ----------- -----------
Gross profit ..... 1,316,209 1,110,696 1,088,930
OPERATING EXPENSES ................. 1,209,986 942,165 1,035,166
----------- ----------- -----------
Income from
operations ...... 106,223 168,531 53,764
OTHER INCOME (EXPENSES)
Investment income, net ........ 1,539 5,086 10,190
Miscellaneous ................. 2,677 8,269 --
Gain (loss) on disposition of
equipment .................... -- 5,354 (1,160)
Interest expense .............. (29,499) (7,021) (12,263)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES ......... 80,940 180,219 50,531
Income tax benefit
(provision) ...... 1,100 (4,100) (800)
----------- ----------- -----------
NET INCOME ......................... 82,040 176,119 49,731
OTHER COMPREHENSIVE INCOME,
NET OF INCOME TAX
Unrealized gain (loss) on
investments .................. 8,300 (2,373) (13,559)
----------- ----------- -----------
COMPREHENSIVE INCOME ............... $ 90,340 $ 173,746 $ 36,172
=========== =========== ===========
See notes to financial statements.
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
dba INTELLICOM, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(See independent accountants' report.)
Accumulated
Other
Comprehensive Retained Comprehensive Common
Total Income Earnings Income Stock
---------- ---------- ---------- ---------- ---------
Balance at
December 31, 1994 . $ (1,977) $ $ (2,977) $ -- $ 1,000
Comprehensive income:
Net income ......... 49,731 49,731 49,731
Other comprehensive
income - unrealized
loss on investments (13,559) (13,559) (13,559)
----------
Comprehensive income $ 36,172
==========
---------- ---------- ---------- ---------
Balance at
December 31, 1995 .. 34,195 46,754 (13,559) $ 1,000
Comprehensive income:
Net income ......... 176,119 176,119 176,119
Other comprehensive
income - unrealized
loss on investments (2,373) (2,373) (2,373)
----------
Comprehensive income $ 173,746
==========
---------- ---------- ---------- ---------
Balance at
December 31, 1996 .. 207,941 222,873 (15,932) $ 1,000
Comprehensive income:
Net income ......... 82,040 82,040 82,040
Other comprehensive
income - unrealized
gain on investments 8,300 8,300 8,300
----------
Comprehensive income $ 90,340
==========
---------- ---------- ---------- ---------
Balance at
December 31, 1997 $ 298,281 $ 304,913 $ (7,632) $ 1,000
========== ========== ========== =========
See notes to financial statements.
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
dba INTELLICOM, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(See independent accountants' report.)
1997 1996 1995
--------- --------- ---------
(reviewed)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income .................... $ 82,040 $ 176,119 $ 49,731
Depreciation and
amortization ............ 56,440 26,552 32,792
Realized(gain)/loss on
sale of investment ...... 13,375 9,191 (9,142)
(Gain)/loss on disposition
of equipment ............ -- (5,354) 1,160
Changes in working
capital ................. 52,342 (167,452) 108,261
--------- --------- ---------
NET OPERATING ACTIVITIES .......... 204,197 39,056 182,802
--------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchases of equipment ... (309,677) (29,329) --
Proceeds from disposals
of equipment ............ -- 19,000 780
Purchase of investments .. (9,961) (125,451) (105,721)
Proceeds from sale of
investments ............. 20,771 134,295 25,327
--------- --------- ---------
NET INVESTING ACTIVITIES .......... (298,867) (1,485) (79,614)
--------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net proceeds from long-
term debt .................... $ 281,250 $ -- $ --
Advances for notes from
shareholders ................. (81,257) (139,633) --
Proceeds from lines of
credit ....................... 2,038 25,163 --
Debt repayments to share-
holders ...................... (62,891) (1,022) (23,620)
--------- --------- ---------
NET FINANCING ACTIVITIES .......... 139,140 (115,492) (23,620)
--------- --------- ---------
NET INCREASE (DECREASE) IN
CASH AND EQUIVALENTS ............. 44,470 (77,921) 79,568
CASH AND EQUIVALENTS AT
BEGINNING OF YEAR ................ 11,817 89,738 10,170
--------- --------- ---------
END OF YEAR ...................... $ 56,287 $ 11,817 $ 89,738
========= ========= =========
See notes to financial statements.
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
dba INTELLICOM, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(See independent accountants' report.)
OPERATIONS, SIGNIFICANT ACCOUNTING POLICIES AND CONCENTRATIONS OF RISK
Intelligent Communications, Inc. is an S corporation doing business as
Intellicom, Inc. The Company was incorporated in Delaware in late 1992 and
commenced operations during March 1993. Company headquarters is in Fremont,
California, and a customer service and software development center is in
Chippewa Falls, Wisconsin.
Intellicom provides VSAT satellite equipment, Internet access options,
applications, and consulting services to businesses, professionals, educational
institutions and on-line service providers. The Company primarily markets to
internet service providers, educational institutions and select corporate
industries throughout the United States and Mexico. These customers are
primarily utilizing Intellicom as their gateway network connectivity to the
Internet. The Company's operations are subject to the risks and uncertainties of
rapidly changing technology and current and potential competitors with greater
financial, technical and marketing resources.
The accompanying financial statements have been prepared using the
following significant accounting policies.
Method of accounting - Intellicom prepares its financial statements
using the accrual basis.
Cash equivalents - The Company considers highly liquid investments with
an original maturity of three months or less to be cash equivalents.
<PAGE>
Investments - Investments are classified as available-for-sale and are
available to support current operations or to take advantage of other
investment opportunities. These investments are stated at estimated
fair value based upon available market quotes. Realized gains and
losses are computed on the basis of specific identification. Unrealized
gains and losses are included as a separate component of stockholders'
equity.
Property and equipment - Major additions and improvements are charged
to the property accounts at cost; replacements, maintenance and repairs
which do not improve or extend the life of the respective assets are
expensed as incurred. When assets are retired or disposed of, the
related cost and accumulated depreciation are removed from the
respective accounts. The gain or loss on an item traded is applied to
the property and equipment accounts, and that of items disposed of is
reflected in income.
Depreciation - Depreciation expense has been computed using
straight-line depreciation methods. Useful lives of property and
equipment are generally five years.
Use of estimates - Preparation of financial statements requires
management to make estimates and assumptions that affect the reported
amounts and to disclose any material contingent amounts.
Accordingly, actual results could differ from such estimates.
Revenues - Revenues consist primarily of monthly service fees,
equipment sales and installation charges. Service fees consist of fixed
monthly amounts and/or hourly amounts based on usage. Service fees are
recognized as the service is provided. Payments received in advance of
providing services are deferred until the period such services are
provided. Equipment sales and installation charges are recognized when
installation is completed.
For the three years ended December 31, 1997, 1996 and 1995,
approximately 28%, 55% and 66% respectively of revenues were realized
from one customer.
Cost of revenues - Cost of revenues consists primarily of network
telecommunications costs, depreciation of network equipment, and the
cost of equipment sold to customers.
Network operations and support consists primarily of operating and
monitoring the network and providing technical support to the Company's
customers.
OPERATIONS, SIGNIFICANT ACCOUNTING POLICIES AND CONCENTRATIONS OF RISK
(continued)
Other - Certain 1995 balances have been reclassified from amounts
previously reported to conform with the current presentation.
INVESTMENTS
The Company invests primarily in common stock of public corporations,
which it classifies as available-for-sale. During 1997, the Company invested in
preferred stock which does not have a readily determinable fair value and,
accordingly, is presented at cost. The fair values of the Company's investments
is as follows.
December 31,
--------------------------------------------------------
1997 1996 1995
---------- ---------- ----------
(reviewed)
Common stock $ 9,684 $ 25,569 $ 70,977
Preferred stock 25,000 25,000 -
---------- ---------- ----------
$ 34,684 $ 50,569 $ 70,977
========== ========== ==========
Investment results included in other income are summarized as follows
For the year ended
December 31,
--------------------------------------------------------
1997 1996 1995
---------- ---------- ----------
(reviewed)
Net realized gain
(loss) on
investment sales $ (13,375) $ (9,191) 9,142
Dividend income - 899 62
Interest income 14,914 13,378 986
---------- ---------- ----------
1,539 $ 5,086 $ 10,190
========== ========== ==========
Unrealized gains and losses included as a component of stockholders'
equity are summarized below.
December 31,
--------------------------------------------------------
1997 1996 1995
---------- ---------- ----------
(reviewed)
Gross unrealized
holding gains $ - $ - $ 1,291
Gross unrealized
holding losses (7,632) (15,932) (14,850)
---------- ---------- ----------
$ (7,632) $ (15,932) $ (13,559)
========== ========== ==========
<PAGE>
ACCOUNTS RECEIVABLE
The Company believes that concentrations of credit risk with respect to
trade accounts receivable are limited, due to the length of service to most of
the Company's customer base. At December 31, 1997, 1996 and 1995, approximately
8%, 75% and 65% respectively of accounts receivable was due from one customer.
No allowance for doubtful accounts was deemed necessary by management as of
December 31, 1996 and 1995. At December 31, 1997, the allowance was $51,500.
PROPERTY AND EQUIPMENT
Property and equipment consist of the following.
December 31,
------------------------------------------------
1997 1996 1995
---------- ---------- ----------
(reviewed)
Network and computer
equipment $ 76,009 $ 37,264 $ 66,570
Furniture and fixtures 17,503 17,503 17,503
Machinery and equipment 32,899 32,899 21,642
Leasehold improvements 47,517 46,962 46,962
VSAT product development 270,377 - -
Less - accumulated
depreciation (106,345) (50,232) (57,739)
---------- ---------- ---------
$ 337,960 $ 84,396 $ 94,938
========== ========== =========
RELATED PARTY TRANSACTIONS
Notes receivable and notes payable with the Company shareholders
consisted of the following.
December 31,
------------------------------------------------
1997 1996 1995
---------- ---------- ----------
(reviewed)
Notes receivable, principal
and interest at 10% per
annum, due on March 1,
1999 or on demand $ 239,144 $ 160,621 $ 25,048
========== ========== ==========
Notes payable, principal
and interest at 10% per
annum, due on March 1,
1999 or on demand $ - $ 52,896 $ 53,918
========== ========== ==========
CREDIT AGREEMENTS
The lines of credit obtained by the Company are as follows.
December 31,
--------------------------------------------
1997 1996 1995
(reviewed)
---------- ---------- ----------
Bank of America, $10,000
credit line expiring in
April 1998, interest at
bank's reference rate
plus 6%, payable monthly $ 10,000 $ 10,000 $ -
Bank One, $20,000 credit
line expiring in December
1999, interest at bank's
reference rate plus 5.8%,
payable monthly $ 17,201 $ 15,163 $ -
---------- ---------- ----------
$ 27,201 $ 25,163 $ -
========== ========== ==========
Each credit line is guaranteed by the Company's shareholders. In June
1997, the Company obtained a standby letter of credit for $70,000 from Union
Bank of California expiring on July 15, 2001. The letter of credit was
established as security for the Company's satellite service lease.
LONG-TERM DEBT
As of December 31, 1995 and 1996, the Company had no long-term debt. As
of December 31, 1997, long-term debt consisted of the following.
Note payable - Union Bank of California,
due September 2001; monthly principal
payments commencing October 1997 plus
interest at bank's prime rate plus 2.5% $ 140,625
Note payable - CEDLI, due September 2001;
monthly principal payments of $3,125
commencing October 1997 plus interest at
Wall Street Journal Prime rate plus 3.5% 140,625
----------
Total debt 281,250
Less current maturities 69,959
Long-term debt $ 211,291
==========
<PAGE>
LONG-TERM DEBT (continued)
Borrowings under these agreements are secured by substantially all of
the Company's assets and are personally guaranteed by the shareholders. The note
payable to the California Economic Development Lending Initiative (CEDLI) is
subordinated to the Union Bank of California note. Each note contains provisions
which requires the Company to maintain certain financial ratios and limits
additional indebtedness. The CEDLI loan also limits shareholder compensation.
Scheduled maturities of long-term debt for the next five years are as
follows.
1998 $ 69,959
1999 73,715
2000 77,906
2001 59,670
2002 -
--------
$281,250
LEASE COMMITMENTS
The Company has commitments under operating leases, principally for
satellite service, computer equipment and building space. Lease terms generally
cover two to five years. Rentals on all operating leases aggregated $657,179,
$441,328 and $102,972, respectively, for the years ended December 31, 1997, 1996
and 1995.
Future minimum lease payments as of December 31, 1997, under all
noncancellable operating lease obligations which extend beyond one year, are as
follows.
December 31,
1998 $1,078,000
1999 1,010,000
2000 821,000
2001 406,000
2002 and thereafter -
----------
Total $3,315,000
<PAGE>
LEASE COMMITMENTS (continued)
The Company is also the lessor of satellite space under noncancellable
operating leases for periods of three to five years. Minimum rentals receivable
under existing leases as of December 31, 1997 are as follows.
December 31,
1998 $ 521,000
1999 341,000
2000 116,000
----------
Total $ 978,000
==========
Interest paid by the company in 1997, 1996 and 1995 was $29,617, $61
and $3,612 respectively.
INCOME TAXES
Since electing S Corporation status in 1990, federal income taxes are
the responsibility of the corporate shareholders. The Company recognizes state
franchise tax currently payable based on taxable income, which may differ from
financial statement income. Such differences arise from the reporting of
financial statement amounts in different periods than for tax purposes. The tax
effect of such timing differences is not material to the financial statements
taken as a whole. Therefore, deferred state income taxes have not been provided
in the accompanying financial statements. The Company is required to pay an
annual franchise tax to the state of California. A payment of $800 for such
taxes was made in 1997 and 1996.
Effective January 1, 1998, the corporate shareholders elected to
terminate the S Corporation election. They have elected to be treated as a C
Corporation and as such, the Company will have the responsibility for federal
income and state franchise taxes for 1998.
<PAGE>
CAPITAL STOCK
The Company's stock has no par value. At December 31, 1997, 1,200
shares are authorized for issuance of which 1,000 shares are outstanding.
During 1998, the Company re-authorized ten million common and ten
million preferred shares of stock. As part of this re-authorization, the Company
reissued five million common shares to the current shareholders, and reserved
one million shares of common stock for future stock options and/or warrant plans
that are to be determined by the board of directors. The Company also plans to
sell 1,850,000 shares of common stock through a Private Placement Memorandum.
PRIOR PERIOD ADJUSTMENT
As Reported As Restated
Retained earnings on
December 31, 1994 $ (46,977) $ (2,977)
Net income for year ended
December 31, 1995 17,967 49,731
------------- -----------
Retained earnings on
December 31, 1995 $ (29,010) $ 46,754
============= ===========
During 1997, the Company discovered that a $44,000 refundable deposit
had been expensed in 1994 instead of recorded as a deposit. The Company also
discovered approximately $31,000 of 1995 sales had not been recorded in 1995.
These amounts have been appropriately reflected in the accompanying financial
statements.
Additionally, the 1995 reviewed financial statements did not report the
Company's investments at fair market value. Accordingly, investments at December
31, 1995 have been restated to comply with generally accepted accounting
principles. Additionally, the unrealized loss on investments is reported as a
separate component of stockholders' equity.
<PAGE>
WORKING CAPITAL
Changes in operating working capital requirements, by principal element,
are as follows.
For the year ended
December 31,
-----------------------------------------------
1997 1996 1995
---------- ---------- ----------
(reviewed)
Receivables $ (10,375) $ (165,834) $ 108,723
Prepaid expenses 23,214 (56,130) 407
Payables (2,065) 33,286 45
Customer deposits 41,568 21,226 (914)
---------- ---------- ----------
$ 52,342 $ (167,452) $ 108,261
========== ========== ==========
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
dba INTELLICOM, INC.
COST OF REVENUES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(See independent accountants' report.)
1997 1996 1995
---------- ---------- ----------
(reviewed)
Transponder fees ...... $ 547,253 $ 416,331 $ 565,602
Software maintenance .. 346,122 240,364 374,197
Leased line services .. 154,478 190,205 211,079
Hardware rental and
maintenance .......... 25,019 156,973 159,398
Programming services .. 101,671 102,557 100,490
Repairs and maintenance 18,279 64,685 52,100
Internet VSAT ......... 58,895 60,424 15,770
Freight and delivery
fees ................. 26,707 48,803 48,614
Equipment leases ...... 31,271 38,720 40,316
Production supplies ... 15,064 37,519 56,358
Earth station ......... 5,258 10,042 --
Dial-up expense ....... 491 5,460 5,432
---------- ---------- ----------
$1,330,508 $1,372,083 $1,629,356
========== ========== ==========
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
dba INTELLICOM, INC.
OPERATING EXPENSES
FOR YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(See independent accountants' report.)
1997 1996 1995
---------- ---------- ----------
(reviewed)
Salaries ................. $ 356,483 $ 369,048 $ 487,366
Rent ..................... 105,847 100,737 111,246
Insurance ................ 86,574 77,603 64,154
Utilities ................ 49,759 74,366 84,539
Travel, meals,
entertainment ........... 81,912 64,723 55,166
Bad debts ................ 54,000 52,120 --
Professional fees ........ 66,574 32,133 59,797
Payroll taxes ............ 86,412 30,749 34,447
Depreciation and
amortization ............ 56,440 26,552 32,792
Repairs and maintenance .. 5,705 18,768 9,952
Telephone ................ 41,493 17,425 21,073
Computer supplies ........ 17,209 16,926 41,993
Advertising and marketing 112,532 15,587 12,183
Office supplies .......... 19,234 10,725 4,840
Temporary labor .......... 27,737 10,279 --
Taxes and licenses ....... 4,659 10,069 1,987
Postage and freight ...... 11,429 4,438 2,663
Dues and subscriptions ... 5,208 2,570 2,554
Office equipment rentals . 4,079 2,428 2,783
Conference and trade shows 14,783 2,009 --
Employee relations ....... 1,532 1,743 5,141
Miscellaneous ............ 385 1,167 490
---------- ---------- ----------
$1,209,986 $ 942,165 $1,035,166
========== ========== ==========
<PAGE>
Intelligent
Communications, Inc.
dba Intellicom, Inc.
Financial Statements
as of September 30, 1998 and December 31, 1998 and for the nine months ended
September 30, 1998 and for the three months ended December 31, 1998 and December
31, 1997
<PAGE>
Report of Independent Accountants
February 9, 1999
To the Board of Directors of
Intelligent Communications, Inc.
In our opinion, the accompanying balance sheet and the related statement of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Intelligent Communications, Inc. at
September 30, 1998, and the results of its operations and its cash flows for the
period from January 1, 1998 to September 30, 1998 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
San Jose, California
<PAGE>
Intelligent Communications, Inc.
dba Intellicom, Inc.
Balance Sheet
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
September 30, December 31,
1998 1998
(Unaudited)
Assets
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 163,189 $ 133,428
Accounts receivable, net of allowance
for doubtful debtsof $67,650 at
September 30 and December 31, 1998 340,162 293,788
Prepaid and other assets 79,585 93,444
--------------- --------------
Total current assets 582,936 520,660
Property and equipment, net 603,043 639,257
Deposits and other assets 86,793 104,203
--------------- --------------
Total assets $1,272,772 $1,264,120
=============== ==============
Liabilities and Shareholder's Deficit
Current Liabilities:
Lines of credit $ 26,184 $ 25,934
Bank loan 637,500 609,375
Accounts payable 905,835 1,127,069
Related party payable - 200,000
Accruals 64,400 64,400
--------------- --------------
Total current liabilities 1,633,919 2,026,778
Customer deposits 98,192 23,994
--------------- --------------
Total liabilities 1,732,111 2,050,772
--------------- --------------
Commitments (Note 6)
Stockholders' Deficit:
Common stock: $0.01 par value;
10,000,000 shares authorized at
September 30, 1998 and December 31, 1998;
6,101,929 shares and 6,603,929 shares
issued and outstanding at
September 30, 1998 and December 31, 1998 251,133 365,087
Accumulated deficit (710,472) (1,151,739)
--------------- --------------
Total stockholders' deficit (459,339) (786,652)
--------------- --------------
Total liabilities and stockholders deficit $1,272,772 $1,264,120
=============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Intelligent Communications, Inc.
dba Intellicom, Inc.
Statement of Operations
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
For the nine
months
ended For the three months
September 30, ended December 31,
1998 1998 1997
(Unaudited)
<S> <C> <C> <C>
Net revenues $ 1,844,294 $ 576,765 $ 689,172
Cost of revenues 1,123,258 395,479 327,003
---------------- ---------------- -----------------
Gross profit 721,036 181,286 362,169
Operating expenses:
Research and development 120,500 27,712 27,532
Sales and marketing 172,341 91,497 84,861
General and administrative 1,192,293 465,946 290,896
---------------- ---------------- -----------------
Total operating expenses 1,485,134 585,155 403,289
Loss from operations: (764,098) (403,869) (41,120)
Interest expense, net (43,534) (37,398) (7,201)
---------------- ---------------- -----------------
Net loss $ (807,632) $ (441,267) $ (48,321)
================ ================ =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Intelligent Communications, Inc.
dba Intellicom, Inc.
Statement of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Total
Accumulated Stockholders'
Common Stock Surplus Equity
------------------------------------
Shares Amount (Deficit) (Deficit)
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 1,000 $ 1,000 $ 297,281 $ 298,281
5000:1 stock split 4,999,000 - - -
Issuance of common stock for cash
on May 15, 1998 at 22.7
cents per share 1,101,929 250,133 - 250,133
Deemed dividend from transferring
ownership interest with
related parties (see Note 8) - - (200,121) (200,121)
Net loss for period - - (807,632) (807,632)
----------------- ----------------- ----------------- ----------------
Balance at September 30, 1998 6,101,929 251,133 (710,472) (459,339)
Exercise of employee share
options at 22.7 cents per share 502,000 113,954 - 113,954
Net loss for period - - (441,267) (441,267)
----------------- ----------------- ----------------- ----------------
Balance at December 31, 1998 (unaudited) 6,603,929 $ 365,087 $ (1,151,739) $ (786,652)
================= ================= ================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Intelligent Communications, Inc.
dba Intellicom, Inc.
Statement of Cash Flows
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
For the nine
months
ended For the three months
September 30, ended December 31,
1998 1998 1997
(Unaudited)
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (807,632) $ (441,267) $ (48,321)
Adjustments to reconcile net income (loss) to net cash
flow from operating activities:
Depreciation 101,677 49,463 10,292
Provision for doubtful debts 16,150 - 2,500
Realized loss on investment - - 9,769
Cancellation of related party receivables (249,144) - -
Common stock issued for services rendered 50,000 - -
Notes cancelled for services rendered 10,000 - -
Change in assets and liabilities:
Accounts receivable (140,312) 46,374 59,953
Prepaid expenses (40,392) (13,859) (12,763)
Deposits and other assets 14,910 (91,608) 60,693
Related party payable 216,357 - -
Accounts payable 638,962 221,234 98,298
Accrued liabilities 68,697 - -
--------------- --------------- ----------------
Net cash provided by (used in) operating activities (120,727) (229,663) 180,421
--------------- --------------- ----------------
Cash flows from investing activities:
Acquisition of property and equipment (328,754) (85,677) (131,998)
--------------- --------------- ----------------
Net cash used in investing activities (328,754) (85,677) (131,998)
--------------- --------------- ----------------
Cash flows from financing activities:
Proceeds from loan 525,000 - -
Repayment of loan (168,750) (28,375) (26,258)
Proceeds (repayment) from/of payable to related party - 200,000 (5,413)
Proceeds from issuance of common stock 200,133 113,954 -
--------------- --------------- ----------------
Net cash provided by (used in) financing activities 556,383 285,579 (31,671)
--------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents 106,902 (29,761) 16,752
Cash and cash equivalents at beginning of period 56,287 163,189 74,219
--------------- --------------- ----------------
Cash and cash equivalents at end of period $ 163,189 $ 133,428 $ 90,971
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Intelligent Communications, Inc.
dba Intellicom, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Formation and Business of the Company
Intelligent Communications, Inc. is doing business as Intellicom, Inc.
The Company was incorporated in Delaware in late 1992 and commenced
operations during March 1993. Company headquarters are in Fremont,
California, and a customer service and software development center is in
Chippewa Falls, Wisconsin.
Intellicom provides VSAT satellite equipment, Internet access options,
applications and consulting services to businesses, professionals,
educational institutions and on-line service providers. The Company
primarily markets to Internet service providers, educational institutions
and select corporate industries throughout the United States and Mexico.
These customers are primarily utilizing Intellicom as their gateway
network connectivity to the Internet.
2. Summary of Significant Accounting Policies
Basis of Presentation
These financial statements have been prepared on the basis that the
Company will continue as a going concern. The loss for the period has
generated negative stockholders' funds as at September 30, 1998.
However, as explained in the Subsequent Events Note 9, the Company has
entered into an agreement to merge with Softnet Systems, Inc.
As such, the financial statements do not include any adjustments that may
have existed if the financial statements had not been prepared on a going
concern basis.
Use of estimates
Preparation of the accompanying financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Certain risks and uncertainties
The Company's products and services are concentrated in a satellite-based
Internet access industry which is characterized by rapid technological
advances, changes in customer requirements and evolving regulatory
requirements and industry standards. The success of the Company depends
on management's ability to anticipate or to respond quickly and
adequately to technological developments in its industry, changes in
customer requirements or changes in regulatory requirements or industry
standards. Any significant delays in the development or introduction of
products or services could have a material adverse effect on the
Company's business and operating results.
Concentration of credit risk
The Company's cash and cash equivalents as of September 30, 1998 are
deposited with two U.S. financial institutions and exceed federal insured
amounts. The Company performs ongoing credit evaluations of its
customers' financial condition and generally does not require collateral.
<PAGE>
During the nine months ended September 30, 1998, one customer represented
25% of total revenues.
Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less at the time of purchase to be cash
equivalents.
Property and equipment
Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful life of the related assets,
generally three to seven years, or the lease term of respective assets.
Gains and losses upon asset disposal are taken into income in the year of
disposition.
Revenue recognition
Revenues consist primarily of monthly service fees, equipment sales and
installation charges. Service fees consist of fixed monthly amounts
and/or hourly amounts based on usage. Service fees are recognized as the
service is provided. Payments received in advance of providing services
are deferred until the period such services are provided. Equipment sales
and installation charges are recognized when installation is completed.
Advertising
Advertising expenditures are charged to operations as incurred.
Advertising costs for the nine months ended September 30, 1998 were
$35,289.
3. Property and Equipment, net:
Property and equipment consist of the following:
September 30, December 31,
1998 1998
(Unaudited)
Office furniture and equipment $ 69,865 $ 69,865
Computer equipment 126,872 137,621
Network equipment 492,811 567,739
Leasehold improvements 121,517 121,517
--------- ---------
811,065 896,742
Less accumulated depreciation (208,022) (257,485)
--------- ---------
$ 603,043 $ 639,257
========= =========
4. Income Taxes
The Company accounts for income taxes using the liability method. Under
this method, deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets
and liabilities using current tax laws and rates. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
<PAGE>
At September 30, 1998, the Company had federal and state net operating
loss carryforwards of approximately $739,157 and $369,579, respectively,
available to offset future regular and alternative minimum taxable
income. The operating loss carryforwards expire in 2018 if not utilized.
For federal and state tax purposes, a portion of the Company's net
operating loss carryforwards may be subject to certain limitations on
utilization in case of a change in ownership, as defined by federal and
state tax law.
The Company was taxed as an S Corporation through December 31, 1997,
after which the Company converted to a C Corporation. As an S
Corporation, the Company did not disclose federal income taxes as it was
the responsibility of the corporate shareholders. Further, the Company
did not disclose deferred state income taxed due to such reporting being
immaterial to the accompanying financial statements. The components of
the provision for income taxes for the period ending September 30, 1998
is as follows:
Current:
Federal $ -
State 800
Deferred
Federal -
State -
--------------
$ 800
==============
Temporary differences which give rise to significant portions of deferred
tax assets and liabilities at September 30, 1998 are as follows:
Net operating loss carryforward $ 274,314
Inventory reserves 25,552
---------------
Net deferred tax asset 299,866
Valuation allowance (299,866)
---------------
$ -
==============
The Company has established a 100% valuation allowance because at this
time it appears more likely than not that no benefit will be realized
from its deferred tax assets.
5. Long-Term Debt
In August 1998, the Company entered into a loan agreement with a
financial institution to borrow $525,000 at 2.75% above the bank's prime
rate. The loan is due for repayment by monthly installment over the seven
year term of the loan, ending September 2005. Net borrowings under this
agreement are collaterized by all of the Company's assets. The inception
of this facility superceded all previous loan agreements with the same
financial institution.
<PAGE>
In addition, this loan agreement contains specific financial, as well as
reporting, covenants noted below.
Debt Covenants
The loan agreement signed in August 1998, and noted above, contains
financial and reporting covenants. Of the financial covenants, the
Company must show a minimum tangible net asset value of $500,000 as of
December 31, 1998.
As at September 30, 1998, the Company is in breach of several financial
covenants, which the bank has not waived. As a result, the debt has been
classified as current.
6. Commitments
Operating leases
The Company leases various facilities under noncancelable operating lease
agreements expiring through January 30, 2002. Future minimum lease
payments under the non-cancelable operating leases as of September 30,
1998 are as follows:
1999 $1,401,625
2000 854,785
2001 612,130
2002 and thereafter 12,476
---------------
$2,881,016
===============
Rent expense was $86,760 for the nine months from January 1, 1998 to
September 30, 1998.
7. Common Stock
As of December 31, 1997, the Company had 1,200 authorized shares of
common stock with 1,000 outstanding and issued. In March 1998, the
Company filed an amended Articles of Incorporation that increased the
number of authorized shares to 10 million common shares and 10 million
preferred shares. The Company then completed a stock split with a 5000:1
ratio.
During this period, the Company also passed a resolution to offer for
sale, through private placement, 1.1 million shares of the Company's
common stock at 22.7 cents per share. The offering raised $250,133.
8. Related Party Transactions
In September 1998, the Company acquired all of the assets, contracts and
subscribers in five Internet Service Provider Point of Presence locations
in the state of Wisconsin. These assets were purchased from Bruce Meachin
and Christine Raines, a California Partnership, through Intellicom ISP,
Inc., a wholly-owned subsidiary of Intelligent Communications, Inc. Bruce
Meachin and Christine Raines are the founding members of Intelligent
Communications, Inc. and the Chief Executive Officer and President,
respectively.
<PAGE>
The purchase consideration for these assets was $249,145 and was
satisfied through the cancellation of notes receivable and accrued
interest accounts due from the founding members. As this transaction was
with an entity under common control, the excess of the consideration over
the net book value of assets transferred has been recognized as a deemed
dividend and reflected in the accumulated deficit of the Company as at
September 30, 1998.
9. Subsequent Events
On August 31, 1998, the Company executed a Definitive Agreement to
acquire all of the outstanding and issued stock of Web Presence
Providers, Inc. in an all-stock transaction valued at $300,000.
Intelligent Communications, Inc. issued 374,995 common shares to the
shareholders of Web Presence Providers, Inc. in exchange for 100% of
their outstanding and issued common stock. The share consideration was
valued at $250,000 or 66.7 cents per share.
Although the Definitive Agreement was executed prior to the period end,
and management and operational control was transferred in September 1998,
the agreement was not closed and finalized until January 1999, and
accordingly the acquisition has not been recorded in the financial
statements as at September 30, 1998.
In addition, the Company agreed to pay to the President of Web Presence
Providers, Inc., to transition and consult with Intelligent
Communications, Inc., in the development of the web-hosting business.
Such payment was satisfied by the issuance of the Company's common shares
through the private placement. As such, the payment has been fully
expensed in the financial statements to September 30, 1998.
On November 22, 1998, the Company entered into a Definitive Agreement to
sell all of the outstanding capital stock of the Company to Softnet
Systems Inc. ("Softnet"). The agreement was completed on February 9,
1999. The agreed purchase price comprises of (i) a cash component of
$500,000 payable at closing, (ii) a promissory note in the amount of $1
million due one year after closing (and payable in cash or in Softnet
common stock at the option of the Company), (iii) a promissory note in
the amount of $2 million due two years after closing (and payable in cash
or in Softnet's common stock at the option of Softnet), (iv) the issuance
of 500,000 shares of Softnet's common stock (adjustable upwards after one
year in certain circumstances), (v) a demonstration bonus of $1 million
payable on the first anniversary of the closing, if certain milestones
are met, in cash or shares of Softnet's common stock at the option of
Softnet, and (vi) additional shares of Softnet's common stock issuable
upon the first, second and third anniversary dates of the closing for a
total value of $3.5 million.
<PAGE>
Item 7. FINANCIAL STATEMENTS OF BUSINESS ACQUIRED, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS
(b) Pro Forma Financial Information. Pro forma financial
information for SoftNet Systems, Inc. is included at the end of this Report.
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated condensed financial
statements have been prepared by the management of SoftNet Systems, Inc. (the
"Company") from its historical financial statements included in Form 10-K/A for
the fiscal year ended September 30, 1998 as filed with the Securities and
Exchange Commission ("SEC") on February 3, 1999 and in Form 10-Q for the
quarterly period ended December 31, 1998 as filed with the SEC on February 16,
1999 and from the historical financial statements of Intelligent Communications,
Inc. ("Intellicom") included in this report on Form 8-K/A. The unaudited pro
forma consolidated condensed statements of operations for the year ended
September 30, 1998 and the three months ended December 31, 1998 reflect
adjustments as if the Company had acquired Intellicom (the "Intellicom
Acquisition"), as described in the accompanying notes, as of October 1, 1997.
The unaudited pro forma consolidated condensed balance sheet as of December 31,
1998 reflect adjustments as if the Intellicom Acquisition, as described in the
accompanying notes, had occurred as of December 31, 1998.
The unaudited pro forma consolidated condensed financial statements should
be read in conjunction with the notes included herewith, the Company's audited
consolidated financial statements and notes thereto as of September 30, 1998 and
1997 and for the three years ended September 30, 1998, the Company's unaudited
consolidated condensed financial statements as of, and for the three months
ended, December 31, 1998 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in the Company's most recent Form
10-K/A and 10-Q filings.
The unaudited pro forma consolidated condensed financial statements do not
purport to represent what the Company's results of operations or financial
position would have been had the Intellicom Acquisition occurred on the dates
specified, or to project the Company's results of operations or financial
position for any future period or date. The pro forma adjustments are based upon
available information and certain assumptions that management believes are
reasonable under the circumstances. In the opinion of management, all
adjustments have been made that are necessary to present fairly the pro forma
data. Actual amounts could differ from those set forth below.
<PAGE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Condensed Balance Sheet
(in thousands)
<TABLE>
<CAPTION>
As of December 31, 1998
---------------------------------------------------------
Acquisition
Historical Adjustments (1) Pro Forma
------------- ------------------- ---------------
Assets
Current assets:
<S> <C> <C> <C>
Cash $ 4,329 $ 134 (a) $ 3,963
(500) (b)
Accounts receivable, net.............................. 3,819 294 (a) 4,113
Current portion of gross investment in leases......... 1,239 1,239
Inventories........................................... 1,195 1,195
Other current assets.................................. 1,146 93 (a) 1,239
------------- ------------------- ---------------
Total current assets............................ 11,728 21 11,749
Restricted cash............................................ 800 800
Property and equipment, net................................ 9,880 639 (a) 10,519
Gross investment in leases, net of current portion......... 1,717 1,717
Acquired technology and other intangibles, net............. 683 16,056 (c) 16,739
Other assets............................................... 1,089 104 (a) 1,193
Net assets associated with discontinued operations......... 3,813 3,813
------------- ------------------- ---------------
Total assets.......................................... $ 29,710 $ 16,820 $ 46,530
============= =================== ===============
Liabilities, Redeemable Convertible Preferred Stock and
Shareholders' Deficit
Current liabilities:
Accounts payable and accrued expenses................. $ 10,862 $ 1,218 (a) $ 13,080
1,000 (b)
Short-term debt....................................... -- 1,000 (b) 1,000
Current portion of long-term debt..................... 1,855 609 (a) 2,464
Other current liabilities............................. 1,086 1,086
------------- ------------------- ---------------
Total current liabilities....................... 13,803 3,827 17,630
Long-term debt, net of current portion..................... 9,430 2,000 (b) 11,430
Other long-term liabilities................................ 518 24 (a) 542
Redeemable convertible preferred stock..................... 15,754 15,754
Shareholders' deficit:
Common stock and capital in excess of par value............ 46,739 10,969 (b) 57,708
Deferred stock compensation................................ (303) (303)
Accumulated deficit........................................ (56,231) (56,231)
------------- ------------------- ---------------
Total shareholders' deficit........................... (9,795) 10,969 1,174
------------- ------------------- ---------------
Total liabilities, redeemable convertible preferred
stock and shareholders' deficit................. $ 29,710 $ 16,820 $ 46,530
============= =================== ===============
- ---------------------------
<FN>
(1) References in parenthetical are to Note 2 to the unaudited pro forma
consolidated condensed financial statements.
</FN>
</TABLE>
See accompanying notes to unaudited pro forma consolidated condensed financial
statements.
<PAGE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Condensed Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the year ended For the three months ended
September 30, 1998 (1) December 31, 1998 (1)
-------------------------------------------- --------------------------------------------
Acquisition Acquisition
Historical Adjustments Pro Forma Historical Adjustments Pro Forma
----------- ------------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 14,060 $ 2,533 (d) $ 16,593 $ 4,296 $ 577 (d) $ 4,873
Cost of sales........................ 10,628 1,450 (d) 12,078 2,967 396 (d) 3,363
----------- ------------- ----------- ------------ ------------- -----------
Gross profit.................... 3,432 1,083 4,515 1,329 181 1,510
Operating expenses................... 19,265 1,888 (d) 23,447 7,339 585 (d) 8,497
2,294 (f) 573 (f)
----------- ------------- ----------- ------------ ------------- -----------
Loss from continuing operations...... (15,833) (3,099) (18,932) (6,010) (977) (6,987)
Other income (expense):
Interest expense................. (1,416) (53) (d) (1,714) (569) (37) (d) (649)
(245) (e) (43) (e)
Other income..................... 320 2 (d) 322 217 217
----------- ------------- ----------- ------------ ------------- -----------
Loss from continuing operations
before discontinued operations... (16,929) (3,395) (20,324) (6,362) (1,057) (7,419)
Income (loss) from discontinued
operations....................... (73) (73) 139 139
----------- ------------- ----------- ------------ ------------- -----------
Net loss............................. (17,002) (3,395) (20,397) (6,223) (1,057) (7,280)
Preferred dividends.................. (343) (343) (243) (243)
----------- ------------- ----------- ------------ ------------- -----------
Net loss applicable to common shares. $ (17,345) $ (3,395) $ (20,740) $ (6,466) $ (1,057) $ (7,523)
=========== ============= =========== ============ ============= ===========
Basic and diluted earnings (loss) per share:
Continuing operations............ $ (2.29) $ (2.58) $ (0.76) $ (0.83)
Discontinued operations.......... (0.01) (0.01) 0.02 0.02
Preferred dividends.............. (0.05) (0.04) (0.03) (0.03)
----------- ----------- ------------ -----------
Net loss applicable to common
shares................... $ (2.35) $ (2.63) $ (0.77) $ (0.84)
=========== =========== ============ ===========
Shares used to compute basic and
diluted earnings (loss) per share 7,391 500 (g) 7,891 8,374 600 (g) 8,974
=========== ============= =========== ============ ============= ===========
- ---------------------------
<FN>
(1) References in parenthetical are to Note 2 to the unaudited pro forma
consolidated condensed financial statements.
</FN>
</TABLE>
See accompanying notes to unaudited pro forma consolidated condensed financial
statements.
<PAGE>
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
Notes to Unaudited Pro Forma Consolidated Condensed Financial Statements
(1) The Intellicom Acquisition
The unaudited pro forma consolidated condensed financial statements reflect
adjustments for the Intellicom Acquisition, in which Intellicom became a
wholly-owned subsidiary of the Company for Total Consideration (as defined
below) of $15,469,000, consisting of:
o Cash paid at closing of $500,000 (the "Cash Consideration");
o Issuance of 500,000 shares of the Company's common stock at closing
(the "Closing Shares"), at which time the Company's common stock was
trading at $14.938 per share, for a total value of $7,469,000;
o A second tranche of Closing Shares of up to 150,000 shares issuable
upon the first anniversary date of the closing if the total amount of
shares issued to date does not exceed a total value of $5,000,000 as of
the first anniversary date. For purposes of the pro forma financial
information presented herein, the second tranche of Closing Shares has
not been factored in as the market value of the Closing Shares
currently exceeds $5,000,000;
o Additional shares of the Company's common stock issuable upon the
first, second and third anniversaries of the closing, valued at a total
of $3,500,000 (together with the Closing Shares, the "Equity
Consideration"), of which $1,500,000 is allotted for the first and
second anniversaries and $500,000 for the third;
o Issuance of a $1,000,000 secured promissory note payable upon the first
anniversary date of the closing, which bears interest at 7.5% per annum
(the "First Promissory Note");
o Issuance of a $2,000,000 secured promissory note payable upon the
second anniversary date of the closing, which bears interest at 8.5%
per annum (the "Second Promissory Note", together with the First
Promissory Note, the "Debt Consideration"); and
o A demonstration bonus of $1,000,000 payable to all Intellicom
shareholders upon the first anniversary date of the closing upon
successful demonstration of certain cable technology (the "Bonus
Consideration", together with the Cash Consideration, the Equity
Consideration and the Debt Consideration, the "Total Consideration").
The Company is in the process of evaluating and finalizing the effects of
the Intellicom Acquisition on its business and financial statements on a
go-forward basis. This includes obtaining a valuation report, which will support
the fair value of the net assets received and the Equity Consideration being
provided. As the outcome of such analysis is unknown at this time, certain
assumptions and conclusions made for purposes of the pro forma financial
information provided herein are considered preliminary and subject to change at
the discretion of the Company's management.
(2) Pro Forma Adjustments
The unaudited pro forma consolidated condensed balance sheet gives effect
to the following acquisition adjustments:
(a) Represents the addition of the tangible net assets of Intellicom
derived from financial statements of Intellicom as if the
acquisition had occurred as of December 31, 1998 consisting of the
following (in thousands):
<PAGE>
Cash............................................. $ 134
Accounts receivable, net......................... 294
Prepaid expenses................................. 93
Property and equipment, net...................... 639
Other assets..................................... 104
Accounts payable and accrued expenses............ (1,218)
Short-term debt.................................. (609)
Other long-term liabilities...................... (24)
(b)......Represents the Total Consideration paid by the Company for the
Intellicom Acquisition consisting of a reduction of cash of $500,000
for the Cash Consideration; an increase in common stock and capital
in excess of par value of $10,969,000 for the Equity Consideration;
an increase in short-term debt and long-term debt of $1,000,000 and
$2,000,000, respectively, for the Debt Consideration and an increase
in accounts payable and accrued expenses of $1,000,000 for the Bonus
Consideration. While the Bonus Consideration is contingent upon
successful demonstration of certain performance criteria (as
defined) being met, for purposes of the pro forma financial
information provided herein, the Company has accrued for such
contingent Bonus Consideration. Furthermore, for purposes of the pro
forma financial information provided herein, the Company has
recorded the Equity Consideration at its full prescribed value
rather than any discounted value, even though the Equity
Consideration is to be paid out over the course of three years and
the equity securities to be issued will be unregistered. Until the
Company's analysis of the Intellicom Acquisition has been completed,
including a valuation of the Equity Consideration to be issued, the
Company's management believes this preliminary treatment to be the
most appropriate for purposes of the pro forma financial information
provided herein.
(c) Represents the intangible asset recorded by the Company for the
acquisition as the Total Consideration paid by the Company exceeded
the negative tangible book value of Intellicom as of December 31,
1998 by $16,056,000. The Company has treated this intangible asset
as acquired technology and will be amortizing this amount by the
straightline method over a period of seven years, the anticipated
useful life of the acquired technology, for purposes of the pro
forma financial information provided herein.
The unaudited pro forma consolidated condensed statements of operations
give effect to the following acquisition adjustments:
(d) Represents the results of operations of Intellicom derived from
financial statements of Intellicom for the following periods (in
thousands):
For the For the three
year ended months ended
September 30, December 31,
1998 (1) 1998
----------------- ----------------
Net Sales................... $ 2,533 $ 577
Cost of sales............... (1,450) (396)
Operating expenses.......... (1,888) (585)
Interest expense............ (53) (37)
Other income................ 2 --
----------------- ----------------
Net loss.................... $ (856) $ (441)
================= ================
-------------------
(1) Includes the results of operations for the period from October
1, 1997 through December 31, 1997, which have been derived from
unaudited management accounts of Intellicom.
(e) Represents the additional interest expense due to the Debt
Consideration of $245,000 and $43,000 for the year ended September
30, 1998 and the three months ended December 31, 1998, respectively.
For purposes of the pro forma financial information presented
herein, the First Promissory Note is assumed to be repaid in full as
of October 1, 1998.
(f) Represents the amortization of the intangible asset acquired in the
Intellicom Acquisition, which is recorded as acquired technology, of
$2,294,000 and $573,000 for the year ended September 30, 1998 and
the three months ended December 31, 1998, respectively. This
acquired technology is being amortized on a straightline basis over
seven years, the anticipated useful life of the acquired technology
for purposes of the pro forma financial information provided herein.
(g) Represents the addition to shares used in computing basic and
diluted loss per share of 500,000 and 600,000 for the year ended
September 30, 1998 and the three months ended December 31, 1998,
respectively. For purposes of the pro forma financial information
presented herein, the shares issuable upon the first anniversary
date, valued at $1,500,000, are based on the same value per share as
the Closing Shares, that is, $14.938 per share, which results in an
additional 100,000 shares of common stock issued upon the first
anniversary date of the closing, which, for purposes of the pro
forma financial information presented herein, is deemed to be
October 1, 1998. The Company has excluded the effect of any of the
other authorized but unissued shares related to the Equity
Consideration, as the effect would be anti-dilutive.
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation of our report dated
February 9, 1999 regarding the audited balance sheet as of September 30, 1998
and the unaudited balance sheet as of December 31, 1998, the related audited
statement of operations, shareholders' deficit and cash flow for the nine month
period ended September 30, 1998 and the related unaudited statements of
operations and cash flows for each of the three months ended December 31, 1998
and 1997 of Intelligent Communications, Inc., a Delaware Corporation, in the
Current Report on Form 8-K (filed February 24, 1999) of SoftNet Systems, Inc., a
New York Corporation.
San Jose, California
February 26, 1999
/s/PricewaterhouseCoopers LLP
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation of our report dated May
28, 1998 regarding the audited balance sheets as of December 31, 1997 and 1996
and the unaudited balance sheet as of December 31, 1995 and the related audited
statements of income and comprehensive income, changes in stockholders' equity
and cash flows and supplemental schedules for the two years ended December 31,
1997 and the related unaudited statement of income and comprehensive income,
changes in stockholders' equity and cash flow and supplemental schedules for the
year ended December 31, 1995 of Intelligent Communications, Inc., a Delaware
Corporation, in the Current Report on Form 8-K (filed February 24, 1999) of
SoftNet Systems, Inc., a New York Corporation.
Walnut Creek, California
February 26, 1999
/s/ Blanding, Boyer, & Rockwell, LLP
