<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 8-K/A
AMENDMENT NO. 2 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. 2
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, and first amended on February 26, 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 reviewed balance sheet as of December 31, 1995 and the
related reviewed statement of income and retained earnings and cash flows 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 23.2 - Consent of Blanding, Boyer & Rockwell LLP.
2. Exhibit 23.3 - Consent of Sarah A. Tull, CPA.
<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: March 12, 1999 By: /s/ Douglas S. Sinclair
----------------------------
DOUGLAS S. SINCLAIR
Chief Financial Officer
<PAGE>
SoftNet Systems, Inc.
Exhibit Index
to Form 8-K/A
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
23.2 Consent of Blanding, Boyer & Rockwell LLP.
23.3 Consent of Sarah A. Tull, CPA.
</TABLE>
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1995
SARAH A. TULL, CPA
AN ACCOUNTANCY CORPORATION
467 Hamilton Avenue #4
Palo Alto, CA 94301
phone (415) 617-0415 fax (415) 617-0429
<PAGE>
[LETTERHEAD]
SARAH A. TULL, CPA
- -------------------------------------------------------------------------------
an accountancy corporation
To the Stockholders
Intelligent Communications, Inc.
Fremont, CA
We have reviewed the accompanying balance sheet of Intelligent Communications,
Inc. (an S corporation) as of December 31, 1995, and the related statements of
income and retained earnings and cash flows for the year then ended, in
accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants. All
information included in these financial statements is the representation of the
management of Intelligent Communications, Inc.
A review consists principally of inquires 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, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles. The information
included in the accompanying schedule of cost of sales and schedule of general
and administrative expenses is presented only for supplementary analysis
purposes. Such information has been subjected to the inquiry and analytical
procedures applied in the review of the basic financial statements, and we are
not aware of any material modifications that should be made to it.
/s/ Sarah A. Tull, CPA
---------------------
March 28, 1996
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
BALANCE SHEET
December 31,1995
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS
Cash $ 89,737.60
Trade accounts receivable 18,850.00
Prepaid insurance 7,707.00
---------------
116,294.60
PROPERTY & EQUIPMENT
Computer & related equipment 66,570.03
Furniture & fixtures 17,502.50
Machinery & equipment 21,642.00
Leasehold improvements 46,962.00
Accumulated depreciation (57,739.00)
---------------
94,937.53
---------------
OTHER ASSETS
Loans to shareholders 1000.00
Investments 84,536.34
Deposits 5000.00
Organization costs, net of accumulated amortization 763.00
---------------
91,299.14
---------------
$ 302,531.47
---------------
---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 152,219.13
Accrued payable 113,650.00
Accrued vacation 32,466.00
Due to employees 1,636.54
Loans to shareholders 29,870.43
Customer deposit 700.00
---------------
330,542.10
SHAREHOLDERS' EQUITY
Common stock, $1 par value, 1000 shares
authorized and issued 1,000.00
Retained earnings (29,010.63)
---------------
$ 302,531.47
---------------
---------------
</TABLE>
See Accompanying Notes and Accountant's Report
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C>
INCOME
Service $ 2,686.522.33
COST OF SALES (Schedule #1) 1,629,355.82
---------------
GROSS PROFIT 1,057,166.51
GENERAL & ADMINISTRATIVE EXPENSES (Schedule #2) 1,039,276.33
---------------
INCOME FROM OPERATIONS 17,890.18
OTHER INCOME (EXPENSES)
Interest expense (9,006.04)
Interest income 1,047.69
Dividend income 62.10
Loss on sale of assets (1,160.00)
Capital gain income 9,142.09
Investment expense (9.32)
---------------
NET INCOME 17,966.70
RETAINED EARNINGS AT BEGINNING OF YEAR (46,977.33)
---------------
RETAINED EARNINGS AT END OF YEAR $ (29,010.63)
---------------
---------------
</TABLE>
See Accompanying Notes and Accountant's Report
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 17,966,70
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 32.465.00
Amortization 327.00
Accrued interest expense 5,394.30
Loss (gain) on disposal of property & equipment 1,160.00
(Increase) decrease in:
Trade accounts receivable 140,486.61
Prepaid expenses 407.00
Increase (decrease) in:
Trade accounts payable (137,106.76)
Accrued payables 95,985.60
Accrued vacation 32,466.00
Customer deposits (914.22)
Suspense 5,000.00
Due to employees (1,692.78)
-----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 191,944.45
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of property & equipment 780.00
Purchase of investments (105,720.88)
Proceeds from sale of investments 16,184.54
-----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (88,756.34)
CASH FLOWS FROM FINANCIAL ACTIVITIES
Debt reduction:
Short-term (23,620.11)
-----------
NET CASH PROVIDED (USED) BY FINANCIAL ACTIVITIES (23,620.11)
-----------
NET INCREASE (DECREASE) IN CASH 79,568.00
CASH AT BEGINNING OF YEAR 10,169.60
-----------
CASH AT END OF YEAR $ 89,737.60
-----------
-----------
</TABLE>
See Accompanying Notes and Account's Report
<PAGE>
SUPPLEMENTARY INFORMATION
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
SCHEDULE #1
SCHEDULE OF COST OF SALES
For the Year Ended December 31, 1995
<TABLE>
<S> <C>
Transpounder fee $ 550,000.00
Production supplies 56,358.46
Software supplies 974.26
One time installation expense 450.00
Dialup expense 4,981.82
Freight 14,580.95
Delivery fees 34,032.84
Equipment lease expense 40,315.70
Communication expense 15,769.69
Repair and maintenance - service 52,099.94
Telephone - production 211,079.24
Hardware maintenance 159,398.13
Software maintenance 320,458.33
Software - non IBM 52,764.64
Professional services 100,489.70
Other cost of sales 15,602.12
--------------
$ 1,629,355.82
--------------
--------------
</TABLE>
See Accountant's Report
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
SCHEDULE #2
SCHEDULE OF GENERAL & ADMINISTRATIVE EXPENSES
For the Year Ended December 31, 1995
<TABLE>
<S> <C>
Salaries $ 454,900.25
Vacation expense 32,466.00
Payroll taxes 34,446.95
Advertising 10,753.35
Public relations 1,020.58
Employee health insurance 41,154.66
Marketing material 409.30
Employee life insurance 1,192.00
Bank service charges 322.86
Late fees 2,933.88
Payroll service fees 1,288.05
Contributions 15.00
Depreciation 32,465.00
Amortization 327.00
Dues and subscriptions 2,553.92
Employee benefits 306.32
Freight 1,077.59
Workmans compensation 4,128.00
Insurance 17,679.00
Licenses 20.00
Miscellaneous 1,133.38
Incorporation expense (21.00)
Furniture expense 450.00
Office equipment leasing 2,353.51
Office expense 4,896.30
Software maintenance 214.50
Computer supplies 39,665.15
Postage 1,057.69
Freight - administration 527.90
Professional fees 51,791.75
Legal 6,717.51
Vehicle repairs 979.70
Rent 108,505.00
Common area maintenance 2,741.00
</TABLE>
See Accountant's Report
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
SCHEDULE #2
SCHEDULE OF GENERAL & ADMINISTRATIVE EXPENSES
For the Year Ended December 31, 1995
Continued
<TABLE>
<S> <C>
Security 1,738.21
Repairs and maintenance 4,674.59
Building maintenance 5,275.65
Seminar and workshop 475.00
Taxes - property 1,966.69
Telephone 21,072.68
Employee morale 4,834.34
Travel 45,000.54
Meals and entertainment 10,165.62
Utilities 82,801.01
State franchise tax 800.00
--------------
$ 1,039,276.33
--------------
--------------
</TABLE>
See Accountant's Report
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is a provider of satellite-based data communications solutions.
They provide end-to-end data communications connectivity through the use of VSAT
technology on its shared hub in Fremont, CA.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation of property and
equipment is provided on the MACRS method including Section 179 expense.
Although this is a departure from GAAP, any resulting variance is deemed
immaterial. Expenditures for maintenance and repairs are charged against
operations. Renewals and betterments that materially extend the life of the
asset are capitalized. The Company has adopted a policy only capitalizing
assets costing more than $500.00.
INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, the Company does not pay federal
corporate income taxes on its taxable income. Instead, the stockholders are
liable for individual federal income taxes on their respective shares of the
Company's taxable income.
NOTE B -- MARKETABLE EQUITY SECURITIES
Cost and fair market value of marketable equity securities at December 31, 1995
are as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Gains Value
---- ----- ----- -----
<S> <C> <C> <C>
$ 84,536.34 $ 1,291.13 $ 14,850.75 $ 70,976.72
</TABLE>
NOTE C -- LEASING ARRANGEMENTS
The Company conducts its operations from facilities that are leased under a five
year noncancelable operating lease which expires March 31, 1999. The lease
shall terminate without further notice at the expiration of the lease term. The
following is a schedule of the future minimum rental payments required under the
operating lease as of December 31, 1995:
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE C -- LEASING ARRANGEMENTS - Continued
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ------
<S> <C>
1996 $ 59,397
1997 56,649
1998 56,100
1999 14,025
</TABLE>
The Company also has a three year noncancelable computer equipment lease. The
lease, which expires in March 1997, calls for a payment of $3,100 per month.
Upon expiration, the Company has the option to purchase the equipment at its
fair market value.
The Company also has a three year noncancelable lease for a copy machine.
Expiring in June 1997, this lease call for payment of $191.89 per month.
Although the lease allows for a 10% buyout at the end of the lease, it is being
accounted for as an operating lease instead of a capital lease. Any resulting
difference is deemed immaterial.
NOTE D -- RELATED PARTY TRANSACTIONS
Notes receivable and notes payable with related parties as of December 31, 1995
consisted of the following:
Note receivable from shareholders for purchase of stock $ 1,000
10% note payable to Bruce Meachim due on demand $ 29,870
NOTE E -- CASH FLOW INFORMATION
Cash paid for interest in 1995 was $3,611.74.
<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.
/s/ Pricewaterhouse Coopers LLP
San Jose, California
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
DBA INTELLICOM, INC.
Balance Sheet
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1998
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 163,189 $ 133,428
Accounts receivable, net of allowance for doubtful debts
of $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.
Statements 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>
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)
----------------- ------------------ -----------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<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>
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)
<S> <C> <C> <C>
Cash flows from operating activities:
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
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.
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.
1
<PAGE>
INTELLIGENT COMMUNICATIONS, INC.
DBA INTELLICOM, INC.
Notes to Financial Statements (continued)
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:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1998
(UNAUDITED)
<S> <C> <C>
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
---------------- ----------------
</TABLE>
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.
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.
2
<PAGE>
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:
<TABLE>
<S> <C>
Current:
Federal $ -
State 800
Deferred
Federal -
State -
----------------
$ 800
----------------
</TABLE>
Temporary differences which give rise to significant portions of deferred
tax assets and liabilities at September 30, 1998 are as follows:
<TABLE>
<S> <C>
Net operating loss carryforward $ 274,314
Inventory reserves 25,552
----------------
Net deferred tax asset 299,866
Valuation allowance (299,866)
----------------
$ -
----------------
</TABLE>
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.
In addition, this loan agreement contains specific financial, as well as
reporting, covenants noted below.
3
<PAGE>
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:
<TABLE>
<S> <C>
1999 $1,401,625
2000 854,785
2001 612,130
2002 and thereafter 12,476
----------------
$2,881,016
----------------
</TABLE>
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.
4
<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.
5.
<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.
1.
<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
------------- ------------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
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 15,056 (c) 15,739
Other assets............................................... 1,089 104 (a) 1,193
Net assets associated with discontinued operations......... 3,813 3,813
------------------- -------------
=============
Total assets.......................................... $29,710 $15,820 $ 45,530
============= =================== =============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses................. $ 10,862 $ 1,218 (a) $ 12,080
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 2,827 16,630
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 $15,820 $ 45,530
============= =================== =============
- ---------------------------
</TABLE>
(1) References in parenthetical are to Note 2 to the unaudited pro forma
consolidated condensed financial statements.
See accompanying notes to unaudited pro forma consolidated condensed
financial statements.
2
<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) 23,304 7,339 585 (d) 8,462
2,151 (f) 538 (f)
----------- ------------- ----------- ------------ ------------- -----------
Loss from continuing operations...... (15,833) (2,956) (18,789) (6,010) (942) (6,952)
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) (3,252) (20,181) (6,362) (1,022) (7,384)
Income (loss) from discontinued
operations....................... (73) (73) 139 139
----------- ------------- ----------- ------------ ------------- ---------
Net loss............................. (17,002) (3,252) (20,254) (6,223) (1,022) (7,245)
Preferred dividends.................. (343) (343) (243) (243)
----------- ------------- ----------- ------------ ------------- -------
Net loss applicable to common shares. $ (17,345) $(3,252) $(20,597) $ (6,466) $(1,022) $ (7,488)
=========== ============= =========== ============ ============= =========
Basic and diluted earnings (loss) per share:
Continuing operations............ $(2.29) $ (2.56) $ (0.76) $(0.82)
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) $ (2.61) $ (0.77) $(0.83)
=========== =========== ============ ===========
Shares used to compute basic and
diluted earnings (loss) per share 7,391 500 (g) 7,891 8,374 600 (g) 8,974
=========== ============= =========== ============ ============= ===========
- ---------------------------
</TABLE>
(1) References in parenthetical are to Note 2 to the unaudited pro forma
consolidated condensed financial statements.
See accompanying notes to unaudited pro forma consolidated condensed
financial statements.
3
<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:
- Cash paid at closing of $500,000 (the "Cash Consideration");
- 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;
- 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;
- 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;
- 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");
- 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
- 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
going-forward basis. 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. However,
the Company believes and represents that any possible variations from the
assumptions applied should not have a material effect on the pro forma
financial statements.
(2) PRO FORMA ADJUSTMENTS
The unaudited pro forma consolidated condensed balance sheet gives effect
to the following acquisition adjustments:
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):
4
<PAGE>
<TABLE>
<S> <C>
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)
</TABLE>
(b) Represents the Total Consideration paid by the Company, less the Bonus
Consideration (see below), 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 and an increase in short-term
debt and long-term debt of $1,000,000 and $2,000,000, respectively,
for the Debt Consideration. Since the Bonus Consideration is
contingent upon successful demonstration of certain performance
criteria (as defined) being met, the Company has not accrued for such
contingent Bonus Consideration as there is significant uncertainty as
to whether or not such performance criteria will be met.
(c) Represents the intangible asset recorded by the Company for the
acquisition as the Total Consideration paid by the Company, less the
Bonus Consideration (refer to pro forma adjustment 2(b) above),
exceeded the negative tangible book value of Intellicom as of December
31, 1998 by $15,056,000. The nature of the developed technology
acquired provides the Company with a proprietary satellite system,
involving both hardware and software, which provides a
high-performance, two-way satellite-based Internet access service. The
nature of the acquired technology will, among other things, allow the
Company to lower the costs of bringing the Internet to small- and
medium-sized independent cable operators. The technology acquired has
already been tested and proven to be a viable business. Therefore,
the Company believes that the underlying technology acquired in the
Intellicom Acquisition is not subject to rapid change, and the Company
feels such acquired technology will support the Company's business
plan over the typical length of its contracts without having to
significantly change or enhance the acquired technology. The Company's
contracts with its cable affiliates typically run from five to seven
years. In determining how much of the purchase price in excess of the
tangible book value of Intellicom to allocate to acquired technology,
the Company considered that there was little value ascribable to other
intangible assets, such as customer lists or workforce. Rather, the
Company, after careful consideration, determined that the fair market
value of the acquired technology is equivalent to the intangible
assets acquired in this acquisition. The Company, therefore, will be
amortizing this amount by the straightline method over a period of
seven years (a typical contract's duration), the anticipated useful
life of this acquired technology.
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):
5
<PAGE>
<TABLE>
<CAPTION>
For the three
For the months ended
year ended
September 30, December 31,
1998 (1) 1998
<S> <C> <C>
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)
------------- ---------------
------------- ---------------
___________________
</TABLE>
(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
$2,151,000 and $538,000 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.
6
<PAGE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion by reference in the registration
statements of SoftNet Systems, Inc. on Form S-3 (Registration No. 333-71887),
Form S-3 (Registration No. 333-65593) and the Current Report of SoftNet on
Form 8-K/A of our report dated May 28, 1998 regarding the financial
statements of Intelligent Communications, Inc., a Delaware Corporation. We
also consent to the reference of our firm under the caption "Experts" in said
registration statements.
Walnut Creek, California
March 10, 1999
/s/ Blanding, Boyer, & Rockwell, LLP
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion by reference in the registration
statements of SoftNet Systems, Inc. on Form S-3 (Registration No. 333-71887),
Form S-3 (Registration No. 333-65593) and the Current Report of SoftNet on
Form 8-K/A of our review report dated March 28, 1996 regarding the financial
statements of Intelligent Communications, Inc., a Delaware Corporation.
Palo Alto, California
March 12, 1999
/s/ Sarah A. Tull, CPA
