-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MUjwSlJ6gv5y4KLYi51Cp83BTaeM7mmAzl+gjYQg3mZt/R+GiFRdTnLxqKbKv6nL I4pFymbDcILfbvVA2iH6Zw== 0000914760-95-000107.txt : 19951024 0000914760-95-000107.hdr.sgml : 19951024 ACCESSION NUMBER: 0000914760-95-000107 CONFORMED SUBMISSION TYPE: 10-Q CONFIRMING COPY: PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19951023 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOFTNET SYSTEMS INC CENTRAL INDEX KEY: 0000097196 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 111817252 STATE OF INCORPORATION: NY FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05270 FILM NUMBER: 00000000 BUSINESS ADDRESS: STREET 1: 717 FOREST AVENUE CITY: LAKE FOREST STATE: IL ZIP: 60045 BUSINESS PHONE: 7084332780 MAIL ADDRESS: STREET 1: 717 FOREST AVE CITY: LAKE FOREST STATE: IL ZIP: 60045 FORMER COMPANY: FORMER CONFORMED NAME: VADER GROUP INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MAGICSILK INC DATE OF NAME CHANGE: 19880308 FORMER COMPANY: FORMER CONFORMED NAME: TENSOR CORP DATE OF NAME CHANGE: 19860819 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ________________________________________ FORM 10-QSB Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended: March 31, 1995 Commission File No.: 1-5270 SOFTNET SYSTEMS, INC. (Exact name of registrant as specified in its charter) New York 11-1817252 (State of incorporation) (I.R.S. employer identification no.) One Overlook Place, Lincolnshire, Illinois 60069 (Address of principal executive office) Registrant's telephone number, including area code: (708) 793-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ As of March 31, 1995, 2,834,919 common shares were outstanding which includes 29,630 shares of common stock subject to put options. PART 1. FINANCIAL STATEMENTS SOFTNET SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, September 30, 1995 1994 (Unaudited) ASSETS Current assets: Cash $ 405,504 $ 176,538 Trade receivables, net of allowance for doubtful accounts of $16,000 at March 31, 1995 1,729,866 88,986 Other receivables 197,487 - Inventories 850,514 - Prepaid expenses 141,684 96,060 Total current assets 3,325,055 361,584 Other assets: Property and equipment, net of accumulated depreciation of $193,260 and $102,152, respectively 866,990 225,450 Other assets 404,699 - Investment in Imnet, at cost 1,989,379 1,989,379 Intangible assets, net of accumulated amortization of $54,041 and $5,018, respectively 4,568,432 224,394 Total other assets 7,829,500 2,439,223 Total Assets $11,154,555 $ 2,800,807 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 3,331,453 $ 738,775 Stock put liability 200,000 - Bank loans 1,500,000 - Deferred revenue 165,900 - Senior Notes payable 295,000 770,000 Current portion of long-term liabilities 156,438 82,226 Total current liabilities 5,648,791 1,591,001 Long-term liabilities: Capitalized lease obligations 158,631 53,577 Long-term debt 2,407,646 - Total long-term liabilities 2,566,277 53,577 Common stock subject to put options, 29,630 shares - 200,000 Redeemable Series A Preferred stock outstanding, 290,858 shares 1,745,148 - Shareholders' Equity: Preferred stock, $.10 par value, 4 million share authorized - - Common stock, $.01 par value, 10 million shares authorized, 2,805,289 and 2,602,598 shares outstanding, respectively, net of treasury shares of 1,906 28,053 26,026 Capital in excess of par value 17,207,669 16,428,886 Accumulated deficit ( 16,041,383) ( 15,498,683) Total shareholders' equity 1,194,339 956,229 Total Liabilities and Shareholders' Equity $11,154,155 $ 2,800,807
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended March 31, March 31, 1995 1994 1995 1994 (Unaudited) (Unaudited) Sales $ 3,585,929 $ 188,566 $ 5,991,429 $ 327,270 Cost of sales 1,940,269 160,515 3,242,735 263,581 Gross profit 1,645,660 28,051 2,748,694 63,689 Expenses: Selling, general and administrative 1,577,941 208,596 2,548,581 330,556 Amortization of goodwill and depreciation of property 82,750 19,571 140,131 34,739 Corporate 204,810 109,111 344,020 216,472 Total expenses 1,865,501 337,278 3,032,732 581,767 Income (loss) from operations ( 219,841) ( 309,227)( 284,038)( 518,078) Interest expense: Interest expense, including amortization of deferred debt issuance cost ( 99,822) ( 18,303)( 210,841)( 42,833) Non-cash charges relating to Senior Note discount ( 51,875) ( 145,625)( 51,875)( 514,164) Total interest expense ( 151,697) ( 163,928)( 262,716)( 556,997) Other income - - 4,054 - Net income (loss) ($ 371,538) ($ 473,155) ($ 542,700) ($1,075,075) Net income (loss) per share ($ .13) ($ .19) ($ .20) ($ .45) Weighted average common shares outstanding 2,834,919 2,534,289 2,781,880 2,412,826
SOFTNET SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended March 31, 1995 1994 (Unaudited) OPERATING ACTIVITIES Net income (loss) ($ 542,700) ($1,075,075) Adjustments to reconcile net income (loss) to net cash used by operations: Amortization of goodwill and depreciation of property 140,131 34,739 Amortization of deferred debt issuance costs 21,592 - Provision for losses on trade receivables 16,000 - Non-cash charge of interest expense related to amortization of Senior Notes payable discount 51,875 514,164 Changes in operating assets and liabilities, net of operating assets and liabilities acquired in acquisition of consolidated subsidiaries: Increase in receivables ( 803,795)( 5,376) Increase in inventory ( 165,992) - Increase in prepaid expenses ( 29,609) ( 38,407) Increase (decrease) in accounts payable and accrued liabilities ( 985,024) 53,938 Increase in deferred revenues 80,652 - Increase in long-term interest payable - long-term 3,653 - Net cash used by operating activities ( 2,213,217) ( 516,017) INVESTING ACTIVITIES Net cash paid in connection with acquisition of consolidated subsidiaries ( 139,980) ( 26,498) Purchase of office furniture and equipment( 206,354) ( 52,921) Cash paid for investment in Imnet - ( 462,924) Increase in other assets ( 267,778) - Net cash used by investing activities ( 614,112) ( 542,343) FINANCING ACTIVITIES Proceeds from issuance of Convertible Subordinated notes 2,305,000 - Proceeds from sale of common stock 726,250 - Borrowings under new revolving bank loans, net 1,500,000 - Repayment of prior revolving credit facility ( 825,000) - Repayment of notes payable ( 200,000) - Capital contribution - 850,000 Proceeds from issuance of Senior Notes 25,000 775,000 Repayment of Senior Notes ( 500,000) ( 550,000) Exercise of warrants - 6,563 Capitalized lease obligations incurred on existing equipment 93,000 - Capitalized lease obligations paid ( 67,955) ( 30,901) Net cash provided by financing activities 3,056,295 1,050,662 Increase in cash 228,966 ( 7,698) Cash at beginning of period 176,538 62,856 Cash at end of period $ 405,504 $ 55,158 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 134,907 $ 31,492 Cash paid during the period for income taxes $ - $ - Property acquired by capitalized leases $ 154,221 $ - Investment in Imnet acquired with issuance of common stock $ - $ 735,083 Consolidated subsidiaries acquired with issuance of stock and notes $ 1,844,141 $ 216,875
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. PRESENTATION OF STATEMENT OF OPERATIONS: In connection with the acquisition of Communicate Direct, Inc. (CDI) on October 31, 1994, the Company has reclassified the statement of operations for the prior fiscal year to conform to the presentation used in 1995. In addition, the Company originally reported the receipt of $850,000 in December 1993 as a reduction of a prior year provision for bad debts. Following a review of the accounting treatment for this transaction by the Securities and Exchange Commission, it was agreed that it should have been recorded as a capital contribution and no income recognized. 2. SUMMARY OF CERTAIN ACCOUNTING POLICIES: INTANGIBLE ASSETS Costs in excess of fair value of net assets acquired incurred in connection with the acquisitions of Utilization Management Associates, Inc. (UMA) and CDI are being amortized on a straight-line basis over forty years. Additional costs resulting from the obligation to pay a portion of the pretax earnings to the former owners of UMA are being amortized over the period from the determination of the amount to the expiration of the original forty years. NET INCOME (LOSS) PER SHARE Net income (loss) per share is based on the weighted average number of common shares (including common stock subject to put options) outstanding during the periods. During the periods presented, the 29,630 shares subject to a put option have been considered outstanding until this obligation is resolved (see Note 8). Common stock equivalents were not included in the computation of income (loss) per share since their effect was anti-dilutive. In addition, no effect has been given to the pending conversion of the preferred shares to common shares (which was approved by the shareholders in April 1995) as this would also be anti- dilutive. 3. ACQUISITION OF CDI: On October 31, 1994, the Company acquired CDI pursuant to a merger of CDI into a wholly-owned subsidiary of the Company in accordance with a certain Agreement and Plan of Reorganization dated October 28, 1994 (the CDI Merger Agreement). CDI is a Chicago-based company which sells and services telephone systems and computer hardware manufactured by others including application oriented peripheral products like voice mail, automated attendant systems, interactive voice response (IVR) and video conferencing systems. Additionally, CDI develops application software for IVR and computer telephone integration applications. CDI also sells and installs local and long distance network services. The Company acquired all of the outstanding common stock of CDI for a consideration initially valued at $5,252,138 consisting of: a. 290,858 shares of SoftNet Series A Preferred Stock (Preferred shares) valued at $6.00 per share (reflecting a discount from the market price of the common shares due to the fact that they are restricted) for a total of $1,745,148; b. Series A Notes in the original principal amount of $1,517,990; c. Series B Notes in the original principal amount of $314,000; d. $100,000 in cash; and e. A capital contribution by SoftNet of $1,575,000. In April 1995, the Preferred shares were converted into common shares on a one-to-one basis following approval by the Company's shareholders (See Part II, Item 5). The Preferred shares issued in connection with this acquisition had been redeemable at certain prices on the fifth anniversary of their issuance if their conversion into common shares had not been approved by the Company's shareholders. The approval of the Company's shareholders eliminated the redeemable feature of the Preferred shares as of April 5, 1995. Additional common shares may be issued to the former CDI shareholders if CDI's operations exceed an earnings level, as defined in the CDI Merger Agreement, of $1.5 million in each of the three fiscal years ending September 30, 1995, 1996 and 1997. In addition, each of the former CDI shareholders received an employment contract through September 1997. The CDI Merger Agreement granted to SoftNet the right to make certain post- closing purchase price adjustments. In accordance with the CDI Merger Agreement, the CDI purchase price was reduced by $1,732,997 by eliminating the Series A Notes ($1,517,990) and reducing the amount of the Series B Notes from $314,000 to $98,993. The Series B Notes, bearing interest at the prime rate, are due in part on September 30, 1996 ($4,993) and in part on September 30, 1997 ($94,000). The Company's adjusted investment in CDI, at cost, is $3,836,606 consisting of the items, as adjusted, outlined above plus professional fees of $317,465. The resulting goodwill, amounting to $4,376,613 and recorded as of the acquisition date, will be adjusted for any payments required under the earnout agreement as these amounts are determined. Pro forma consolidated statements of operations for the six months ended March 31, 1995 and 1994 and for the year ended September 30, 1994 for the Company and CDI (as if CDI had been acquired October 1, 1993) are as follows: PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended Year Ended March 31, September 30, 1995 1994 1994 Sales $6,894,461 $5,541,942 $12,460,572 Cost of sales 3,744,550 3,453,316 7,406,733 Gross profit 3,149,911 2,088,626 5,053,839 Expenses: Selling, general and administrative 3,002,256 2,633,604 5,583,852 Amortization and depreciation 156,518 107,696 258,600 Corporate 344,020 216,472 701,776 Total expenses 3,502,794 2,957,772 6,544,228 Income (loss) from operations ( 352,883)( 869,146) ( 1,490,389) Interest expense ( 285,015)( 693,742) ( 893,428) Other income 4,054 - 1,967 Net income (loss) ($ 633,844)($1,562,888) ($2,381,850) Net income (loss) per share ($ .21) ($ .58) ($ .86) The six month pro forma statement for 1995 includes the operating results for CDI for the month of October, 1994 (prior to the acquisition) and reflects amortization of goodwill and interest expense for that period. The six month 1994 pro forma statement adds CDI's results and goodwill amortization and interest expense for the six months and the fiscal year 1994 pro forma statement adds CDI's results and goodwill amortization and interest expense for the full year. No adjustment was made to the amount of notes outstanding which are subject to adjustment based on CDI performance levels nor was any adjustment made for the possible issuance of additional shares based on CDI performance levels. The weighted average number of common shares outstanding used in computing the above income (loss) per share includes an additional 290,858 shares to reflect the assumed conversion to common stock of the Preferred shares issued in connection with the acquisition.
4. BANK LOANS: CDI obtained on October 31, 1994, with the Company's assistance and the payment of a loan fee of $25,000, a new bank line-of-credit, maturing on March 1, 1996, in the amount of $2.5 million. This loan is collateralized by the assets of CDI and the outstanding loan balance is limited to certain percentages of CDI's eligible receivables and inventories. The outstanding loan balance at March 31, 1995 of $1.25 million bears interest at 1% above the bank's prime rate (9% on March 31, 1995). Interest is payable monthly and the loan is guaranteed by the Company. On March 30, 1995, SoftNet borrowed $250,000 from the same bank with the note maturing on September 30, 1995. The loan bears interest at 1% above the bank's prime rate with interest payable monthly and the balance of the loan at maturity. The bank note is secured by a lien on SoftNet's assets. 5. SENIOR NOTES PAYABLE: In October and November 1994, the Company repaid $50,000 of the outstanding Senior Notes and issued an additional $25,000 note resulting in an adjusted balance of outstanding Senior Notes of $745,000. The note holder of the additional $25,000 note also received a warrant to purchase 2,500 shares of the Company's common stock at the then current market price of $6.375 per share. (A) The maturity of $450,000 of notes was extended to March 31, 1995 at which time the notes were repaid. The note holders received additional warrants expiring in five years to purchase a total of 54,000 shares of the Company's common stock at prices ranging from $6.125 to $7.875 (market prices at the end of each month during the period the notes were extended). (B) The maturity of $295,000 ($125,000 of which is owned by an affiliate of John Jellinek, President of the Company) of notes was extended to October 1, 1995. On April 1, 1995, the notes were exchanged for 9% Convertible Subordinated Notes (see Note 6 below). The note holders received additional warrants expiring in five years to purchase a total of 35,400 shares of the Company's common stock at prices ranging from $6.125 to $7.875 (market prices at the end of each month during the period the notes were extended). As of April 1, 1995, all Senior Notes have been repaid. Two outstanding warrants previously issued to Senior note holders for 2,500 shares each exercisable at $3.75 per share were reissued for 5,000 shares each exercisable at $1.75 per share to conform to the terms of warrants issued to other note holders at that time. In addition, two additional warrants issued to the same Senior note holders contained exercise prices of $3.75 per share and were reissued with an exercise price of $1.75 per share. The reissuance of these warrants at prices less than market resulted in additional Senior Note discount of $51,875 which was expensed in the quarter ended March 31, 1995. 6. LONG-TERM DEBT: At March 31, 1995, long-term debt consisted of the following: 10% Convertible Subordinated Notes $ 1,250,000 9% Convertible Subordinated Notes 1,055,000 Series B Notes (see Note 3 above) 98,993 Accrued interest on Series B Notes due at maturity 3,653 $ 2,407,646 In October and November 1994, the Company issued 10% Convertible Subordinated Notes, in the aggregate amount of $1.25 million, due in October 1999. Such notes (which bear interest, payable quarterly, at 10% per annum for the first two years only and no interest thereafter) are subordinate to all other liabilities of the Company and are convertible into the Company's common shares at $4.10 per share. In connection with the issuance of the 10% Convertible Subordinated Notes, the Company incurred fees of $55,936 and issued warrants to purchase 297,750 shares of its common stock exercisable for five years at an exercise price of $6.875 per share. During the quarter ended March 31, 1995, the Company issued 9% Convertible Subordinated Notes due December 31, 1998 in the aggregate amount of $1,055,000. Interest is payable quarterly on the first of April, July, October, January and at maturity. Such notes are subordinate to all other liabilities of the Company and are convertible into the Company's common shares at $5 per share. These notes may be prepaid by the Company in whole after April 1, 1996 provided the market price of the Company's common stock is at least 200% of the conversion price (presently $5 per share) on any 20 trading days within a period of 30 consecutive trading days ending on the trading date prior to the date of the notice of prepayment. 7. COMMON STOCK SUBJECT TO PUT OPTIONS: In connection with the acquisition of UMA, the former shareholders of UMA received 29,630 shares of the Company's common stock together with the right to sell such shares back to the Company at $6.75 per share or a total of $200,000 during a period commencing on November 14, 1994 and ending January 27, 1995. The former shareholders of UMA have exercised their right to sell such shares back to the Company but negotiations are continuing as to the means of the settlement of this obligation. Accordingly, as of March 31, 1995, this obligation has been classified as a current liability in the accompanying consolidated balance sheet. 8. SALE OF COMMON STOCK: On October 26, 1994, the Company sold 200,000 shares of its common stock in a Regulation S offering at $4 per share. In connection with the sale of common stock, the Company incurred fees of $90,172 and issued warrants to purchase 249,750 shares of its common stock exercisable for five years at an exercise price of $6.875 per share. 9. RELATED PARTY TRANSACTION: As more fully disclosed in the Company's annual report on Form 10-KSB for the year ended September 30, 1994, the Company is owed $4,150,000 plus accrued interest by Ozite Corporation (Ozite). Peter Harvey, Chairman of the Company, and John Hamm, a Director of the Company, have held and continue to hold substantial interests in Ozite. Due to uncertainties about collecting these funds, the receivable, which would be recorded as a capital contribution, has not been recorded in the Company's consolidated financial statements. In July 1994, Ozite and Pure Tech International, Inc., among others, signed a merger agreement subject to shareholder approval and certain other conditions. This merger agreement has been modified, most recently in March 1995, and provides that the obligations of Ozite be performed in all material respects as of the merger's effective date. Subject to final approval of all of the parties and certain other conditions imposed by the Company, the Company has agreed to accept common and preferred shares of Artra Group Incorporated held by Ozite and common shares of Pure Tech Newco, Inc. in settlement of the Ozite obligation to the Company. 10. EXECUTIVE COMPENSATION: During 1994, the Board of Directors revised the compensation arrangements of Peter Harvey, Chairman of the Board, John Jellinek, President, and John G. Hamm, a Director. Mr. Harvey's compensation was reduced from $120,000 to $60,000 per year effective May 1, 1994, Mr. Jellinek's compensation was set at $110,000 per year effective with his taking office on July 1, 1993 and Mr. Hamm, a Director of the Company since 1985, was given a one-time compensation amount of $150,000 for his substantial prior services to the Company. These individuals have not been receiving this compensation on a regular monthly basis and at March 31, 1995, their aggregate unpaid compensation was $380,000. A portion of each individual's compensation, aggregating $195,000 at March 31, 1995, is to be paid in shares of the Company's common stock or 10 year warrants to purchase shares of the Company's common stock. The choice to receive shares or warrants is to be made by each individual on specified dates. Each individual would receive additional shares or warrants equal to 10% of the amount originally granted until the shares to be received or the shares under warrant are freely tradable. In addition, at the specified dates, each individual may elect to receive any unpaid cash compensation in shares or warrants or receive interest on his unpaid compensation. Mr. Harvey and Mr. Hamm have each elected to receive collectively 24,000 shares of the Company's common stock for $120,000 of the above mentioned compensation and to receive the additional common shares (4,000 shares) due them through September 30, 1994. Further, they elected to receive their remaining unpaid compensation as of September 30, 1994 in the form of cash. At March 31, 1995, additional compensation relating to the payment of compensation in shares or warrants aggregated $46,796 of which $20,000 will be paid when the above 4,000 common shares are issued. 11. STOCK OPTIONS AND WARRANTS: Outstanding warrants and options (all are currently exercisable) to purchase shares of common stock at March 31, 1995 were as follows: Issued in 1995 to 10% Convertible Subordinated note holders at $6.875 per share, expiring in October 1999 272,500 Issued in 1995 in connection with the sale of common stock and the issuance of the 10% Convertible Subordinated notes at $6.875 per share, expiring in 1999 275,000 Issued in 1995 to Senior Note holders in connection with extensions of Senior Note maturity dates at exercise prices ranging from $6.125 to $7.875 per share, expiring between October 31, 1999 and March 31, 2000 89,400 Issued in 1995 to a Senior Note holder in connection with a new Senior Note issued in 1995 at an exercise price of $6.375 per share expiring in October 1999 2,500 Issued in 1994 in connection with the acquisition of UMA at $4.0429 per share expiring in 1998. In 1995 warrants for 6,250 shares were exercised in a cashless transaction and 2,691 shares were issued 118,750 Issued in 1994 to Senior Note holders (110,000 at $1.75 per share, 10,000 at $3.75 per share) expiring in 1999 (market prices at date of grant ranged from $3.50 to $6.63 per share). In 1995, the exercise price for the 10,000 warrants was revised from $3.75 to $1.75 per share (see Note 5). 120,000 Issued in 1994 to Senior Note holders (at market price at date of grant - 82,000 at $5.50 per share, 5,000 at $5.75 per share and 24,500 at $6.125 per share) expiring in 1999 111,500 Issued in 1993 to Senior Note holders (5,000 at $3.75 per share, 25,000 at $1.75 per share) expiring in 1998 (market prices at date of grant ranged from $3.50 to $4.00 per share) In 1995, the 5,000 warrants at $3.75 per share were reissued as 10,000 warrants at $1.75 per share (see Note 5). 35,000 Issued in 1993 to certain directors for past services at $1.75 per share, expiring in 1998, (market prices at date of grant ranged from $2.00 to $2.50 per share) 39,000 Issued in 1992 to Jelco Ventures, Inc. (controlled by the President of the Company) in connection with the acquisition of HPR software at $1.75 per share expiring in 1997 250,000 Issued in 1990 to directors and outside counsel for services at $1.75 per share, expiring in 1998. In 1993, the exercise price and the expiration date were modified. 57,000 Issued in 1988 (in connection with short-term loans to the Company) to the Chairman of the oard at $1.75 per share, expiring in fiscal year 1998. In 1993, the exercise price and the expiration date were modified. 1,564 1,372,214 12. POTENTIAL ACQUISITIONS: On March 27, 1995, the Company announced that it had entered into an agreement to acquire Micrographic Technology Corporation (MTC) and an agreement to acquire Kansas Communications, Inc. (KCI). MTC is a designer, developer, manufacturer and integrator of comprehensive, non-paper based systems and components that enable MTC to deliver to its customers cost-effective solutions for the storage, indexing and/or distribution of high-volume output data streams. These systems, which include both hardware and software products, are based on an open systems architecture providing flexibility to connect to a wide variety of information systems. The hardware manufactured by MTC includes a family of computer output microfilm printers. MTC's software is principally related to the capture of data and information from a variety of sources, its intelligent indexing and the ultimate output of that information to a variety of storage medias including optical disk, magnetic disk and tape, CD-ROM, microfilm and microfiche. KCI is an information technology company which provides communications solutions through the design, implementation, maintenance and integration of voice, data and video communications equipment and services. The equipment, which is manufactured by others, includes telephone systems and call processing systems (including call centers, voice messaging, interactive voice response and computer telephone integration). Services include maintenance contracts for its existing customers, installation of local and long distance network services, cabling and data communications. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL POSITION RESULTS OF OPERATIONS FOR THE SIX MONTHS OF FY 1995 COMPARED TO THE SIX MONTHS OF FY 1994 The substantial increases in sales, cost of sales and selling, general and administrative expenses reflect the inclusion of the results of Communicate Direct, Inc.'s (CDI) operations from the date of its acquisition by the Company on October 31, 1994. Included in the consolidated results for 1995 are CDI's sales ($5,342,000), cost of sales ($2,775,000) and selling, general and administrative expenses ($2,088,000). In addition, the results of operations of UMA are included for the full quarter in 1994 as compared to only the period after UMA's acquisition on November 12, 1993 in the prior year. UMA's sales increased 69% to $487,000 and added an additional $104,000 to the Company's gross profit. Amortization of goodwill in 1995 increased $47,000 while CDI added $39,000 to depreciation expense. Corporate expenses increased primarily due to additional legal, accounting and public relations fees. Interest expense increased (after deducting the non-cash charges relating to Senior Note discount) due to the issuance of Convertible Subordinated notes and new bank loans (see Notes 4 and 6 of Notes to Consolidated Financial Statements) and the amortization of debt issuance costs in 1995. MATERIAL CHANGES IN FINANCIAL POSITION FROM SEPTEMBER 30, 1994 TO MARCH 31, 1995 During the six months, the Company's working capital position changed as follows: Working capital deficit at September 30, 1994 ($1,229,417) Working capital deficit acquired in acquisition of CDI ( 2,632,498) Reclassification of stock put obligation ( 200,000) Increase in working capital during the quarter 1,738,179 Working capital deficit at March 31, 1995 ($2,323,736) The increase in working capital during the period was primarily generated by the sale of common stock and the issuance of long-term Convertible Subordinated notes (See Note 6 of Notes to Consolidated Financial Statements), the proceeds of which were used, in part, to repay certain of the Company's current liabilities. Currently, management is anticipating that any shortfall in its cash flow from operations will be provided for by additional borrowings. In addition, cash flow may be enhanced by acquisitions and additional sales of the Company's common stock. No assurances can be made that these sources of funds will be available or sufficient. _______________________ It is suggested that this report be read in conjunction with the financial statements and footnotes appearing in the September 30, 1994 Form 10-KSB which has been previously filed with the Commission. The information furnished reflects all adjustments (consisting of only normal recurring adjustments) which are, in the opinion of management, necessary to a fair statement of the results for the interim period. PART II. OTHER INFORMATION Items 1 to 4. Not applicable. Item 5. Other Information. IMNET IMNET Systems, Inc. (IMNET) filed a Registration Statement with the Securities and Exchange Commission on Form S-1 on May 10, 1995 pursuant to which IMNET intends to sell 2,750,000 shares of Common Stock, $.01 par value (assuming no exercise of the underwriters' over-allotment option to acquire up to 412,500 additional shares from IMNET solely to cover over-allotments), to the public at an estimated price of from $10 to $12 per share. Based on the outstanding capital stock of IMNET at March 31, 1995, and after adjustment for (i) a 1.88-for-1 stock split to be effected on May 19, 1995, (ii) the issuance of shares of Common Stock upon conversion of all outstanding shares of IMNET's Series I and II Convertible Preferred Stock and Series A Preferred Stock including accrued dividends at an assumed public offering price of $11 per share of IMNET Common Stock immediately prior to completion of the offering, and (iii) the exercise of outstanding warrants to acquire 39,168 shares Common Stock immediately prior to completion of the offering, SoftNet will own 385,588 shares of Common Stock of IMNET. After such adjustment, and assuming (i) no exercise of the underwriters' over- allotment option, and (ii) an initial public offering price of $11 per share, the shares of capital stock of IMNET owned by SoftNet would represent approximately 5.1% of the outstanding shares of IMNET after the offering, based on the outstanding capital stock of IMNET at March 31, 1995. THIS COMMUNICATION IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OF IMNET. SIGNING OF LEASES Communicate Direct Inc. (CDI) recently signed a lease for approximately 24,777 square feet of lease space in Buffalo Grove, Illinois for an initial term of five years. CDI intends to relocate its principal office from Chicago, Illinois to the new lease space in Buffalo Grove, Illinois on or about June 26, 1995. Philip Kenny, a Director of the Company, indirectly owns 4.7% of the owner of such real property leased by CDI. CONVERSION OF SERIES A PREFERRED STOCK AND 10% CONVERTIBLE SUBORDINATED NOTES At the SoftNet Annual Meeting of Shareholders held on April 5, 1995, the shareholders approved a proposal to convert the 290,858 outstanding shares of Series A Preferred Stock of SoftNet into 290,858 shares of SoftNet Common Stock. The Series A Preferred Stock was held by the shareholders of the former Communicate Direct, Inc. On October 31, 1994, Communicate Direct, Inc. was merged into a wholly-owned subsidiary of SoftNet pursuant to an Agreement and Plan of Reorganization dated October 28, 1994 (CDI Plan). Pursuant to the CDI Plan, the shareholders of the former Communicate Direct, Inc. received 290,858 shares of SoftNet's newly created Series A Preferred Stock, $ .10 par value, and the right to receive additional shares of Series A Preferred Stock based on an earnout arrangement for the three years ended September 30, 1995, 1996 and 1997. The term of the Series A Preferred Stock provided that upon approval of SoftNet's shareholders (which was required by the rules of the AMEX due to the number of shares of common stock to be issued) all of the Series A Preferred Stock issued or to be issued pursuant to the CDI Plan would be converted in shares of SoftNet Common Stock. Upon approval of this prop[osal, the Series A Preferred Stock was converted into 290,858 shares of SoftNet Common Stock and the right to receive shares of Series A Preferred Stock pursuant to the earnout arrangement was converted into the right to receive shares of SoftNet Common Stock. There are no more shares of Series A Preferred Stock outstanding. The SoftNet shareholders also approved a proposal to allow conversion of the $1,250,000 in principal amount of 10% Convertible Subordinated Notes of SoftNet (the "10% Notes") into SoftNet Common Stock. The terms of the 10% Notes state that the 10% Notes would be convertible into SoftNet Common Stock at $4.10 per share upon approval of the SoftNet shareholders. If the holders of the 10% Notes choose to convert the entire principal amount of the 10% Notes, 304,878 shares of SoftNet Common Stock would be issued. Item 6. Exhibits ad Reports on Form 8-K (a) Exhibits 27 - Financial Data Schedule SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SoftNet Systems, Inc. (Registrant) /S/ John Jellinek John Jellinek President and Chief Executive Officer /S/ Alfred J. Ziegler Alfred J. Ziegler Vice President and Chief Accounting Officer (Principal Financial Officer) Date: May 18, 1995 EX-27 2
5 This schedule contains summary financial information extracted from SoftNet Systems, Inc.'s Form 10-Q and is qualified in its entirety by reference to such Form 10-Q filing. 6-MOS SEP-30-1995 MAR-31-1995 405,504 1,989,379 1,927,353 16,000 850,514 3,325,055 886,990 193,260 11,154,555 5,648,791 2,566,277 17,235,722 1,745,148 0 0 11,154,155 3,585,929 3,585,929 1,940,269 1,865,501 0 0 151,697 (371,538) 0 (371,538) 0 0 0 (371,539) (0.13) (0.13)
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