As filed with the Securities and Exchange Commission on February 13, 1998
Registration No. 333-45335
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
__________________________
SOFTNET SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-1817252
(State or other jurisdiction (I.R.S Employer Identification No.)
of incorporation or organization)
520 Logue Avenue
Mountain View, CA 94043
(650) 965-3700
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
A.J.R. Oosthuizen
Chief Executive Officer and President
SoftNet Systems, Inc.
520 Logue Avenue
Mountain View, CA 94043
(650) 965-3700
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
___________________________
Copy To:
H. George Mann, P.C.
McDermott, Will & Emery
227 West Monroe Street
Chicago, Illinois 60606-5096
___________________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
___________________________
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. /__/
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. /__/
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. /__/
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /__/
__________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
SUBJECT TO COMPLETION, DATED FEBRUARY 13, 1998
PROSPECTUS
SOFTNET SYSTEMS, INC.
2,697,320 Shares of Common Stock
($0.01 par value)
This Prospectus covers the sale from time to time of up to 2,697,320 issued
and outstanding shares (the "Shares") of Common Stock, par value $0.01 per share
("Common Stock"), of SoftNet Systems, Inc., a New York corporation (the
"Company"), by certain shareholders of the Company (the "Selling
Shareholders"). The Selling Shareholders or their respective pledgees,
donees, transferees or other successors in interest may from time to time
sell the Shares directly or through one or more broker-dealers, in one or
more transactions on the American Stock Exchange, in privately negotiated
transactions or otherwise, at prices related to the prevailing market prices
or at negotiated prices. See "Plan of Distribution."
The Shares consist of Common Stock issued or issuable upon exercise of
outstanding stock purchase warrants and the Company's Series A Convertible
Preferred Stock (the "Convertible Preferred Stock"). In addition, the Shares
include a good faith estimate of the number of shares underlying the Convertible
Preferred Stock and, pursuant to Rule 416 of the Securities Act of 1933, as
amended (the "Securities Act"), the actual number of shares offered hereby
includes such additional number of shares of Common Stock as may become issuable
upon conversion of the Convertible Preferred Stock or as a result of stock
splits, stock dividends and anti-dilution provisions (including, by reason of
any reduction in the floating rate conversion price mechanism and certain other
adjustment mechanisms of the Convertible Preferred Stock).
The Company will not receive any of the proceeds from the sale of the
Shares. The Company has agreed with the Selling Shareholders to register the
Shares offered hereby and to pay the expenses incident to the registration and
offering of the Shares, except that the Selling Shareholders will pay any
applicable underwriting commissions and expenses, brokerage fees and transfer
taxes, as well as the fees and disbursements of counsel to and experts for the
Selling Shareholders.
The Company's Common Stock is listed on the American Stock Exchange under
the symbol SOF. On February 12, 1998, the last reported sales price of the
Common Stock on the American Stock Exchange was $6-13/16 per share.
SEE "RISK FACTORS" ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS TO BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This Prospectus is to be used solely in connection with sales of the Shares
from time to time by the Selling Shareholders.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY
PERSON IN ANY JURISDICTION WHERE SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF
THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE.
The date of this Prospectus is _____________, 1998.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
AVAILABLE INFORMATION
SoftNet Systems, Inc. (the "Company") is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements, the registration statement related to this
offering and other information filed by the Company may be inspected and copied
at the public reference facilities of the Commission located at 450 Fifth Street
N.W., Washington D.C. 20549 and at the Commission's regional offices located at
Seven World Trade Center, Suite 1300, New York, New York 10048 and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates
or accessed electronically on the Commission's home page on the World Wide Web
at http://www.sec.gov. In addition, reports, proxy statements and other
information filed by the Company may be inspected at the offices of the American
Stock Exchange, 86 Trinity Place, New York, New York 10006, upon which the
Common Stock of the Company is traded.
The Company has filed with the Commission, a Registration Statement on Form
S-3 (together with all amendments, schedules and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), covering the sale of the Shares by the Selling Shareholders
from time to time. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement. Statements made in the Prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement for a more complete
description. Each such statement is qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File No.
1-5270) pursuant to the Exchange Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1997 ("Form 10-K").
2. The Company's Current Report on Form 8-K dated January 12,
1998.
3. The description of the Company's Common Stock contained in
the Company's Current Report on Form 8-K dated February 12, 1998.
4. The Company's amendment to its Form 10-Q for the quarter ended
December 31, 1996 filed with the Commission on January 29, 1998.
5. The Company's amendment to its Form 10-Q for the quarter ended
March 31, 1997 filed with the Commission on January 29, 1998.
6. The Company's amendment to its Form 10-Q for the quarter ended
June 30, 1997 filed with the Commission on January 29, 1998.
7. The Company's Schedule 14A filed with the Commission on January
28, 1998.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering made hereby shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date such documents were filed. Any statement contained herein or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any subsequently filed document which also is
or is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any and all of the documents
incorporated by reference herein (other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference in such documents).
Requests for such copies should be directed to Mark Phillips, Treasurer, SoftNet
Systems, Inc., 520 Logue Avenue, Mountain View, California 94043.
THE COMPANY
SoftNet Systems, Inc. is engaged in the business of developing, marketing,
installing and servicing electronic information and document management systems
that allow customers to electronically request and electronically receive
information. The Company's strategy includes the selling of products and
services that, when taken together with a customer's existing computer, data and
voice communication systems, can consolidate all information within an
enterprise into a common, electronically accessible information warehouse,
regardless of geographic diversity. The Company operates through three
segments: document management, telecommunications and Internet services.
The document management segment designs, develops, and manufactures
electronic and film based imaging products. This segment provides intelligent
document management solutions to its customers, utilizing cost-saving
automation. All of the Company's products, both hardware and software, are
based on industry standard client-server architecture, providing flexibility to
connect to a wide variety of information systems. The hardware manufactured by
the Company includes a family of Computer Output to Microfilm ("COM") printers.
The Company's software principally captures information from a variety of
sources, intelligently indexes the data and outputs it to a variety of storage
media including optical disk, magnetic disk and tape, CD-ROM, and microfilm and
microfiche. The image source and storage media are transparent to the system
user.
The telecommunications segment provides communication solutions through the
design, implementation, maintenance and integration of voice, data and video
communication equipment and service. The telecommunications segment operates
throughout the Midwest with offices in Kansas City, Kansas and the greater
metropolitan area, Columbia, Missouri; Wichita, Kansas and Milwaukee,
Wisconsin. The Company's telecommunications product offerings include third
party manufactured telephone systems and call processing systems (including call
centers, voice messaging, interactive voice response ("IVR") and computer
telephone integration ("CTI")). Additionally, the Company develops software for
IVR and CTI applications, sells local and long distance network services,
provides maintenance services for existing customers and provides cabling and
data communications. The telecommunications segment markets its products and
services primarily to customers with 25 or more telephones located in the
Midwest.
The Internet services segment provides Internet access as well as World
Wide Web and database development. It is also a provider of Internet services
over the cable television infrastructure to consumers and businesses. The
segments primary service offering, the ISP ChannelSM, allows small to middle
market cable and wireless cable operators to connect their subscribers to the
Internet via cable modems. For businesses, the segment offers services which
provide a platform for Internet and Intranet connectivity solutions and
networked business applications over both cable infrastructure and leased
telecommunication lines. By combining an Internet distributed architecture with
cable and telephone technology, Media City World, a wholly-owned subsidiary of
Softnet, services provide a compelling platform for nationwide delivery of
network-based business applications.
The Company maintains corporate offices in Mountain View, California. The
Company was incorporated in New York in December 1956. Its principal executive
offices are located at 520 Logue Avenue, Mountain View, California 94043 and its
telephone number is (650) 975-3700.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares by
the Selling Shareholders.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The actual results of the Company could differ significantly from
those set forth herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Risk Factors"
as well as those discussed elsewhere in the Company's Form 10-K. Statements
contained herein that are not historical facts are forward-looking statements
that are subject to the safe harbor created by the Private Securities Litigation
Reform Act of 1995. Words such as "believes", "anticipates", "expects",
"intends" and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements. A
number of important factors could cause the Company's actual results for fiscal
1998 and beyond to differ materially from past results and those expressed in
any forward-looking statements made by, or on behalf of, the Company. These
factors include, without limitation, those listed in the following "Risk
Factors" section. The Company undertakes no obligation to release publicly the
result of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
RISK FACTORS
LIMITED OPERATING HISTORY; LACK OF PROFITABLE OPERATIONS
The Company currently operates in three industries; telecommunications,
document management and Internet services. On September 15, 1995, a wholly-owned
subsidiary of the Company merged with Kansas Communications, Inc. ("KCI"), a
company which sells and services telephone systems, third-party computer
hardware and application oriented peripheral products such as voice mail,
automated attendant systems, interactive voice response and video conferencing
systems. On December 29, 1995, KCI acquired the Milwaukee operations of
Executone Information Systems, Inc., in a business combination accounted for as
a purchase. KCI represents the telecommunications segment of the Company. Also
on September 15, 1995, the Company acquired Micrographic Technology Corporation
("MTC") in a business combination accounted for as a purchase. 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 storage, indexing and/or distribution of high-volume
output data streams. MTC represents the document management segment of the
Company. On June 21, 1996, the Company acquired MediaCity World, Inc. ("MCW"),
in a business combination accounted for as a purchase. MCW is an Internet
service provider whose services include business to business Internet access and
web development for sales, marketing and electronic commerce applications. MCW
also provides the ISP Channel service, a no-cost solution for small to middle
market cable and wireless cable operators that allows these operators to provide
broadband Internet access and multimedia voice and video services to their
subscribers over the existing cable plant.
The Company has sustained substantial losses in each of the fiscal years
that it has operated in these three industries. In addition, the Company will
require significant funds to continue to implement its business strategies.
Factors which have had an influence on and may continue to influence the
Company, resulting in continued losses, include (i) the Company's expense levels
are based on anticipated future revenues and are relatively fixed in the short-
term; (ii) the Company incurs significant expenses in connection with research
and development of new product and service offerings, and the continued
development of its direct and indirect selling and marketing efforts; and (iii)
the Company may continue to incur charges related to acquisitions, divestitures,
business alliances or changing technologies. As a result, there can be no
assurance that the Company will be profitable in the future or that available
funds, together with funds provided by operations will be sufficient to fund the
Company's ongoing operations. If the Company has insufficient funds, there can
be no assurance that additional financing can be obtained on acceptable terms,
if at all. The absence of such financing would have a material adverse effect on
the Company's business, including a possible reduction or cessation of
operations.
FLUCTUATIONS IN QUARTERLY RESULTS; LACK OF BACKLOG; VOLATILITY OF STOCK PRICE
Results of operations have fluctuated and may continue to fluctuate
significantly from quarter to quarter. Factors which have had an influence on
and may continue to influence the Company's results of operations in a
particular quarter include the size and timing of customer orders and subsequent
shipments, customer order deferrals in anticipation of new products and
services, timing of product introductions or enhancements by the Company or its
competitors, market acceptance of new products and services, technological
changes in the industry, competitive pricing pressures, accuracy of customer
forecasts of end-user demand, changes in the Company's operating expenses,
personnel changes, foreign currency fluctuations, changes in the mix of products
sold, quality control of products sold, disruption in sources of supply, capital
spending, delays of payments by customers and general economic conditions.
Product sales to the Company's customers typically involve long approval and
procurement cycles and can involve large purchase commitments. Accordingly,
cancellation or deferral of one or a small number of orders could cause
significant fluctuations in the Company's quarterly results of operations.
Because the Company generally ships products within a short period after
receipt of an order, the Company typically does not have a material backlog of
unfilled orders, and revenues in any quarter are substantially dependent on
orders booked in that quarter. The Company's expense levels are based in large
part on anticipated future revenues and are relatively fixed in the short-term.
Therefore, the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected shortfall of orders. Accordingly, any significant
shortfall of demand in relation to the Company's expectations or any material
delay of customer orders would have an almost immediate adverse impact on the
Company's business and results of operations.
The Company expects to continue to evaluate new product and service
opportunities and engage in extensive research and development activities. This
will require the Company to continue to invest in research and development and
sales and marketing, which could adversely affect short-term results of
operations. The Company believes that its future revenue growth and
profitability will principally depend on its success in developing new products
and services. Failure to increase revenues from new products and services,
whether due to lack of market acceptance, competition, technological change or
otherwise, would have a material adverse effect on the Company's business and
quarterly results of operations.
As a result, the Company believes that period-to-period comparisons of its
revenues and results of operations are not necessarily meaningful and should not
be relied upon as indicators of future performance. Due to the aforementioned
factors, among others, it is possible that the Company's operating results will
be below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock could significantly decline. In
addition, the market price for the Company's Common Stock has been volatile and
in the future could be adversely affected. Market fluctuations may adversely
affect the market price of the Company's Common Stock without regard to the
operating performance of the Company. In addition, the Company believes that
factors such as announcements of developments related to the Company's business,
fluctuations in the Company's results of operations, sales of substantial
amounts of securities of the Company into the marketplace, general conditions in
the Company's industries or the worldwide economy, an outbreak of hostilities, a
shortfall in revenues or earnings compared to analysts' expectations, changes in
analysts' recommendations or projections, announcements of new products by the
Company or its competitors or developments in the Company's relationships with
its suppliers or customers could cause the price of the Company's Common Stock
to fluctuate in the future, perhaps substantially. There can be no assurance
that the market price of the Company's Common Stock will not experience
significant fluctuations in the future, including fluctuations that are
unrelated to the Company's performance. General market price declines or market
volatility in the future could adversely affect the market price of the Common
Stock, and the current market price of the Common Stock may not be indicative of
future market prices.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS
There can be no assurance that the Company's future development efforts
will result in commercially successful products or that the Company's products
and services will not be rendered obsolete by changing technology, new industry
standards or new product announcements by competitors. The markets for the
Company's products and services are characterized by intense competition, rapid
technological advances, evolving industry standards, changes in end-user
requirements, frequent new product introductions and enhancements, and rapidly
evolving, alternative service offerings. If technologies or standards applicable
to the Company's products or service offerings become obsolete or fail to gain
widespread commercial acceptance, then the Company's business and results of
operations will be materially adversely affected. Moreover, the introduction of
products embodying new technology or the emergence of new industry standards
could render the Company's existing products, as well as products under
development, obsolete and unmarketable.
The Company's past sales have resulted, to a significant extent, from its
ability to anticipate changes in technology and industry standards, and to
develop and introduce new and enhanced products and service offerings. The
Company's continued ability to adapt to such changes will be a significant
factor in maintaining or improving its competitive position and its prospects
for growth. Due to rapid technological changes in the Internet,
telecommunication and document imaging industries, the lengthy product approval
and purchase processes of the Company's customers and the Company's reliance on
third-party technology for the development of new products and service
offerings, however, there can be no assurance that the Company will successfully
introduce new products and services on a timely basis or achieve sales of new
products and services in the future. In addition, there can be no assurance that
the Company will have the financial and manufacturing resources necessary to
continue to successfully develop new products based on emerging technology or to
otherwise successfully respond to changing technology and/or industry standards.
Moreover, due to intense competition, there may be a time-limited market
opportunity for the Company's cable-based consumer and business Internet
services. There can be no assurance that the Company will be successful in
achieving widespread acceptance of its services before competitors offer
products and services with speed and performance similar to the Company's
current offerings.
DEPENDENCE ON THE INTERNET; SECURITY RISKS; GOVERNMENT REGULATION
Market acceptance of the Company's Internet services is substantially
dependent upon the adoption of the Internet for communications, entertainment
and commerce. In addition, critical issues concerning the commercial use of the
Internet remain unresolved and may affect the growth of Internet use, especially
in the business and consumer markets targeted by the Company. Despite growing
interest in the commercial possibilities for the Internet, many businesses and
consumers have been deterred from purchasing Internet access services for a
number of reasons, including inconsistent quality of service, lack of
availability of cost-effective, high-speed service, a limited number of local
access points for corporate users, inability to integrate business applications
on the Internet, the need to deal with multiple and frequently incompatible
vendors, inadequate protection of the confidentiality of stored data and
information moving across the Internet and a lack of tools to simplify Internet
access and use. The adoption of the Internet for commerce and communications,
particularly by those individuals and enterprises that have historically relied
upon alternative means of commerce and communication, generally requires
understanding and acceptance of a new way of conducting business and exchanging
information. In particular, enterprises that have already invested substantial
resources in other means of conducting commerce and exchanging information, or
in relationships with other Internet service providers ("ISPs"), may be
reluctant and slow to adopt a new strategy that may make their existing
personnel, infrastructure and Internet service provider relationship obsolete.
If the market fails to develop, develops more slowly than expected or market
competition increases, the Company's business, operating results and financial
condition may be materially adversely affected.
Despite the implementation of security measures, the Company's or the
Company's cable affiliates' networks may be vulnerable to unauthorized access,
computer viruses and other disruptive problems. Internet service providers and
online service providers have in the past experienced, and may in the future
experience, interruptions in service as a result of the accidental or
intentional actions of Internet users, current and former employees or others.
Unauthorized access could also potentially jeopardize the security of
confidential information stored in the computer systems of the Company and its
subscribers, which may result in liability of the Company to its subscribers and
also may deter potential subscribers. Although the Company intends to continue
to implement industry-standard security measures, such measures have been
circumvented in the past, and there can be no assurance that measures
implemented by the Company will not be circumvented in the future. Moreover, the
Company has no control over the security measures that the Company's cable
affiliates adopt. Eliminating computer viruses and alleviating other security
problems may require interruptions, delays or cessation of service to the
Company's subscribers, which could have a material adverse effect on the
Company's business, operating results and financial condition.
Although the Company's services are not directly subject to current
regulations of the Federal Communications Commission ("FCC") or any other
federal or state communications regulatory agency, changes in the regulatory
environment relating to the Internet connectivity and the telecommunications
markets, including regulatory changes that, directly or indirectly, affect
telecommunications costs, limit usage of subscriber-related information or
increase the likelihood or scope of competition from the Regional Bell Operating
Companies ("RBOCs") or other telecommunications companies, could affect the
prices at which the Company may sell its services. For example, proposed
regulations by the FCC would require discounted Internet connectivity rates for
schools and libraries, which would limit revenues without reducing related
costs. The Company cannot predict the impact, if any, that future regulation or
regulatory changes might have on its business. In addition, regulation of cable
television rates may affect the speed at which the Company's cable affiliates
upgrade their cable infrastructures to two-way hybrid fiber coaxial cable
("HFC"). Currently, the Company's cable affiliates have generally elected to
classify the distribution of the Company's services as "additional cable
services" under their respective franchise agreements, and to pay franchise fees
in accordance therewith. Local franchise authorities may attempt to subject the
cable affiliates to higher or other franchise fees or taxes or otherwise seek to
require them to obtain additional franchises in connection with their
distribution of the Company's services. There are thousands of franchise
authorities in the United States alone, and thus it will be difficult or
impossible for the Company or its cable affiliates to operate under a unified
set of franchise requirements. It is possible that governmental authorities may
attempt to impose additional fees or regulations on cable affiliates carrying
the Company's services. In the event that the FCC or another governmental
agency were to classify the cable system operators as "common carriers" of
Internet services, or cable system operators were to seek such classification as
a means of protecting themselves against liabilities, the Company's rights as
the exclusive Internet Service Provider over the systems of certain of the cable
affiliates could be lost. In addition, if the Company or its cable affiliates
were classified as common carriers, they could be subject to government-
regulated tariff schedules for the amounts they could charge for their services.
To the extent the Company increases the number of foreign jurisdictions in which
it offers its services, the Company will be subject to additional governmental
regulation. Any future implementation of any of the aforementioned regulations,
or any other regulation not necessarily discussed herein, could have a material
adverse effect on the Company's business, operating results and financial
condition.
In addition, the Company's business and results of operations may also be
adversely affected by the imposition of certain tariffs, duties and other import
restrictions on components which the Company obtains from non-domestic
suppliers. Changes in or future laws or regulations, in the U.S. or elsewhere,
could materially adversely affect the Company's business and results of
operations.
NEED FOR ADDITIONAL FINANCING
The Company must continue to enhance and expand its product and service
offerings in order to maintain its competitive position and increase its market
share. As a result, the continuing operations of the Company's business may
require substantial capital infusions. Whether or when the Company can achieve
cash flow levels sufficient to support its operations, its development of new
products and services, and its expansion of its Internet business cannot be
accurately predicted. Unless such cash flow levels are achieved, the Company
will require additional borrowings or the sale of debt or equity securities, or
some combination thereof, to provide funding for its operations. In December
31, 1997, the Company completed a private placement of Series A Convertible
Preferred Stock for $5 million to fund its expansion of the Company's Internet
business. In the event that the Company cannot generate sufficient cash flow
from its operations, or is unable to borrow or otherwise obtain additional funds
to finance its operations when needed, the Company's financial condition and
results of operations could be adversely affected.
COMPETITION
The markets for the Company's products and services are intensely
competitive and the Company expects competition to increase in the future. Many
of the Company's competitors and potential competitors have greater financial,
technological, manufacturing, marketing and human resources than the Company.
Any increase in competition could reduce the Company's gross margin, require
increased spending by the Company on research and development and sales and
marketing, and otherwise materially adversely affect the Company's business and
results of operations. In the document management industry, the Company competes
on the basis of breadth of offering different document management solutions,
cost, flexibility, and customer service. The Company has a number of direct
competitors, including Anacomp and Mobius. These competitors have longer
operating histories, greater name recognition, and significantly greater
financial, technical, and marketing resources than the Company. In the
telecommunications industry the Company competes on the basis of customer
service, flexibility and breadth of offering different technological products
and solutions. The Company competes with Lucent Technologies, Inc., Northern
Telecom, Siemens and the RBOCs. These competitors have longer operating
histories and significantly greater financial, technical, marketing, and other
resources, as well as greater name recognition, than the Company. In addition,
the RBOCs are currently subject to a variety of government regulations limiting
the manufacture, marketing and sale of certain products and services in the
telecommunications market. If any of these restrictions were to be eliminated or
lessened, the Company's business could be materially adversely affected.
Furthermore, the markets for the Company's Internet products and services are
considered to be especially competitive and the Company expects this competition
to intensify in the future. Some of the Company's most direct competitors in the
access markets are Internet Service Providers, national long distance carriers
and local exchange carriers, wireless service providers, and Internet content
aggregators. Several competitors in this area are AT&T, BBN Corporation,
Earthlink Network, Inc., Netcom On-Line Communications Services, Inc., PSInet
Inc. and WorldCom, Inc., who provide basic Internet access to residential
consumers and businesses, generally using existing telephone network
infrastructures. This method is widely available and inexpensive. Barriers to
entry are low, resulting in a highly competitive and fragmented market. Some of
the Company's competitors are offering diversified packages of
telecommunications services, including Internet access service, to residential
customers and could bundle such services together, which could place the Company
at a competitive disadvantage. Many of these competitors are offering (or may
soon offer) technologies that will attempt to compete with some or all of the
Company's high-speed data service offerings. The bases of competition in these
markets include transmission speed, reliability of service, ease of access,
price/performance, ease-of-use, content quality, quality of presentation,
timeliness of content, customer support, brand recognition, operating experience
and revenue sharing. The Company also competes with other cable-based data
services that are seeking to contract with cable system operators to bring their
services into geographic areas that are not covered by an exclusive relationship
between the Company and its cable affiliates. The Company's competitors in the
cable-based services market are those cable companies that have developed their
own cable-based services and market those services to unaffiliated cable system
operators that are planning to deploy data services and with which the Company
would like to work. Several cable system operators, including TCI, Cox, Comcast,
Time Warner Inc. and the Continental Cablevision have deployed high-speed
Internet access services over their existing local hybrid fiber coaxial cable
networks. TCI, Cox and Comcast market through @Home while Time Warner plans to
market the Road Runner service through Time Warner's own cable systems as well
as to other cable system operators nationwide. Many of the Company's
competitors and potential competitors have substantially greater financial,
technical and marketing resources, larger subscriber bases, longer operating
histories, greater name recognition and more established relationships with
advertisers and content and application providers than the Company. Such
competitors may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and devote substantially more resources to
developing Internet services or on-line content than the Company. There can be
no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures faced by the Company
will not materially adversely affect the Company's business, operating results
or financial condition. Further, as a strategic response to changes in the
competitive environment, the Company may make certain pricing, service or
marketing decisions or enter into acquisitions or new ventures that could have a
material adverse effect on the Company's business, operating results or
financial condition.
DEPENDENCE ON THIRD-PARTY TECHNOLOGY
Some of the Company's products and service offerings incorporate technology
developed and owned by third parties. Consequently, the Company must rely upon
third parties to develop and introduce technologies which enhance the Company's
current products and enable the Company, in turn, to develop its own products on
a timely and cost-effective basis to meet changing customer needs and
technological trends in its industries. Any impairment or termination of the
Company's relationship with any licensers of third-party technology would force
the Company to find other developers on a timely basis or develop its own
technology. There can be no assurance that the Company will be able to obtain
the third-party technology necessary to continue to develop and introduce new
and enhanced products, that the Company will obtain third-party technology on
commercially reasonable terms or that the Company will be able to replace
third-party technology in the event such technology becomes unavailable,
obsolete or incompatible with future versions of the Company's products. The
absence of or any significant delay in the replacement of third-party technology
would have a material adverse effect on the Company's business and results of
operations.
EXCLUSIVITY CONTRACTS; DEPENDENCE ON SOLE SUPPLIERS
Certain key products resold by the Company are currently contracted
exclusively for distribution in certain of the Company's markets. For instance,
the Company's telecommunications division currently maintains an exclusivity
contract with Executone Information Systems, Inc., for the resale of their
products in each of their defined markets. For the year ended September 30,
1997, such products accounted for approximately 30% of the Company's
telecommunications business revenues, or 13% of the Company's total revenues.
Any change in the exclusivity provisions of these types of contracts, or loss
thereof, could have a materially adverse effect on the Company and its results
of operations.
In the Company's manufacturing operations, certain key components may be
available to the Company only through a limited number of suppliers. There can
be no assurance that delays in key components or product deliveries will not
occur in the future due to shortages resulting from the limited number of
suppliers, the financial or other difficulties of such suppliers or the possible
limited availability in the suppliers underlying raw materials. The inability to
obtain sufficient key components or to develop alternative sources for such
components, if and as required in the future, could result in delays or
reductions in product shipments, which in turn could have a material adverse
effect on the Company's customer relationships, its business and its results of
operations.
ABILITY TO EXPAND INTERNET BUSINESS
The Company's current strategy for growth is to focus on expanding its
Internet business. As the Company recently entered the Internet business with
its acquisition of MCW in June 1996, it has very limited operating history in
this area and consequently has limited experience in the Internet business. The
successful expansion of the Company's Internet business will require strategies
and operations that are different from those historically used by the Company in
connection with its two other business segments. There can be no assurance that
the Company will be able to develop or maintain strategies and business
operations that are necessary to increase the revenues of the Company's Internet
business. The Company's ability to manage and expand its Internet business will
require the Company to continue to improve its operational, management and
financial systems and controls and to train, motivate and manage its employees
in an industry in which it has very limited operating history. Consequently,
such expansion could place a significant strain on the Company's services and
support operations, sales and administrative personnel and other resources. As
a result, the Company is subject to certain expansion-related risks, including
the risk that it will be unable to retain the necessary personnel or acquire the
experience and other resources necessary to service such expansion adequately.
RISKS ASSOCIATED WITH ACQUISITIONS
As part of the Company's strategy to enhance and maintain its competitive
position, the Company has previously consummated several acquisitions and
continues to evaluate potential acquisitions of businesses, products and
technologies. In considering an acquisition, the Company may compete with other
potential acquirors, many of whom may have greater financial and operational
resources. Further, the evaluation, negotiation, and integration of such
acquisitions may divert significant time and resources of the Company,
particularly of management. There can be no assurance that suitable acquisition
candidates will be identified, that any acquisitions can be consummated or that
any acquired businesses or products can be successfully integrated into the
Company's operations. In addition, there can be no assurance that the previous
acquisitions or any future acquisitions will not have a material adverse effect
upon the Company, particularly in the fiscal quarters immediately following the
consummation of such transactions due to operational disruptions, unexpected
expenses and accounting charges which may be associated with the integration of
such acquisitions.
PROPRIETARY TECHNOLOGY; RISK OF THIRD-PARTY CLAIMS OF INFRINGEMENT
To develop and maintain its competitive position, the Company relies
primarily upon the technical expertise and creative skills of its personnel,
confidentiality agreements and, to some degree, patents and copyrights. The
Company owns patents and has license rights to certain patents held by third
parties. These patents and patent rights relate to aspects of the technology
used in certain of the Company's products and services. Successful litigation
against the Company regarding its patents or patent rights, or infringement by
the Company of the patent rights of others, could have a material adverse effect
on the Company's business. There can be no assurance that patents issued to or
licensed by the Company will not be challenged or circumvented by competitors or
be found to be sufficiently broad to protect the Company's technology or to
provide it with any competitive advantage. Moreover, the Company's business and
results of operations may be materially adversely affected by competitors who
independently develop substantially equivalent technology. In addition, there
can be no assurance that confidentiality agreements will not be breached or that
the Company will have adequate remedies for any such breach. The Company's
competitive industries may be affected by an increasing number of patents and
frequent litigation based on allegations of patent and other intellectual
property infringement. To the knowledge of the Company there are no such claims
pending against or involving the Company. There can be no assurance that third
parties will not assert infringement claims against the Company in the future,
that assertions by such parties will not result in costly litigation, or that
the Company would prevail in any such litigation or be able to license any valid
and infringed patents from third parties on commercially reasonable terms.
Further, such litigation, regardless of its outcome, could result in substantial
costs to and diversion of effort by the Company. Any infringement claim or other
litigation against or by the Company could have a material adverse effect on the
Company's business and results of operations. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights to the same
extent as U.S. law.
PRODUCT LIABILITY
Some of the Company's products, such as those sold by the document
management division, are used to provide information that relates to the
customer's enterprise operations and information that may be used in other
critical applications. Any failure by the Company's products to provide accurate
and timely information could result in claims against the Company. The Company
maintains insurance to protect against claims associated with the use of its
products, but there can be no assurance that its insurance coverage would
adequately cover any claim asserted against the Company. A successful claim
brought against the Company in excess of its insurance coverage could have a
material adverse effect on the Company. Even unsuccessful claims could result in
the Company's expenditure of funds in litigation and management time and
resources. There can be no assurance that the Company will not be subject to
product liability claims, that such claims will not result in liability in
excess of its insurance coverage or that the Company's insurance will cover such
claims or that appropriate insurance will continue to be available to the
Company in the future at commercially reasonable rates.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent, in part, on its ability to attract
and retain qualified technical, marketing, sales and management personnel.
Competition for such personnel is intense and the Company's inability to attract
and retain additional key employees or the loss of one or more of its current
key employees could materially adversely affect the Company's business and
results of operations. There can be no assurance that the Company will be
successful in hiring or retaining key personnel.
RISKS DUE TO EXPANDING INTERNATIONAL OPERATIONS
Sales outside of the United States accounted for approximately 12% and 13%
of the Company's total revenues for fiscal years 1997 and 1996, respectively.
Sales to foreign customers in the fiscal years 1997 and 1996 have been
attributable primarily to the document management division. Further development
of foreign distribution channels by all of the Company's divisions, covering
potentially all of the Company's products and services, could require a
significant investment by the Company, which could adversely affect short-term
results of operations. The Company believes that its future revenue growth and
profitability in the foreign markets will principally depend on its success in
developing these new distribution channels. Failure to increase revenues from
the introduction of new products and services to these markets, could have a
material adverse effect on the Company's business. Due to its export sales, the
Company is subject to the risks of conducting business internationally,
including unexpected changes in regulatory requirements, foreign currency
fluctuations which could result in reduced revenues or increased operating
expenses, tariffs and trade barriers, potentially longer payment cycles,
difficulty in accounts receivable collection, foreign taxes, and the burdens of
complying with a variety of foreign laws and trade standards. To date, the
Company's contracts have all been denominated in U.S. currency, and therefore
the Company has not suffered transaction losses due to foreign currency
fluctuations. This may not be the case in the future as the Company further
develops its foreign distribution channels. Similarly, the Company has not
previously engaged in hedging with respect to any foreign currency exposure but
may do so in the future. The Company also is subject to general geopolitical
risks, such as political and economic instability and changes in diplomatic and
trade relationships, in connection with its international operations. In
addition, the laws of certain foreign countries may not protect the Company's
proprietary technology to the same extent as do the laws of the U.S. There can
be no assurance that the risks associated with the Company's international
operations will not materially adversely affect the Company's business and
results of operations in the future or require the Company to modify
significantly its current business practices.
CONVERTIBLE SECURITIES; SHARES ELIGIBLE FOR FUTURE SALE; DILUTION
Sales of substantial amounts of the shares of Common Stock currently
issued, issuable upon conversion or the exercise of securities convertible into
or exercisable for Common Stock or of the shares of Common Stock offered hereby
could adversely affect the market value of the Common Stock, depending upon the
timing of such sales, and, in the case of convertible and exercisable
securities, may effect a dilution of the book value per share of Common Stock.
As of December 31, 1997, 5,000 shares of the Company's Convertible
Preferred Stock were issued and outstanding. Each share of the Convertible
Preferred stock is convertible into such number of shares of Common Stock as is
determined by dividing the stated value ($1,000) of the shares of Convertible
Preferred Stock (as such value is increased by a premium of five percent (5%)
per annum based on the number of days the Convertible Preferred Stock is held)
by the then current conversion price (which is determined in accordance with the
Certificate of Designation for the Convertible Preferred Stock and is the lower
of $8.28 per share or an amount based upon the current market price of the
Common Stock over a certain trading period). If a conversion had been requested
on January 28, 1998, the Convertible Preferred Stock would have been convertible
into approximately 803,988 shares of Common Stock. Depending on market
conditions at the time of conversion, the number of shares issuable could prove
to be significantly greater in the event of a decrease in the market price of
the Common Stock. Purchasers of Common Stock could therefore experience
substantial dilution upon conversion of the Convertible Preferred Stock. The
shares of Common Stock into which the Convertible Preferred Stock may be
converted are being registered pursuant to this Registration Statement.
As of December 31, 1997, approximately 4,308,352 shares of Common Stock
were reserved for issuance upon exercise of outstanding warrants and options,
the conversion of the Company's Convertible Preferred Stock and pursuant to the
Company's employee and director stock option plans. At December 31, 1997, there
were 6,970,546 shares of Common Stock outstanding, nearly all of which were
freely tradeable without restriction under the Securities Act unless held by
affiliates.
THE SELLING SHAREHOLDERS
The following table sets forth certain information regarding the Selling
Shareholders, including (i) the name of each Selling Shareholder, (ii) the
number of Shares beneficially owned by each Selling Shareholder as of December
31, 1997, and (iii) the maximum number of Shares which may be offered hereby.
The information presented is based on data furnished to the Company by the
Selling Shareholders. Percentage ownership is based upon 6,970,546 shares of
Common Stock outstanding on December 31, 1997.
The number of shares that may be actually sold by each Selling Shareholder
will be determined by such Selling Shareholder. Because each Selling
Shareholder may sell all, some or none of the shares of Common Stock which each
holds, and because the offering contemplated by this Prospectus is not currently
being underwritten, no estimate can be given as to the number of shares of
Common Stock that will be held by the Selling Shareholders upon termination of
the offering.
Pursuant to Rule 416 of the Securities Act, Selling Shareholders may also
offer and sell additional shares of Common Stock issued with respect to warrants
and the Convertible Preferred Stock as a result of stock splits, stock dividends
and anti-dilution provisions (including by reason of the floating rate
conversion price mechanism of the Convertible Preferred Stock in accordance with
the terms thereof).
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
PRIOR TO SHARES BEING
OFFERING OFFERED
Number Percent
<S> <C> <C> <C>
RGC International Investors, LDC . . . . . . . . . . . . . 1,543,412(1) 18.1% 1,543,412(1)
John Jellinek . . . . . . . . . . . . . . . . . . . . . . . 378,102(2) 5.4% 251,500(3)
Joseph Rich . . . . . . . . . . . . . . . . . . . . . . . . 370,484(4) 5.3% 113,500(5)
Compania Di Investimento Italiani . . . . . . . . . . . . . 200,000(5) 2.8% 200,000
Forsythe/McArthur . . . . . . . . . . . . . . . . . . . . . 109,000(5) 1.6% 109,000
Robert G. Lamphere . . . . . . . . . . . . . . . . . . . . 143,507(6) 2.1% 45,500(5)
Charles R. Lamphere . . . . . . . . . . . . . . . . . . . . 121,004(6) 1.7% 45,500(5)
Alpine Capital Partners, Inc. . . . . . . . . . . . . . . . 50,000(7) * 50,000
Miami University Foundation . . . . . . . . . . . . . . . . 50,000 * 50,000
John G. Hamm . . . . . . . . . . . . . . . . . . . . . . . 44,430(8) * 15,000
Christopher Moore . . . . . . . . . . . . . . . . . . . . . 2,225(5) * 2,225
Donald Asher . . . . . . . . . . . . . . . . . . . . . . . 37,200(9) * 26,000(5)
Alfred Ziegler . . . . . . . . . . . . . . . . . . . . . . 30,522(6) * 30,508(5)
E. Forbes Gordon . . . . . . . . . . . . . . . . . . . . . 30,000(6) * 20,000(5)
Willard Aaron . . . . . . . . . . . . . . . . . . . . . . . 21,800(5) * 21,800
BWJ Partnership . . . . . . . . . . . . . . . . . . . . . . 21,800(5) * 21,800
Jeannette Von Witzenburg . . . . . . . . . . . . . . . . . 20,000(10) * 20,000
CGRM Partnership . . . . . . . . . . . . . . . . . . . . . 13,080(5) * 13,080
Michael I. Cleary . . . . . . . . . . . . . . . . . . . . . 5,995(5) * 5,995
David Prokupek . . . . . . . . . . . . . . . . . . . . . . 5,995(5) * 5,995
Timothy P. Reiland . . . . . . . . . . . . . . . . . . . . 5,450(5) * 5,450
Christopher Barnes . . . . . . . . . . . . . . . . . . . . 2,180(5) * 2,180
Harlan P. Kleiman . . . . . . . . . . . . . . . . . . . . . 12,800(5) * 12,800
Michael Sweeney . . . . . . . . . . . . . . . . . . . . . . 8,400(5) * 8,400
Robert Rubin . . . . . . . . . . . . . . . . . . . . . . . 7,000(5) * 7,000
David Slater . . . . . . . . . . . . . . . . . . . . . . . 7,000(5) * 7,000
Frank H. Jellinek, Jr. . . . . . . . . . . . . . . . . . . 1,000(5) * 1,000
Russell Jeppesen . . . . . . . . . . . . . . . . . . . . . 1,000(5) * 1,000
Phillip Kenny . . . . . . . . . . . . . . . . . . . . . . . 178,102(11) * 51,500(5)
Irene F. Jellinek . . . . . . . . . . . . . . . . . . . . . 2,500(12) * 2,500
David Garbus . . . . . . . . . . . . . . . . . . . . . . . 1,000 * 1,000
Sean Kenlon . . . . . . . . . . . . . . . . . . . . . . . . 3,500(5) * 3,500
James L. Kropf . . . . . . . . . . . . . . . . . . . . . . 3,000(5) * 3,000
Steven Lamar . . . . . . . . . . . . . . . . . . . . . . . 2,400(5) * 2,400
D&K Stores . . . . . . . . . . . . . . . . . . . . . . . . 43,600(5) * 43,600
Brian Feuer . . . . . . . . . . . . . . . . . . . . . . . . 2,000(5) * 2,000
Mark Rabkin . . . . . . . . . . . . . . . . . . . . . . . . 1,875(5) * 1,875
Joshua Breen . . . . . . . . . . . . . . . . . . . . . . . 1,000(5) * 1,000
Thomas Griesel . . . . . . . . . . . . . . . . . . . . . . 800(5) * 800
* Less than 1%.
(1) Includes 150,000 shares of Common Stock issuable upon exercise of the RGC Warrants and 1,393,412 shares of Common Stock
issuable upon conversion of Convertible Preferred Stock. The actual number of shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock is indeterminate, and is subject to adjustment and could be materially less
or more than the 1,393,412 set forth above depending on factors which cannot be predicted by the Company at this time,
including, among other factors, the future market price of the Common Stock. The 1,393,412 shares of Common Stock
included in the Selling Shareholders table represents a good faith estimate of the number of shares of Common Stock that
are issuable upon conversion of the Convertible Preferred Stock (including shares issuable as a result of payment of
premiums in Common Stock or as a result of conversion default or other default payments). Pursuant to Rule 416 under the
Securities Act, the actual number of shares offered hereby, and included in the Registration Statement of which this
prospectus forms a part, includes, such additional number of shares of Common Stock as may be issued or issuable upon
conversion of the Convertible Preferred Stock by reason of the floating rate conversion price mechanism or other
adjustment mechanisms described therein, or by reason of any stock split, stock dividend or similar transaction involving
the Common Stock, in order to prevent dilution. Pursuant to the terms of the Certificate of Designation for the
Convertible Preferred Stock, the actual number of shares of Common Stock issuable upon conversion of the Convertible
Preferred Stock will equal (i) the aggregate stated value of the shares of Convertible Preferred Stock then being
converted (i.e., $1,000 per share), plus a premium in the amount of 5% per annum accruing cumulatively from December 31,
1997, through the date of conversion (unless the Company chooses to pay such premium in cash or additional shares of
Convertible Preferred Stock), divided by (ii) a conversion price equal to the lower of $8.28 per share and the lowest
two-day average closing price of the Common Stock (as determined in accordance with the Certificate of Amendment
designating the Convertible Preferred Stock) during a specified 20-day trading period immediately prior to such
conversion (subject to adjustment in accordance with the Certificate of Amendment designating the Convertible Preferred
Stock). Except under certain limited circumstances, the Convertible Preferred Stock is not convertible to the extent
that the shares to be received upon such conversion or exercise would equal or exceed 20% of the outstanding Common
Stock. Therefore, the number of shares set forth herein and which a stockholder may sell pursuant to this Prospectus may
exceed the number of shares of Common Stock such stockholder would otherwise beneficially own as determined pursuant to
Section 13(d) of the Exchange Act. Pursuant to the terms of the Convertible Preferred Stock, the shares of Convertible
Preferred Stock are convertible by any holder only to the extent that the number of shares of Common Stock thereby
issuable, together with the number of shares of Common Stock owned by such holder and its affiliates (but not including
shares of Common Stock underlying unconverted shares of Convertible Preferred Stock) would not exceed 4.99% of the then
outstanding Common Stock as determined in accordance with Section 13(d) of the Exchange Act unless such stockholder
notifies the Company of its intent to convert an amount of Convertible Preferred Stock that causes such stockholder to
own more than 4.99% of the Common Stock at least sixty-one days prior to the date of such conversion. Accordingly, the
number of shares of Common Stock set forth in the table for this Selling Shareholder exceeds the number of shares of
Common Stock that this Selling Shareholder beneficially owns as of December 31, 1997. In that regard, beneficial
ownership of this Selling Shareholder set forth in the table is not determined in accordance with Rule 13d-3 under the
Exchange Act.
(2) Includes (i) 200,000 shares of Common Stock held by Jelco Ventures, Inc., (ii) 126,602 shares of Common Stock held by
Jelken LLC, and (iii) 51,500 shares of Common Stock issuable upon exercise of stock purchase warrants held by Jelken LLC.
Mr. Jellinek shares voting power with Phillip Kenny for all shares held by Jelken LLC.
(3) Includes 200,000 shares of Common Stock held by Jelco Ventures, Inc. and 51,500 shares of Common Stock issuable upon
exercise of stock purchase warrants held by Jelken LLC.
(4) Includes 113,500 shares issuable upon exercise of warrants.
(5) Consists of shares issuable upon exercise of stock purchase warrants.
(6) Includes shares issuable upon exercise of stock purchase warrants.
(7) Consists of shares issuable upon exercise of warrants held by Alpine Capital Partners, Inc. for which Evan Bines has full
voting and dispositive power.
(8) Includes 29,430 shares of Common Stock held jointly with his wife.
(9) Includes (i) 26,000 shares issuable upon exercise of stock purchase warrants that are held by DF Investments, for which
Mr. Asher has full voting and dispositive power, (ii) 5,600 shares held by Mr. Asher's wife, and (iii) 5,600 shares held
by Mr. Asher.
(10) Consists of shares issuable upon exercise of stock purchase warrants held in trust under which Ms. Van Witzenburg, as
trustee, has full dispositive and voting power.
(11) Consists of the shares described in note (2)(ii) and (iii) above.
(12) Consists of shares issuable upon exercise of stock purchase warrant held in trusts under which Ms. Jellinek, as trustee,
has full dispositive and voting power.
</TABLE>
RELATIONSHIPS WITH THE COMPANY
On December 31, 1997, Registrant issued to RGC International Investors, LDC
("RGC"), 5,000 shares of Convertible Preferred Stock and warrants to purchase
150,000 shares of Common Stock ("RGC Warrants") pursuant to a Securities
Purchase Agreement. The Convertible Preferred Stock is convertible at a price
based upon the market price for the Common Stock during the trading period
preceding conversion but not more than $8.28 per share. The RGC Warrants are
exercisable at $7.95 per share. Any Convertible Preferred Stock outstanding on
December 31, 2000 will be automatically converted into Common Stock and the RGC
Warrants expire on December 31, 2001. The RGC Warrants require adjustments of
the exercise price and the number of shares of Common Stock issuable if the
Company issues additional shares of Common Stock (other than pursuant to
presently outstanding warrants and other convertible securities, as well as
under Board approved employee/director option plans) at prices less than the
then market price. The Convertible Preferred Stock is subject to mandatory
redemption, at 118% of stated value per share ($1,000), and the Company is
subject to penalties, under a variety of circumstances, including failure to
list the underlying Common Stock on the American Stock Exchange and failure to
register the resale of the underlying Common Stock under the Securities Act. At
the Company's option, the Convertible Preferred Stock may be redeemed after
December 31, 1998 at the greater of Parity Value (as defined therein) or 130% of
its stated value. The Convertible Preferred Stock is entitled to dividends, at
the rate of 5% per annum, payable in cash or, at the Company's election, in
additional shares of Convertible Preferred Stock. Pursuant to the Securities
Purchase Agreement, the Company has filed with the Commission a Registration
Statement on Form S-3, of which this Prospectus forms a part, with respect to
the resale of the shares issued to RGC and Shoreline and agreed to use its best
efforts to keep such Registration Statement effective until such date as all of
the shares have been resold, or such time as all of the shares held by RGC can
be sold immediately without compliance with the registration requirement of the
Securities Act, pursuant to Rule 144 or otherwise. The sale of the Preferred
Stock and the RGC Warrants was arranged by Shoreline Pacific Institutional
Finance, the Institutional Division of Financial West Group ("Shoreline"), who
received a fee of $250,000 plus warrants, exercisable at $6.625 and expiring on
December 31, 2000, to purchase 20,000 shares of Common Stock. The warrants
issued to Shoreline have been allocated among Messrs. Kleiman, Kropf, Lamar and
Griesel.
Mr. Hamm has been a director of the Company since 1985. At September 30,
1994, the Company was owed approximately $4.1 million plus accrued interest by
Ozite Corporation ("Ozite"). John G. Hamm held a substantial interest in
Ozite. Mr. Hamm was a director of Ozite from 1984 to 1994, Vice President-
Finance of Ozite from 1990 to 1994 and a director of Plastic Specialties &
Technologies, Inc. ("PST"), a majority-owned subsidiary of Ozite, from 1993
to January 1996. Due to uncertainties about collecting these funds, the
receivable from Ozite was written off and charged against earnings in 1991.
On July 26, 1995, Ozite shareholders approved a merger of Ozite with Pure
Tech International, Inc. ("Pure Tech") with Pure Tech being the surviving
corporation. As a condition of the merger, Ozite was required to secure a
general release from the Company and to surrender certain securities in
satisfaction of the amount owed to the Company. As a result, the Company
received 311,025 shares of Pure Tech common stock, 267,203 shares of ARTRA
Group Incorporated ("ARTRA") Common Stock, and approximately 932 shares of
ARTRA Preferred Stock. Subsequently, the Company sold all 311,025 shares of
Pure Tech for net proceeds of $1,027,466. During fiscal 1996, the remaining
securities consisting of ARTRA Common Stock and ARTRA Preferred Stock were
sold for net proceeds of $815,000, which were recorded as a capital
contribution.
In 1994, the Board voted to compensate Mr. Hamm $150,000 for previously
uncompensated services as a consultant rendered to the Company over the prior
ten years. During that period, Mr. Hamm coordinated the preparation of public
filings made by the Company, reviewed acquisition proposals and was involved in
investor relations. The Board authorized Mr. Hamm to receive (i) $100,000 in
cash, and (ii) either $50,000 in shares of Common Stock (10,000 shares) or 10
year warrants to purchase 16,667 shares of Common Stock at $5.00 per share, as
Mr. Hamm elects. In May 1996, the Company paid Mr. Hamm $77,000 and signed a
promissory note for $88,000 payable in equal monthly installments of $15,000
beginning June 1, 1996. The cash payment and the promissory note fulfilled the
Company's entire obligation to Mr. Hamm. At the Company's request, payments to
Mr. Hamm were suspended on September 1, 1996 due to cash flow constraints. At
September 30, 1996, the unpaid compensation was $44,500. Payments to Mr. Hamm
resumed in fiscal 1997, and the Company's entire obligation to Mr. Hamm, with
respect to his unpaid compensation, was satisfied as of January 1998. In
connection with these payments, Mr. Hamm exercised his stock purchase warrants
to purchase 15,000 shares of Common Stock.
Mr. Jellinek was the Chief Executive Officer of the Company from June 1993
to September 1996 and a director of the Company from June 1993 to December
1996. Mr. Kenny was a director of the Company from June 1993 to December
1996. In December 1997, Communicate Direct, Inc., a wholly-owned subsidiary
of the Company ("CDI"), sold its operations that support its Fujitsu
maintenance base in the Chicago metropolitan area to a new company formed by
Messrs. Jellinek and Kenny. The buyer acquired certain assets in exchange
for a $209,000 promissory note and the assumption of trade payables of at
least $624,000. In addition, at the closing the buyer paid off $438,000 of
existing Company bank debt and entered into a sub-lease of CDI's facility in
Buffalo Grove, Illinois. At the closing, the buyer merged with Telecom
Midwest, LLC. and Messrs. Jellinek and Kenny and two other shareholders of
the merged company personally guaranteed trade payables. The personal
guarantees of the promissory note are several. The personal guarantees of
the sub-lease are limited to $400,000 and are on a joint and several basis.
The personal guarantees of trade payables are on a joint and several basis
but are limited to Messrs. Jellinek and Kenny. Concurrent with this
transaction, Messrs. Jellinek and Kenny resigned from the Company's board.
The transaction was approved by the disinterested members of the Company's
board.
In June 1996, the Company acquired the exclusive worldwide manufacturing
rights to IMNET Systems, Inc.'s ("IMNET") MegaSAR Microfilm Jukebox and
completed and amended its obligations under a previous agreement. In addition
to becoming the exclusive manufacturer of the MegaSAR for IMNET, the Company
issued a $2.9 million note for prepaid license fees, software inventory, the
manufacturing rights, and certain other payables. Approximately $2.5 million
was paid on this note during the fourth quarter of fiscal 1996. The Company has
a receivable from IMNET of $176,000. The transaction was approved by the
disinterested members of the Company's board. Following the transaction,
Messrs. Jellinek and McDonough, a former director of the Company, resigned from
IMNET's board, and James Gordon, director of IMNET, resigned from the Company's
Board.
During the fourth quarter of fiscal 1996, the Company decided to integrate
the IMNET microfilm retrieval software with another software developer's
product, which the Company was already distributing. The integrated product
will require less IMNET software than previously assumed. As a result, the
Company recorded a one-time charge of $1.5 million to write-off software
inventory. Since the acquisition of the manufacturing rights from IMNET, the
transfer of all of the technical and manufacturing know-how has been delayed due
to technical difficulties. In July 1997, the Company and IMNET further amended
the June 1996 Agreement. In an attempt to facilitate the technology transfer,
the Company accepted an order from IMNET for the first 14 MegaSAR units to be
manufactured by the Company. A portion of the payment for these initial units
would be applied against the outstanding promissory note. The transfer of the
technology and the parts needed for production was to have occurred no later
than September 1, 1997. As of September 30, 1997, the transfer to the Company
of the technical and manufacturing know-how for this product offering has
continued to be delayed. Despite the ongoing negotiation and cooperation
between the two parties, the Company determined there was a potential material
risk in completing the technology transfer and getting the product to market.
As a result, in the fourth quarter of fiscal 1997, the Company recorded a one-
time charge to write-off the remaining $1.0 million in assets associated with
this transaction. The Company is currently negotiating with IMNET to either
complete the transfer or seek an alternative solution. During fiscal 1996, the
Company sold its entire holdings in IMNET for net proceeds of $7.7 million.
Accordingly, the Company recorded a gain on the sale of the securities of $5.7
million.
Mr. Ziegler was the Vice President and Secretary of the Company from 1978
to February 1996 and a director of the Company from 1977 to 1996.
PLAN OF DISTRIBUTION
The Company will not receive any proceeds from the sale of the Shares
offered hereby. The Selling Shareholders have advised the Company that the
Shares may be sold by the Selling Shareholders or their respective pledgees,
donees, transferees or successors in interest, in one or more transactions
(which may involve one or more block transactions) on the American Stock
Exchange, in sales occurring in the public market of such Exchange, in privately
negotiated transactions, through the writing of options on shares, short sales
or in a combination of such transactions; that each sale may be made either at
market prices prevailing at the time of such sale or at negotiated prices; that
some or all of the Shares may be sold through brokers acting on behalf of the
Selling Shareholders or to dealers for resale by such dealers; and that in
connection with such sales such brokers and dealers may receive compensation in
the form of discounts and commissions from the Selling Shareholders and may
receive commissions from the purchasers of Shares for whom they act as broker or
agent (which discounts and commissions are not anticipated to exceed those
customary in the types of transactions involved). Any broker or dealer
participating in any such sale may be deemed to be an "underwriter" within the
meaning of the Securities Act and will be required to deliver a copy of this
Prospectus to any person who purchases any of the Shares from or through such
broker or dealer. The Company has been advised that, as of the date hereof,
none of the Selling Shareholders have made any arrangements with any broker for
the sale of their Shares.
In offering the Shares covered hereby, the Selling Shareholders and any
broker-dealers and any other participating broker-dealers who execute sales for
the Selling Shareholders may be deemed to be "underwriters" within the meaning
of the Securities Act in connection with such sales, and any profits realized by
the Selling Shareholders and the compensation of such broker-dealer may be
deemed to be underwriting discounts and commissions. In addition, any Shares
covered by this Prospectus which qualify for sale pursuant to Rule 144 may be
sold under Rule 144 rather than pursuant to this Prospectus.
In order to comply with certain states' securities laws, if applicable, the
Shares will be sold in such jurisdictions only through registered or licensed
brokers or dealers. In certain states, the Shares may not be sold unless the
Shares have been registered or qualified for sale in such state or an exemption
from registration or qualification is available and is complied with. Under
applicable rules and regulations under Regulation M, any person engaged in the
distribution of the shares may not simultaneously engage in market making
activities, subject to certain exceptions, with respect to the Common Stock of
the Company for a period of five business days prior to the commencement of such
distribution and until its completion. In addition and without limiting the
foregoing, each Selling Shareholder will be subject to the applicable provisions
of the Securities Act and Exchange Act and the rules and regulations thereunder,
including, without limitation, Regulation M, which provisions may limit the
timing of purchases and sales of shares of the Company's Common Stock by the
Selling Shareholders.
The Company will bear all expenses of the offering of the Shares, except
that the Selling Shareholders will pay any applicable underwriting commissions
and expenses, brokerage fees and transfer taxes, as well as the fees and
disbursements of counsel to and experts for the Selling Shareholders.
Pursuant to the terms of registration rights agreements with certain of the
Selling Shareholders, the Company has agreed to indemnify and hold harmless such
Selling Shareholders from certain liabilities under the Securities Act.
EXPERTS
The consolidated financial statements of the Company appearing in the
Company's Annual Report on Form 10-K for the year ended September 30, 1997 have
been audited by Coopers & Lybrand L.L.P., independent certified public
accountants, as set forth in their reports thereon included therein and
incorporated herein by reference. Such financial statements are incorporated
herein by reference in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3, and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in Mountain View, California on February 12, 1998
SOFTNET SYSTEMS, INC.
By: /s/ A.J.R. Oosthuizen
A.J.R. Oosthuizen,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on February 12, 1998.
Signature Title
/s/ A.J.R. Oosthuizen President; Chief Executive
A.J.R. Oosthuizen Officer
(Principal Executive Officer)
* Treasurer
Mark Phillips (Principal Financial and
Accounting Officer)
* Director
Ronald Simon
* Director
Ian B. Aaron
* Director
John G. Hamm
* Pursuant to Power of Attorney
/s/ A.J.R. Oosthuizen
A.J.R. Oosthuizen
Attorney-in-fact
