Pursuant to Rule 424 (Registration Statement 333-45335)
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 3 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 September 29, 1998.
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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
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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.
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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
These risk factors include "forward-looking" statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Although the Company believes that its plans, intentions, and expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such plans, intentions or expectations will be achieved. Actual
results will differ from such plans, intentions and expectations, and such
differences may be material. Important factors that could cause actual results
to differ materially from the Company's forward-looking statements are set forth
below. All forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the cautionary
statements set forth herein. The Company disclaims any obligation to update
information contained in any forward-looking statement.
Limited Operating History of the Internet Services Division; Unproven Business;
Historical Losses; No Assurance of Profitability
The Company currently operates two continuing businesses: Micrographic
Technology Corporation ("MTC") and the Internet Services Division. The Company
is seeking a buyer for the Telecommunications Division, which is accounted for
as a discontinued operation. The Company's current strategy for growth is to
focus on substantially expanding the business of its Internet Services Division,
which was acquired in June 1996. The Company has very limited operating history
and experience in the Internet services business, and the successful expansion
of the Company's Internet Services Division will require strategies and
operations that are different from those historically employed by the Company in
connection with its two other businesses. 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 Services
Division sufficiently to enable it to achieve positive cash flow and
profitability.
To be successful, the Company must, among other things, develop and
market products and services that are widely accepted by consumers and
businesses at prices that will yield cash flow sufficient to meet the Company's
debt service, capital expenditure and working capital requirements. the
provision of Internet services over cable infrastructure has only recently
become feasible on a broad scale. There are only a very limited number of
companies offering such services, none of which is currently profitable. The
Company's ISP Channel service has only recently been launched in 12 cable
franchise areas (all of which have revenue-paying subscribers) in the United
States, and there can be no assurance that it will achieve broad consumer or
commercial acceptance. The success of the Company's ISP Channel service will
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depend upon the willingness of subscribers to pay the monthly fees and
installation costs as well as to purchase or lease the equipment necessary to
access the Internet. Currently, the Company has only approximately 500
subscribers to its ISP Channel service in these areas. Accordingly, it is
difficult to predict whether the Company's pricing model will prove to be
viable, whether demand for the Company's services will materialize at the prices
it expects to charge or whether current or future pricing levels will be
sustainable. If such pricing levels are not achieved or sustained or if the
Company's services do not achieve or sustain broad market acceptance, the
Company's business, financial condition, prospects and ability to repay its
indebtedness will be materially adversely affected.
The Company has sustained substantial losses over the last five fiscal
years. For the six months ended March 31, 1998 and the fiscal year ended
September 30, 1997, the Company had net losses of $3.7 million and $2.6 million,
respectively, and as of March 31, 1998, the Company had an accumulated
stockholders' deficit of approximately $36 million. The Company expects to incur
substantial losses and experience substantial negative cash flows as it expands
its Internet Services Division. The costs of expansion will include expenses in
connection with: (i) the deployment of infrastructure necessary to enable its
cable affiliates to offer its services; (ii) research and development of new
product and service offerings; (iii) the continued development of its direct and
indirect selling and marketing efforts; and (iv) any charges related to
acquisitions, divestitures, business alliances or changing technologies. The
Company's prospects should also be considered in light of the risks, expenses
and difficulties encountered by companies competing in new and rapidly evolving
markets. There can be no assurance that the Company will ever achieve favorable
operating results or profitability.
Fluctuations in Quarterly Results
The Company's results of operations have fluctuated and will likely
continue to fluctuate significantly from quarter to quarter, especially as the
Company implements a new strategic focus that will emphasize its Internet
Services Division. In addition, the Company is seeking a buyer for its
Telecommunications Division. 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. The Company's quarterly operating results may fluctuate
significantly in the future as a result of a variety of factors, many of which
are beyond the Company's control. Factors that may affect the Company's
quarterly operating results attributable to its Internet Services Division
include, among others, the rate at which the Company can enter into agreements
with cable operators, the exclusivity and term of such agreements, the rate of
subscription to the Company's Internet services, the prices subscribers pay for
such services, subscriber churn rates, changes in the revenue sharing
arrangements between the Company and its affiliated cable operators, the ability
of the Company and its cable affiliates to coordinate timely and effective
marketing, the success of the Company and its cable affiliates in marketing the
ISP Channel service to subscribers in such affiliates' local cable areas, the
quality of cable affiliates' cable infrastructure, the quality of customer and
technical support, and the rate at which the cable affiliates can complete the
installations required to initiate service for new subscribers. Additional
factors that may affect the Company's quarterly operating results generally
include the amount and timing of capital expenditures and other costs relating
to the expansion of the Company's Internet Services Division, the introduction
of new Internet services by the Company or its competitors, customer acceptance
of such services, price competition or pricing changes in the Internet or cable
industries, general economic conditions and economic conditions specific to the
Internet and cable industries, and changes in law and regulation.
Factors that may affect the Company's quarterly operating results
attributable to MTC include, among other things, 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, 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.
The Company expects to continue to engage in extensive research and
development activities and to evaluate new product and service opportunities.
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 depend in part on its success in developing new products and
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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,
financial condition, prospects and ability to repay its indebtedness.
Dependence on Local Cable Operators and their Cable Infrastructure
Certain ISP Channel services are dependent on the quality of the cable
infrastructure. Cable system operators have announced and begun to implement
major infrastructure investments in order to increase the capacity of their
networks and deploy two-way capability. However, cable system operators have
limited experience with implementing such upgrades, and these investments have
placed a significant strain on the financial, managerial, operating and other
resources of cable system operators, most of which are already significantly
leveraged. Further, cable operators must periodically renew their franchises
with city, county, or state governments and, as a condition of obtaining such
renewal, may have to meet certain conditions imposed by the issuing
jurisdiction, which may have the effect of causing the cable operator to delay
such upgrades. The Company's contracts with its cable affiliates typically have
terms ranging from three to five years, and there can be no assurance that the
Company will be able to renew any such contracts. Moreover, even if cable
affiliates renew such contracts, there can be no assurance that such renewal
will be on terms satisfactory to the Company. In addition, cable operators are
primarily concerned with increasing television programming capacity to compete
with other modes of multichannel entertainment delivery systems such as direct
broadcast satellite ("DBS") and may consequently choose to roll-out incompatible
set-top boxes that do not support high-speed Internet access services, rather
than to upgrade their network infrastructures as described above. Such upgrades
thus have been, and the Company expects will continue to be, subject to change,
delay or cancellation. The failure of cable operators to complete these upgrades
in a timely and satisfactory manner, or at all, would adversely affect the
market for the Company's products in any such operator's franchise area and, if
repeated on a broad scale, could have a material adverse effect on the Company's
business, financial condition, prospects and ability to repay its indebtedness.
The Company provides Internet services to cable systems irrespective of
their two-way capabilities. To the extent the Company provides Internet services
over cable systems to the home with a telephone line return path for data from
the home (under a "one-way" cable system), the Company's services may not
provide the high speed, quality of experience and availability of certain
applications, such as video conferencing, necessary to attract and retain
subscribers to the ISP Channel service. Subscribers using a telephone line
return path will experience the upstream data transmission speeds provided by
their analog modems (typically 28.8 Kbps). It is not clear what impact the lack
of two-way capability will have on penetration levels for the ISP Channel.
Because subscribers to the ISP Channel will subscribe through a cable
affiliate, the cable affiliate (and not the Company) will substantially control
the customer relationship with the subscriber. For example, under the Company's
existing contracts, cable affiliates are responsible for important functions,
such as billing for and collecting ISP Channel subscription fees and providing
the labor and costs associated with the distribution of local marketing
materials. Therefore, in addition to the Company's business being subject to
general economic and market conditions and factors relating to Internet service
providers and on-line services specifically, the success and future growth of
the Company's business will also be subject to economic and other factors
affecting its cable affiliates generally.
Dependence on Exclusive Access to Cable Subscribers; Need for Aggressive
Implementation and Deployment
The success of the Company's Internet Services Division is dependent,
in part, on its ability to gain exclusive access to cable consumers. This
exclusivity is a function of cable operators' dominance within their geographic
markets and the Company's exclusive relationship with such cable operators.
There can be no assurance that cable operators affiliated with the Company will
not face competition in the future or that the Company will be able to establish
and maintain exclusive relationships with cable operators. Currently, a number
of the Company's contracts with cable operators do not contain exclusivity
provisions. Even if the Company is able to establish and maintain exclusive
relationships with cable operators, there can be no assurance that the Company
will be able to do so on terms favorable to the Company or in quantities to be
profitable. In addition, the Company seeks to affiliate with a large number of
cable operators as quickly as possible because it will be excluded from
providing Internet over cable in those areas served by cable operators with
exclusive arrangements with other Internet service providers. If the exclusive
relationship between either the Company and its cable affiliates or its cable
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affiliates and their cable subscribers is impaired, or if the Company does not
become affiliated with a sufficient number of cable operators, the Company's
business, financial condition, prospects and ability to repay its indebtedness
could be materially adversely affected.
Substantial Future Capital Requirements
The development of the Company's business will require substantial
capital infusions as a result of (i) the Company's need to enhance and expand
its product and service offerings in order to maintain its competitive position
and increase its market share and (ii) the substantial investment in equipment
and corporate infrastructure required by the continued national deployment of
the ISP Channel. In addition, the Company anticipates that the majority of cable
affiliates with one-way cable systems will eventually upgrade their cable
infrastructure to two-way cable systems, at which time the Company will have to
upgrade its equipment on any affected cable system to handle two-way
transmissions. Whether or when the Company ultimately can achieve cash flow
levels sufficient to support its operations, development of new products and
services, and expansion of its Internet Services Division, cannot be predicted
accurately. Unless such cash flow levels are achieved, the Company will require
additional borrowings, the sale of debt or equity securities, the sale of assets
or businesses, or some combination thereof, to provide funding for its
operations. 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 on desirable terms when needed, the Company's
business, financial condition, prospects and ability to repay its indebtedness
would be materially adversely affected.
Management of Growth
To fully exploit the market for its products and services, the Company
must rapidly execute its sales strategy while managing anticipated growth by
implementing effective planning and operating processes. To manage its
anticipated growth, the Company must, among other things, continue to implement
and improve its operational, financial and management information systems, hire
and train additional qualified personnel, continue to expand and upgrade core
technologies and effectively manage multiple relationships with various
customers, suppliers and other third parties. Consequently, such expansion could
place a significant strain on the Company's services and support operations,
sales and administrative personnel and other resources. The Company may in the
future also experience difficulties meeting the demand for its products and
services. Additionally, if the Company is unable to provide training and support
for its products, the implementation process will be longer and customer
satisfaction may be lower. There can be no assurance that the Company's systems,
procedures or controls will be adequate to support the Company's operations or
that the Company's management will be capable of exploiting fully the market for
the Company's products and services. Any failure of the Company to manage its
growth effectively could have a material adverse effect on the Company's
business, financial condition, prospects and ability to repay its indebtedness.
Non-Exclusivity of Cable Franchises; Non-Renewal or Termination of Franchises
Cable television companies operate under non-exclusive franchises
granted by local or state authorities that are subject to renewal and
renegotiation from time to time. A franchise is generally granted for a fixed
term ranging from five to 15 years but in many cases is terminable if the
franchisee fails to comply with the material provisions thereof. The Cable
Television Consumer Protection and Competition Act of 1992 prohibits franchising
authorities from granting exclusive cable television franchises and from
unreasonably refusing to award additional competitive franchises; it also
permits municipal authorities to operate cable television systems in their
communities without franchises. No assurance can be given that the cable
television companies that have contracts with the Company will be able to retain
or renew their franchises. The non-renewal or termination of any such franchises
would result in the termination of the Company's contract with the applicable
cable operator. Were an affiliated cable operator to lose its franchise, the
Company would seek to affiliate with the successor to the franchisee. No
assurance can be given that the Company would be able to achieve such
replacement affiliation or that to do so would not result in additional costs to
the Company. If the Company cannot affiliate with replacement cable operators in
sufficient numbers, the Company's business, financial condition, prospects and
ability to repay its indebtedness could be materially adversely affected.
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Risk of Acquisition of Cable Affiliate by Unaffiliated Cable Operator
The Company believes that it is highly unlikely that a cable operator
will find it desirable, economically or otherwise, to devote the channel
capacity to offer Internet services to its subscribers over its infrastructure
through more than one provider. However, under many of the Company's initial
contracts, in the event a cable affiliate is acquired by an unaffiliated cable
operator that already has a relationship with one of the Company's competitors
or that does not enter into a contract with the Company, the Company may lose
its ability to offer its Internet services in the area served by such former
cable affiliate, which could have a material adverse effect on the Company's
business, financial condition, prospects and ability to repay its indebtedness.
Dependence on Third Party Technology and Suppliers
Many of the Company's products and service offerings incorporate
technology developed and owned by third parties. The markets for all of the
products and services used by the Company are characterized by intense
competition, rapid technological advances, evolving industry standards, changes
in subscriber requirements, frequent new product introductions and enhancements,
and rapidly evolving, alternative service offerings. Consequently, the Company
must rely upon third parties to develop and introduce technologies that enhance
the Company's current product and service offerings and enable the Company, in
turn, to develop its own products and services 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 and
services, 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 or services. 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, financial
condition, prospects and ability to service its indebtedness.
In addition, the Internet Services Division and MTC currently depend on
a limited number of suppliers for certain key products and services. In
particular, the Internet Services Division depends on Excite, Inc. for national
content aggregation, 3Com Corporation and Com21, Inc. for headend and cable
modem equipment, Cisco Systems, Inc. for specific network routing and switching
equipment, and, among others, MCI Communications Corporation ("MCI") for
national Internet backbone services. Certain of the Company's cable modem and
headend equipment suppliers are in litigation over their patents. The Company
could experience disruptions in the delivery or increases in the prices of
products and services purchased from such vendors as a result of intellectual
property litigation involving such vendors. 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. In addition, the Company may not have
adequate remedies against such third parties as a result of breaches of their
agreement with the Company. 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,
business, financial condition, prospects and ability to repay its indebtedness.
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 exclusive
contract with Executone Information Systems, Inc. ("Executone") for the resale
of Executone's products in certain specified markets. For the fiscal year ended
September 30, 1997, such products accounted for approximately 30% of the
Telecommunications Division's revenues and 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's business,
financial condition, prospects and ability to repay its indebtedness.
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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 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, financial
condition, prospects or ability to repay its indebtedness. Any increase in
competition could reduce the Company's gross margins, require increased spending
by the Company on research and development and sales and marketing, and
otherwise materially adversely affect the Company's business, financial
condition, prospects and ability to repay its indebtedness.
Internet Services. The markets for the Company's Internet products and
services are extremely competitive, and the Company expects this competition to
intensify in the future. In the cable-based segment of the Internet access
industry, 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 agreement between the Company and
its cable affiliates. These competitors include systems integrators such as
Convergence.com, Online System Services, HSAnet and Frontier Communications'
Global Center business, as well as ISPs such as Earthlink Network, Inc.
("Earthlink"), MindSpring Enterprises, Inc., and IDT Corporation. Several cable
system operators, including CableVision Systems Corporation, Comcast Corporation
("Comcast"), Cox Enterprise, Inc. ("Cox"), MediaOne Group, Inc.,
Tele-Communications, Inc. ("TCI") and Time Warner Inc. ("Time Warner") have
deployed high-speed Internet access services over their existing local hybrid
fiber and coaxial cable networks. TCI, Cox and Comcast market through At Home
Corporation ("@Home") while Time Warner plans to market the RoadRunner service
through Time Warner's own cable systems as well as to other cable system
operators nationwide.
Some of the Company's most direct competitors in the access markets are
telephony-based access providers, including incumbent local exchange carriers
("ILECs"), national interexchange or long distance carriers, fiber-based
competitive local exchange carriers ("CLECs"), Internet service providers
("ISPs"), online service providers ("OSPs"), wireless and satellite data service
providers, and DSL-focused CLECS. Competitors in the Internet services industry
include AT&T Corp., BBN Corporation, Earthlink, Netcom Online Communications
Services, Inc., Concentric Network, PSInet Inc., and WorldCom, Inc., which
provide basic Internet access to residential consumers and businesses, generally
using the existing telephone network infrastructure. This method is widely
available and inexpensive, and 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, 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,
ratio of price to performance, ease of use, content quality, quality of
presentation, timeliness of content, customer support, brand recognition,
operating experience and revenue sharing.
In addition, the market for high-speed data transmission services is
characterized by several competing technologies that offer alternative
solutions. Competitive technologies include telecom-related wireline
technologies that utilize telephone copper twisted-pair wiring, such as ISDN and
DSL implementations, as well as wireless technologies such as local multipoint
distribution service ("LMDS"), multichannel multipoint distribution service
("MMDS") and DBS. The Company's prospects may be further compromised by Federal
Communications Commission ("FCC") rules and regulations, which are designed, at
least in part, to increase competition in video and related services, for
example, new multi-channel video technologies and services known as Open Video
Systems ("OVS") and LMDS. While both are in nascent stages of development, OVS
and LMDS offer the potential for providing competition to traditional cable
television and other multi-channel video services. One form of OVS involves
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delivery of signals over existing telephone lines. LMDS is a broadband,
wireless, digital service, and offers the potential for providing Internet
access along with a variety of other services, including traditional
multi-channel video entertainment. The FCC has also created a General Wireless
Communications Service ("GWCS") in which licensees are afforded broad latitude
in defining the nature and service area of the communications services they
offer. The full impact of the GWCS remains to be seen. Nevertheless, all of
these new technologies pose potential competition to the Company and its
business. Significant market acceptance of alternative solutions for high-speed
data transmission could decrease the demand for the Company's services if such
alternatives are viewed as providing faster access, greater reliability,
increased cost-effectiveness or other advantages over cable solutions.
Competition from telecom-related solutions is expected to be intense.
There can be no assurance that technological developments will not have
a material adverse effect on the competitive position of the Company. The rapid
development of new competing technologies and standards increases the risk that
current or new competitors could develop products and services that would reduce
the competitiveness of the Company's products and services, which could have a
material adverse effect on the Company's business, financial condition,
prospects and ability to repay its indebtedness.
Document Management. In the document management industry, the Company
competes on the basis of breadth of offering, cost, flexibility and customer
service. The Company has two direct competitors to its hardware products: Agfa
AG in Europe and Anacomp, Inc. worldwide. Indirect competitors include
International Business Machines Corp., Fuji Photo Film Co., Ltd., Mobius
Management Systems, Inc., Storage Technology and others. In most cases, the
Company's competitors have longer operating histories, greater name recognition,
and significantly greater financial, technical and marketing resources. While
the Company is not aware of any direct competitors to its software product
offerings, the industry is rapidly evolving and the Company may face significant
competition in the future.
Unproven Network Scalability and Speed
Due to the limited deployment of the Company's ISP Channel service, the
ability of the Company to connect and manage a substantial number of on-line
subscribers at high transmission speeds is as yet unknown, and the Company faces
risks related to its ability to scale up to its expected subscriber levels while
maintaining superior performance. While peak downstream data transmission speeds
across cable infrastructure approaches 3 megabits per second ("Mbps") in each 6
MHz channel, the actual downstream data transmission speeds are likely to be
significantly slower and will depend on a variety of factors, including type and
location of content, Internet traffic, the number of active subscribers on a
given cable network node, the number of 6 MHz channels allocated by the cable
affiliate (in its discretion) to carry the Company's service, the capability of
cable modems used and the service quality of the cable affiliates' cable
infrastructures. As subscriber penetration increases, it may be necessary for
the cable affiliates to add additional 6 MHz channels in order to maintain
adequate downstream data transmission speeds, which would render such additional
channels unavailable to such cable affiliates for video or other programming.
There can be no assurance that cable affiliates will provide additional capacity
for this purpose. On two-way cable systems, the upstream transmission data
channel is located in a range not used for broadcast by traditional cable
infrastructures and is more susceptible to interference than the downstream
channel, resulting in a slower peak upstream transmission speed. In addition to
the factors affecting downstream data transmission speeds, the level of
interference in the cable affiliates' upstream data broadcast range can
materially affect actual upstream data transmission speeds. The actual data
delivery speeds that can be realized by subscribers will be significantly lower
than peak data transmission speeds and will vary depending on the subscriber's
hardware, operating system and software configurations. There can be no
assurance that the Company will be able to achieve or maintain a speed of data
transmission sufficiently high to enable the Company to attract and retain its
planned numbers of subscribers, especially as the number of the subscribers to
the Company's services grows, and a perceived or actual failure by the Company
to achieve or maintain sufficiently high speed data transmission could
significantly reduce consumer demand for its services and have a material
adverse effect on its business, financial condition, prospects and ability to
repay its indebtedness.
Dependence on Network
The Company's success will depend upon the capacity, reliability and
security of the infrastructure used to carry data between its subscribers and
the Internet. A significant portion of such infrastructure is owned by third
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parties, and accordingly the Company has no control over its quality and
maintenance. The Company relies on cable operators to maintain their cable
infrastructure. In addition, the Company relies on other third parties to
provide a connection from the cable infrastructure to the Internet. Currently,
the Company has transit agreements with MCI, MFS, Sprint Communications Company,
and others to support the exchange of traffic between the Company's network
operations center ("NOC"), cable infrastructure and the Internet. The failure of
the Internet backbone, or the NOC, or any other link in the delivery chain
resulting in an interruption in the Company's operations would have a material
adverse effect on the Company's business, financial condition, prospects and
ability to repay its indebtedness.
Risk of System Failure
The Company's operations are dependent upon its ability to support its
highly complex infrastructure and avoid damages from fires, earthquakes, floods,
power losses, telecommunications failures, network software flaws, transmission
cable cuts and similar events. The occurrence of one of these events could cause
interruptions in the services provided by the Company. In addition, failure of
an ILEC or other service provider to provide communications capacity required by
the Company, as a result of a natural disaster, operational disruption or any
other reason, could cause interruptions in the services provided by the Company.
Any damage or failure that causes interruptions in the Company's operations
could have a material adverse effect on the Company's business, financial
condition, prospects and ability to repay its indebtedness.
Security Risks
Despite the implementation of security measures, the Company's or its
cable affiliates' networks may be vulnerable to unauthorized access, computer
viruses and other disruptive problems. ISPs and OSPs 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. Unauthorized
access by current and former employees or others could also potentially
jeopardize the security of confidential information stored in the computer
systems of the Company and its subscribers. Such events 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, financial condition, prospects and
ability to repay its indebtedness. In addition, the threat of these and other
security risks may deter potential ISP Channel subscribers from purchasing the
ISP Channel service, which could have a material adverse effect on the Company's
business, financial condition, prospects and ability to repay its indebtedness.
Dependence on High-Quality Content Provision and Acceptance; Developing Market
for High-Quality Content
A key component of the Company's strategy is to provide a more
compelling interactive experience to Internet users than the experience
currently available to customers of dial-up ISPs and OSPs. The Company believes
that, in addition to providing high-speed, high-performance Internet access, it
must also develop and aggregate high-quality multimedia content. The Company's
success in providing and aggregating such content will depend in part on the
Company's ability to develop a customer base sufficiently large to justify
investments in the development of such content as well as (i) the ability of
content providers to create and support high-quality multimedia content; and
(ii) the Company's ability to aggregate content offerings in a manner that
subscribers find attractive. There can be no assurance that the Company will be
successful in these endeavors. In addition, the market for high-quality
multimedia Internet content has only recently begun to develop and is rapidly
evolving, and there is significant competition among ISPs and OSPs for
aggregating such content. If the market were to fail to develop, or were to
develop more slowly than expected, or if competition were to increase, or if the
Company's content offerings did not achieve or sustain market acceptance, the
Company's business, financial condition, prospects and ability to repay its
indebtedness would be materially adversely affected.
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Dependence on Advertising Revenues
The success of the Company's Internet Services Division depends in part
on the ability of the Company to entice advertisers to advertise through the ISP
Channel. The Company expects to derive significant revenues from advertisements
placed on co-branded and ISP Channel web pages and "click through" revenues from
products and services purchased through links from the ISP Channel to vendors.
While the Company believes that it can leverage the ISP Channel to provide
information to advertisers to help them better target prospective customers,
there can be no assurance that advertisers will find such information useful or
choose to advertise through the ISP Channel. There can be no assurance that the
Company will be able to attract advertising revenues in quantities and at rates
that are satisfactory to the Company. The failure to do so could have a material
adverse effect on the Company's business, financial condition, prospects and
ability to repay its indebtedness.
Uncertain Acceptance and Maintenance of the ISP Channel Brand
The Company believes that establishing and maintaining the ISP Channel
brand are critical to attracting and expanding its subscriber base. Promotion of
the ISP Channel brand will depend, among other things, on the Company's success
in providing high-speed, high-quality consumer and business Internet products,
services and content, the marketing efforts of the cable affiliates, and the
reliability of the cable affiliates' networks and services, none of which can be
assured. The Company has little control over the cable affiliates' marketing
efforts or the reliability of their networks and services. If consumers and
businesses do not perceive the Company's existing products and services to be of
high quality or if the Company introduces new products or services or enters
into new business ventures that are not favorably received by consumers and
businesses, the Company will be unsuccessful in promoting and maintaining its
brand. To the extent the Company expands the focus of its marketing efforts to
geographic areas where the ISP Channel service is not available, the Company
risks frustrating potential subscribers who are not able to access the Company's
products and services. Furthermore, in order to attract and retain subscribers,
and to promote and maintain the ISP Channel brand in response to competitive
pressures, the Company may find it necessary to increase substantially its
financial commitment to creating and maintaining a distinct brand loyalty among
customers. If the Company were unable to establish or maintain the ISP Channel
brand successfully or if the Company were to incur excessive expense in an
attempt to improve its offerings or promote and maintain its brand, the
Company's business, financial condition, prospects and ability to repay its
indebtedness would be materially adversely affected.
Billing and Collections Risks
The Company has recently commenced the process of designing and
implementing its billing and collections system for its Internet Services
Division. It is the Company's intention to bill for the services provided by
this business over the Internet and, in most cases, to collect these invoices
through payments received via the Internet. Such invoices and payments have
security risks. Given the complexities of such a system, there can be no
assurance that the Company will be successful in developing and implementing the
system in a timely manner or that it will be able to scale the system quickly
and efficiently if necessary to accommodate potential growth in the number of
subscribers requiring such a billing format. In some circumstances, the
Company's cable affiliates are responsible for billing and collection for the
Company's Internet access services. In any such instance, the Company has little
or no control over the accuracy and timeliness of its invoices or over
collection efforts. Given its relatively limited history with billing and
collection for Internet services, the Company cannot predict the extent to which
it may experience bad debts or the extent to which it will be able to minimize
such bad debts. If the Company encounters significant problems with its billing
and collections process, the Company's business, financial condition, prospects
and ability to repay its indebtedness could be materially adversely affected.
Dependence on the Growth and Evolution of the Internet
Market acceptance of the Company's Internet services is substantially
dependent upon the growth and evolution of the Internet in ways that are best
suited for the Company's products and services. High-speed cable-based Internet
access is of greatest value to consumers of multimedia and other
bandwidth-intensive content. The nature of the content available over the
Internet, and the technologies available to access that content, are evolving
rapidly, and there can be no assurance that those applications that most favor
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the Company's services and technology will be widely accepted by the
marketplace. In addition, to the extent that the Internet continues to
experience significant growth in the number of users and level of use, there can
be no assurance that the Internet infrastructure will continue to be able to
support the demands placed on it by such potential growth or that the
performance or reliability of the Internet will not be adversely affected. The
Internet could lose its commercial viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of Internet
activity. There can be no assurance that the infrastructure or complementary
services necessary to make the Internet a viable commercial marketplace will be
developed. In particular, the Internet has only recently become a medium for
advertising and electronic commerce. If the necessary infrastructure or
complementary services or facilities are not developed, or if the Internet does
not become a viable commercial marketplace or platform for advertising and
electronic commerce, the Company's business, financial condition, prospects and
ability to repay its indebtedness could be materially adversely affected.
Potential Liability for Defamatory or Indecent Content
The law relating to liability of ISPs and OSPs for information carried
on or disseminated through their networks is currently unsettled. A number of
lawsuits have sought to impose such liability for defamatory speech and indecent
materials. A recent federal statute seeks to impose such liability, in some
circumstances, for transmission of obscene or indecent materials. In one case, a
court has held that an OSP could be found liable for defamatory matter provided
through its service, on the ground that the service provider exercised active
editorial control over postings to its service. The imposition upon ISPs or OSPs
of potential liability for materials carried on or disseminated through their
systems could require the Company to implement measures to reduce its exposure
to such liability, which may require the expenditure of substantial resources or
the discontinuation of certain products or service offerings. In addition, the
imposition of liability on the Company for information carried on the Internet
could have a material adverse effect on the Company's business, financial
condition, prospects and ability to repay its indebtedness.
Potential Liability for Information Retrieved and Replicated
Because materials will be downloaded and redistributed by subscribers
and cached or replicated by the Company in connection with the Company's
offering of its services, there is a possibility that claims may be made against
the Company or its cable affiliates under both U.S. and foreign law for
defamation, negligence, copyright or trademark infringement, or other theories
based on the nature and content of such materials. Such types of claims have
been successfully brought against OSPs. In particular, copyright and trademark
laws are evolving both domestically and internationally, and there is
uncertainty concerning how broadly the rights afforded under these laws will be
applied to on-line environments. It is impossible for the Company to determine
who the potential rights holders may be with respect to all materials available
through the Company's services. In addition, a number of third party owners of
patents have claimed to hold patents that cover various forms of on-line
transactions or on-line technology. As with other OSPs, patent claims could be
asserted against the Company based upon its services or technologies. The
Company's liability insurance may not cover potential claims of the foregoing
types or may not be adequate to indemnify the Company for all liability that may
be imposed. Any imposition of liability that is not covered by insurance or is
in excess of insurance coverage could have a material adverse effect on the
Company's business, financial condition, prospects and ability to repay its
indebtedness.
Rapid Technological Change; Dependence on New Products and Services
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 all of
the Company's products and services are characterized by intense competition,
rapid technological advances, evolving industry standards, changes in subscriber
requirements, frequent new product introductions and enhancements, and rapidly
evolving, alternative service offerings. For example, the Company expects
digital set-top boxes capable of supporting high-speed Internet access services
to be commercially available in the next 18 months. Although the widespread
availability of set-top boxes could increase the demand for the Company's
Internet Service, there is no assurance that the demand for set-top boxes will
ever reach the level estimated by the Company and industry experts or, if
set-top boxes reach this level of popularity, that the Company will be able to
capitalize on such demand. If this scenario occurs or if other technologies or
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standards applicable to the Company's products or service offerings become
obsolete or fail to gain widespread commercial acceptance, then the Company's
business, financial condition, prospects and ability to repay its indebtedness
will be materially adversely affected.
The introduction of products or services embodying, or purporting to
embody, new technology or the emergence of new industry standards could also
render the Company's existing products and services, as well as products or
services under development, obsolete and unmarketable. Internet,
telecommunications and cable technologies are evolving rapidly. Many large
corporations, including large telecommunications providers, Regional Bell
Operating Companies ("RBOCs") and telecommunications equipment providers, as
well as large cable system operators, regularly announce new and planned
technologies and service offerings that could impact the market for the
Company's services. These announcements can have the effect of delaying
purchasing decisions by the Company's customers and confusing the marketplace
regarding available alternatives. Such announcements could in the future
adversely impact the Company's business, financial condition, prospects and
ability to repay its indebtedness.
The Company's ability to adapt to changes in technology and industry
standards, and to develop and introduce new and enhanced products and service
offerings will be significant factors in maintaining or improving its
competitive position and its prospects for growth. Due to rapid technological
changes in the Internet and telecommunications 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, 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, or, if sales are achieved, that latent
defects will not exist in the Company's products or equipment purchased by the
Company from third parties. 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 or services based on emerging
technologies 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. In addition, the widespread adoption of new Internet or
telecommuting technologies or standards, cable-based or otherwise, could require
substantial expenditures by the Company to modify or adapt its equipment,
products and services and could fundamentally alter the character, viability and
frequency of Internet-based advertising, either of which could have a material
adverse effect on the Company's business, financial condition, prospects and
ability to repay its indebtedness.
The technology underlying capital equipment used by the Company such as
headends and cable modems is continuing to evolve and, accordingly, it is
possible that the equipment acquired by the Company could become out-of-date or
obsolete prior to the time the Company would otherwise intend to replace such
equipment. In any such circumstance, the Company may need to acquire substantial
amounts of new capital equipment, which could have a material adverse effect on
the Company's business, financial condition, prospects and ability to repay its
indebtedness.
Adverse Effect on MTC of Growth of Alternate Technologies
Revenues for MTC's products and services have been adversely affected
in recent years, and could in the future be substantially adversely affected by,
among other things, the increasing use of digital technology. MTC's revenues,
after giving effect to the discontinuation of the Telecommunications Division,
have represented substantially all of the Company's revenues for the past
several years.
The effect of digital and other technologies on the demand for MTC's
products and services depends, in part, on the extent of technological advances
and cost decreases in such technologies. The recent trend of technological
advances and attendant price declines in digital systems and products is
expected to continue. As a result, in certain instances, potential MTC customers
have deferred, and may continue to defer, investments in MTC systems while
evaluating the abilities of digital and other technologies.
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The continuing development of local area computer networks and similar
systems based on digital technologies has resulted and will continue to result
in many MTC customers changing their use of MTC products from data storage and
retrieval to primarily archival use. The rapidly changing data storage and
management industry also has resulted in intense price competition in certain of
MTC's markets.
Therefore, the Company has been and expects to continue to be impacted adversely
by the decline in the market for Computer Output to Microfilm ("COM") services,
the high fixed costs and declining market for COM systems and the attendant
reduction in equipment and supplies. The Company's revenues for maintenance of
COM systems have declined in part because of efficiencies associated with the
Company's systems and could decline further in the event of lesser use and fewer
sales of COM systems. The growth of alternate technologies has created
consolidation in the micrographics industry. To the extent consolidation in the
micrographics industry has the effect of causing major providers of
micrographics services and products to cease providing such services and
products, the negative trends in the industry, such as competition from
alternate technologies described above, may accelerate.
MTC Proprietary Technology; Risk of Third Party Claims of Infringement
The industry in which MTC operates may be affected by an increasing
number of patents and frequent litigation based on allegations of patent and
other intellectual property infringement. To develop and maintain its
competitive position, MTC relies primarily upon the technical expertise and
creative skills of its personnel, confidentiality agreements and, to some
degree, patents and copyrights that it owns or, with respect to patents held by
third parties, has license rights to use. There can be no assurance that such
confidentiality or licensing agreements will not be breached, that others may
not infringe upon such patents or licenses, or that the Company would have
adequate remedies for any such breach for infringement. 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 may be materially adversely affected by
competitors who independently develop substantially equivalent technology.
Further, any litigation, either on behalf of or against the Company, relating to
such confidentiality or licensing agreements, patents or copyrights, regardless
of outcome, could result in substantial costs to the Company and diversion of
effort by management. Any infringement claim or other litigation against or by
the Company could have a material adverse effect on the Company's business,
financial condition, prospects and ability to repay its indebtedness.
Acquisition-Related Risks
The Company may from time to time acquire other businesses that the
Company believes will complement its existing business. The Company is unable to
predict whether or when any prospective acquisitions will occur or the
likelihood of a material transaction being completed on favorable terms and
conditions, if at all. Such transactions, if effected, are likely to involve
certain risks, including, among other things: the difficulty of assimilating the
acquired operations and personnel; the potential disruption of the Company's
ongoing business and diversion of resources and management time; the possible
inability of management to maintain uniform standards, controls, procedures and
policies; the risks of entering markets in which the Company has little or no
direct prior experience; and the potential impairment of relationships with
employees or customers as a result of changes in management. There can be no
assurance that any acquisition will be so made, that the Company will be able to
obtain additional financing needed to finance such acquisitions and, if any
acquisitions are so made, that the acquired business will be successfully
integrated into the Company's operations or that the acquired business will
perform as expected.
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,
financial condition, prospects and ability to repay its indebtedness. The
Company has recently assembled a new management team to implement its strategy
for launching its ISP Channel concept on a large-scale basis, most of whom have
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been with the Company for less than six months. The Company is currently seeking
new employees in connection with the expansion of its Internet Services
Division. The loss of any member of the new team, or failure to attract such
personnel, could also have a material adverse effect on the Company's business,
financial condition, prospects and ability to repay its indebtedness. There can
be no assurance that the Company will be successful in hiring or retaining key
personnel.
Government Regulation
Although the Company's services are not currently subject to direct
regulation by the FCC or any other federal or state communications regulatory
agency, changes in law or regulation relating to Internet connectivity and the
telecommunications markets, including changes that, directly or indirectly,
affect costs, limit usage of subscriber-related information or increase the
likelihood or scope of competition from the RBOCs or other telecommunications
companies, could affect the nature, scope and prices of the Company's services.
For example, proceedings are pending at the FCC to determine whether, and to
what extent, ISPs should be considered "telecommunications carriers" and, if so,
whether they should be required to contribute to the Universal Service Fund.
Although the FCC has decided for the moment that ISPs are not telecommunications
carriers, that decision is not yet final and is being challenged by various
parties, including the RBOCs. Some members of Congress have also challenged the
FCC's conclusion. Congressional dissatisfaction with the FCC's conclusions could
result in further changes to the FCC's governing law. The Company cannot predict
the impact, if any, that future legal or regulatory changes might have on its
business. In addition, regulation of cable television may affect the speed at
which the Company's cable affiliates upgrade their cable infrastructures to
two-way hybrid fiber coaxial cable. 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. However, the election by cable
operators to classify Internet access as an additional cable service may be
challenged before the FCC, the courts or Congress, and any alteration in the
classification of service could potentially have an adverse impact on the
Company and its business.
Another risk lies in the possibility that local franchise authorities
may attempt to subject the cable affiliates to higher or other franchise fees or
taxes or otherwise 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. In the event that the FCC or another governmental
agency were to classify the cable system operators as "common carriers" or
"telecommunications carriers" because of their provision of Internet services,
or if cable system operators were to seek such classification as a means of
limiting their liability, the Company's rights as the exclusive ISP 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 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 changes in
law or regulation including those discussed herein, could have a material
adverse effect on the Company's business, financial condition, prospects and
ability to repay its indebtedness.
In addition, the Company's business, financial condition, prospects and
ability to repay its indebtedness may also be adversely affected by the
imposition of certain tariffs, duties and other import restrictions on
components that the Company obtains from non-domestic suppliers. Changes in law
or regulation, in the United States or elsewhere, could materially adversely
affect the Company's business, financial condition, prospects and ability to
repay its indebtedness.
Product Liability
Some of the Company's products, such as those sold by MTC, 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. There can be no assurance that the Company's
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's
business, financial condition, prospects and ability to repay its indebtedness.
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
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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.
Risks Relating to MTC's International Operations
After giving effect to discontinued operations, sales outside of the
United States accounted for approximately 22% and 27% of the Company's total
revenues for the fiscal years ended September 30, 1997 and 1996, respectively,
which are attributable solely to MTC. Further development of foreign
distribution channels for MTC's products and services could require a
significant investment, 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, financial condition,
prospects and ability to repay its indebtedness. Because of its export sales,
MTC is subject to the risks of conducting business internationally, including
unexpected changes in regulatory requirements (including the regulation of
Internet access), uncertainty regarding liability for information retrieved and
replicated in foreign institutions, 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. MTC is also 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 MTC's
proprietary technology to the same extent as do the laws of the United States.
There can be no assurance that the risks associated with MTC's international
operations will not materially adversely affect the Company's business,
financial condition, prospects and ability to repay its indebtedness or require
MTC to modify significantly its current business practices.
Shares Eligible for Future Sale
Future sales of shares of the Common Stock by its existing shareholders
under Rule 144 of the Securities Act, or through the exercise of registration
rights or the issuance of shares of the Common Stock upon the exercise of
options or warrants, could materially adversely affect the market price of
shares of the Common Stock and could materially impair the Company's future
ability to raise capital through an offering of equity securities. No
predictions can be made as to the effect, if any, of market sales of such shares
or the availability of such shares for future sale will have on the market price
of shares of the Common Stock prevailing from time to time. At June 30, 1998,
the Company has reserved for issuance 2,886,493 shares of Common Stock for
issuance pursuant to outstanding Convertible Subordinated Debentures, options
and warrants. The Company also has reserved up to 19.9% of its outstanding
Common Stock as of May 29, 1998 for issuance under its cable affiliate incentive
program. The Company has issued Convertible Preferred Stock that has a
conversion price that fluctuates in relation to the price of the Common Stock.
At June 30, 1998, such Convertible Preferred Stock would be convertible into
1,127,442 shares of Common Stock.
Failure to Sell the Telecommunications Division
The Company has decided to discontinue its Telecommunications Division,
and is currently seeking a buyer for this division. However, there can be no
assurance these efforts will be successful. If the Company is unable to
consummate a sale of the Telecommunications Division on terms it believes are
satisfactory, it will not obtain the proceeds anticipated from such sale, which
will correspondingly diminish the capital available to the Company to implement
its Internet Service Division's strategy. In the absence of such a sale,
management's attention could be substantially diverted to operate or otherwise
dispose of the Telecommunications Division. If a sale of the Telecommunications
Division is delayed, its value could be diminished. Moreover, the
Telecommunications Division could incur losses and operate on a cash flow
negative basis in the future. Any such event could have a material adverse
effect on the Company's business, financial condition, prospects and ability to
repay its indebtedness.
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Absence of Dividends
The Company has not historically paid any cash dividends on its Common
Stock and does not expect to declare any such dividends in the foreseeable
future. Payment of any future dividends will depend upon earnings and capital
requirements of the Company, the Company's debt facilities and other factors the
Board of Directors deems relevant. The Company currently intends to retain its
earnings, if any, to finance the development and expansion of its Internet
Services Division, and therefore does not anticipate paying any cash dividends
in the foreseeable future. The Company's Certificate of Incorporation prohibits
the payment of cash dividends on the Common Stock, without the consent of the
holders of the Convertible Preferred Stock, while shares of the Convertible
Preferred Stock are outstanding and, upon liquidation of the Company, requires
payment of the liquidation value of the Convertible Preferred Stock prior to any
payments with respect to the Common Stock. The Company's ability to pay
dividends on its Common Stock is also restricted by certain of the Company's
financing agreements.
Volatility of Stock Price
The market price for the Common Stock has been volatile and market
fluctuations may adversely affect the market price of the Common Stock without
regard to the operating performance of the Company. 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 or
services by the Company or its competitors or developments in the Company's
relationships with its suppliers or customers could cause the price of the
Common Stock to fluctuate in the future, perhaps substantially. There can be no
assurance that the market price of the 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.
Prospective Anti-Takeover Provisions
The Company is a New York corporation. It is the Company's intention to
solicit shareholder approval to reincorporate in Delaware. Both the New York
Business Corporation Law and the Delaware General Corporation Law contain
certain provisions that may have the effect of discouraging, delaying or making
more difficult a change in control of the Company or preventing the removal of
incumbent directors. In addition, the Company is currently reviewing proposed
changes to its Certificate of Incorporation and Bylaws that would have the same
effect. The existence of these provisions may have a negative impact on the
price of the Common Stock and may discourage third party bidders from making a
bid for the Company or may reduce any premiums paid to shareholders for their
Common Stock.
Year 2000 Issues
Many existing computer systems, related software applications and other
control devices use only two digits to identify a year in a date field, without
considering the impact of the upcoming change in the century. Such systems,
applications and/or devices could fail or create erroneous results unless
corrected so that they can process data related to the Year 2000. The Company
relies on such computer systems, applications and devices in operating and
monitoring all major aspects of its business, including, but not limited to, its
financial systems (such as general ledger, accounts payable and payroll
modules), customer services, internal networks and telecommunications equipment,
and end products. The Company also relies, directly and indirectly, on the
external systems of various independent business enterprises, such as its
customers, suppliers, creditors, financial organizations, and of governments,
both domestically and internationally, for the accurate exchange of data and
related information.
The Company is currently in the process of evaluating the potential
impact of the Year 2000 issue on its business and the related expenses that
could likely be incurred in attempting to remedy such impact (including testing
and implementation of remedial action). Management's current estimate is that
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the costs associated with the Year 2000 issue should not have a material adverse
affect on the results of operations or financial position of the Company in any
given year. However, despite the Company's efforts to address the Year 2000
impact on its internal systems, the Company is not sure that it has fully
identified such impact or that it can resolve it without disruption of its
business and without incurring significant expenses. In addition, even if the
internal systems of the Company are not materially affected by the Year 2000
issue, the Company could be affected as a result of any disruption in the
operation of the various third party enterprises with which the Company
interacts such as cable affiliates, vendors and suppliers.
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).
Shares Beneficially Owned Shares Being
Prior to Ofering Offered
---------------- -------
Number Percent
------ -------
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 Italian 200,000(5) 2.8% 200,000(5)
Forsythe/McArthur 109,000(5) 1.6% 109,000(5)
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(5)
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
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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.
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(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.
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
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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.
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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,
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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 PricewaterhouseCoopers LLP, 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.
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