As filed with the Securities and Exchange Commission on November 2, 1998
Registration No. 333-65593
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
__________________________________
SoftNet Systems, Inc.
(Exact name of registrant as specified in its charter)
NEW YORK 11-1817252
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
520 Logue Avenue
Mountain View, CA 94043
(650) 962-7470
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Dr. Lawrence B. Brilliant
Chief Executive Officer and President
SoftNet Systems, Inc.
520 Logue Avenue
Mountain View, CA 94043
(650) 962-7470
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
__________________________________
Copy to: Thomas W. Kellerman, Esq.
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
(650) 424-0160
__________________________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From
time to time after the effective date of this Registration Statement.
__________________________________
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. /__/
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering./__/
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering./__/
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 2, 1998
PROSPECTUS
SOFTNET SYSTEMS, INC.
4,240,000 Shares of Common Stock
The shareholders of SoftNet Systems, Inc. listed on
page 20 are offering and selling up to 4,240,000 shares of
SoftNet Common Stock under this prospectus.
One of the Selling Shareholders obtained its shares
of SoftNet Common Stock upon conversion of SoftNet Series C or
Series D Preferred Stock or upon exercise of warrants to
purchase SoftNet Common Stock held by such Selling
Shareholder. The other two Selling Shareholders obtained their
shares upon exercise of warrants to purchase SoftNet Common
Stock held by such Selling Shareholders.
The Selling Shareholders may offer their SoftNet
Common Stock through public or private transactions, on or off
the American Stock Exchange, at prevailing market prices or at
privately negotiated prices. For a complete description of how
the Selling Shareholders may distribute the SoftNet Common
Stock under this Prospectus, please carefully read the section
entitled "Plan of Distribution" beginning on page 23. SoftNet
will not receive any of the proceeds from the sale of the
SoftNet Common Stock by the Selling Shareholders.
The SoftNet Common Stock is listed on the American
Stock Exchange under the symbol "SOF." On October 8, 1998, the
last reported sales price of the SoftNet Common Stock on the
American Stock Exchange was $7.375 per share.
_________________________________
You should carefully consider the risk factors
beginning on page 4 of this Prospectus before purchasing any
of the SoftNet Common Stock being offered by the Selling
Shareholders.
_________________________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this Prospectus. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is November 2, 1998.
_________________________________
The information presented in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
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TABLE OF CONTENTS
Page
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AVAILABLE INFORMATION..........................................................................3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE................................................3
RISK FACTORS...................................................................................4
Limited Operating History of the Internet Services Division...........................4
Unproven Business.....................................................................4
Historical Losses; No Assurance of Profitability......................................5
Fluctuations in Quarterly Results.....................................................5
Dependence on Local Cable Operators and their Cable Infrastructure....................6
Dependence on Exclusive Access to Cable Subscribers;
Need for Aggressive Implementation and Deployment..................................7
Substantial Future Capital Requirements...............................................7
Management of Growth..................................................................7
Non-Exclusivity of Cable Franchises; Non-Renewal or Termination of Franchises.........8
Risk of Acquisition of Cable Affiliate by Unaffiliated Cable Operator.................8
Dependence on Third Party Technology and Suppliers....................................8
Competition...........................................................................9
Unproven Network Scalability and Speed...............................................10
Dependence on Network................................................................11
Risk of System Failure...............................................................11
Security Risks.......................................................................11
Dependence on High-Quality Content Provision and Acceptance;
Developing Market for High-Quality Content.......................................11
Dependence on Advertising Revenues...................................................12
Uncertain Acceptance and Maintenance of the ISP Channel Brand........................12
Billing and Collections Risks........................................................12
Dependence on the Growth and Evolution of the Internet...............................13
Potential Liability for Defamatory or Indecent Content...............................13
Potential Liability for Information Retrieved and Replicated.........................13
Rapid Technological Change; Dependence on New Products and Services..................14
Adverse Effect on MTC of Growth of Alternate Technologies............................15
MTC Proprietary Technology; Risk of Third Party Claims of Infringement...............15
Acquisition-Related Risks............................................................15
Dependence on Key Personnel..........................................................16
Government Regulation................................................................16
Product Liability....................................................................17
Risks Relating to MTC's International Operations.....................................17
Shares Eligible for Future Sale; Potential for Dilution..............................17
Failure to Sell the Telecommunications Division......................................18
Absence of Dividends.................................................................18
Volatility of Stock Price............................................................18
Prospective Anti-Takeover Provisions.................................................19
Year 2000 Issues.....................................................................19
USE OF PROCEEDS...............................................................................19
THE SELLING SHAREHOLDERS......................................................................19
Description of Certain Provisions of the Preferred Stock.............................21
Relationships with the Company.......................................................22
PLAN OF DISTRIBUTION..........................................................................23
EXPERT........................................................................................24
</TABLE>
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AVAILABLE INFORMATION
You should rely only on the information contained in this Prospectus
and incorporated by reference into this Prospectus. We have not authorized
anyone to provide you with information different from that contained in this
Prospectus. The Selling Shareholders are offering to sell, and seeking offers to
buy, shares of SoftNet Common Stock only in jurisdictions where offers and sales
are permitted. The information contained in this Prospectus is accurate only as
of the date of this Prospectus, regardless of the time of delivery of this
Prospectus or of any sale of the shares.
In this Prospectus, the "Company," "SoftNet," "we," "us" and "our"
refer to SoftNet Systems, Inc. In addition, we refer to our securities as
follows:
o "Common Stock" refers to our common stock.
o "Series A Preferred Stock" refers to our Series A Convertible Preferred Stock.
o "Series B Preferred Stock" refers to our Series B Convertible Preferred Stock.
o "Series C Preferred Stock" refers to our Series C Convertible Preferred Stock.
o "Series D Preferred Stock" refers to our Series D Convertible Preferred Stock.
o "Preferred Stock" refers to our outstanding preferred stock, which includes
the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock.
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). You
may read and copy any document we file at the public reference facilities of the
SEC located at 450 Fifth Street N.W., Washington D.C. 20549 and at the SEC'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. You can also access copies of such material electronically on the
SEC's home page on the World Wide Web at http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Prospectus is part of a registration statement we filed with the
SEC (Registration No. 333-65593). The SEC permits us to "incorporate by
reference" the information we file with them, which means that we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is considered to be part of this
Prospectus, and information that we file with the SEC after the date of this
Prospectus will automatically update and supersede this information. We
incorporate by reference the following documents filed by us with the SEC (File
No. 1-5270). We also incorporate by reference any future filings made with the
SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"), until the Selling Shareholders sell all of the shares
of Common Stock being registered or until such shares can be sold without being
registered.
1. Our Annual Report on Form 10-K for the fiscal year ended September 30,
1997.
2. Our Current Report on Form 8-K filed with the SEC on January 12, 1998.
3. Our Proxy Statement on Schedule 14A filed with the SEC on January 28, 1998.
4. Our Current Report on Form 8-K filed with the SEC on February 12, 1998.
5. Our Quarterly Report on Form 10-Q for the quarter ended December 31, 1997.
6. Our Current Report on Form 8-K filed with the SEC on April 24, 1998.
7. Our Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
8. Our Current Report on Form 8-K filed with the SEC on June 1, 1998.
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9. Our Current Report on Form 8-K filed with the SEC on July 28, 1998.
10. Our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, as
amended.
11. Our Current Report on Form 8-K filed with the SEC on September 14, 1998.
If you request a copy of any or all of the documents incorporated by
reference, then we will send to you the copies you requested at no charge.
However, we will not send exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents. You should direct
requests for such copies to Mr. Steven M. Harris, Secretary, SoftNet Systems,
Inc., 520 Logue Avenue, Mountain View, California 94043.
RISK FACTORS
You should carefully consider the risks described below before making
an investment decision. The risks and uncertainties described below are not the
only ones facing the Company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations.
If any of the following risks actually occur, our business, financial
condition or results of operations could be materially adversely affected. In
such case, the trading price of our common stock could decline, and you may lose
all or part of your investment.
This prospectus also contains "forward-looking" statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this
prospectus.
Limited Operating History of the Internet Services Division
We currently own two continuing businesses, Micrographic Technology
Corporation ("MTC") and the Internet Services Division. We also own one
discontinued business, the Telecommunications Division. We are seeking a buyer
for the Telecommunications Division and we currently account for it as a
discontinued operation. Our current growth strategy is to focus on substantial
expansion of the Internet Services Division, which was acquired in June 1996. We
have very limited operating history and experience in the Internet services
business. Therefore, the successful expansion of our Internet Services Division
will require strategic and operational implementations that differ from those
historically employed in connection with our two other businesses. Consequently,
we cannot assure our ability to develop or maintain strategies and business
operations that will achieve positive cash flow and profitability for our
Internet Services Division.
Unproven Business
To be successful, we must, among other things, develop and market
products and services that are widely accepted by consumers and businesses at
prices that provide cash flow sufficient to meet our debt service, capital
expenditure and working capital requirements. Recently, it has become feasible
to offer Internet services over cable infrastructure on a broad scale. There are
only a few companies offering such services. We recently launched our ISP
Channel service in 17 cable franchise areas (all of which have revenue-paying
subscribers) in the United States, and we cannot assure you that it will achieve
broad consumer or commercial acceptance. The success of our ISP Channel service
will depend upon the willingness of subscribers to pay the monthly fees and
installation costs associated with the service and purchase or lease the
equipment necessary to access the Internet. Currently, we have approximately
1000 subscribers to the ISP Channel service in these areas. Accordingly, we
cannot predict whether our pricing model will prove to be viable, whether demand
for our services will materialize at the prices we expect to charge, or whether
current or future pricing levels will be sustainable. If we do not achieve or
sustain such pricing levels or if our services do not achieve or sustain broad
market acceptance, then our business, financial condition, prospects and ability
to repay our debts will be materially adversely affected.
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Historical Losses; No Assurance of Profitability
We have sustained substantial losses over the last five fiscal years.
For the nine months ended June 30, 1998, we had net losses of $6.8 million and
for the fiscal year ended September 30, 1997, we had net losses of $2.6 million.
As of June 30, 1998, we had an accumulated stockholders' deficit of
approximately $39 million. We expect to incur substantial additional losses and
experience substantial negative cash flows as we expand our Internet Services
Division. The costs of expansion will include expenses incurred in connection
with:
o the deployment of infrastructure necessary to enable our cable affiliates to
offer our services; o research and development of new product and service
offerings; o the continued development of our direct and indirect selling and
marketing efforts; and o any charges related to acquisitions, divestitures,
business alliances or changing technologies.
Therefore, you should consider our prospects in light of the risks,
expenses and difficulties typically encountered by companies competing in new,
rapidly evolving markets. We cannot assure you that we will ever achieve
favorable operating results or profitability.
Fluctuations in Quarterly Results
Our quarterly results have fluctuated and will likely continue to
fluctuate significantly from quarter to quarter, especially as we implement a
new strategic focus that will emphasize our Internet Services Division. In
addition, we are seeking a buyer for our Telecommunications Division. As a
result, we believe that period-to-period comparisons of our revenues and results
of operations are not necessarily meaningful and should not be relied upon as
indicators of future performance. Our quarterly operating results may fluctuate
significantly in the future as a result of a variety of factors, many of which
are beyond our control.
Factors that may affect the quarterly operating results attributable to
our Internet Services Division include, among others:
o the rate at which we enter into agreements with cable operators and the
exclusivity and term of such agreements the rate of subscription to our
Internet services and the prices subscribers pay for such services;
o subscriber churn rates;
o changes in the revenue sharing arrangements between us and our affiliated
cable operators; o the ability of us and our cable affiliates to coordinate
timely and effective marketing strategies; o the success of us and our
cable affiliates in marketing the ISP Channel service to subscribers in
such affiliates' local cable areas;
o the quality of our cable affiliates' cable infrastructure;
o the quality of customer and technical support;
o the rate at which the cable affiliates can complete the installations
required to initiate service for new subscribers;
o the amount and timing of capital expenditures and other costs relating to
the expansion of our Internet Services Division;
o the introduction of new Internet services by us or our competitors and
customer acceptance of such services;
o price competition or pricing changes in the Internet or cable industries;
o general economic conditions and economic conditions specific to the
Internet and cable industries; and
o changes in law and regulation.
Factors that may affect the quarterly operating results attributable to
MTC include, among others:
o the size and timing of customer orders and subsequent shipments;
o customer order deferrals in anticipation of new products and services;
o timing of product introductions or enhancements by us or our competitors;
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o market acceptance of new products and services;
o technological changes in the industry;
o competitive pricing pressures;
o accuracy of customer forecasts of end-user demand;
o changes in the mix of products sold; and
o quality control of products sold.
Additional factors that may affect our quarterly operating results in
general include, among others:
o changes in our operating expenses;
o personnel changes;
o disruption in sources of supply;
o capital spending;
o delays of payments by customers; and
o general economic conditions.
We expect to continue extensive research and development activities and
to evaluate new product and service opportunities. These activities will require
our continued investment in research and development and sales and marketing,
which could adversely affect our short-term results of operations. We believe
that future revenue growth and profitability will depend in part on our ability
to develop new products and services. Failure to increase revenues from new
products and services, whether due to lack of market acceptance, competition,
technological change or otherwise, would have a material adverse effect on our
financial condition, prospects and ability to repay our debts.
Dependence on Local Cable Operators and their Cable Infrastructure
Certain ISP Channel services are dependent on cable infrastructure
quality. Cable system operators have announced and begun to implement major
infrastructure investments 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, operational 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. As a condition of obtaining such renewal, they may have to
meet certain conditions imposed by the issuing jurisdiction. These conditions
may cause the cable operator to delay such upgrades. Our contracts with cable
affiliates typically range from three to five years, and we cannot assure that
such contracts will be renewed. Moreover, even if such contracts are renewed, we
cannot assure that such renewal will be on satisfactory terms. 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. Consequently, cable operators may
choose not to upgrade their network infrastructures. Instead, they may roll-out
incompatible set-top boxes that do not support high-speed Internet access
services. Thus, such upgrades have been, and we expect will continue to be,
subject to change, delay or cancellation. Cable operators' failure to complete
these upgrades in a timely and satisfactory manner, or at all, would adversely
affect the market for our products in any such operators' franchise area. If
repeated on a broad scale, such failures could have a material adverse effect on
our business, financial condition, prospects and ability to repay our debts.
We provide Internet services to cable systems irrespective of their
two-way capabilities. In some circumstances, we provide Internet services over
cable systems to homes with a telephone line return path for data from the home
(under a "one-way" cable system). Therefore, in those circumstances, our
services may not provide the high speed access, 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 must subscribe through a cable
affiliate, the cable affiliate (and not the Company) will substantially control
the customer relationship with the subscriber. For example, under our
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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 distribution of local marketing materials.
Therefore, in addition to general economic conditions, market conditions and
factors relating to Internet service providers and on-line services
specifically, our success and future business growth will also be subject to
economic and other factors effecting cable affiliates in general.
Dependence on Exclusive Access to Cable Subscribers; Need for Aggressive
Implementation and Deployment
The success of our Internet Services Division is dependent, in part, on
our ability to gain exclusive access to cable consumers. This exclusivity is a
function of cable operators' dominance within their geographic markets and our
exclusive relationship with such cable operators. We cannot assure that
affiliated cable operators will not face competition in the future or that we
will be able to establish and maintain exclusive relationships with cable
operators. Currently, a number of our contracts with cable operators do not
contain exclusivity provisions. Even if we are able to establish and maintain
exclusive relationships with cable operators, we cannot assure the ability to do
so on favorable terms or in sufficient quantities to be profitable. In addition,
we are seeking affiliations with a large number of cable operators as quickly as
possible because we 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 us and our cable
affiliates or our cable affiliates and their cable subscribers is impaired, or
if we do not become affiliated with a sufficient number of cable operators, our
business, financial condition, prospects and ability to repay our debts could be
materially adversely affected.
Substantial Future Capital Requirements
The development of our business will require substantial capital
infusions as a result of (1) our need to enhance and expand product and service
offerings to maintain our competitive position and increase market share and (2)
the substantial investment in equipment and corporate infrastructure required by
the continued national deployment of the ISP Channel. In addition, we anticipate
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 we
will have to upgrade our equipment on any affected cable system to handle
two-way transmissions. Whether or when we ultimately achieve cash flow levels
sufficient to support our operations, development of new products and services,
and expansion of our Internet Services Division, cannot be predicted accurately.
Unless such cash flow levels are achieved, we 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 operations. In
the event that we cannot generate sufficient cash flow from operations, or are
unable to borrow or otherwise obtain additional funds on favorable terms to
finance operations when needed, our business, financial condition, prospects and
ability to repay our debts would be materially adversely affected.
Management of Growth
To fully exploit the market for our products and services, we must
rapidly execute our sales strategy while managing anticipated growth by
implementing effective planning and operating processes. To manage our
anticipated growth, we must, among other things:
o continue to implement and improve our operational, financial and management
information systems,
o hire and train additional qualified personnel,
o continue to expand and upgrade core technologies and
o effectively manage multiple relationships with various customers, suppliers
and other third parties.
Consequently, such expansion could place a significant strain on our
services and support operations, sales and administrative personnel and other
resources. We may, in the future, also experience difficulties meeting demand
for our products and services. Additionally, if we are unable to provide
training and support for our products, the implementation process will be longer
and customer satisfaction may be lower. We cannot assure that our systems,
procedures or controls will be adequate to support our operations or that
management will be able to fully exploit the market for our products and
services. Our failure to manage growth effectively could have a material adverse
effect on our business, financial condition, prospects and ability to repay our
debts.
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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 the franchise is
terminable if the franchisee fails to comply with the material provisions of the
franchise. 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. This Act also permits municipal authorities to operate cable
television systems in their communities without franchises. We cannot assure
that cable television companies having contracts with us will retain or renew
their franchises. Non-renewal or termination of any such franchises would result
in the termination of our contract with the applicable cable operator. If an
affiliated cable operator were to lose its franchise, we would seek to affiliate
with the successor to the franchisee. We cannot, however, assure an affiliation
with such successor or that such affiliation would result in no additional costs
to us. If we cannot affiliate with replacement cable operators, our business,
financial condition, prospects and ability to repay our debts could be
materially adversely affected.
Risk of Acquisition of Cable Affiliate by Unaffiliated Cable Operator
We believe it is highly unlikely that a cable operator will find it
desirable, economically or otherwise, to devote the channel capacity necessary
to offer Internet services to subscribers via more than one provider. However,
under many of our initial contracts, in the event a cable affiliate is acquired
by an unaffiliated cable operator that already has a relationship with one of
our competitors or chooses not to enter into a contract with us, we may lose our
ability to offer Internet services in the area served by such former cable
affiliate. Such a loss could have a material adverse effect on our business,
financial condition, prospects and ability to repay our debts.
Dependence on Third Party Technology and Suppliers
The markets for the products and services we use are characterized by
the following:
o intense competition;
o rapid technological advances;
o evolving industry standards;
o changes in subscriber requirements;
o frequent new product introductions and enhancements;
o rapidly evolving; and
o multiple alternative service offerings.
Because of these factors, we must rely upon third parties to develop and
introduce technologies that enhance our current product and service offerings.
Reliance on third parties enables us to develop and introduce our own products
and services on a timely and cost-effective basis to meet changing customer
needs and technological trends in our industries. If our relationship with such
third parties is impaired or terminated, then we would have to find other
developers on a timely basis or develop our own technology. We cannot predict
whether we will be able to obtain the third party technology necessary for
continued development and introduction of new and enhanced products and
services. In addition, we cannot predict whether we will obtain third party
technology on commercially reasonable terms or replace third party technology in
the event such technology becomes unavailable, obsolete or incompatible with
future versions of our products or services. The absence of or any significant
delay in the replacement of third party technology would have a material adverse
effect on our business, financial condition, prospects and ability to repay our
debts.
In addition, both 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 our cable modem and headend
equipment suppliers are in litigation over their patents. We could experience
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disruptions in the delivery or increases in the prices of products and services
purchased from vendors as a result of intellectual property litigation. We
cannot predict whether delays in key components or product deliveries will 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, we may not
have adequate remedies against such third parties as a result of breaches of
their agreements with us. The inability to obtain sufficient key components or
to develop alternative sources for such components could result in delays or
reductions in product shipments. If that were to happen, it could have a
material adverse effect on our customer relationships, business, financial
condition, prospects and ability to repay our debts.
Certain key products that we resell are currently contracted
exclusively for distribution in certain markets we are in. For instance, the
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 our total revenues. Any change in the exclusivity
provisions of these types of contracts, or loss thereof, could have a materially
adverse effect on our business, financial condition, prospects and ability to
repay our debts.
Competition
The markets for our products and services are intensely competitive,
and we expect competition to increase in the future. Many of our 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 we do. 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 we can. We cannot predict whether we will be able to
compete successfully against current or future competitors or that competitive
pressures faced by us will not materially adversely affect the Company's
business, financial condition, prospects or ability to repay its debts. Any
increase in competition could reduce our gross margins, require increased
spending by us on research and development and sales and marketing, and
otherwise materially adversely affect our business, financial condition,
prospects and ability to repay our debts.
Internet Services. In the cable-based segment of the Internet access
industry, we compete with other cable-based data services that are seeking to
contract with cable system operators. These competitors include (1) systems
integrators such as Convergence.com, Online System Services, HSAnet and Frontier
Communications' Global Center business, and (2) Internet Service Providers
("ISPs") such as Earthlink Network, Inc. ("Earthlink"), MindSpring Enterprises,
Inc., and IDT Corporation. Several cable system operators have deployed
high-speed Internet access services over their existing local hybrid fiber and
coaxial cable networks. The largest of these cable system operators are
CableVision Systems Corporation, Comcast Corporation ("Comcast"), Cox
Enterprise, Inc. ("Cox"), MediaOne Group, Inc., Tele-Communications, Inc.
("TCI") and Time Warner Inc. ("Time Warner"). 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 our most direct competitors in the access markets are
telephony-based access providers, including incumbent local exchange carriers,
national interexchange or long distance carriers, fiber-based competitive local
exchange carriers, ISPs, online service providers ("OSPs"), wireless and
satellite data service providers, and competitive local exchange carriers that
use digital subscriber line technologies. Some of these competitors are among
the largest companies in the country, including AT&T Corp and WorldCom, Inc.
Other competitors include BBN Corporation, Earthlink, Netcom Online
Communications Services, Inc., Concentric Network, and PSInet Inc. Internet
access via the existing telephone infrastructure is widely available and
inexpensive, and barriers to entry are low. The result is a highly competitive
and fragmented market.
Some of our potential competitors are offering diversified packages of
telecommunications services to residential customers. If these companies bundle
Internet access service with other telecommunications services, then we would be
at a competitive disadvantage. Many of these companies are offering (or may soon
offer) technologies that will attempt to compete with some or all of our
Internet 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.
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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, such as integrated services digital network and digital subscriber
line implementations, and wireless technologies such as local multipoint
distribution service, multichannel multipoint distribution service and direct
broadcast satellite. Our prospects may be impaired by Federal Communications
Commission ("FCC") rules and regulations, which are designed, at least in part,
to increase competition in video and related services. 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
us and our business. Significant market acceptance of alternative solutions for
high-speed data transmission could decrease the demand for our 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.
We cannot predict whether and to what extent technological developments
will have a material adverse effect on our competitive position. 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 our products and services. If that were to happen, it
could have a material adverse effect on our business, financial condition,
prospects and ability to repay our debts.
Document Management. In the document management industry, we compete on
the basis of breadth of offering, cost, flexibility and customer service. We
have two direct worldwide competitors to our hardware products: Agfa AG in
Europe and Anacomp, Inc. in North America. Indirect competitors include
International Business Machines Corp., Fuji Photo Film Co., Ltd., Mobius
Management Systems, Inc., Storage Technology and others. In most cases, our
competitors have longer operating histories, greater name recognition, and
significantly greater financial, technical and marketing resources. While we are
not aware of any direct competitors to our software product offerings, the
industry is rapidly evolving and we may face significant competition in the
future.
Unproven Network Scalability and Speed
Because of the limited deployment of our ISP Channel service, our
ability to connect and manage a substantial number of on-line subscribers at
high transmission speeds is as yet unknown. In addition, we face risks related
to our ability to scale up to 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:
o type and location of content;
o Internet traffic;
o the number of active subscribers on a given cable network node;
o the number of 6 MHz channels allocated by the cable affiliate (in its
discretion) to carry the Company's service; and o 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 our cable
affiliates to add additional 6 MHz channels in order to maintain adequate
downstream data transmission speeds. These additions would render such channels
unavailable to such cable affiliates for video or other programming. We cannot
assure you that our 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 interference level in the
cable affiliates' upstream data broadcast range can materially affect actual
upstream data transmission speeds. The actual data delivery speeds 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. We cannot assure our ability to achieve or maintain data
transmission speeds high enough to enable us to attract and retain our planned
numbers of subscribers, especially as the number of subscribers to our services
grows. Consequently, a perceived or actual failure by us to achieve or maintain
high speed data transmission could significantly reduce consumer demand for our
services and have a material adverse effect on our business, financial
condition, prospects and ability to repay our debts.
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Dependence on Network
Our success will depend upon the capacity, reliability and security of
the infrastructure used to carry data between our subscribers and the Internet.
A significant portion of such infrastructure is owned by third parties, and
accordingly we have no control over its quality and maintenance. We rely on
cable operators to maintain their cable infrastructure. In addition, we rely on
other third parties to provide a connection from the cable infrastructure to the
Internet. Currently, we have transit agreements with MCI, MFS, Sprint
Communications Company, and others to support the exchange of traffic between
the Company's network operations center, cable infrastructure and the Internet.
The failure of the Internet backbone, the network operations center, or any
other link in the delivery chain resulting in an interruption of our operations
would have a material adverse effect on our business, financial condition,
prospects and ability to repay our debts.
Risk of System Failure
Our operations are dependent upon our ability to support a 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 any one of these events could cause
interruptions in the services we provide. In addition, the failure of an
incumbent local exchange carrier or other service provider to provide the
communications capacity we require, as a result of a natural disaster,
operational disruption or any other reason, could cause interruptions in the
services we provide. Any damage or failure that causes interruptions in our
operations could have a material adverse effect on our business, financial
condition, prospects and ability to repay our debts.
Security Risks
Despite implementation of security measures, our networks or those of
our cable affiliates may be vulnerable to unauthorized access, computer viruses
and other disruptive problems. ISPs and OSPs have experienced in the past, and
may experience in the future, 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 our computer systems and those of
our subscribers. Such events may result in our liability to our subscribers and
may also deter potential subscribers. Although we intend to continue
implementation of industry-standard security measures, such measures have been
circumvented in the past, and we cannot assure you that measures implemented by
us will not be circumvented in the future. Moreover, we have no control over the
security measures our cable affiliates adopt. Eliminating computer viruses and
alleviating other security problems may cause our subscribers delays due to
interruptions or cessation of service. Such delays could have a material adverse
effect on our business, financial condition, prospects and ability to repay
debts. In addition, the threat of these and other security risks may deter
potential ISP Channel subscribers from purchasing the ISP Channel service. This
could also have a material adverse effect on our business, financial condition,
prospects and ability to repay debts.
Dependence on High-Quality Content Provision and Acceptance; Developing Market
for High-Quality Content
A key component of our strategy is to provide Internet users a more
compelling interactive experience than the one currently available to customers
of dial-up ISPs and OSPs. We believe that, in addition to providing high-speed,
high-performance Internet access, we must also develop and aggregate
high-quality multimedia content. Our success in providing and aggregating such
content will depend in part on our ability to develop a customer base large
enough to justify investments in the development of such content. Such success
will also depend on (1) the ability of content providers to create and support
high-quality multimedia content and (2) our ability to aggregate content
offerings in a manner subscribers find attractive. We cannot assure you that we
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 fails to develop, or develops more
slowly than expected, or if competition increases, or if our content offerings
do not achieve or sustain market acceptance, our business, financial condition,
prospects and ability to repay our debts will be materially adversely affected.
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Dependence on Advertising Revenues
The success of our Internet Services Division depends in part on our
ability to entice advertisers to advertise through the ISP Channel. We expect 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. We believe that we can
leverage the ISP Channel to provide information to advertisers to help them
better target prospective customers. Nonetheless, we cannot assure you that
advertisers will find such information useful or will choose to advertise
through the ISP Channel. Therefore, we cannot assure you that we will be able to
attract advertising revenues in quantities and at rates that are satisfactory to
us. The failure to do so could have a material adverse effect on our business,
financial condition, prospects and ability to repay our debts.
Uncertain Acceptance and Maintenance of the ISP Channel Brand
We believe that establishing and maintaining the ISP Channel brand are
critical to attract and expand our subscriber base. Promotion of the ISP Channel
brand will depend on several factors, including: (1) our success in providing
high-speed, high-quality consumer and business Internet products, services and
content, (2) the marketing efforts of our cable affiliates and (3) the
reliability of our cable affiliates' networks and services. We cannot assure you
that any of these factors will be achieved. We have little control over our
cable affiliates' marketing efforts or the reliability of their networks and
services.
If consumers and businesses do not perceive our existing products and
services as high quality or we introduce new products or services or enter into
new business ventures that are not favorably received by consumers and
businesses, then we will be unsuccessful in promoting and maintaining our brand.
In addition, to the extent that we direct our marketing efforts to geographic
areas where the ISP Channel service is unavailable, we risk frustrating
potential subscribers who are unable to access our products and services.
Furthermore, we may need to devote substantial resources to create and
maintain a distinct brand loyalty among customers to attract and retain
subscribers and to promote and maintain the ISP Channel brand in a very
competitive market. If we are unsuccessful in establishing or maintaining the
ISP Channel brand or if we incur excessive expenses in promoting and maintaining
our brand, our business, financial condition, prospects and ability to repay our
debts would be materially adversely affected.
Billing and Collections Risks
We have recently begun the process of designing and implementing our
billing and collections system for the Internet Services Division. We intend to
bill for these services 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, we cannot assure
you that we will be successful in developing and implementing the system in a
timely manner or that we will be able to scale the system quickly and
efficiently if the number of subscribers requiring such a billing format
increases. In some circumstances, our cable affiliates are responsible for
billing and collection for our Internet access services. In these instances, we
have little or no control over the accuracy and timeliness of the invoices or
over collection efforts.
Given our relatively limited history with billing and collection for
Internet services, we cannot predict the extent to which we may experience bad
debts or our ability to minimize such bad debts. If we encounter significant
problems with our billing and collections process, our business, financial
condition, prospects and ability to repay our debts could be materially
adversely affected.
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Dependence on the Growth and Evolution of the Internet
Market acceptance of our Internet services substantially depends upon
the growth and evolution of the Internet in ways that are best suited for our
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 thus, we cannot assure you that
those applications most favorable to our services and technology will be widely
accepted by the marketplace.
Because the number of Internet users and level of use continue to grow
significantly, we cannot assure you that the Internet infrastructure will be
able to support this increased demand 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 to handle increased levels of Internet activity. In addition, we
cannot assure you 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, our business, financial condition, prospects and ability
to repay our debts 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. Congress has attempted 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. Because of the potential
liability for materials carried on or disseminated through our systems, we may
have to implement measures to reduce our exposure to such liability. Such
measures may require the expenditure of substantial resources or the
discontinuation of certain products or services. Any imposition of liability on
our company for information carried on the Internet could have a material
adverse effect on our business, financial condition, prospects and ability to
repay our debts.
Potential Liability for Information Retrieved and Replicated
Because subscribers download and redistribute materials which are
cached or replicated by us in connection with our Internet services, claims
could be made against us or our 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. You should know that
these types of claims have been successfully brought against OSPs. In
particular, copyright and trademark laws are evolving both domestically and
internationally, and it is uncertain how broadly the rights provided under these
laws will be applied to on-line environments. It is impossible for us to
determine who the potential rights holders may be with respect to all materials
available through our 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 us based upon our services or technologies. Our liability
insurance may not cover these types of potential claims or may not be adequate
to indemnify us for all liability that may be imposed. Any imposition of
liability not covered by insurance or in excess of insurance coverage could have
a material adverse effect on our business, financial condition, prospects and
ability to repay our debts.
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Rapid Technological Change; Dependence on New Products and Services
Our future development efforts may not result in commercially
successful products or our products and services may be rendered obsolete by
changing technology, new industry standards or new product announcements by
competitors. The markets for all of our products and services are characterized
by:
o intense competition;
o rapid technological advances;
o evolving industry standards;
o changes in subscriber requirements;
o frequent new product introductions and enhancements; and
o rapidly evolving alternative service offerings.
For example, we expect 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 our Internet Service, the demand for set-top boxes may never reach
the level we and industry experts have estimated. Even if set-top boxes do reach
this level of popularity, we cannot assure you we will be able to capitalize on
such demand. If this scenario occurs or if other technologies or standards
applicable to our products or services become obsolete or fail to gain
widespread commercial acceptance, then our business, financial condition,
prospects and ability to repay our debts 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 our 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 our services. These announcements can delay purchasing
decisions by our customers and confuse the marketplace regarding available
alternatives. Such announcements could, in the future, adversely impact our
business, financial condition, prospects and ability to repay our debts.
Our ability to adapt to changes in technology and industry standards,
and to develop and introduce new and enhanced products and service offerings
will determine whether we can maintain or improve our competitive position and
our prospects for growth. However, the following factors may hinder our efforts
to introduce and sell new products and services:
o rapid technological changes in the Internet and telecommunications
industries;
o the lengthy product approval and purchase process of our customers; and
o our reliance on third party technology for the development of new products
and services.
In addition, we cannot assure you that we will have the financial and
manufacturing resources necessary to continue successful development of new
products or services based on emerging technologies. Moreover, due to intense
competition, there may be a time-limited market opportunity for our cable-based
consumer and business Internet services. Our services may not achieve widespread
acceptance before competitors offer products and services with speed and
performance similar to our current offerings. In addition, the widespread
adoption of new Internet or telecommuting technologies or standards, cable-based
or otherwise, could require substantial and costly modifications to our
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 our business, financial condition, prospects
and ability to repay our debts.
The technology underlying our capital equipment, such as headends and
cable modems, continues to evolve and, accordingly, our equipment could become
out-of-date or obsolete prior to the time we originally intended to replace it.
If this occurs, we may need to purchase substantial amounts of new capital
equipment, which could have a material adverse effect on our business, financial
condition, prospects and ability to repay our debts.
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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 be substantially adversely affected by the increasing
use of digital technology in the future. MTC's revenues, after taking into
account the discontinuation of the Telecommunications Division, have represented
substantially all of our 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 accompanying price declines in digital systems and products is
expected to continue. As a result, some potential MTC customers have deferred,
and may continue to defer, investments in MTC systems while evaluating the
abilities of digital and other technologies.
Continued development of local area computer networks and similar
systems based on digital technologies has led to 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 has led to
intense price competition in certain of MTC's markets. Therefore, the decline in
the market for Computer Output to Microfilm ("COM") services, the high fixed
costs and declining market for COM systems and the corresponding reduction in
equipment and supplies have, and we expect will continue to, adversely impact
our business. Our revenues for maintenance of COM systems have declined in part
because of efficiencies associated with our 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 caused 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
An increasing number of patents and frequent litigation based on
allegations of patent and other intellectual property infringement characterize
the industry in which MTC operates. 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 has license rights to use. We cannot assure you that
such confidentiality or licensing agreements will not be breached, that others
may not infringe upon such patents or licenses, or that we would have adequate
remedies for any such breach or infringement. In addition, we cannot assure you
that patents issued to or licensed by us will not be challenged or circumvented
by competitors or be found to be sufficiently broad to protect our technology or
to provide us with any competitive advantage. Moreover, we may be materially
adversely affected if our competitors independently develop substantially
equivalent technology. Further, any litigation, either on behalf of or against
us, relating to such confidentiality or licensing agreements, patents or
copyrights, regardless of outcome, could be costly and could divert the efforts
of our management. Therefore, any infringement claim or other litigation against
or initiated by us could have a material adverse effect on our business,
financial condition, prospects and ability to repay our debts.
Acquisition-Related Risks
We may acquire other businesses that we believe will complement our
existing business. We cannot predict if or when any prospective acquisitions
will occur or the likelihood that they will be completed on favorable terms.
Acquiring a business involves many risks, including:
o difficulty assimilating the acquired operations and personnel;
o potential disruption of our ongoing business and diversion of resources and
management time;
o possible inability of management to maintain uniform standards, controls,
procedures and policies;
o risks of entering markets in which we have little or no direct prior
experience;
o potential impairment of relationships with employees or customers as a
result of changes in management.
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We cannot assure that we will make any acquisitions or that we will be
able to obtain additional financing for such acquisitions, if necessary. If any
acquisitions are made, we cannot assure that we will be able to successfully
integrate the acquired business into our operations or that the acquired
business will perform as expected.
Dependence on Key Personnel
Our success depends, in large part, on our ability to attract and
retain qualified technical, marketing, sales and management personnel. With the
expansion of our Internet Services Division, we are currently seeking new
employees. However, competition for such personnel is intense in our business,
and thus, we may be unsuccessful in our hiring efforts. To launch our ISP
Channel concept on a large-scale basis, we have recently assembled a new
management team, most of whom have been with us for less than six months. The
loss of any member of the new team, or failure to attract or retain other key
employees, could have a material adverse effect on our business, financial
condition, prospects and ability to repay our debts.
Government Regulation
Currently, neither the FCC nor any other federal or state
communications regulatory agency directly regulates our services. However, any
changes in law or regulation relating to Internet connectivity and
telecommunications markets could affect the nature, scope and prices of our
services. Such changes include those 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.
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 lead to further changes to the FCC's governing law.
We cannot predict the impact, if any, that future legal or regulatory changes
might have on our business.
In addition, regulation of cable television may affect the speed at
which our cable affiliates upgrade their cable infrastructures to two-way hybrid
fiber coaxial cable. Currently, our cable affiliates have generally elected to
classify the distribution of our services as "additional cable services" under
their respective franchise agreements, and accordingly pay franchise fees.
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 change in the classification of service could have a
potentially adverse impact on our company.
Another possible risk is that local franchise authorities may subject
the cable affiliates to higher or additional franchise fees or taxes or
otherwise require them to obtain additional franchises in connection with
distribution of our services. There are thousands of franchise authorities in
the United States alone, and thus it will be difficult or impossible for us or
our cable affiliates to operate under a unified set of franchise requirements.
If the FCC or another governmental agency classifies cable system operators as
"common carriers" or "telecommunications carriers" because they provide Internet
services, or if cable system operators themselves seek such classification as a
means of limiting their liability, we could lose our rights as the exclusive ISP
for some of our cable affiliates. In addition, if we or our cable affiliates are
classified as common carriers, we could be subject to government-regulated
tariff schedules for the amounts we charge for our services. To the extent we
increase the number of foreign jurisdictions in which we offer our services, we
will be subject to further governmental regulation.
In addition, we obtain some of the components for our products and
services from foreign suppliers which may be subject to tariffs, duties and
other import restrictions. Any changes in law or regulation including those
discussed above, whether in the United States or elsewhere, could materially
adversely affect our business, financial condition, prospects and ability to
repay our debts.
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Product Liability
Our customers use our products, such as those sold by MTC, to provide
information relating to their business operations and information used in other
critical applications. If any of our products failed to provide accurate and
timely information, our customers may bring claims against us. We cannot assure
you that our insurance coverage would adequately cover any claim asserted
against us. A successful claim brought against us in excess of our insurance
coverage could have a material adverse effect on our business, financial
condition, prospects and ability to repay our debts. Even unsuccessful claims
could result in the expenditure of funds in litigation, management time and
resources. We cannot assure you that we will not be subject to product liability
claims, that such claims will not result in liability in excess of our insurance
coverage or that our insurance will cover such claims or that appropriate
insurance will continue to be available to us in the future at commercially
reasonable rates.
Risks Relating to MTC's International Operations
After taking into account discontinued operations, sales outside of the
United States accounted for approximately 22% of our total revenues for the
fiscal year ending September 30, 1997 and 27% of our total revenues for the
fiscal year ending September 30, 1996. These sale 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. We believe that our future revenue growth and
profitability in the foreign markets will principally depend on our success in
developing 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 our business, financial condition, prospects and ability to
repay our debts.
Because of its export sales, MTC is subject to the risks of conducting
business internationally, including:
o unexpected changes in regulatory requirements (including the regulation of
Internet access);
o uncertainty regarding liability for information retrieved and replicated in
foreign institutions;
o foreign currency fluctuations which could result in reduced revenues or
increased operating expenses;
o potential inadequacy of the laws of some foreign countries to protect our
intellectual property;
o tariffs and trade barriers;
o potentially longer payment cycles;
o difficulty in accounts receivable collection;
o foreign taxes;
o burdens of complying with a variety of foreign laws and trade standards;
and
o general geopolitical risks, such as political and economic instability and
changes in diplomatic and trade relationships.
Thus, we cannot assure you that the risks associated with MTC's
international operations will not materially adversely affect our business,
financial condition, prospects and ability to repay our debts or require MTC to
modify significantly its current business practices.
Shares Eligible for Future Sale; Potential for Dilution
Any of the occurrences listed below could (1) cause a material decline
in the market price of our common stock, (2) impair our future ability to raise
capital through an offering of equity securities, and (3) cause substantial
dilution to the holders of Common Stock:
o the future sale of shares of Common Stock by our existing shareholders
under Rule 144 of the Securities Act;
o the exercise of registration rights by the holders of these rights;
o the exercise of options or warrants resulting in an issuance of shares of
our Common Stock;
o the conversion of convertible securities into Common Stock.
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We cannot predict what effect, if any, the sales of such shares or the
availability of such shares for future sale will have on the market price of our
Common Stock. As of September 30, 1998, we have reserved for issuance 2,960,344
shares of Common Stock for outstanding convertible subordinated debentures,
options and warrants. We have also reserved up to 19.9% of our outstanding
Common Stock as of May 29, 1998 for issuance under our cable affiliate incentive
program.
In addition, we have issued convertible preferred stock that has a
conversion price that fluctuates in relation to the price of our Common Stock.
If converted on September 30, 1998, the convertible preferred stock would have
converted into approximately 1,930,500 shares of Common Stock, but this number
of shares could be much greater if the trading price of our common stock were to
decrease. We have not registered these shares of convertible preferred stock,
and they may be sold only if registered under the Securities Act or sold under
an applicable exemption from registration, such as Rule 144. We have previously
registered or we are now registering these shares of Common Stock into which the
Preferred Stock may be converted.
Failure to Sell the Telecommunications Division
We have decided to discontinue our Telecommunications Division, and we
are currently seeking a buyer for this division. However, we cannot assure you
that these efforts will be successful. If we are unable to sell the
Telecommunications Division on terms we believe are satisfactory, we will not
obtain the proceeds anticipated from the sale. Accordingly, the capital
available to implement our Internet Service Division's strategy will be
correspondingly reduced. 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 negative cash flow basis in the
future. Thus, any delay in finding a buyer or failure to sell this division
could have a material adverse effect on our business, financial condition,
prospects and ability to repay our debts.
Absence of Dividends
We have not historically paid any cash dividends on our Common Stock
and do not expect to declare any such dividends in the foreseeable future.
Payment of any future dividends will depend upon our earnings and capital
requirements, our debt facilities and other factors the Board of Directors deems
relevant. We currently intend to retain our earnings, if any, to finance the
development and expansion of our Internet Services Division. Our Certificate of
Incorporation (1) prohibits the payment of cash dividends on our Common Stock,
without the approval of the holders of the convertible preferred stock and (2)
upon liquidation of our company, requires us to pay the holders of the
convertible preferred stock before we make any payments to the holders of our
Common Stock. You should also know that some of our financing agreements
restrict our ability to pay dividends on our Common Stock.
Volatility of Stock Price
The market price for our Common Stock has been volatile in the past,
and several factors could cause the price to fluctuate substantially in the
future. These factors include:
o announcements of developments related to our business;
o fluctuations in our results of operations;
o sales of substantial amounts of our securities into the marketplace;
o general conditions in our industries or the worldwide economy;
o an outbreak of war or hostilities;
o a shortfall in revenues or earnings compared to securities analysts'
expectations;
o changes in analysts' recommendations or projections;
o announcements of new products or services by us or our competitors; and
o changes in our relationships with our suppliers or customers.
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The market price of our Common Stock may fluctuate significantly in the
future, and these fluctuations may be unrelated to our performance. General
market price declines or market volatility in the future could adversely affect
the price of our common stock, and thus, the current market price may not be
indicative of future market prices.
Prospective Anti-Takeover Provisions
We are a New York corporation. We intend 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
discourage, delay or make a change in control of our company more difficult or
prevent the removal of incumbent directors. In addition, our proposed
Certificate of Incorporation and Bylaws for the Delaware corporation would have
certain provisions that have the same effect. These provisions may have a
negative impact on the price of our Common Stock and may discourage third-party
bidders from making a bid for our company or may reduce any premiums paid to
shareholders for their Common Stock.
Year 2000 Issues
Many existing computer systems and related software applications use
only two digits to identify a year in a date field, without considering the
impact of the upcoming change in the century. These systems and applications
could fail or create erroneous results unless corrected so that they can process
data related to the Year 2000. We rely on such computer systems and applications
in operating and monitoring all major aspects of our business including our
financial systems (such as general ledger, accounts payable and payroll
modules), customer services, internal networks and telecommunications equipment,
and end products. We also rely, directly and indirectly, on the external systems
of various independent businesses (such as our customers, suppliers, creditors,
financial organizations) and of domestic and foreign governments for the
accurate exchange of data.
We are currently in the process of evaluating the potential impact of
the Year 2000 issue on our business and the expenses we expect to incur in
remedying such an impact (including testing and implementation of remedial
action). Our management estimates that the costs associated with the Year 2000
issue should not have a material adverse affect on the results of our operations
or our financial position in any given year. However, despite our efforts to
address the Year 2000 impact on our internal systems, we cannot be sure that we
have fully identified such impact or that we can resolve it without disruption
of our business and without incurring significant expenses. Even if our internal
systems are not materially affected by the Year 2000 issue, any disruption in
the operation of the various third-parties with which we interact (such as cable
affiliates, vendors and suppliers) could affect our business.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the Shares by the
Selling Shareholders.
THE SELLING SHAREHOLDERS
The following table sets forth information regarding the Selling
Shareholders, including (1) the name of each Selling Shareholder, (2) the number
of Shares beneficially owned by each Selling Shareholder as of October 7, 1998,
and (3) the maximum number of Shares that may be offered pursuant to this
Prospectus. The information presented is based on data furnished to us by the
Selling Shareholders. Percentage ownership is based upon 8,191,550 shares of
Common Stock outstanding on October 7, 1998.
Each Selling Shareholder will determine the number of shares of Common
Stock that such Selling Shareholder will sell. We cannot estimate the number of
shares of Common Stock that will be held by the Selling Shareholders upon
termination of the offering because the Selling Shareholders may choose to sell
less than the number of shares being offered.
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Pursuant to Rule 416 of the Securities Act, Selling Shareholders may
also offer and sell additional shares of Common Stock issued with respect to the
Warrants, the Series C Preferred Stock or the Series D Preferred Stock as a
result of stock splits, stock dividends and anti-dilution provisions.
Shares Beneficially Owned Shares Being
Prior to Offering Offered
----------------- -------
Number Percent
------ -------
RGC International Investors, LDC..... 2,556,196(1) 24.2% 4,187,500(2)
Shoreline Pacific Equity, Ltd........ 23,625(3) * 47,250(3)
Steve Lamar.......................... 10,025(3) * 5,250(3)
- ----------------------
* Less than 1%.
(1) Consists of (i) 201,946 shares of Common Stock, (ii) 423,750 shares of
Common Stock issuable upon exercise of the Warrants, (iii) 403,354
shares of Common Stock issuable upon conversion of the Series A
Preferred Stock at the conversion price in effect as of the date of
this Prospectus, which is $7.6875 per share, (iv) 690,341 shares of
Common Stock issuable upon conversion of the Series B Preferred Stock
at the conversion price in effect as of the date of this Prospectus,
which is $13.20 per share, and (v) 836,805 shares of Common Stock
issuable upon conversion of the Series C Preferred Stock at the
conversion price in effect as of the date of this Prospectus, which is
$9.00 per share, held by such Selling Shareholder. The actual number of
shares of Common Stock issuable upon conversion of the Preferred Stock
is indeterminable and is subject to adjustment based on various
factors, including the floating rate conversion price mechanism
contained in the terms of the Preferred Stock. See "--Description of
Certain Provisions of the Preferred Stock--Conversion Prices."
We have reserved up to 1,093,466 shares of Common Stock for issuance
upon conversion of the Series A Preferred Stock held by this
Shareholder. The aggregate maximum number of shares of Common Stock
issuable upon conversion of the Series B Preferred Stock and Series C
Preferred Stock held by this Selling Shareholder is 3,800,000. If this
Selling Shareholder obtained these share amounts upon conversion of the
Preferred Stock that it owns, then its total ownership position would
equal 5,519,162 shares of Common Stock, or 40.9% of the outstanding
shares of Common Stock of the Company.
This Selling Shareholder is contractually bound not to convert its
Preferred Stock into more than 19.99% of the outstanding Common Stock
without shareholder approval. In addition, this Selling Shareholder is
contractually bound not to own more than 4.99% of the outstanding
Common Stock as determined in accordance with Section 13(d) of the
Exchange Act. However, if this Selling Shareholder no longer holds
Series C Preferred Stock, Series D Preferred Stock, or warrants issued
in connection with the Series C and Series D financings, this Selling
Shareholder may waive this prohibition by providing to us a notice of
election to convert at least 61 days prior to such conversion.
Accordingly, the number of shares of Common Stock set forth in this
table for this Selling Shareholder exceeds the number of shares of
Common stock that this Selling Shareholder beneficially owns as of the
date of this Prospectus. In that regard, the table does not present the
beneficial ownership of this Selling Shareholder in accordance with
Rule 13d-3 under the Exchange Act.
(2) Consists of (i) 187,500 shares of Common Stock issuable upon exercise
of warrants, and (ii) 4,000,000 shares of Common Stock, which
represents the maximum number of shares potentially issuable upon
conversion of Series C Preferred Stock and Series D Preferred Stock
held by such Selling Shareholder. The actual number of shares of Common
Stock that we will issue upon conversion of the Series C Preferred
Stock and Series D Preferred Stock is indeterminable as of the date of
this Prospectus, is subject to adjustment, and could be materially less
than the 4,000,000 set forth above, depending on various factors,
including the floating rate conversion price mechanism contained in the
Series C Preferred Stock and Series D Preferred Stock. See
"--Description of Certain Provisions of the Preferred Stock--Conversion
Prices." In addition, our obligation to issue the Series D Preferred
Stock is contingent upon a number of conditions being satisfied,
including shareholder approval, all of which are outside the control of
the Selling Shareholder and us. We cannot assure you that the
contingencies relating to the issuance of the Series D Preferred Stock
will be satisfied.
(3) Consists of shares of Common Stock issuable upon the exercise of stock
purchase warrants.
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Description of Certain Provisions of the Preferred Stock
Our Certificate of Incorporation defines the rights and privileges of
the Preferred Stock. The stated value of each series of Preferred Stock is
$1,000 per share. The actual number of shares of Common Stock issuable upon
conversion of each series of Preferred Stock will be determined by the following
formula:
[(The aggregate stated value of the shares of Preferred Stock
thus being converted at $1,000 per share)
plus
(5% per annum accruing cumulatively from the date of
issuance through the date of conversion (unless the
Company chooses to pay such premium in cash or additional
shares of the Preferred Stock being ))]
divided by
(The applicable conversion price of the series of the
Preferred Stock being converted).
Conversion Prices
The conversion price of the Series A Preferred Stock is equal to the
lower of $8.28 per share and the consecutive two day average closing price of
the Common Stock during the 20 day trading period immediately prior to such
conversion. The conversion price is subject to adjustment as set forth in the
Certificate of Incorporation.
Prior to February 28, 1999, the conversion price of the Series B
Preferred Stock is equal to $13.20 per share. Thereafter, the conversion price
of the Series B Preferred Stock is equal to the lower of $13.20 per share and
the lowest five day average closing price of the Common Stock during the 20 day
trading period immediately prior to such conversion. The conversion price is
subject to adjustment as set forth in the Certificate of Incorporation.
Prior to May 31, 1999, the conversion price of the Series C Preferred
Stock is equal to $9.00 per share. Thereafter, the conversion price of the
Series C Preferred Stock is equal to the lower of $9.00 per share and the lowest
five day average closing price of the Common Stock during the 30 day trading
period immediately prior to such conversion. The conversion price is subject to
adjustment as set forth in the Certificate of Incorporation.
The conversion price of the Series D Preferred Stock (the "Series D
Conversion Price") will initially be a price equal to 120% of the average
closing bid price of the Common Stock on the five days prior to the date the
Series D Preferred Stock is issued (the "Initial Series D Conversion Price"). On
the ninth month anniversary of the issuance of the Series D Preferred Stock, the
Series D Conversion Price will be the lower of the Initial Series D Conversion
Price and a five day average market price within a 30 day trading period prior
to conversion, subject to adjustment upon certain conditions. Assuming the
Series D Preferred Stock was issued on October 7, 1998, the Conversion Price as
of the date of this Prospectus would be $10.89 and the 7,500 shares of Series D
Preferred Stock designated in the Certificate of Incorporation would convert
into 688,705 shares of Common Stock.
Redemption
We may redeem or automatically convert the Series A Preferred Stock at
118% of stated value per share. The Company is subject to penalties under a
variety of circumstances, including failure to list the underlying Common Stock
on the American Stock Exchange or NASDAQ and failure to register the resale of
the underlying Common Stock under the Securities Act. At the Company's option,
the Series A Preferred Stock may be redeemed after December 31, 1998 at the
greater of the value of the Common Stock into which the Series A Preferred Stock
would convert or 130% of its stated value. The Series A 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 Series A Preferred Stock. Any Series
A Preferred Stock outstanding on December 31, 2000 will automatically convert
into Common Stock.
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We may redeem or automatically covert the Series B Preferred Stock at
the greater of 120% of stated value per share or the value of the Common Stock
into which the Series B Preferred Stock would convert. The Company is subject to
penalties under a variety of circumstances, including failure to list the
underlying Common Stock on the American Stock Exchange or NASDAQ and failure to
register the resale of the underlying Common Stock under the Securities Act. At
the Company's option, the Series B Preferred Stock may be redeemed on or after
the earlier of (1) an underwritten public offering or 144A offering in an amount
greater than $10,000,000 or (2) November 29, 1999, at the greater of the value
of the Common Stock into which the Series B Preferred Stock would convert or
120% of its stated value. The Series B 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 Series B Preferred Stock. The holders of the Series B
Preferred Stock cannot convert into more than an aggregate 2,000,000 shares of
Common Stock.
We may redeem or automatically convert the Series C Preferred Stock at
the greater of 120% of stated value per share or the value of the Common Stock
into which the Series C Preferred Stock would convert. The Company is subject to
penalties under a variety of circumstances, including failure to list the
underlying Common Stock on the American Stock Exchange or NASDAQ and failure to
register the resale of the underlying Common Stock under the Securities Act. At
the Company's option, the Series C Preferred Stock may be redeemed on or after
the earlier of (1) an underwritten public offering or 144A offering in an amount
greater than $10,000,000 or (2) February 29, 2000, at a price equal to 110% of
its stated value if such redemption is made prior to September 1, 1999 and 120%
of the stated value thereafter. The Series C 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 Series C Preferred Stock. The holders of the
Series C Preferred Stock cannot convert the Series C Preferred Stock into more
than 2,000,000 shares of Common Stock. Any Series C Preferred Stock outstanding
on August 31, 2001 will automatically convert into Common Stock.
Please see the Company's Current Report on Form 8-K filed with the SEC
on September 14, 1998 for a more complete description of the Preferred Stock.
Relationships with the Company
On December 31, 1997, we issued to RGC International Investors, LDC
("RGC") 5,000 shares of Series A Preferred Stock and warrants to purchase
150,000 shares of Common Stock ("RGC Series A Warrants") pursuant to a
Securities Purchase Agreement. The RGC Series A Warrants are exercisable at
$7.95 per share. The Series A Warrants expire on December 31, 2001. The exercise
price and the number of shares of Common Stock issuable under the Series A
Warrants will change if we issue additional shares of Common Stock at prices
less than the then market price. These adjustments do not apply if we issue
Common Stock under warrants and convertible securities outstanding as of
December 31, 1997 or pursuant to the Company's stock option plans. The sale of
the Preferred Stock and the RGC Series A Warrants was arranged by Shoreline
Pacific Institutional Finance, the Institutional Division of Financial West
Group ("SPIF"), which received a fee of $250,000 plus warrants to purchase
20,000 shares of Common Stock, exercisable at $6.625 and expiring on December
31, 2000. The warrants issued to SPIF were allocated to Mr. Lamar, among others.
On May 29, 1998, we issued to RGC and Shoreline Associates I, LLC
("Shoreline"), an aggregate of 10,000 shares of Series B Preferred Stock and
warrants to purchase an aggregate 200,000 shares of Common Stock ("Series B
Warrants") pursuant to a Securities Purchase Agreement. The Series B Warrants
are exercisable at $13.75 per share. The Series B Warrants expire on May 28,
2002. The exercise price and the number of shares of Common Stock issuable under
the Series B Warrants will change if we issue additional shares of Common Stock
at prices less than the then market price. These adjustments do not apply if we
issue Common Stock under warrants and convertible securities outstanding as of
May 29, 1998 or pursuant to the Company's stock option plans. The sale of the
Preferred Stock and the Series B Warrants was arranged by SPIF, which received a
fee of $500,000 plus warrants to purchase 50,000 shares of Common Stock,
exercisable at $11.00 and expiring on May 28, 2002. The warrants issued to SPIF
were allocated to Mr. Lamar, among others.
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On August 31, 1998, we issued to RGC, 7,500 shares of Series C
Preferred Stock and warrants to purchase 93,750 shares of Common Stock ("RGC
Series C Warrants") pursuant to a Securities Purchase Agreement. The RGC Series
C Warrants are exercisable at $9.375 per share. The RGC Series C Warrants expire
on August 31, 2002. The exercise price and the number of shares of Common Stock
issuable under the Series C Warrants will change if we issue additional shares
of Common Stock at prices less than the then market price. These adjustments do
not apply if we issue Common Stock under warrants and convertible securities
outstanding as of August 31, 1998 or pursuant to the Company's stock option
plan. The sale of the Series C Preferred Stock and the Series C Warrants was
arranged by SPIF, which received a fee of $375,000 plus warrants to purchase
26,250 shares of Common Stock, exercisable at $7.50 and expiring on August 31,
2002. The warrants issued to SPIF were allocated among Mr. Lamar and Shoreline
Pacific Equity, Ltd.
Also on August 31, 1998, the Company agreed to issue to RGC 7,500
shares of the Series D Preferred Stock and warrants to purchase an additional
93,750 shares of Common Stock (the "Series D Warrants") for an aggregate
purchase price of $7,500,000 on terms similar to the Series C and subject to
shareholder approval and other closing conditions. The sale of the Series D
Preferred Stock and the Series D Warrants was arranged by SPIF. SPIF will
receive a fee of $375,000, and warrants to purchase 26,250 shares of Common
Stock previously issued will vest, upon issuance of the Series D Preferred Stock
and Series D Warrants.
PLAN OF DISTRIBUTION
We will not receive any proceeds from the sale of the Shares offered
hereby. The Selling Shareholders have advised us:
1. that the Shares may be sold by them or their respective pledgees,
donees, transferees or successors in interest, in one or more of the following
transactions (which may involve one or more block transactions):
o on the American Stock Exchange;
o in sales occurring in the public market of such exchange;
o in privately negotiated transactions;
o through the writing of options on shares or short sales; or
o in a combination of such transactions.
2. that each sale may be made either at market prices prevailing at the
time of such sale or at negotiated prices or such other price as the Selling
Shareholders determine from time to time;
3. that some or all of the Shares may be sold directly to market makers
acting as principals or through brokers acting on behalf of the Selling
Shareholders or as agents for themselves or their customers or to dealers for
resale by such dealers; and
4. 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).
The Selling Shareholders have sole discretion not to accept any
purchase offer or make any sale of Shares if they deem the purchase price to be
unsatisfactory. 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. We have 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. We cannot assure you
that all or any of the Shares being offered hereby will be issued to, or sold by
the Selling Shareholders. Any profits realized by the Selling Shareholders and
the compensation of such broker-dealers may be deemed underwriting discounts and
commissions. In addition, any Shares covered by this Prospectus that qualify for
sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to
this Prospectus.
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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 (1) the
Shares have been registered or qualified for sale in such state or an exemption
from registration exists or (2) qualification is available and is complied with.
Under the applicable rules and regulations of 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. Also, each Selling Shareholder will be
subject to the applicable provisions of the Securities Act and Exchange Act and
the rules and regulations of both acts, including Regulation M. Regulation M's
provisions may limit the timing of purchases and sales of shares of the Common
Stock by the Selling Shareholders.
We will pay 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
Selling Shareholders, we have agreed to indemnify and hold harmless such Selling
Shareholders from certain liabilities under the Securities Act.
EXPERT
Consolidated financial statements appearing in our Annual Report on
Form 10-K for the year ended September 30, 1997 have been audited by
PricewaterhouseCoopers L.L.P., independent certified public accountants, as set
forth in their reports. Such financial statements are incorporated herein by
reference in reliance upon the reports given to us by PricewaterhouseCoopers
L.L.P. experts in accounting and auditing.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the expenses (estimated except for the SEC
registration fee) for the issuance and distribution of the securities being
registered, all of which will be paid by the Registrant.
SEC registration fee...............................................$ 8,693
Fees and expenses of counsel..........................................20,000
Fees and expenses of accountants......................................10,000
Listing fees..........................................................17,500
Transfer agent fees....................................................5,000
Miscellaneous.........................................................17,500
--------
Total...................................................$78,693
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The New York Business Corporation Law and the By-laws of the Registrant
provide for indemnification of directors and officers for expenses (including
reasonable amounts paid in settlement) incurred in defending actions brought
against them.
The Company's Certificate of Incorporation provides that no contract or
other transaction between the corporation and any other corporation shall be
affected or invalidated by the fact that any one or more of the directors of the
Company is or are interested in or is a director or officer, or are directors or
officers, of such other corporation, and any director or directors, individually
or jointly, may be a party or parties to or may be interested in any contractor
transaction of the Company, or in which the Company is interested, and no
contract, act or transaction of the Company with any person or persons, firms or
corporations shall be affected or invalidated by the fact that any director or
directors of the Company is a party or are parties to, or interested in, such
contract, act or transaction, or in any way connected with such person or
persons, firms or corporations, and each and every person who may become a
director of the Company is hereby relieved from any liability that might
otherwise exist from contracting with the Company for the benefit of himself or
any firm or corporation in which he may be in anyway interested.
The Company's Bylaws provide that the Company may indemnify any person
made, or threatened to be made, a party to a civil or criminal action or
proceeding (other than one by or in the right of the Company to procure a
judgment in its favor), by reason of the fact that he was a director or officer
of the Company, or serves another entity in any capacity at the request of the
Company, against judgments, fines, settlement amounts and reasonable expenses,
including actual and necessary attorneys' fees, if such director or officer
acted, in good faith, for a purpose which he reasonably believed to be in, or,
in the case of service for any other entity, not opposed to, the best interest
of the Company, and, in criminal actions or proceedings, had no reasonable cause
to believe that his conduct was unlawful ("Good Faith"). The termination of any
such action or proceeding by judgment, settlement, conviction or upon a plea of
nolo contendere, or its equivalent, shall not in itself create a presumption
that any such director or officer did not act in Good Faith.
Under the Company's Bylaws, a person who has been successful, on the
merits or otherwise, in the defense of an action or proceeding described above
shall be entitled to indemnification. Except as provided in immediately
preceding sentence, any indemnification under the above paragraph or otherwise
permitted by Section 721 of the New York Business Corporation Law, unless
ordered by a court of competent jurisdiction, shall be made by the Company, only
if authorized in the specific case: (i) by the Board of Directors acting by a
quorum consisting of disinterested directors, or (ii) if a quorum is not
obtainable or a quorum of disinterested directors so directs, by the Board, upon
the opinion of independent legal counsel that indemnification is proper in the
circumstances, or by the shareholders.
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Under the Company's Bylaws, the Company may indemnify any person made,
threatened or threatened to be made, a party to an action by or in the right of
the Company to procure a judgment in its favor by reason of this fact that he is
or was a director or officer of the Company, or is or was serving at the request
of the Company as a director or officer of any other entity against amounts paid
in settlement and reasonable expenses, including actual and necessary attorneys,
fees, if such director or officer acted, in good faith, for a purpose which he
reasonably believed to be in, or, in the case of service for any other entity,
not opposed to, the best interest of the Company, except, that no
indemnification under this paragraph shall be made in respect of (i) a
threatened action, or a pending action if settled or otherwise disposed of, or
(ii) any claim, issue or matter as to which such person shall have been adjudged
to be liable to the Company, unless the court in which the action was brought,
or, if no action was brought, any court of competent jurisdiction, determines
that the person is fairly and reasonably entitled to indemnity for such portion
of the settlement amount and expenses as the court deems proper.
Under the Company's Bylaws, the Company shall have the power to
purchase and maintain insurance to satisfy its indemnification obligations
hereunder, or to indemnify directors and officers in instances in which they may
not otherwise be indemnified by the Company under certain circumstances. No
insurance may provide for any payment, other than the cost of defense, to or on
behalf of any director or officer: (i) if it is established that his acts were
committed in bad faith or with deliberate dishonesty, were material to the cause
of the adjudicated action, or that he personally and illegally gained a
financial profit or other advantage, or (ii) in relation to any risk, the
insurance of which is prohibited under New York state insurance law.
Under the Company's Bylaws, the indemnification and advancement of
expenses shall not be deemed the exclusive right of any other rights to which a
director or officer may be entitled, provided that no indemnification may be
made to or on behalf of any director or officer if a judgment or other final
adjudication adverse to the director or officer establishes that his acts were
committed in bad faith or were the result of deliberate dishonesty and were
material to the cause of action so adjudicated, or that he personally and
illegally gained a financial profit or other advantage. No indemnification,
advancement or allowance shall be made in any circumstances if (i) the
indemnification would be inconsistent with a provision of the Company's
Certificate of Incorporation, By- laws, Board or shareholders resolutions, an
agreement or other proper corporate action, that is in effect at the time of the
accrual of the alleged cause of action, which prohibits or limits
indemnification, or (ii) the court states that indemnification would be
inconsistent with any condition with respect to indemnification expressly
imposed by the court in a court-approved settlement. If any amounts are paid by
indemnification, otherwise than by court order or action by the shareholders,
the Company shall mail to its voting shareholders, a statement describing the
terms of the indemnification and any corporate action taken with respect to the
indemnification.
The Registrant maintains directors and officers liability insurance
covering all directors and officers of the Registrant against claims arising out
of the performance of their duties.
ITEM 16. EXHIBITS.
Exhibit
Number Description of Exhibit
4.1+ Amended and Restated Certificate of Incorporation.
4.2 By-Laws, as amended (incorporated herein by reference to Exhibit 3.2
to the Company's Annual Report on Form 10-K for the year ended
September 30, 1993).
5.1+ Opinion of Brobeck, Phleger & Harrison L.L.P.
23.1+ Consent of Brobeck, Phleger & Harrison L.L.P. (included as part of
Exhibit 5).
23.2+ Consent of PricewaterhouseCoopers, L.L.P.
24.1+ Powers of Attorney (included on signature page of the Registration
Statement).
99.1+ Form of Common Stock Purchase Warrant Certificate issued to
purchasers of the Series C Preferred Stock dated August 31,
1998.
99.2+ Form of Common Stock Purchase Warrant Certificate issued to
Assignees of Shoreline Pacific Institutional Finance dated August
31, 1998 (Series C).
99.3+ Form of Common Stock Purchase Warrant Certificate issued to
Assignees of Shoreline Pacific Institutional Finance dated August
31, 1998 (Series D).
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99.4+ Securities Purchase Agreement by and among the Company and the
Buyers (as defined therein), dated as of August 31, 1998.
99.5+ Registration Rights Agreement by and among the Company and the
Initial investors (as defined therein) dated as of August 31, 1998.
99.6+ Escrow Agreement by and among the Company, the Buyers (as defined
therein), SPIF and the Escrow Holder (as defined therein), dated as
of August 31, 1998.
- ---------------
+ Previously filed.
ITEM 17. UNDERTAKINGS.
1. (a)......The undersigned Registrant hereby undertakes to file,
during any period in which offers or sales are being made, a post-effective
amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933 (the
"Securities Act");
(ii) To reflect, in the prospectus any facts or
events arising after the date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in any information in the Registration Statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the Registration Statement or any material change to such
information in the Registration Statement;
provided, however, that the undertakings set forth in paragraph (i) and (ii)
above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by the Registrant pursuant to section 13 or section 15(d) of the Exchange
Act that are incorporated by reference in this Registration Statement.
(b) The undersigned Registrant hereby undertakes that,
for determining any liability under the Securities Act, each post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to file
a post-effective amendment to remove from registration any of the securities
that remain unsold at the termination of the offering.
(d) The undersigned Registrant hereby undertakes that for
purposes of determining any liability under the Securities Act, each filing of
the Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act that- is incorporated by reference in this Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered herein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
2. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the undersigned Registrant pursuant to the foregoing provisions, or
otherwise, the undersigned Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the undersigned Registrant of expenses incurred or paid by a
director, officer or controlling person of the undersigned Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the undersigned Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3, and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in Mountain View, California on November 2, 1998
SOFTNET SYSTEMS, INC.
By: /s/ Mark A. Phillips
--------------------
Mark A. Phillips,
Attorney-in-Fact
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below does hereby constitute and appoint, jointly and severally, Dr.
Lawrence B. Brilliant and Mark A. Phillips, or either of them, as his or her
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign the Registration Statement filed herewith and
any and all amendments to said Registration Statement (including post-effective
amendments and registration statements filed pursuant to Rule 462 and
otherwise), and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on October 8, 1998.
Signature Title
_____________________________________ Chairman of the Board
Ronald I. Simon
Vice Chairman of the Board,
_____________________________________
Dr. Lawrence B. Brilliant President and Chief Executive Officer
_____________________________________ Chief Operating Officer and
Garrett J. Girvan Chief Financial Officer
_____________________________________ Treasurer and
Mark A. Phillips Chief Accounting Officer
_____________________________________ Director
Ian B. Aaron
II-4
<PAGE>
_____________________________________ Director
John G. Hamm
_____________________________________ Director
Edward A. Bennett
_____________________________________ Director
Sean P. Doherty
_____________________________________ Director
Robert C. Harris, Jr.
II-5
