U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended September 30, 1999.
OR
[ ] Transition Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File No.: 1-5270
SOFTNET SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-1817252
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
650 Townsend Street, Suite 225, San Francisco California 94103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 365-2500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par NASDAQ National Market
value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at November 30, 1999 was approximately $544.9 million.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 30, 1999
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Common stock, $.01 per share par value 18,755,105
Documents Incorporated by Reference:
Proxy Statement for registrant's 2000 Annual Meeting of Shareholders (Part III)
<PAGE>
PART I
Item 1. Business
This Annual Report of Form 10-K contains forward-looking statements concerning
the Company's anticipated future operating results, future revenues and
earnings, adequacy of future cash flow, or expected Y2K readiness. (These
forward-looking statements include, but are not limited to, statements
containing the words "expect", "believe", "will", "may", "should", "project",
"estimate" and like expressions, and the negative thereof.) These statements are
subject to risks and uncertainties that could cause actual results to differ
materially from the statements, including the risks attendant to a growing
business in a new industry as well as those risks described under the caption
"Factors Affecting the Company's Operating Results".
During fiscal 1999, SoftNet Systems, Inc. and its Subsidiaries (the "Company")
completed its plans to refocus its entire strategy and resources on providing
broadband Internet services. This refocus was achieved in two parts: first, by
the disposition during the year of the Company's two non-Internet related
businesses: Kansas Communications, Inc. ("KCI") which was divested in February
1999 and Micrographic Technology Corporation ("MTC") which was divested in
September, 1999; and second, the acquisition in February, 1999 of Intelligent
Communications, Inc. ("Intellicom"), a company that owns a proprietary two-way
satellite technology providing an alternative to terrestrial connectivity to
rural ISPs and other businesses. The Company believes that with the two
remaining businesses, Intellicom and ISP Channel Inc. ("ISP Channel"), the
latter a leading provider of high-speed Internet access over cable primarily to
exurban markets, it brings together a unique and cost-effective means of
providing high speed Internet access to a substantial potential customer base,
both domestic and international.
At the beginning of fiscal 1999, ISP Channel had systems deployed in 13 cable
headends that served an aggregate of approximately 800 cable modem customers.
These systems passed approximately 167,000 marketable homes, that is, homes that
could access ISP Channel high speed Internet service. At September 30, 1999, 62
systems were deployed serving an aggregate of approximately 7,380 customers and
the deployed systems passed approximately 562,000 marketable homes. Similarly,
in February 1999, when the Company acquired Intellicom, Intellicom had deployed
approximately 60 very small aperture terminal ("VSAT") satellite systems; at
September 30, 1999, the number of VSAT systems deployed was 98, of which 24 were
used by ISP Channel as an alternative to terrestrial connectivity. As of
November 30, 1999, the ISP Channel had 69 systems deployed, approximately 9,140
cable modem customers.
In April 1999, the Company successfully completed a secondary offering of its
common stock, raising net proceeds of approximately $141.5 million which funds
have been, and will continue to be, used for the financing of the Company's
aggressive deployment of the services of both ISP Channel and Intellicom as well
as for possible acquisitions and expansion into related market opportunities. In
December 1999, the Company completed a private placement to Pacific Century
Cyberworks ("Pacific Century") of 5 million shares of the Company's common stock
for $129 million and, at the same time, Pacific Century agreed to form a joint
venture with the Company to provide certain services relating to cable-based
Internet access throughout up to 63 countries in Asia. As a result of the
Pacific Century placement, Pacific Century will have the right to nominate two
directors to the Company's board of directors.
On July 2, 1999, the Company entered into a letter agreement with Mediacom LLC,
one of the top-ten cable operators in the US, which was formalized in definitive
agreements dated November 4, 1999. Under the agreements, the Company will issue
to Mediacom an aggregate 3.5 million shares of common stock in exchange for
Mediacom entering into an affiliate agreement of up to 10 years, but with a 5
year minimum, with ISP Channel that provides for Mediacom delivering to ISP
Channel over one million homes passed, of which are 900,000 two-way upgraded
homes passed, on a minimum schedule of 150,000 homes every 6 months over the
first three years of the contract. In the event that Mediacom fails to deliver
the agreed number of homes within the contractual time period, a portion of the
stock issued to Mediacom will be returned to the Company. In the event that
Mediacom acquires or upgrades more than 900,000 two-way homes, then both parties
are obligated to extend the original agreement on similar terms for such
incremental homes subject to a cap on the total aggregate number of shares that
the Company is obligated to issue to Mediacom. In addition, Mediacom gained the
right to nominate one member to the Company's board of directors, who shall be
Rocco Commisso, Mediacom's chairman and chief executive officer.
The employees of the Company have increased from approximately 80 as of
September 30, 1998 to approximately 220 as of September 30, 1999. Senior
appointments made during the year included the appointment of a senior vice
president customer sales and service, a vice president human resources, a
general manager for Intellicom, a corporate controller and, in November 1999,
the appointment of a chief technology officer.
The Company's current principal executive office is located at 650 Townsend
Street, Suite 225, San Francisco, California 94103. As of November 30, 1999, the
Company had approximately 55 employees at its principal executive office.
<PAGE>
ISP Channel
ISP Channel seeks to become the leading broadband services provider of
high-speed Internet access and other Internet-related services to homes and
businesses located primarily in the franchise areas of small to mid-sized cable
companies, a market segment which has seen dramatic consolidation during fiscal
year 1999. As of November 1, 1999, ISP Channel had contracts with cable
operators representing approximately 2.4 million homes passed. Of these homes,
approximately 63% are currently, or will shortly be, passed by two-way cable
systems. In addition, ISP Channel is targeting certain other markets including
multiple dwelling units, hotels, hospitals, schools and campuses, which may
significantly increase the size of the market for ISP Channel's services. The
ISP Channel service provides residential and business subscribers access to the
Internet over the existing cable television infrastructure at speeds up to 1.5
megabits per second ("Mbps"). This increased speed means that the required
download time for a 10 megabyte file can be less than one minute. Higher speed
and the "always on" feature of cable modem access differentiate this service
from traditional dial up Internet access and allow subscribers to more
conveniently enjoy sophisticated multimedia applications and programming. ISP
Channel also offers an intuitive user interface provided through a co-branding
agreement with Snap.com and local information, news and entertainment customized
for each community served through its own ISP Channel Neighborhood local portal.
Services
High-Speed Internet Access.
ISP Channel's service offerings utilize the cable television infrastructure and
ISP Channel's network and content technologies to provide a rapidly deployable,
relatively inexpensive method of access to the Internet for residential and
business customers at speeds up to 1.5 Mbps. The ISP Channel service enables
customers to experience graphically rich, interactive, and multimedia
applications thereby improving the Internet experience. As of November 30, 1999,
ISP Channel had contracts for its ISP Channel service with 43 cable operators,
including Mediacom LLC, Galaxy Telecom L.P., and Cable Communications Co-op of
Palo Alto, representing approximately 2.4 million homes passed. Sixty-nine of
these systems, representing over 610,000 marketable homes, have been equipped
and have begun offering ISP Channel's services. As of November 30, 1999, ISP
Channel had approximately 9,140 residential and business customers to its ISP
Channel service. ISP Channel also provides non-cable based dial-up and dedicated
Internet access to approximately 1,500 residential and business customers. For
areas where two-way cable is not yet available, ISP Channel deploys a telephone
return solution, which uses the cable infrastructure for high-speed downstream
transmission and telephone dial-up access for upstream transmission. To use the
ISP Channel via cable modem, residential and business customers need a personal
computer with at least a 66 MHz, 486 or equivalent microprocessor and 16
megabytes of main memory. When compatible set-top boxes become widely available,
ISP Channel plans to deliver its high-speed Internet access through televisions.
Residential. All ISP Channel customers are provided an e-mail address,
roaming services, access to unique newsgroups and chat services and
personal Web space as part of their monthly fee. Additionally, ISP Channel
provides a co-branded "cable affiliate/ISP Channel" default home page that
allows each customer to personalize his or her portal to the Internet.
Monthly service charges (excluding modem rental) currently range from
$29.95 to $49.00 for flat rate residential service, with one-time
installation charges of approximately $99. The retail price of cable modems
has declined significantly over the past year and now range from
approximately $150 to $250 each, which the Company typically rents for
$10-12 per month.
Business. ISP Channel's business solutions include Internet and intranet
services over existing cable infrastructure and traditional telephone data
lines when necessary. ISP Channel provides its cable affiliates the ability
to offer local telecommuters, small office/home office customers and
business customers a comprehensive selection of Internet and corporate
local area network access for employees in the office, and virtual private
network and remote local area network applications, which extend corporate
network access to remote employees and external organizations, including
business partners, suppliers and customers. ISP Channel's future business
services are expected to include on-line software distribution, secure
high-speed data storage facilities, international roaming services and
office-to-office IP telephony. Prices vary significantly depending on
functionality and speed.
On-line Services.
ISP Channel's content and programming services enhance the customer's on-line
experience by aggregating local and national content through agreements with
content providers such as Snap.com. ISP Channel's network architecture and local
cable headend caching and collaborative server functionality facilitate the
distribution of multimedia applications, including multi-player games, video
conferencing and multicast video applications, as well as local and national
advertising.
<PAGE>
National Content Aggregation. ISP Channel has entered into an agreement
with Snap.com to provide co-branded ISP Channel/Snap content aggregation,
directory and search services. The co-branded content incorporates a custom
on-line presence for the cable affiliate, including on-line cable
schedules, pay-per-view and, in the future, bill payment options.
Personalization also allows a customer to use the co-branded ISP
Channel/Snap "push" technology to create a customized default page
incorporating the customer's interests, including local and national news,
weather, sports, stock portfolio, horoscope, local city information and
hundreds of other selections. In addition, the co-branded "cable
affiliate/ISP Channel/Snap" user interface provides a simplified, intuitive
navigation tool for the customer.
Local On-line Communities. ISP Channel develops and deploys local on-line
communities called ISP Channel Neighborhoods that target the interests of
local residents, including civic, commercial and education issues. The
on-line communities provide a graphical directory of local services,
including shops, restaurants and events currently not focused on by
national, regional or city-wide content aggregation services. Local on-line
community conferencing forums include an on-line PTA to foster better
communications between parents and teachers and an on-line town hall to
provide residents a more timely method to communicate with city officials.
Video Conferencing and Collaborative Computing. Each of ISP Channel's local
cable affiliate collaborative servers facilitates high-speed desktop video
conferencing (15-30 frames per second) and collaborative computing not
feasible using traditional Internet dial-up access methods. The local
collaborative server allows users to work on documents over the network
while engaged in voice and videoconferences. ISP Channel provides an
intuitive user interface that is integrated into the browser to facilitate
"single-click" conferencing to individuals or groups.
Web Hosting Services. ISP Channel provides a full complement of Web hosting
and server co-location. ISP Channel's Virtual Merchant hosting service
allows businesses to create an on-line storefront using available software
and receive orders over the Internet in a matter of hours. Cost-effective
Web hosting packages target small business and are deployed in 24 to 48
hours. Commercial extranet applications allow a business to let their
customers or vendors access their local area networks using cable modems or
dial-up facilities. Monthly charges for Web hosting and co-location range
from $25 to $1,500 per month depending on bandwidth usage, number of
inquiries (or "hits") per month and scripting and database requirements.
Local and National Advertising. Through its cable affiliates, ISP Channel
plans to offer the ability to bundle local Internet banner and multimedia
advertising with the existing cable video advertising sales efforts.
Through ISP Channel's network architecture, local and national advertising
content will be stored in the Network Operations Center ("NOC") and
replicated at the local cable affiliate headend to enhance performance. ISP
Channel's network architecture utilizes multicast routing to enable the
efficient distribution of Internet-based advertising and video and audio
content services from content providers and the NOC to many ISP Channel
customers simultaneously.
Development of New Services. As the Internet continues to evolve and
encompass additional applications, ISP Channel plans to develop new
products and services targeted to this marketplace for the future. Such
products and services may include set-top box applications, Internet-based
telephony services (sometimes called IP telephony), enhancements to the ISP
Channel portal and improved on-line communities.
Network Architecture
ISP Channel's scalable, distributed network architecture links the
high-bandwidth capacity of the local cable infrastructure with leased nationwide
Internet backbone facilities from major telecommunications carriers, including
MCI, MFS and Sprint. ISP Channel has designed its network to move content closer
to the customer (thereby increasing speed of access) and provide end-to-end
network management. ISP Channel's backbone vendors provide it with scalable
Internet backbone capacity, and thereby enable ISP Channel to respond quickly to
increases in demand, avoiding the need to build and maintain a parallel Internet
network.
Network Operations Center. ISP Channel's NOC, which includes a network of
highly redundant servers, network management systems and broadband Internet
access facilities, manages core customer services, such as e-mail,
newsgroups, conferencing and chat facilities, and local content
replication. The NOC provides nationwide provisioning for all customer
services, whether the customer registers at the local cable affiliate's
business office, via a cable affiliate personalized toll-free telephone
number, or through an automated on-line provisioning system. ISP Channel is
continuing the process of building a new state-of-the-art facility to
support the activities of a growing number of cable affiliates and provide
the maximum service availability that consumers and commercial customers
demand. To date, ISP Channel has deployed one NOC in Mountain View,
California and plans to deploy regional data centers as justified by the
geographic concentration of cable affiliates in order to reduce operating
and capital expenditures and to provide a level of network redundancy.
<PAGE>
Local Content Replication. ISP Channel's network architecture utilizes
content replication technologies to enhance the speed at which content is
delivered to customers and makes more efficient use of the cable
affiliates' local headend Internet connectivity by moving the requested
information closer to customers. By replicating frequently accessed content
in storage servers located in each cable affiliate's headend, ISP Channel
delivers large multimedia files, including graphically rich Web pages and
multimedia content, to numerous local cable modem customers without
frequent re-transmission over the Internet.
Total Network Management. ISP Channel utilizes a network of dedicated
servers to monitor connectivity and performance from the NOC to each
on-line cable affiliate headend and its respective cable modem customers.
In addition, ISP Channel's NOC currently monitors over 250 independent
routers and servers on the Internet, including major backbone providers,
major Internet service providers ("ISPs"), frequently accessed Web sites,
and major nationwide peering and routing facilities across the country. The
NOC allows ISP Channel to automatically reroute Internet traffic to
maintain customer cable modem performance despite regional Internet
congestion and backbone outages.
Redundant Leased Backbone Facilities. ISP Channel connects cable affiliate
headends to the Internet via facilities leased from MCI, MFS, Sprint and
others. By utilizing multiple providers, ISP Channel can assure maximum
network availability while enhancing the routing efficiency of cable modem
customers' Internet requests. National network agreements allow ISP Channel
to provide scalable local connections to its cable affiliates. ISP
Channel's network architecture facilitates high performance, rapid
cost-effective deployment independent of location and software scalability
for responsive additions to network capacities.
Cable Affiliate Headends. Affiliated cable system headends are connected to
the Internet and, in turn, the NOC through ISP Channel's leased backbone
facilities. Each Internet connection utilizes a high performance router
supporting speeds up to 45 Mbps, which can be upgraded to 155 Mbps as
required. Currently, ISP Channel is deploying headend equipment from Cisco,
3Com and Com21. In addition, ISP Channel purchases telephone access lines
to support local dial-up Internet access services or dial-up return for
one-way cable systems. ISP Channel actively monitors its dial-up facilities
and purchases additional lines as necessary to meet customer demand. ISP
Channel installs servers into the cable affiliate headend to support local
caching, collaborative and IP telephony functions. Local collaborative
servers facilitate desktop video conferencing and collaborative document
sharing. ISP Channel has been evaluating technology from several IP
telephony vendors and plans to deploy IP telephony servers to facilitate IP
telephony services through ISP Channel's network.
Cable Modems and Television Set-Top Boxes. Residential customers can
connect to the Internet over the local cable infrastructure using a cable
modem and, in the future will be able to connect via an integrated
television set-top box. In the case of cable modems, the coaxial cable is
connected to the cable modem and the cable modem is connected to an
Ethernet card installed in a customer's personal computer. Internal cable
modem personal computer cards do not require the Ethernet card
installation. In the case of television based high-speed Internet access,
the coaxial cable is attached directly to the set-top box. ISP Channel
currently provides a custom installation CD that allows a cable modem
customer to choose either Microsoft Internet Explorer or Netscape
Navigator, along with a selection of popular utility programs. ISP Channel
currently uses cable modems manufactured by 3Com, Com21 and General
Instruments.
Sales and Marketing
To Cable Operators.
ISP Channel markets its services through the establishment of exclusive
relationships with cable operators whose systems are primarily located in
secondary and tertiary markets and bedroom communities of major demographic
metropolitan areas. ISP Channel uses its sales force with offices in Chicago,
Illinois, Denver, Colorado and Los Angeles and Mountain View, California to
market the ISP Channel and other Internet services to cable operators and
businesses. This sales force targets the corporate offices of national and
regional multiple system operators. The sales force employs a team-selling
approach targeting key management, marketing and engineering personnel within
each cable system. ISP Channel typically participates in three national industry
trade shows, the Atlantic, NCTA and Western, in addition to numerous
state-sponsored local cable industry trade shows.
ISP Channel began offering telephone-based Internet services in June 1996 and
cable-based Internet services in the fourth quarter of fiscal 1997. As of
November 30, 1999, ISP Channel had contracts for its ISP Channel service with 43
cable operators, including Mediacom, Galaxy and Palo Alto Cable Co-op,
representing over 250 cable systems and approximately 2.4 million homes passed.
Sixty-nine of these systems, representing approximately 610,000 marketable
homes, have been equipped and have begun offering ISP Channel's services. As of
November 30, 1999, ISP Channel had approximately 9,140 residential and business
customers to its ISP Channel service. ISP Channel also provides non-cable based
dial-up and dedicated Internet access to approximately 1,500 residential and
business customers.
<PAGE>
ISP Channel has a revenue sharing arrangement with its cable affiliates pursuant
to which a cable affiliate generally receives 25% of Internet services revenue
for the first 200 ISP Channel customers on a cable system and approximately 50%
of such revenues thereafter. In addition, ISP Channel has adopted an affiliate
incentive program whereby certain cable operators have been offered either cash
or shares of common stock as an incentive to sign an exclusive contract with ISP
Channel for the provision of Internet services to their cable systems and to
upgrade their cable network to two-way whereby it can then transmit data to and
from the end user. The number of shares of common stock that may be paid to any
individual cable affiliate will depend on a variety of factors, including the
number and size of the cable systems covered by a contract with a multiple
system cable operator, the number of homes passed and the number of cable
subscribers in a system, the services provided by ISP Channel and the length of
exclusivity of the contract. These incentive payments are expected to range
between $15.00 and $25.00 worth of stock per home passed, based on the fair
market value of the common stock at the time a letter of intent or definitive
agreement is entered into with a cable affiliate, depending upon the various
factors described above. ISP Channel may issue stock or pay cash incentives at
the time a contract is entered into, or it may place the stock or cash incentive
amounts in escrow to be disbursed as cable systems are deployed.
To Internet Customers.
Through Cable Affiliates. ISP Channel's agreements with its cable
affiliates provide ISP Channel a conduit to reach potential customers.
Cable affiliates provide ISP Channel with television advertising time and
the ability to include material describing ISP Channel's services in bills
mailed to cable subscribers. ISP Channel creates all of the content to be
included in such marketing efforts. ISP Channel produces a new marketing
campaign each quarter that includes 30 second television commercials, print
materials, radio spots and newspaper ads.
Direct to the Public. ISP Channel markets directly to homes and businesses
in its cable affiliates' franchise areas through telemarketing, direct
mail, door hangers, local event marketing, and Internet advertising
channels such as e-mail blasts and banner advertising. ISP Channel
telemarkets to existing cable subscribers using the cable affiliate's
current subscriber list. In addition, ISP Channel has entered into a
distribution agreement with Radio Shack whereby consumers will be able to
purchase ISP Channel service in Radio Shack stores. ISP Channel anticipates
implementing this agreement throughout calendar year 2000 in those areas
where ISP Channel service is available.
ISP Channel also e-mails a monthly newsletter to its Internet existing
customers that includes the latest Websites, useful software available to
enhance the Internet browsing experience, and news of upcoming Internet
events. ISP Channel also sends periodic notifications of service upgrades,
customer agreement updates and new product features.
Customer Care and Billing
As part of ISP Channel's strategy to leverage local cable affiliates' brand
identities, ISP Channel is developing a comprehensive provisioning, billing and
customer care system that allows for its services to be individualized and
co-branded for each cable affiliate system. ISP Channel has entered into
contracts with PeopleSoft, Inc. (a financial system vendor), Clarify Inc. (a
customer contact system vendor) and Aspect Telecommunications (a call center
system vendor) to design and implement an integrated, flexible and scalable
solution. ISP Channel's Customer Care Center is designed to provide customer
service from a central care center located in Mountain View, California. The
Customer Care Center will provide individualized toll-free support for each
affiliated cable system for pre-sales information and through which customers
can coordinate all services including provisioning, billing and technical
support. Additionally, ISP Channel will provide cable affiliates with the
ability to access individualized Web-based reporting and call monitoring for all
customer care service including telemarketing, sales and technical support.
Provisioning. ISP Channel today provisions service by means of an
individualized toll-free number with personalized answering for each cable
affiliate system. ISP Channel is in the process of exploring an on-line
provisioning system that will enable a customer to purchase a cable modem
in a retail location or at the cable affiliate's business office and
register and provision the service on-line 24 hours per day. The on-line
services will include provisioning, Web-based or e-mail bill presentation
and Web-based service modification.
Billing. ISP Channel currently provides the ability for cable affiliates or
ISP Channel to be responsible for billing and collection. If any cable
affiliate elects to bill ISP Channel customers within its franchise area,
ISP Channel maintains a duplicate customer record in its system for
provisioning and reconciliation. If ISP Channel provides the billing and
collection services, ISP Channel provides bill delivery.
<PAGE>
Technical Support. The Customer Care Center currently utilizes a
state-of-the-art automatic call distribution system to provide full-time
individualized technical support for each cable affiliate system. ISP
Channel is currently implementing a new Aspect automatic call distribution
system accompanied by Clarify's customer care software allowing a
customer's information and history to be presented to a technical support
representative in conjunction with each call. ISP Channel's "knowledge base
system" facilitates expedient trouble shooting and historical reporting on
an individualized cable system basis delivered to cable affiliates in
real-time through a Web-based interface or monthly via e-mail.
Vendor Relationships
In addition to the relationships that ISP Channel has with Snap.com, MCI, MFS
and Sprint, ISP Channel currently depends on a limited number of other suppliers
for certain key technologies used to provide Internet related services. In
particular, ISP Channel depends on 3Com Corporation, Com21, Inc. and General
Instruments for headend and cable modem technology and Cisco Systems, Inc. for
network routing and switching hardware.
Competition
ISP Channel faces competition in two broad areas. First, ISP Channel faces
competition for partnerships with cable operators from other cable modem-based
providers of Internet access services. Second, ISP Channel faces competition for
customers from other of providers of Internet services.
Cable Modem Service Providers
Even if a consumer believes that cable-based Internet access is the best method
of accessing the Internet, the consumer may not be able to obtain this service
from ISP Channel unless the consumer lives in an area serviced by a cable
operator that has partnered with ISP Channel. Thus, our primary competitors are
companies which seek to partner with cable operators and offer to equip these
cable systems with Internet access capability or to manage the cable operator's
Internet services. In addition, to the extent that cable operators decide not to
choose a partner but rather to develop and offer their own Internet service
themselves it would reduce the number of cable partners available to ISP Channel
and increase competition for the remaining cable operators.
Competitive cable modem service providers such as At Home Corporation, Road
Runner and High Speed Access Corporation (and their respective cable partners)
are deploying high speed Internet access services over cable networks. Where
deployed, these networks provide similar services to those offered by ISP
Channel. These Internet access providers and their cable operator affiliates
have substantially greater financial and operational resources than ISP Channel
and may accordingly be able to deploy their service more rapidly and aggregate
content more effectively than ISP Channel. In addition, such competitive
providers enjoy an inherent advantage in marketing their services to their cable
operator affiliates by virtue of such affiliations.
Alternative Internet Service Providers
There are many competing technologies for delivering Internet access to homes
and businesses, which compete with ISP Channel. The number of such competing
technologies is growing, and ISP Channel expects that competition will intensify
in the future. ISP Channel's competitors comprise several categories of
providers of Internet services such as: incumbent local exchange carriers,
national long distance carriers (otherwise known as Interexchange Carriers),
Competitive Local Exchange Carriers, Internet Service Providers, On-line Service
Providers, Wireless and Satellite Data Service Providers and Digital Subscriber
Line focused Competitive Local Exchange Carriers.
Many of these competitors are offering (or may soon offer) technologies and
services that will directly compete with ISP Channel. Such technologies include
Integrated Services Digital Network ("ISDN"), Digital Subscriber Line ("DSL")
and wireless data. The bases of competition in ISP Channel's markets include
transmission speed, reliability of service, breadth of service availability,
price/performance, network security, ease of access and use, content bundling,
customer support, brand recognition, operating experience, and capital
availability. ISP Channel believes that it compares unfavorably with its more
established competitors with regard to, among other things, brand recognition,
operating experience and capital availability. Many of ISP Channel's competitors
and potential competitors have substantially greater resources than ISP Channel
and there can be no assurance that ISP Channel will be able to compete
effectively when challenged within its target markets.
The various competitor types are detailed below:
Incumbent Local Exchange Carriers ("ILECs"). All of the larger ILECs that
are present in ISP Channel's target markets are offering DSL-based data
services. As they move forward in implementing these services (and secure
any additional needed regulatory approvals), the Regional Bell Operating
<PAGE>
Companies and other ILECs will represent strong competition in all of ISP
Channel's target service areas. The ILECs have an established brand name
and reputation for high quality in their service areas, possess sufficient
capital to deploy DSL equipment rapidly, have their own copper lines and
can bundle digital data services with their existing analog voice services
to achieve economies of scale in serving customers.
National Long Distance Carriers. National Long Distance Carriers, such as
AT&T, Sprint and MCIWorldCom have deployed large-scale Internet access
networks, sell connectivity to businesses and residential customers and
have high brand recognition. They also have interconnection agreements with
many of the ILECs, and those agreements include collocation spaces from
which they have begun to offer DSL services competitive with ISP Channel.
In addition, AT&T's acquisition of TeleCommunications Inc.(TCI), allows
AT&T to provide broadband Internet service using TCI's cable
infrastructure, making AT&T a national cable modem service provider that
poses a competitive threat to ISP Channel.
Competitive Local Exchange Carriers ("CLECs"). Fiber-based CLECs such as
Intermedia Communications Group, Inc. and ICG Communications, Inc. have
extensive fiber networks in many metropolitan areas primarily providing
high speed digital and voice circuits to large customers. Some fiber-based
CLECs have announced plans to offer DSL services that will compete with the
ISP Channel in many of those markets targeted by ISP Channel. These
companies could modify their current business focuses to include
residential and small business customers using cable-based access or DSL in
combination with their current fiber networks, but are currently focused on
the business market.
Internet Service Providers ("ISPs"). ISPs, such as the ISP division of GTE
Corporation, UUNET Technologies, Inc. (a subsidiary of MCIWorldCom),
Earthlink (merging with Mindspring), Concentric Network Corporation, Netcom
(a subsidiary of ICG Communications) and PSINet, Inc. provide Internet
access using the existing public switched telephone network at ISDN speeds
or below for residential customers but at a higher bit rate for business
customers. Several of these ISPs have begun offering DSL-based services in
select areas. As these ISPs expand their coverage and additional ISPs
become DSL service providers, this will pose a competitive threat to ISP
Channel.
On-line Service Providers. On-line Service Providers, such as America
Online ("AOL"), MSN (a subsidiary of Microsoft), and Prodigy, Inc., provide
proprietary on-line services and specialized content and applications as
well as Internet access. These services are designed for broad consumer
access over telecommunications-based transmission media, which enable the
provision of digital services to the significant number of consumers who
have personal computers with modems. In addition, they provide Internet
connectivity, ease of use and consistency of environment. Many of these
On-line Service Providers have developed their own access networks for
modem connections. AOL has already begun limited rollout of DSL access
through ILEC and CLEC partnerships. If the On-line Service Providers are
successful in extending their access networks to cable-based access or DSL,
they will become a greater competitive threat to ISP Channel.
Wireless and Satellite Data Service Providers. Wireless and Satellite Data
Service Providers are developing wireless and satellite-based Internet
connectivity. ISP Channel may face competition from terrestrial wireless
services, including, wireless cable systems operating on the two Gigahertz
("GHz") and 28 GHz bands as well as Multi-channel Multi-point Distribution
Service and Local Multipoint Distribution Service, and 18 GHz and 39 GHz
point-to-point microwave systems. For example, the Federal Communications
Commission ("FCC") is currently considering new rules to permit
Multi-channel Multi-point Distribution Service licensees to use their
systems to offer two-way services, including high-speed data, rather than
solely to provide one-way video and telephony services. The FCC also
recently awarded Local Multipoint Distribution Service licenses, which can
be used for high-speed data services as well. In addition, companies such
as Teligent, Inc., Advanced Radio Telecom Corp. and WinStar Communications,
Inc. hold point-to-point microwave licenses to provide fixed wireless
services such as voice, data and videoconferencing.
ISP Channel also may face competition from satellite-based systems.
Motorola Satellite Systems, Inc., Hughes Space and Communications Group (a
subsidiary of General Motors Corporation), Teledesic and others have filed
applications with the FCC for global satellite networks which can be used
to provide broadband voice and data services. Partnerships have formed to
offer satellite Internet connections. For example, AOL is available through
Direct PC and Echostar (DishNet) provides Web TV as a bundled piece with
their hardware but continues to use phone lines for the return path.
In addition, unlicensed devices are permitted to provide short-range,
high-speed wireless digital communications. These frequencies must be
shared with incumbent users without causing interference. Although the
allocation is designed to facilitate the creation of new wireless local
area networks, users of these frequencies could become competitors of the
ISP Channel.
<PAGE>
Cable Overbuild. The Telecommunications Act of 1996 made it possible for
competing cable companies to offer service in the same service areas. In
order to do this, a prospective competitor must "overbuild" their cable
infrastructure throughout the incumbent operator's service area. If an
overbuild takes place in one of ISP Channel's service areas, this would
pose a competitive threat were the "overbuilder" to offer high speed
Internet access themselves or through a competitor to ISP Channel.
DSL Providers. Certain companies, such as Covad Communications Group,
NorthPoint Communications Group and Rhythms NetConnections have obtained
CLEC certification and are offering high speed data services using a
strategy of collocating in ILEC central offices. The 1996 Act specifically
grants any and all CLECs the right to negotiate interconnection agreements
with the ILEC providing for such collocation.
Alternative Internet Service Delivery. The scope of the Internet is going
beyond the personal computer. Services such as WebTV (a subsidiary of
Microsoft), Palm.net from Palm Pilot, and Sprint PCS Wireless Web, offer
Internet access through television, Personal Digital Assistants and
cellular phones respectively. In addition, companies like Metricom offer
mobile Internet access service through portable, wireless modems. All of
these technologies will compete with ISP Channel in the future as
alternative forms of Internet access.
Federal Regulation
Internet Regulation
ISP Channel's Internet services are not currently subject to direct regulation
by the FCC or any other governmental agency. However, it is possible that new
laws and regulations may be adopted that would subject the provision of ISP
Channel's Internet services to government regulation. Certain other legislative
initiatives, including those involving taxation of Internet services and payment
of access charges by ISPs, are also possible. Any new laws regarding the
Internet, particularly those that impose regulatory or financial burdens, could
impact adversely ISP Channel's ability to provide various services and could
have a material adverse effect on the Company's results of operations and
financial condition. ISP Channel cannot predict the impact, if any, that any
future laws or regulatory changes may have on its business.
The introduction of, or changes to, regulations that directly or indirectly
affect the regulatory status of Internet services, affect telecommunications
costs (including the application of reciprocal compensation requirements, access
charges or universal service contribution obligations to Internet services), or
increase the competition from regional telecommunications companies or others,
could have a material adverse effect on the Company's results of operations and
financial condition. For instance, if the FCC determines, through any one of its
ongoing or future proceedings, that the Internet is subject to regulation, or
that cable facilities used to provide Internet access must be opened to
competitors, ISP Channel or its cable affiliates could be required to comply
with a number of FCC regulations, including but not limited to rules relating to
entry/exit, facility access by competitors, reporting, fee, and record-keeping
requirements, marketing restrictions, access charge obligations, and universal
service contribution obligations, which could adversely impact ISP Channel's
ability to provide various planned services and have a material adverse effect
on the Company's results of operations and financial condition. ISP Channel
cannot predict the impact, if any, that regulations or regulatory changes may
have on its business. A final determination by the FCC that providing Internet
transport or telephony services to customers over an IP-based network is subject
to regulation also could impact adversely ISP Channel's ability to provide
various planned services and could have a material adverse effect on the
Company's results of operations and financial condition.
One issue that could have a material effect on ISP Channel is the continued
classification by the FCC of Internet access services as an "information
service". In the FCC's April 10, 1998 Report to Congress (the "April Report"),
the FCC discussed whether ISPs should be classified as telecommunications
carriers, and, on that basis, be required to contribute to the USF. The April
Report concluded that Internet access service-which the FCC defined as an
offering combining computer processing, information storage, protocol
conversion, and routing transmissions-is an "information service" under the
Telecommunications Act of 1996 and thus not subject to regulation. In contrast,
the FCC found that the provision of transmission capabilities to ISPs and other
information services providers do constitute "telecommunications services" under
the Telecommunications Act of 1996. Consequently, parties providing those
telecommunications services are subject to current FCC regulation (and the
corresponding USF obligations).
Another significant regulatory issue concerns the obligation of ISPs to pay
access charges to ILECs. Unlike "basic services," "enhanced services," which are
generally analogous to "information services" and include Internet access
services, have been exempt from interstate access charges. In 1997, the FCC
declined to modify the exemption, and the FCC's position was affirmed by the
United States Court of Appeals for the Eighth Circuit. The FCC has determined
that dial-up calls to ISPs are interstate, not local, calls for regulatory
<PAGE>
purposes. It is uncertain whether this decision will have an adverse affect on
the ISP exemption from access charges. ISP Channel cannot assure , however, that
the FCC or the courts will not revisit this issue in the future and decide to
eliminate the access charge exemption applicable to ISPs.
Another major regulatory issue concerns Internet-based telephony. In the April
Report, the FCC observed that Internet-based telephone service (which the FCC
called "IP telephony") appears to be a telecommunications service rather than an
unregulated information service. For example, in the April Report the FCC stated
its intention to consider regulating voice and fax telephony services provided
over the Internet as "telecommunications" even though Internet access itself
would not be regulated. The FCC is also considering whether such Internet-based
telephone services should be subject to the universal service contribution
obligations discussed above, or pay carrier access charges on the same basis as
traditional telecommunications companies. ISP Channel cannot predict how the FCC
will resolve this issue, or the effect that the FCC's resolution would have on
its business.
ISP Channel could also be affected in a material adverse way by federal and
state laws and regulations relating to the liability of on-line services
companies and Internet access providers for information carried on or
disseminated through their networks. Several private lawsuits seeking to impose
such liability upon on-line services companies and Internet access providers are
currently pending. In addition, legislation has been enacted and new legislation
has been proposed that imposes liability for the transmission of or prohibits
the transmission of certain types of information on the Internet, including
sexually explicit and gambling information. The United States Supreme Court has
already held unconstitutional certain sections of the Communications Decency Act
of 1996 that would have proposed to impose criminal penalties on persons
distributing "indecent" materials to minors over the Internet. Congress
subsequently enacted legislation that imposes both criminal and civil penalties
on persons who knowingly or intentionally make available materials through the
Internet that are "harmful" to minors. However, that new law generally excludes
from the definition of "person" ISPs that are not involved in the selection of
content disseminated through their networks. Congress also enacted legislation
recently that limits liability for on-line copyright infringement. That latter
law includes exemptions which enable ISPs to avoid copyright infringement if
they merely transmit material produced and requested by others. It is possible
that other laws and regulations could be enacted in the future that would place
copyright infringement liability more directly on ISPs.
The imposition of potential liability on ISP Channel and other Internet access
providers for information carried on or disseminated through their systems could
require ISP Channel to implement measures to reduce its exposure to such
liability, which may require ISP Channel to expend substantial resources or to
discontinue certain service or product offerings. The increased attention to
liability issues as a result of these lawsuits and legislative actions and
proposals could impact the growth of Internet use. While ISP Channel carries
professional liability insurance, it may not be adequate to compensate claimants
or may not cover ISP Channel in the event ISP Channel becomes liable for
information carried on or disseminated through its networks. Any costs not
covered by insurance incurred as a result of such liability or asserted
liability could have a material adverse effect on the Company's results of
operations and financial condition.
State Regulation
As use of the Internet has proliferated in the past several years, state
legislators and regulators have increasingly shown interest in regulating
various aspects of the Internet. Much of the legislation that has been proposed
to date may, if enacted, handicap further growth in the use of the Internet. It
is possible that the state legislatures and regulators will attempt to regulate
the Internet in the future, either by regulating transactions or by restricting
the content of the available information and services. Enactment of such
legislation or adoption of such regulations could have a material adverse impact
on ISP's business.
One area of potential state regulation concerns taxes. The United States
Congress enacted a three-year moratorium on new state and local taxes on the
Internet as well as taxes that discriminate against commerce through the
Internet. Congress also established an advisory commission to study and make
recommendations on the federal, state and local taxation of Internet-related
commerce. These recommendations are due to Congress by April 2000 and could
serve as the basis for additional legislation. Future laws or regulatory changes
that lead to state taxation of Internet transactions could have a material
adverse impact on ISP Channel's business.
Although customer-level use of the Internet to conduct commercial transactions
is still in its infancy, a growing number of corporate entities are engaging in
Internet transactions. It is not possible to predict how state law will evolve
to address new transactional circumstances created by Internet commerce, or
whether the evolution of such laws will have a material adverse impact on ISP
Channel's business.
State legislators and regulators have also sought to restrict the transmission
or limit access to certain materials on the Internet. For example, in the past
several years, various state legislators have sought to limit or prohibit: (1)
certain communications between adults and minors, (2) anonymous and pseudonymous
<PAGE>
use of the Internet, (3) on-line gambling, and (4) the offering of securities on
the Internet. Enforcement of such limitations or prohibitions in some states
could affect transmission in other states. State laws and regulations that
restrict access to certain materials on the Web could inadvertently block access
to other permissible sites. ISP Channel cannot predict the impact, if any, that
any future laws or regulatory changes in this area may have on its business.
Some states have also sought to impose tort liability or criminal penalties on
various conduct involving the Internet, such as the use of "hate" speech,
invasion of privacy, and fraud. The adoption of such laws could adversely impact
the transmission of non-offensive material on the Internet and, to that extent,
possibly have a material adverse impact on ISP Channel's business.
ISP Channel anticipates that it may in the future seek to offer
telecommunications service as a CLEC. All states in which ISP Channel operates
require a certification or other authorization from the state regulatory
commission to offer intrastate telecommunications services. Many of the states
in which ISP Channel operates are in the process of addressing issues relating
to the regulation of CLECs. Some states may require authorization to provide
enhanced services.
The Telecommunications Act contains provisions that prohibit states and
localities from adopting or imposing any legal requirement that may prohibit, or
have the effect of prohibiting, the ability of any entity to provide any
interstate or intrastate telecommunications service. The FCC is required to
preempt any such state or local requirements to the extent necessary to enforce
the Telecommunications Act's open market entry requirements. States and
localities may, however, continue to regulate the provision of intrastate
telecommunications services and require carriers to obtain certificates or
licenses before providing service.
In states where ISP Channel operates, rulemaking proceedings, arbitration
proceedings and other state regulatory proceedings that may affect ISP Channel's
ability to compete with ILECs are now underway or may be instituted in the
future. These proceedings involve a variety of telecommunications issues,
including but not limited to: pricing and pricing methodologies of local
exchange and intrastate interexchange services; development and approval of
resale agreements between ILECs and CLECs and among CLECs; terms and conditions
governing the provision of telecommunications services; customer service and
unauthorized changes in customer-selected telephone service providers;
complaints regarding anticompetitive practices and transactions between
affiliated telecommunications companies; denial of entry into telecommunications
markets; discount levels for resale of local exchange and toll services;
treatment of and compensation for calls to Internet service providers; charges
for access to ILEC networks; cost sharing and implementation of interim and
permanent number portability; dialing parity; access to and responsibility for
universal service funding; and review and recommendation to the FCC concerning
Regional Bell Operating Company authorization to offer in-region long distance
service. To the extent ISP Channel decides in the future to install its own
transmission facilities, rulemaking proceedings, arbitration proceedings and
other state regulatory proceedings may also affect ISP Channel's ability to
compete with ILECs. These proceedings may involve issues including but not
limited to: collocation of ILEC and CLEC facilities; interconnection agreements
between ILECs and CLECs; and access to unbundled and combined network elements
of ILECs. In addition, states in which ISP Channel operates may consider
legislation that involves issues including but not limited to: any of the
aforementioned issues in rulemaking proceedings, arbitration proceedings and
other state regulatory proceedings; alternative forms of regulation; and
limitations on the provision of competitive telecommunications services.
Local Regulation
Although local jurisdictions generally have not sought to regulate the Internet,
it is possible that such jurisdictions will seek to impose regulations in the
future. In particular, local jurisdictions may attempt to tax various aspects of
Internet access or services, such as transactions handled through the Internet
or customer access, as a way of generating municipal revenue. The imposition of
local taxes and other regulatory burdens by local jurisdictions could have a
material adverse impact on ISP Channel's business.
In the context of the acquisition of TCI by AT&T, several local jurisdictions
that approved the acquisition imposed open access conditions on such approval,
while other such local jurisdictions have rejected such conditions or have
reserved the right to impose such conditions in the future. In addition, a class
action lawsuit was filed against the major cable modem ISPs and their cable
company owners earlier this year seeking, among other things, to impose open
access on such cable companies. While ISP Channel was not named in the lawsuit,
the outcome could affect its business. ISP Channel cannot predict the outcome or
scope of the local approval process or the class action lawsuit. Nor can ISP
Channel predict the impact, if any, that future federal, state or local legal or
regulatory changes, including open access conditions, might have on its
business.
ISP Channel's networks may also be subject to numerous local regulations such as
building codes and licensing. Such regulations vary on a city by city and county
by county basis. To the extent ISP Channel decides in the future to install its
own transmission facilities, it will need to obtain rights-of-way over private
and publicly owned land. There can be no assurance that such rights-of-way will
be available to ISP Channel on economically reasonable or advantageous terms.
<PAGE>
Foreign Regulation
ISP Channel has recently begun to expand operations in foreign countries that
may require ISP Channel to qualify to do business in such foreign countries.
Qualification to do business in a foreign jurisdiction could subject ISP Channel
to taxes, regulations, and other legal requirements which could have a material
adverse affect on the Company's results of operations and financial condition.
Conversely, ISP Channel's failure to qualify as a foreign corporation in a
jurisdiction where we are required to do so could subject ISP Channel to taxes,
interest and penalties and could impair ISP Channel's ability to enforce
contracts in such jurisdictions. It is also possible that the statutes and
regulations of any applicable foreign jurisdiction could allow claims to be made
against ISPs for defamation, negligence, copyright or trademark infringement, or
other theories based on the nature and content of the materials disseminated
through their networks. Any such legislation or regulation, or the application
of laws or regulations from jurisdictions whose laws do not currently apply to
ISP Channel's business, could have a material adverse affect on the Company's
results of operation and financial condition.
The foregoing discussion of regulatory factors does not describe all laws,
regulations, or restrictions that may apply to ISP Channel. Nor does it review
all laws or regulations under consideration by federal and state governmental
bodies that may affect ISP Channel's operations. It is possible that present and
future laws and regulations not discussed here could have a material adverse
effect on the Company's results of operations and financial condition.
Backlog
As of November 30, 1999, the ISP Channel had 43 signed contracts representing
over 250 cable systems and approximately 2.45 million homes passed. Sixty nine
of these systems, representing approximately 610,000 marketable homes passed,
have been equipped and have begun offering ISP Channel's services. The remainder
of these systems, representing approximately 1.84 million homes passed, are in
backlog pending upgrade by the cable operator to two-way capability or pending
other factors. As of November 30, 1999, ISP Channel had approximately 9,140
residential and business customers to its ISP Channel service, plus
approximately 1,060 customer orders in backlog.
Employees and Facilities
As of November 30, 1999 ISP Channel had approximately 179 employees.
ISP Channel has a network operations center and customer care center located
respectively at 510 and 520 Logue Avenue, Mountain View, California 94043. The
Company also maintains sales offices in Chicago, Illinois; Denver, Colorado; and
Los Angeles, California.
Legal Proceedings
ISP Channel has no material pending litigation.
<PAGE>
Intellicom
Intellicom provides two-way satellite Internet access options utilizing VSAT
technology. Intellicom focuses its sales penetration efforts on rural markets,
particularly ISPs, educational institutions and small businesses. In addition to
providing Internet access options, Intellicom provides Internet-based
applications, consulting services and full Internet access (including direct
network connectivity). Intellicom's other products and services include Web
server hosting and integration services, client software development and
maintenance services, training and network integration and consulting services.
A major focus for Intellicom is its K.I.D.S. package, providing curriculum
content, Internet access and revenue opportunities for schools. Intellicom's
VSAT-based point of presence locations can be placed throughout North and South
America. Intellicom currently bases its service on Ku-band architecture but may,
in the future, provide its Internet services in the C-band satellite arena in
addition. Many international satellites utilize the C-band architecture and
Intellicom expects to retrofit its equipment for C-band coverage areas with
little difficulty.
Intellicom's mission is to become the leading provider of two-way
satellite-based network connectivity solutions for organizations requiring
access to the global Internet. To this end, Intellicom utilizes its unique
experience and expertise to provide an effective alternative for Internet
services and solutions to Internet customer networks. Intellicom has worked
toward achieving this position by focusing on building a high performance
network infrastructure, integrating and expanding its suite of value-added
products and services, investing in its network operations and technical support
infrastructure, expanding and tailoring its sales and marketing efforts to reach
its targeted customers more effectively, and leveraging relationships with
strategic partners.
Products and Services
Intellicom provides its customers with a comprehensive range of Internet access
options, applications and consulting services. Intellicom believes that, over
time, its strategic focus on business applications for the Internet and its
niche network connectivity options will play a larger role in differentiating
Intellicom from its competitors. Intellicom's options and services include a
stable, low-cost VSAT system on two-way satellite technology, providing
high-speed access to the Internet. Intellicom's branded offerings include the T1
Plus product line as a connectivity solution to the marketplace and its
proprietary EdgeConnector(TM) server which enhances the VSAT network's
efficiency . The comprehensive package of Internet applications is customized to
work within the VSAT network, specifically for the ISP industry. A key component
of its service offering is the ability to cache content at the EdgeConnector
server. Intellicom created this services within its network as an answer to
Internet backbone congestion. The objective is to move a substantial amount of
the Web, FTP, and NNTP traffic from the network backbone to the `network edge.'
The major benefit of such technology lies in its ability to cache a majority of
the web's most popular sites. In addition to caching, the EdgeConnector server
hosts a number of additional services, such as e-mail, Web hosting, proxy
service, shell accounts, Telnet, FTP, file sharing, dynamic addressing,
firewalling, address translation, and speed enhancement .
Additionally, Intellicom offers connectivity services based on a range of VSAT
service options ranging from 33 kilobits per second to 66 kilobits per second
dedicated uplinks with 2 megabit shared downlinks. The majority of Intellicom's
customers use Intellicom as their primary gateway to the Internet and rely on
Intellicom to connect, secure, and maintain their network integrity. Intellicom
designs and out-source manufactures VSAT equipment specifically for its
applications.
Intellicom makes a variety of other products and services available, including
Web server hosting and content development services, client software products,
training, end-user support and engineering support. All of these products and
services are integrated to provide customers with a total solution to their
Internet application and business needs. Intellicom enables Internet users to
purchase access, applications, products and services, including network
integration services, through a single source. Intellicom's Network Operations
Center continually monitors traffic across Intellicom's network.
Sales and Marketing
Intellicom's marketing focus, for the first six months after acquisition by the
Company, was primarily to serve the needs of the ISP Channel. Going forward,
Intellicom's focus is to build and leverage relationships with strategic
partners and distributors, which involves expanding market coverage by
partnering into new point of presence locations and building new relationships
with other Internet service providers, service companies, and niche access
providers.
Competition
The market for Internet access services is extremely competitive. Intellicom
believes that its ability to compete successfully depends upon a number of
factors, including: market presence; the capacity, reliability, and security of
<PAGE>
its network infrastructure; the pricing policies of its competitors and
suppliers; the timing and release of new products and services by Intellicom and
its competitors; and industry and general economic trends.
The competitors of Intellicom are broken into three groups: (1)
vertically-integrated satellite service operators including Hughes and Intelsat;
(2) wholesale service providers including Tachyon, eSAT, and OptiStreams; (3)
retail service providers including DirecTV/PC, local cable providers, and
private network providers. Many of these competitors have greater market
presence, engineering and marketing capabilities, and financial, technological
and personnel resources than Intellicom.
While Intellicom believes that the price and performance characteristics of its
products and services are currently competitive, increased competition may
result in price reductions, reduced gross margin and loss of market share, any
of which could materially affect Intellicom's business, operating results and
financial condition. Many of Intellicom's current and potential competitors have
significantly greater financial, technical, marketing, and other resources than
Intellicom. As a result, they may be able to respond more quickly to new or
emerging technologies and changes to customer requirements, or to devote greater
resources to the development, promotion, sale, and support of their products
than Intellicom. The introduction of products embodying new technologies and the
emergence of new industry standards could render Intellicom's existing products
less marketable. In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. There can
be no assurance that Intellicom will be able to compete successfully against
current or future competitors or that the pressures faced by Intellicom will not
materially adversely affect its business, operating results, and financial
condition.
Intellicom does not believe that it competes directly with terrestrial
telecommunications service providers. Terrestrial providers are likely to expand
their availability of high-speed access services in cities, but are unlikely to
enter the rural markets because of cost, volume and required infrastructure
investments. Intellicom believes that new competitors include large satellite
operators that are integrating vertically by offering satellite transponder
leasing, Internet access, equipment and systems integration. As a result of
acquisitions, certain companies have obtained or expanded their Internet access
products and services which may permit them to devote greater resources to the
development of new competitive products and services and the marketing and
distribution of existing products and services. Also, the ability of some of
Intellicom's competitors to bundle satellite services with Internet access and
other products could place Intellicom at a competitive disadvantage.
Intellicom believes that the industry will see mergers and consolidation in the
near future, which could result in greater competition and increased pricing
pressures. Changing market conditions could adversely affect Intellicom's
business, financial condition, and results of operations. There can be no
assurance that Intellicom will have the financial resources, technical
expertise, or marketing and support capacity to continue to compete
successfully.
Employee and Facilities
As of September 30, 1999, Intellicom had 35 employees. None of Intellicom's
employees is currently subject to any collective bargaining agreement.
Intellicom operates from two principal locations. Intellicom leases
approximately 16,700 square feet of space for its office, warehouse and
operations center in Livermore, California and a 1,400 square foot Customer
Service Center in Chippewa Falls, Wisconsin. Intellicom handles client-side
technical support issues and order fulfillment through its Customer Service
Center in Chippewa Falls, Wisconsin.
Legal Proceedings
Intellicom has no material pending litigation.
<PAGE>
Factors Affecting The Company's Operating Results
The risks and uncertainties described below are not the only ones that the
Company face. Additional risks and uncertainties not presently known to the
Company or that the Company currently deems immaterial may also impair the
Company's business operations. If any of the following risks actually occur, the
Company's business, financial condition or results of operations could be
materially adversely affected. In such case, the trading price of the Company's
common stock could decline, and you may lose all or part of your investment.
The Company Cannot Assure You That The Company Will Be Profitable Because The
Company Has Operated The Company's Internet Services Business Only For A Short
Period Of Time
The Company acquired ISP Channel in June 1996 and Intellicom on February 9,
1999. As such, the Company has very limited operating history and experience in
the Internet services business and the Company cannot assure you that the
Company's ability to develop or maintain strategies and business operations for
the Company's Internet services will achieve positive cash flow and
profitability. The successful expansion of both the ISP Channel and Intellicom
services will require strategies and business operations that differ from those
the Company has historically employed. To be successful, the Company must
develop and market products and services that are widely accepted by consumers
and businesses at prices that provide cash flow sufficient to meet the Company's
debt service, capital expenditures and working capital requirements.
The Company's ISP Channel Business May Fail If The Industry As A Whole Fails Or
The Company's Products And Services Do Not Gain Commercial Acceptance
It has become feasible to offer Internet services over existing cable lines and
equipment on a broad scale only recently. There is no proven commercial
acceptance of cable-based Internet services and none of the companies offering
such services are currently profitable. It is currently very difficult to
predict whether providing cable-modem Internet services will become a viable
industry.
The success of the ISP Channel service will depend upon the willingness of new
and existing cable subscribers to pay the monthly fees and installation costs
associated with the service and to purchase or lease the equipment necessary to
access the Internet. Accordingly, the Company cannot predict whether the
Company's pricing model will prove to be viable, whether demand for the
Company's services will materialize at the prices the Company expect to charge,
or whether current or future pricing levels will be sustainable. If the Company
does not achieve or sustain such pricing levels or if the Company's services do
not achieve or sustain broad market acceptance, then the Company's business,
financial condition, and prospects will be materially adversely affected.
The Company's Continued Negative Cash Flow And Net Losses May Depress Stock
Prices
The Company's continued negative cash flow and net losses may result in
depressed market prices for the Company's common stock. The Company cannot
assure you that the Company will ever achieve favorable operating results or
profitability. The Company has sustained substantial losses over the last five
fiscal years. For the year ended September 30, 1999, the Company had a net loss
of $50.5 million. As of September 30, 1999, the Company had an accumulated
deficit of $100.2 million. The Company expects to incur substantial additional
losses and experience substantial negative cash flows as the Company expands the
Company's Internet service offerings. The costs of expansion will include
expenses incurred in connection with:
o inducing cable affiliates to enter into exclusive multi-year contracts
with the Company;
o the amount and timing of capital expenditures and other costs related
to the Company's operations;
o research and development of new product and service offerings;
o the continued development of the Company's direct and indirect selling
and marketing efforts; and
o possible charges related to acquisitions, divestitures, business
alliances or changing technologies.
In addition, the Company's expense levels are based in part on expectations of
future revenues and, to a large extent, are fixed. The Company may be unable to
adjust spending quickly enough to compensate for any unexpected revenue
shortfall. The Company's revenues will be dependent upon the growth rates of ISP
Channel's subscribers and Intellicom's customers.
If The Company Does Not Achieve Cash Flows Sufficient To Support The Company's
Operations, The Company May Be Unable To Implement The Company's Business Plan
The development of the Company's business will require substantial capital
infusions as a result of:
<PAGE>
o the Company's need to enhance and expand product and service offerings
to maintain the Company's competitive position and increase market
share; and
o the substantial investment in equipment and corporate resources
required by the continued national launching of the ISP Channel and
Intellicom services.
In addition, the Company anticipates that the majority of cable affiliates with
one-way cable systems will eventually upgrade their cable infrastructure to
two-way cable systems, at which time the Company will have to upgrade the
Company's equipment on any affected cable system to handle two-way
transmissions. The Company cannot accurately predict whether or when the Company
will ultimately achieve cash flow levels sufficient to support the Company's
operations, development of new products and services, and expansion of the
Company's Internet services. Unless the Company reaches such cash flow levels,
the Company may require additional financing to provide funding for operations.
If the Company is required to raise capital through a long-term debt financing,
the Company will be highly leveraged and such debt securities may have rights or
privileges senior to those of the Company's current stockholders. If the Company
is required to raise capital by issuing equity securities, the percentage
ownership of the Company's stockholders will be reduced, stockholders may
experience additional dilution and such securities may have rights, preferences
and privileges senior to those of the Company's common stock. In the event that
the Company cannot generate sufficient cash flow from operations, or is unable
to borrow or otherwise obtain additional funds on favorable terms to finance
operations when needed, the Company's business, financial condition, and
prospects would be materially adversely affected.
The Unpredictability Of The Company's Quarter-To-Quarter Results May Adversely
Affect The Trading Price Of The Company's Common Stock
The Company cannot predict with any significant degree of certainty the
Company's quarter-to-quarter operating results. As a result, the Company
believes that period-to-period comparisons of the Company's revenues and results
of operations are not necessarily meaningful and should not be relied upon as
indicators of future performance. It is likely that in one or more future
quarters the Company's results may fall below the expectations of analysts and
investors. In such event, the trading price of the Company's common stock would
likely decrease. Many of the factors that cause the Company's quarter-to-quarter
operating results to be unpredictable are largely beyond the Company's control.
These factors include, among others:
o the number of ISP Channel and Intellicom customers;
o the Company's ability and that of the Company's cable affiliates to
coordinate timely and effective marketing strategies, in particular,
the Company's strategy for marketing the ISP Channel service to
subscribers in such affiliates' local cable areas;
o the rate at which the Company's 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 and provision of ISP Channel and Intellicom services;
o competition in the Internet or cable industries; and
o changes in law and regulation.
Existing Contractual Obligations Allow For Additional Issuances Of Common Stock
Upon A Market Price Decline, Which Could Further Adversely Affect The Market
Price For The Company's Common Stock
As of November 30, 1999, the total number of shares of the Company's common
stock underlying all of the Company's convertible securities, including common
stock underlying unvested stock options and grants made under the Company's 1998
Stock Incentive Plan and 1999 Supplemental Stock Incentive Plan, and common
stock that the Company is obligated to issue to Mediacom, LLC pursuant to a
stock purchase agreement (and 500,000 shares of common stock that the Company
issued to Pacific Century on December 13, 1999) was approximately 12,405,000
shares. This would have been 39.8% of the Company's outstanding common stock as
of November 30, 1999, assuming such shares would have been issued as of such
date. The issuance of common stock as a result of these obligations could result
in immediate and substantial dilution to the holders of the Company's common
stock. To the extent any of these shares of common stock are issued, the market
price of the Company's common stock may decrease because of the additional
shares on the market.
<PAGE>
The Company May Not Be Able To Successfully Implement The ISP Channel's Business
Plan If The Company's Cable Affiliates Are Adversely Impacted
The success of the Company's business depends upon the Company's relationship
with the Company's cable affiliates. Therefore, the Company's success and future
business growth will be substantially affected by economic and other factors
affecting the Company's cable affiliates.
The Company does not have direct contact with the Company's customers
Because customers to the ISP Channel service must subscribe through a cable
affiliate, in many cases the cable affiliate (and not the Company) will
substantially control the customer relationship with the end-user customers. For
example, under some of the Company's existing contracts, cable affiliates are
responsible for important functions, such as billing for and collecting ISP
Channel subscription fees and providing the labor and costs associated with
distribution of local marketing materials.
Failure or delay by cable operators to upgrade their systems may adversely
affect subscription levels
Certain ISP Channel services are dependent on the quality of the cable networks
of the Company's cable affiliates. Currently, some cable systems are capable of
providing only information from the Internet to the subscribers, and require a
telephone line to carry information from the subscriber back to the Internet.
These systems are called "one-way" cable systems. Several cable operators have
announced and begun making upgrades to their systems to increase the capacity of
their networks and to enable traffic both to and from the Internet over their
networks, so-called "two-way capability". However, cable system operators have
limited experience with implementing such upgrades. These investments have
placed a significant strain on the financial, managerial, operational and other
resources of cable system operators, many of which already maintain a
significant amount of debt.
Further, cable operators must periodically renew their franchises with city,
county or state governments. These governmental bodies may impose technical and
managerial conditions before granting a renewal, and these conditions may
adversely affect the cable operator's ability or willingness to implement such
upgrades.
In addition, many cable operators may emphasize increasing television
programming capacity to compete with other forms of entertainment delivery
systems, such as direct broadcast satellite, instead of upgrading their networks
for two-way Internet capability. Such upgrades have been, and the Company
expects 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 the Company's products
and services in any such operators' franchise area. In addition, cable operators
may roll-out Internet access systems that are incompatible with the Company's
high-speed Internet access services. Any of these actions could have a material
adverse effect on the Company's business, financial condition, and prospects.
If The Company Does Not Obtain Exclusive Access To Cable Customers, The Company
May Not Be Able To Sustain Any Meaningful Growth
The success of the ISP Channel service is dependent, in part, on the Company's
ability to gain exclusive access to cable consumers. The Company's ability to
gain exclusive access to cable customers depends upon the Company's ability to
develop exclusive relationships with cable operators that are dominant within
their geographic markets. The Company cannot assure you that affiliated cable
operators will not face competition in the future or that the Company will be
able to establish and maintain exclusive relationships with cable affiliates.
Currently, a number of the Company's contracts with cable operators do not
contain exclusivity provisions. Even if the Company is able to establish and
maintain exclusive relationships with cable operators, the Company cannot assure
the ability to do so on favorable terms or in sufficient quantities to be
profitable. In addition, the Company will be excluded from providing
Internet-over-cable in those areas served by cable operators with exclusive
arrangements with other Internet service providers. The Company's contracts with
cable affiliates typically range from three to seven years, and the Company
cannot assure you that such contracts will be renewed on satisfactory terms. If
the exclusive relationship between either the Company and the Company's cable
affiliates or between the Company's cable affiliates and their cable subscribers
is impaired, if the Company does not become affiliated with a sufficient number
of cable operators, or if the Company is not able to continue the Company's
relationship with a cable affiliate once the initial term of its contract has
expired, the Company's business, financial condition and prospects could be
materially adversely affected.
<PAGE>
Failure To Increase Revenues From New Products And Services, Whether Due To Lack
Of Market Acceptance, Competition, Technological Change Or Otherwise, Would Have
A Material Adverse Effect On The Company's Business, Financial Condition And
Prospects
The Company expects to continue extensive research and development activities
and to evaluate new product and service opportunities. These activities will
require the Company's continued investment in research and development and sales
and marketing, which could adversely affect the Company's short-term results of
operations. The Company believes that future revenue growth and profitability
will depend in part on the Company's ability to develop and successfully market
new products and services. Failure to increase revenues from new products and
services, whether due to lack of market acceptance, competition, technological
change or otherwise, would have a material adverse effect on the Company's
business financial condition and prospects.
The Company's Purchase Of Intellicom Subjects The Company To Risks In A New
Market
The purchase of Intellicom involves other risks including potential negative
effects on the Company's reported results of operations from acquisition-related
charges and amortization of acquired technology and other intangible assets. As
a result of the Intellicom acquisition, the Company recorded approximately $16
million of intangible assets which will adversely affect the Company's earnings
and profitability for the foreseeable future. If the amount of such recorded
intangible assets is increased or if the Company has future losses and is unable
to demonstrate the Company's ability to recover the amount of intangible assets
recorded during such time periods, the period of amortization could be
shortened, which may further increase annual amortization charges. In such
event, the Company's business and financial condition could be materially and
adversely affected. In addition, the Intellicom acquisition was structured as a
purchase by the Company of all of the outstanding stock of Intellicom. As a
result, the Company could be adversely affected by direct and contingent
liabilities of Intellicom. It is possible that the Company is not aware of all
of the liabilities of Intellicom and that Intellicom has greater liabilities
than the Company expected.
In addition, the Company has very little experience in the markets and
technology in which Intellicom is focused. As such, the Company is faced with
risks that are new to the Company, including the following:
Dependence on VSAT market
One of the reasons the Company purchased Intellicom was to be able to
provide two-way satellite Internet access options to the Company's
customers using VSAT satellite technology. However, the market for VSAT
communications networks and services may not continue to grow or VSAT
technology may be replaced by an alternative technology. A significant
decline in this market or the replacement of the existing VSAT technology
by an alternative technology could adversely affect the Company's business,
financial condition and prospects.
Risk of damage, loss or malfunction of satellite
The loss, damage or destruction of any of the satellites used by
Intellicom, or a temporary or permanent malfunction of any of these
satellites, would likely result in interruption of Internet services the
Company provides over the satellites which could adversely affect the
Company's business, financial condition and prospects.
In addition, use of the satellites to provide Internet services requires a
direct line of sight between the satellite and the cable headend and is
subject to distance and rain attenuation. In certain markets which
experience heavy rainfall, transmission links must be engineered for
shorter distances and greater power to maintain transmission quality. Such
engineering changes may increase the cost of providing service. In
addition, such engineering changes may require FCC approval, and the
Company cannot assure you that the FCC would grant such approval.
Equipment failure and interruption of service
The Company's operations will require that the Company's network, including
the satellite connections, operate on a continuous basis. It is not unusual
for networks, including switching facilities and satellite connections, to
experience periodic service interruption and equipment failures. It is
therefore possible that the network facilities the Company uses may from
time to time experience interruptions or equipment failures, which would
negatively affect consumer confidence as well as the Company's business
operations and reputation.
Dependence on leases for satellites
Intellicom currently leases satellite space from GE Americom and Satmex. If
for any reason, the leases were to be terminated, the Company cannot assure
you that the Company could renegotiate new leases with GE Americom, Satmex
or another satellite provider on favorable terms, if at all. The Company
has not identified alternative providers and believe that any new leases
would probably be more costly to the Company. In any case, the Company
cannot assure you that an alternative provider of satellite services would
be available, or, if available, would be available on terms favorable to
the Company.
<PAGE>
Competition
The market for Internet access services is extremely competitive.
Intellicom believes that its ability to compete successfully depends upon a
number of factors, including: market presence; the capacity, reliability,
and security of its network infrastructure; the pricing policies of its
competitors and suppliers; and the timing and release of new products and
services by Intellicom and its competitors. The Company cannot assure you
that Intellicom will be able to successfully compete with respect to these
factors.
Government regulation
The VSAT satellite industry is a highly regulated industry. In the United
States, operation and use of VSAT satellites requires licenses from the
FCC; and Satmex is licensed by the Mexican government. As a lessee of
satellite space, the Company could in the future be indirectly subject to
new laws, policies or regulations or changes in the interpretation or
application of existing laws, policies or regulations, that modify the
present regulatory environment.
While the Company believes that the Company's lessors will be able to
obtain all licenses and authorizations necessary to operate effectively,
the Company cannot assure you that the Company's lessors will be successful
in doing so. The Company's failure to indirectly obtain some or all
necessary licenses or approvals could have a material adverse effect on the
Company's business, financial condition and prospects.
If The Company Fails To Manage The Company's Expanding Business Effectively, The
Company's Business, Financial Condition And Prospects Could Be Adversely
Affected
To exploit fully the market for the Company's products and services, the Company
must rapidly execute the Company's sales strategy while managing anticipated
growth through the use of effective planning and operating procedures. To manage
the Company's anticipated growth, the Company must, among other things:
o continue to develop and improve the Company's 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 the Company's
services and support operations, sales and administrative personnel and other
resources. The Company may, in the future, also experience difficulties meeting
demand for the Company's products and services. Additionally, if the Company is
unable to provide training and support for the Company's products, it will take
longer to install the Company's products and customer satisfaction may be lower.
The Company cannot assure that the Company's systems, procedures or controls
will be adequate to support the Company's operations or that management will be
able to exploit fully the market for the Company's products and services. The
Company's failure to manage growth effectively could have a material adverse
effect on the Company's business, financial condition and prospects.
The Company's Limited Experience With International Operations May Prevent The
Company From Growing The Company's Business Outside The United States
A key component of the Company's strategy is to expand into international
markets and offer broadband services in those markets. The Company has limited
experience in developing localized versions of the Company's products and
services and in developing relationships with international cable system
operators. The Company may not be successful in expanding the Company's product
and service offerings into foreign markets. In addition to the uncertainty
regarding the Company's ability to generate revenues from foreign operations and
expand the Company's international presence, the Company faces specific risks
related to providing broadband services in foreign jurisdictions, including:
o regulatory requirements, including the regulation of Internet access;
o legal uncertainty regarding liability for information retrieved and
replicated in foreign jurisdictions; and
o lack of a developed cable infrastructure in many international
markets.
<PAGE>
If Cable Affiliates Are Unable To Renew Their Franchises Or The Company is
Unable To Affiliate With Replacement Operators, The Company's Business,
Financial Condition And Prospects Could Be Materially Adversely Affected
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 may be terminated if the
franchisee fails to comply with the material provisions of the franchise. The
Cable Television Consumer Protection and Competition Act of 1992 (the "Cable
Act") prohibits franchising authorities from granting exclusive cable television
franchises and from unreasonably refusing to award additional competitive
franchises. The Cable Act also permits municipal authorities to operate cable
television systems in their communities without franchises. The Company cannot
assure that cable television companies having contracts with the Company will
retain or renew their franchises. Non-renewal or termination of any such
franchises would result in the termination of the Company's contract with the
applicable cable operator. If an affiliated cable operator were to lose its
franchise, the Company would seek to affiliate with the successor to the
franchisee. The Company cannot, however, assure an affiliation with such
successor. In addition, affiliation with a successor could result in additional
costs to the Company. If the Company cannot affiliate with replacement cable
operators, the Company's business, financial condition and prospects could be
materially adversely affected.
The Company May Lose Cable Affiliates Through Their Acquisition Which Could Have
A Material Adverse Effect On The Company's Business, Financial Condition And
Prospects
Under many of the Company's contracts, if a cable affiliate is acquired and the
acquiring company chooses not to enter into a contract with the Company, the
Company may lose the Company's ability to offer Internet services in the area
served by such former cable affiliate entirely or on an exclusive basis. Such a
loss could have a material adverse effect on the Company's business, financial
condition and prospects.
The Company Depends On Third-Party Technology To Develop And Introduce
Technology The Company Uses And The Absence Of Or Any Significant Delay In The
Replacement Of Third-Party Technology Would Have A Material Adverse Effect On
The Company's Business, Financial Condition And Prospects.
The markets for the products and services the Company uses 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; and
o alternative service offerings.
Because of these factors, the Company has chosen to rely upon third parties to
develop and introduce technologies that enhance the Company's current product
and service offerings. If the Company's relationship with such third parties is
impaired or terminated, then the Company would have to find other developers on
a timely basis or develop the Company's own technology. The Company cannot
predict whether the Company will be able to obtain the third-party technology
necessary for continued development and introduction of new and enhanced
products and services or whether such technology will gain market acceptance. In
addition, the Company cannot predict whether the Company 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 the Company's products or services. The absence of or any
significant delay in the replacement of third-party technology would have a
material adverse effect on the Company's business, financial condition and
prospects.
The Company Depends On Third-Party Suppliers For Certain Key Products And
Services And Any Inability To Obtain Sufficient Key Components Or To Develop
Alternative Sources For Such Components Could Result In Delays Or Reductions In
The Company's Product Shipments
The Company currently depends on a limited number of suppliers for certain key
products and services. In particular, the Company depends on General Instrument
Corporation, 3Com Corporation and Com21, Inc. for headend and cable modem
equipment, Cisco Systems, Inc. for specific network routing and switching
equipment, and, among others, MCIWorldCom, Inc. for national Internet backbone
services. Additionally, certain of the Company's cable modem and headend
equipment suppliers are in litigation over their patents. The Company could
experience disruptions in the delivery or increases in the prices of products
and services purchased from vendors as a result of this intellectual property
litigation. The Company cannot predict when delays in the delivery of key
components and other products may occur due to shortages resulting from the
<PAGE>
limited number of suppliers, the financial or other difficulties of such
suppliers or the possible limited availability in the suppliers' underlying raw
materials. In addition, the Company may not have adequate remedies against such
third parties as a result of breaches of their agreements with the Company. The
inability to obtain sufficient key components or to develop alternative sources
for such components could result in delays or reductions in the Company's
product shipments. If that were to happen, it could have a material adverse
effect on the Company's customer relationships, business, financial condition,
and prospects.
If New Data Over Cable System Interface Specifications ("DOCSIS")-Compliant
Cable Modems Are Not Deployed Timely And Successfully, The Company's Subscriber
Growth Could Be Constrained
Each of the Company's subscribers currently obtains a cable modem from the
Company to access the ISP Channel. The North American cable industry has
recently adopted interface standards known as DOCSIS for hardware and software
to support the delivery of data services over the cable infrastructure utilizing
compatible cable modems. If the Company is not able to obtain a sufficient
quantity of DOCSIS-compliant modems, the Company's growth will be limited.
The Company also believes that in order to meet the Company's subscriber goals,
two-way cable modems must also become widely available in other channels, such
as through personal computer manufacturers and through retail outlets.
Currently, this widespread availability has not yet occurred. In addition, these
modems must be easy for consumers to install themselves, rather than requiring a
customer service representative to perform the installation. If two-way cable
modems do not become quickly available in outlets other than through cable
television companies, or if they cannot be installed easily by consumers, it
would be difficult for the Company to attract large numbers of additional
subscribers and the Company's business would be harmed.
The Company Depends On Third-Party Carriers To Maintain Their Cable Systems
Which Carry The Company's Data And Any Interruption Of The Company's Operations
Due To The Failure To Maintain Their Cable Systems Would Have A Material Adverse
Effect On The Company's Business, Financial Condition And Prospects
The Company's success will depend upon the capacity, reliability and security of
the network used to carry data between the Company's subscribers and the
Internet. A significant portion of such network is owned by third parties, and
accordingly the Company has no control over its quality and maintenance. The
Company relies on cable operators to maintain their cable systems. In addition,
the Company relies on other third parties to provide a connection from the cable
system to the Internet. Currently, the Company has transit agreements with
MCIWorldCom, Sprint, and others to support the exchange of traffic between the
Company's network operations center, cable system and the Internet. The failure
of any other link in the delivery chain resulting in an interruption of the
Company's operations would have a material adverse effect on the Company's
business, financial condition and prospects.
Any Increase In Competition Could Reduce The Company's Gross Margins, Require
Increased Spending By The Company On Research And Development And Sales And
Marketing, And Otherwise Materially Adversely Affect The Company's Business,
Financial Condition And Prospects
The markets for the Company's products and services are intensely competitive,
and the Company expects competition to increase in the future. Many of the
Company's competitors and potential competitors have substantially greater
financial, technical and marketing resources, larger subscriber bases, longer
operating histories, greater name recognition and more established relationships
with advertisers and content and application providers than the Company does.
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 online content than the Company can. The
Company's ability to compete may be further impeded if, as evidenced by the
acquisitions of TCI and MediaOne by AT&T, competitors utilizing different or the
same technologies seek to acquire or merge to enhance their competitive
strengths. The Company cannot predict whether the Company will be able to
compete successfully against current or future competitors or that competitive
pressures faced by the Company will not materially adversely affect the
Company's business, financial condition, prospects or ability to repay the
Company's debts. Any increase in competition could reduce the Company's gross
margins, require increased spending by the Company on research and development
and sales and marketing, and otherwise materially adversely affect the Company's
business, financial condition and prospects.
ISP Channel face competition from many sources, which include:
o other cable-based access providers;
o telephone-based access providers; and
o alternative technologies.
<PAGE>
Cable-based access providers
In the cable-based segment of the Internet access industry, the Company competes
with other cable-based data services that are seeking to contract with cable
system operators. These competitors include:
o systems integrators such as Excite@Home, Roadrunner and High Speed
Access Corp.; and
o Internet service providers such as Earthlink Network, Inc. and
MindSpring Enterprises, Inc. (which two companies are in the process
of merging), and IDT Corporation.
Most cable system operators have begun to provide high-speed Internet access
services over their existing networks. The largest of these cable system
operators are Adelphia, CableVision, Charter, Comcast, Cox, MediaOne, TCI and
Time Warner. Comcast, Cox and TCI market through Excite@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. Adelphia provides high
speed Internet access through a wholly owned subsidiary called Powerlink. In
particular, Excite@Home has announced its intention to compete directly in the
small- to medium-sized cable system market, where High Speed Access Corp., an
affiliate of Charter, currently competes as well.
Telephone-based access providers
Some of the Company's most direct competitors in the access markets are
telephone-based access providers, including incumbent local exchange carriers,
national interexchange or long distance carriers, fiber-based competitive local
exchange carriers, ISPs, online service providers, wireless and satellite data
service providers, and local exchange carriers that use digital subscriber line
technologies. Some of these competitors are among the largest companies in the
country, including AT&T, MCIWorldCom, Sprint and Qwest. Other competitors
include BBN, Earthlink/Mindspring, Netcom, Concentric Network, and PSINet. The
result is a highly competitive and fragmented market.
Some of the Company's potential competitors are offering diversified packages of
telecommunications services to residential customers. If these companies also
offer Internet access service, then the Company 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 the Company's
Internet data service offerings. The bases of competition in these markets
include:
o transmission speed;
o security of transmission;
o reliability of service;
o ease of access and use;
o ratio of price to performance;
o quality of presentation and content;
o timeliness of content;
o customer support;
o brand recognition; and
o operating experience and revenue sharing.
Alternative technologies
In addition, the market for high-speed data transmission services is
characterized by several competing technologies that offer alternatives to
cable-modem service and conventional dial-up access. Competitive technologies
include telecom-related wireline technologies, such as integrated services
digital network and digital subscriber line technologies, and wireless
technologies such as local multipoint distribution service, multichannel
multipoint distribution service and various types of satellite services. The
Company's prospects may be impaired by 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 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 General
Wireless Communications Service remains to be seen. Nevertheless, all of these
new technologies pose potential competition to the Company's business.
Significant market acceptance of alternative solutions for high-speed data
transmission could decrease the demand for the Company's services.
The Company cannot predict whether and to what extent technological developments
will have a material adverse effect on the Company's 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 the Company's products and services. If that were
to happen, it could have a material adverse effect on the Company's business,
financial condition and prospects.
<PAGE>
A Perceived Or Actual Failure By The Company To Achieve Or Maintain High Speed
Data Transmission Could Significantly Reduce Consumer Demand For The Company's
Services And Have A Material Adverse Effect On The Company's Business, Financial
Condition And Prospects
Because the ISP Channel and Intellicom services have been operational for a
relatively short period of time, the Company's ability to connect and manage a
substantial number of online subscribers at high transmission speeds is unknown.
In addition, the Company face risks related to the Company's ability to scale up
to expected subscriber levels while maintaining superior performance. The actual
downstream data transmission speeds for each subscriber will be significantly
slower and will depend on a variety of factors, including:
o actual speed provisioned for the subscriber's modem;
o quality of the server used to deliver content;
o overall Internet traffic congestion;
o the number of active subscribers on a given channel at the same time;
o the capability of modems used; and
o the service quality of the cable networks of ISP Channel's cable
affiliates and the networks of Intellicom's customers.
As the number of subscribers increases, it may be necessary for the Company's
cable affiliates to add additional 6 MHz channels in order to maintain adequate
data transmission speeds from the Internet. These additions would render such
channels unavailable to such cable affiliates for video or other programming.
The Company cannot assure you that the Company's cable affiliates will provide
additional capacity for this purpose. On two-way cable systems, the transmission
data channel to the Internet (or return path) is located in a range not used for
broadcast by traditional cable networks and is more susceptible to interference
than the transmission data channel from the Internet, resulting in a slower peak
transmission speed to the Internet. In addition to the factors affecting data
transmission speeds from the Internet, the interference level in the cable
affiliates' data broadcast range to the Internet can materially affect actual
data transmission speeds to the Internet. 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. The Company cannot assure you that the Company will
be able achieve or maintain data transmission speeds high enough to attract and
retain the Company's planned numbers of subscribers, especially as the number of
subscribers to the Company's services grows. Consequently, a perceived or actual
failure by the Company to achieve or maintain high speed data transmission could
significantly reduce consumer demand for the Company's services and have a
material adverse effect on the Company's business, financial condition and
prospects.
Any Damage Or Failure That Causes Interruptions In The Company's Operations
Could Have A Material Adverse Effect On The Company's Business, Financial
Condition And Prospects
The Company's operations are dependent upon the Company's ability to support a
highly complex network and avoid damages from fires, earthquakes, floods, power
losses, telecommunications and satellite failures, network software flaws,
transmission cable cuts and similar events. The occurrence of any one of these
events could cause interruptions in the services the Company provides. In
addition, the failure of an incumbent local exchange carrier or other service
provider to provide the communications capacity the Company requires, as a
result of a natural disaster, operational disruption or any other reason, could
cause interruptions in the services the Company provides. Any damage or failure
that causes interruptions in the Company's operations could have a material
adverse effect on the Company's business, financial condition and prospects.
The Company May Be Vulnerable To Unauthorized Access, Computer Viruses And Other
Disruptive Problems Which May Result In The Company's Liability To The Company's
Subscribers And May Deter Others From Becoming Subscribers
While the Company has taken substantial security measures, the Company's
networks or those of the Company's cable affiliates may be vulnerable to
unauthorized access, computer viruses and other disruptive problems. Internet
service providers and online service providers 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 the Company's computer systems
and those of the Company's subscribers. Such events may result in the Company's
liability to the Company's subscribers and may deter others from becoming
subscribers, which could have a material adverse effect on the Company's
business, financial condition and prospects. Although the Company intends to
continue using industry-standard security measures, such measures have been
circumvented in the past, and the Company cannot assure you that these measures
will not be circumvented in the future. Moreover, the Company has no control
<PAGE>
over the security measures that the Company's cable affiliates adopt.
Eliminating computer viruses and alleviating other security problems may cause
the Company's subscribers delays due to interruptions or cessation of service.
Such delays could have a material adverse effect on the Company's business,
financial condition and prospects.
If The Market For High-Quality Content Fails To Develop, Or Develops More Slowly
Than Expected, The Company's Business, Financial Condition And Prospects Will Be
Materially Adversely Affected
A key part of the Company's strategy is to provide Internet users a more
compelling interactive experience than the one currently available to customers
of dial-up Internet service providers and online service providers. The Company
believes that, in addition to providing high-speed, high-performance Internet
access, to be successful the Company must also develop and aggregate
high-quality multimedia content. The Company's success in providing and
aggregating such content will depend in part on:
o the Company's ability to develop a customer base large enough to
justify investments in the development of such content;
o the ability of content providers to create and support high-quality
multimedia content; and
o the Company's ability to aggregate content offerings in a manner
subscribers find attractive.
The Company cannot assure you that the Company will be successful in these
endeavors. In addition, the market for high-quality multimedia Internet content
has only recently begun to develop and is rapidly evolving, and there is
significant competition among Internet service providers and online service
providers for obtaining such content. If the market fails to develop, or
develops more slowly than expected, or if competition increases, or if the
Company's content offerings do not achieve or sustain market acceptance, the
Company's business, financial condition and prospects will be materially
adversely affected.
The Company's Failure To Attract Advertising Revenues In Quantities And At Rates
That Are Satisfactory To The Company Could Have A Material Adverse Effect On The
Company's Business, Financial Condition And Prospects
The success of the ISP Channel service depends in part on the Company's ability
to draw advertisers to the ISP Channel. The Company expects to derive
significant revenues from advertisements placed on co-branded and ISP Channel
web pages and "click through" revenues from products and services purchased
through links from the ISP Channel to vendors. The Company believes that the
Company can leverage the ISP Channel to provide demographic information to
advertisers to help them better target prospective customers. Nonetheless, the
Company has not generated any significant advertising revenue yet and the
Company cannot assure you that advertisers will find such information useful or
will choose to advertise through the ISP Channel. Therefore, the Company cannot
assure you that the Company will be able to attract advertising revenues in
quantities and at rates that are satisfactory to the Company. The failure to do
so could have a material adverse effect on the Company's business, financial
condition and prospects.
If The Company Is Unsuccessful In Establishing And Maintaining The ISP Channel
Brand, Or If The Company Incurs Excessive Expenses In Promoting And Maintaining
The ISP Channel's Brand, The Company's Business, Financial Condition And
Prospects Would Be Materially Adversely Affected
The Company believes that establishing and maintaining the ISP Channel brand are
critical to attract and expand the Company's subscriber base. Promotion of the
ISP Channel brand will depend on several factors, including:
o the Company's success in providing high-speed, high-quality consumer
and business Internet products, services and content;
o the marketing efforts of the Company's cable affiliates; and
o the reliability of the Company's cable affiliates' networks and
services.
The Company cannot assure you that any of these factors will be achieved. The
Company has little control over the Company's cable affiliates' marketing
efforts or the reliability of their networks and services.
If consumers and businesses do not perceive the Company's existing products and
services as high quality or the Company introduces new products or services or
enter into new business ventures that are not favorably received by consumers
and businesses, then the Company will be unsuccessful in building brand
recognition and brand loyalty in the marketplace. In addition, to the extent
that the ISP Channel service is unavailable, the Company risks frustrating
potential subscribers who are unable to access the Company's products and
services.
Furthermore, the Company 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
<PAGE>
competitive market. If the Company is unsuccessful in establishing or
maintaining the ISP Channel brand or if the Company incurs excessive expenses in
promoting and maintaining the Company's brand, the Company's business, financial
condition and prospects would be materially adversely affected.
If The Company Encounters Significant Problems With The Company's Billing And
Collections Process, The Company's Business, Financial Condition And Prospects
Could Be Materially Adversely Affected
The Company is in the process of designing and implementing the Company's
billing and collections system for the ISP Channel service. The Company intends
to bill for the Company's services primarily over the Internet and, in most
cases, to collect these invoices through payments initiated via the Internet.
Such invoices and payments have security risks. Given the complexities of such a
system, the Company cannot assure you that the Company will be successful in
developing and launching the system in a timely manner or that the Company will
be able to scale the system quickly and efficiently if the number of subscribers
requiring such a billing format increases. Currently, many of the Company's
cable affiliates are responsible for billing and collection for the Company's
Internet access services. As a result, the Company has little or no control over
the accuracy and timeliness of the invoices or over collection efforts.
Given the Company's relatively limited history with billing and collection for
Internet services, the Company cannot predict the extent to which the Company
may experience bad debts or the Company's ability to minimize such bad debts. If
the Company encounters significant problems with the Company's billing and
collections process, the Company's business, financial condition and prospects
could be materially adversely affected.
The Company May Face Potential Liability For Defamatory Or Indecent Content,
Which May Cause The Company To Modify The Way The Company Provides Services
Any imposition of liability on the Company for information carried on the
Internet could have a material adverse effect on the Company's business,
financial condition and prospects. The law relating to liability of Internet
service providers and online service providers 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 online service providers 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 the Company's systems, the Company may have to implement measures to
reduce the Company's exposure to such liability. Such measures may require the
expenditure of substantial resources or the discontinuation of certain products
or services.
The Company May Face Potential Liability For Information Retrieved And
Replicated That May Not Be Covered By The Company's Insurance
The Company's liability insurance may not cover potential claims relating to
providing Internet services or may not be adequate to indemnify the Company for
all liability that may be imposed. Any liability not covered by insurance or in
excess of insurance coverage could have a material adverse effect on the
Company's business, financial condition and prospects. Because subscribers
download and redistribute materials that are cached or replicated by the Company
in connection with the Company's Internet services, claims could be made against
the Company or the Company's 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 online service
providers. 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 online environments. It is
impossible for the Company to determine who the potential rights holders may be
with respect to all materials available through the Company's services. In
addition, a number of third-party owners of patents have claimed to hold patents
that cover various forms of online transactions or online technology. As with
other online service providers, patent claims could be asserted against the
Company based upon the Company's services or technologies.
The Company's Success Depends Upon The Development Of New Products And Services
In The Face Of Rapidly Evolving Technology
The Company's products and services may not be commercially successful
The Company's future development efforts may not result in commercially
successful products and services or the Company's products and services may be
rendered obsolete by changing technology, new industry standards or new product
announcements by competitors.
<PAGE>
For example, the Company expects digital set-top boxes capable of supporting
high-speed Internet access services to be commercially available in the next 12
months. Set top boxes will enable subscribers to access the Internet without a
computer. Although the widespread availability of set-top boxes could increase
the demand for the Company's Internet service, the demand for set-top boxes may
never reach the level the Company and industry experts have estimated. Even if
set-top boxes do reach this level of popularity, the Company cannot assure you
that the Company will be able to capitalize on such demand. If this scenario
occurs or if other technologies or standards applicable to the Company's
products or services become obsolete or fail to gain widespread commercial
acceptance, then the Company's business, financial condition and prospects will
be materially adversely affected.
The Company's ability to adapt to changes in technology and industry standards,
and to develop and introduce new and enhanced products and service offerings,
will determine whether the Company can maintain or improve the Company's
competitive position and the Company's prospects for growth. However, the
following factors may hinder the Company's 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 the Company's
customers; and
o the Company's reliance on third-party technology for the development
of new products and services.
The Company's suppliers' products may become obsolete, requiring the Company to
purchase additional inventory or replacement equipment
The technology underlying the Company's capital equipment, such as headends and
cable modems, continues to evolve and, accordingly, the Company's equipment
could become out-of-date or obsolete prior to the time the Company originally
intended to replace it or sell it. If this occurs, the Company may need to
purchase substantial amounts of new capital equipment or inventory, which could
have a material adverse effect on the Company's business, financial condition
and prospects.
The Company's competitors' products may make the Company's products less
commercially viable
The introduction by the Company's competitors of products or services embodying,
or purporting to embody, new technology could also render the Company's existing
products and services, as well as products or services under development,
obsolete and unmarketable. Internet, telecommunications and cable technologies
are evolving rapidly. Many large corporations, including large
telecommunications providers, regional Bell operating companies and
telecommunications equipment providers, as well as large cable system operators,
regularly announce new and planned technologies and service offerings that could
impact the market for the Company's services. The announcements can delay
purchasing decisions by the Company's customers and confuse the marketplace
regarding available alternatives. Such announcements could, in the future,
adversely impact the Company's business, financial condition and prospects.
In addition, the Company cannot assure you that the Company will have the
financial and technical 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 the
Company's cable- based consumer and business Internet services. The Company's
services may not achieve widespread acceptance before competitors offer products
and services with speed and performance similar to the Company's current
offerings. In addition, the widespread adoption of new Internet or telecommuting
technologies or standards, cable-based or otherwise, could require substantial
and costly modifications to the Company's equipment, products and services and
could fundamentally alter the character, viability and frequency of
Internet-based advertising, either of which could have a material adverse effect
on the Company's business, financial condition and prospects.
If The Company Is Unable To Successfully Integrate Future Acquisitions Into The
Company's Operations, Then The Company's Results And Financial Condition May Be
Adversely Affected
In addition to the recent acquisition of Intellicom, the Company may acquire
other businesses that the Company believes will complement the Company's
existing businesses. The Company 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 potential disruption of the Company's ongoing business and diversion
of resources and management time;
o potential dilution to existing stockholders if the Company uses equity
securities to finance acquisitions; o incurrence of unforeseen
obligations or liabilities;
o possible inability of management to maintain uniform standards,
controls, procedures and policies;
o difficulty assimilating the acquired operations and personnel;
o risks of entering markets in which the Company has little or no direct
prior experience; and
<PAGE>
o potential impairment of relationships with employees or customers as a
result of changes in management.
The Company cannot assure that the Company will make any acquisitions or that
the Company will be able to obtain additional financing for such acquisitions,
if necessary. If any acquisitions are made, the Company cannot assure that the
Company will be able to successfully integrate the acquired business into the
Company's operations or that the acquired business will perform as expected.
The Company's Equity Investments In Other Companies May Not Yield Any Returns
The Company has made equity investments in several Internet-related companies,
including joint ventures in other countries. In most instances, these
investments are in the form of illiquid securities of private companies. These
companies typically are in an early stage of development and may be expected to
incur substantial losses. The Company's investments in these companies may not
yield any return. Furthermore, if these companies are not successful, the
Company could incur charges related to the write-down or write-off of assets.
The Company also records and continues to record a share of the net losses in
these companies, up to the Company's cost basis, if they are the Company's
affiliates. The Company intends to continue to make significant additional
investments in the future. Losses or charges resulting from these investments
could harm the Company's operating results.
Loss Of Key Personnel May Disrupt The Company's Operations
The loss of key personnel may disrupt the Company's operations. The Company's
success depends, in large part, on the Company's ability to attract and retain
qualified technical, marketing, sales and management personnel. With the
expansion of the ISP Channel and Intellicom services, the Company is currently
seeking new employees. However, competition for such personnel is intense in the
Company's business, and thus, the Company may be unsuccessful in the its hiring
efforts. To launch the ISP Channel service concept on a large-scale basis, the
Company has recently assembled a new management team, many of whom have been
with the Company for less than twelve 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 the Company's business, financial condition and prospects.
Direct And Indirect Government Regulation Can Significantly Impact The Company's
Business
Currently, neither the FCC nor any other federal or state communications
regulatory agency directly regulates Internet access services provided by the
Company's cable systems. However, any changes in law or regulation relating to
Internet connectivity, cable operators or telecommunications markets could
affect the nature, scope and prices of the Company's 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 telecommunications companies or other Internet access
providers.
Possibility of changes in law or regulation
Because the provision of Internet access services using cable networks is a
relatively recent development, the regulatory classification of such services
remains unsettled. Some parties have argued that providing Internet access
services over a cable network is a "telecommunications service" and that,
therefore, Internet access service providers should be subject to regulation
which, under the Communications Act of 1934, apply to telephone companies. Other
parties have argued that Internet access services over the cable system is a
cable service under the Communications Act, which would subject such services to
a different set of laws and regulations. It is unclear at this time whether
federal, state, or local governing bodies will adopt one classification over
another, or adopt another regulatory classification altogether, for Internet
access services provided over cable systems. The FCC recently decided to address
Internet access issuers in its February 17, 1999 order approving the merger
between AT&T and TCI, which was announced by the two companies on June 24, 1998.
A number of parties had opposed the merger unless the FCC required the AT&T/TCI
combination to provide unaffiliated ISPs with unbundled, open access to the
cable platform whenever that platform is being used by an AT&T/TCI affiliate to
provide Internet service. Other parties argued that the FCC should examine
industry-wide issues surrounding open access to cable-provided Internet service
in a generic rulemaking, rather than in the specific, adjudicatory context of a
merger evaluation. The FCC decided that it would be imprudent to grant either
request for action at this time given the nascent stage in the development and
deployment of high-speed Internet access services. Certain local jurisdictions
that approved the AT&T/TCI merger have imposed open access conditions on such
approval, while other such local jurisdictions have rejected such conditions or
have reserved the right to impose such conditions in the future. At least one
federal district court has upheld the local jurisdiction's decision to mandate
open access. The Company cannot predict the ultimate outcome or scope of the
local approval process. Nor can the Company predict the impact, if any, that
future federal, state or local legal or regulatory changes, including open
access conditions, might have on the Company's business.
<PAGE>
Regulations affecting the cable industry may discourage cable operators from
upgrading their systems
Regulation of cable television may affect the speed at which the Company's cable
affiliates upgrade their cable infrastructures to two-way cable. Currently, the
Company's cable affiliates have generally elected to classify the distribution
of the Company's services as "additional cable services" under their respective
franchise agreements, and 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 the
Company.
The Company's cable affiliates may be subject to multiple franchise fees for
distributing the Company's services
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 the
Company's services. There are thousands of franchise authorities in the United
States alone, and thus it will be difficult or impossible for the Company or the
Company's cable affiliates to operate under a unified set of franchise
requirements.
Possible negative consequences if cable operators are classified as common
carriers
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, the Company could lose the Company's rights
as the exclusive ISP for some of the Company's cable affiliates and the Company
or the Company's cable affiliates could be subject to common carrier regulation
by federal and state regulators.
Import restrictions may affect the delivery schedules and costs of supplies from
foreign shippers
In addition, the Company obtains some of the components for the Company's
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 the Company's business, financial condition and
prospects.
The Company Does Not Intend To Pay Dividends
The Company has not historically paid any cash dividends on the Company's common
stock and do not expect to declare any such dividends in the foreseeable future.
Payment of any future dividends will depend upon the Company's earnings and
capital requirements, the Company's debt obligations and other factors the board
of directors deems relevant. The Company currently intends to retain the its
earnings, if any, to finance the development and expansion of the ISP Channel
service.
The Company's Stock Price Is Volatile
The volatility of the Company's stock price may make it difficult for holders of
the common stock to transfer their shares at the prices they want. The market
price for the Company's 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 the Company's business;
o fluctuations in the Company's results of operations;
o sales of substantial amounts of the Company's securities into the
marketplace;
o general conditions in the Company's 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 the Company or the
Company's competitors; and
o changes in the Company's relationships with the Company's suppliers or
customers.
The market price of the Company's common stock may fluctuate significantly in
the future, and these fluctuations may be unrelated to the Company's
performance. General market price declines or market volatility in the future
could adversely affect the price of the Company's common stock, and thus, the
current market price may not be indicative of future market prices.
Prospective Anti-Takeover Provisions Could Negatively Impact The Company's
Stockholders
The Company is a Delaware corporation. The Delaware General Corporation Law
contains certain provisions that may discourage, delay or make a change in
<PAGE>
control of the Company more difficult or prevent the removal of incumbent
directors. In addition, the Company's certificate of incorporation and bylaws
have certain provisions that have the same effect. These provisions may have a
negative impact on the price of the Company's common stock and may discourage
third-party bidders from making a bid for the Company or may reduce any premiums
paid to stockholders for their common stock.
The Year 2000 Issue Could Harm The Company's Operations
Many computer programs have been written using two digits rather than four to
define the applicable year. This poses a problem at the end of the century
because such computer programs would not properly recognize a year that begins
with "20" instead of "19". This, in turn, could result in major system failures
or miscalculations that could disrupt the Company's business. The Company has
formulated a year 2000 ("Y2K") plan (the "Y2K Plan") to address the Company's
Y2K issues and has created a Y2K Task Force headed by the Director of
Information Systems and Data Services to implement the plan. The Company's Y2K
Plan has six phases:
1. Organizational Awareness: educate the Company's employees, senior
management, and the board of directors about the Y2K issue.
2. Inventory: complete inventory of internal business systems and their
relative priority to continuing business operations. In addition, this
phase includes a complete inventory of products and services, critical
vendors, suppliers and services providers and their Y2K compliance
status.
3. Assessment: assessment of internal business systems and external
customers (including cable affiliates), critical vendors, suppliers
and service providers and their Y2K compliance status.
4. Planning: preparing the individual project plans and project teams and
other required internal and external resources to implement the
required solutions for Y2K compliance.
5. Execution: implementation of the solutions and fixes.
6. Validation: testing the solutions for Y2K compliance.
The Company's Y2K Plan will apply to two areas:
1. Internal business systems
2. Compliance by external customers and providers
During the course of addressing all Y2K issues, the Company also added
remediation and contingency planning processes.
Internal Business Systems
The Company's internal business systems and workstation business applications
will be a primary area of focus. The Company is completing the implementation of
new enterprise-wide business solutions to replace existing manual processes
and/or "home grown" applications during 1999. These solutions are represented by
their vendors as being fully Y2K compliant. The Company has few, if any,
"legacy" applications that needed to be evaluated for Y2K compliance.
The Company completed the Inventory, Assessment and Planning Phases of
substantially all critical internal business systems. The Execution and
Validation Phases have begun. The Company expects to be Y2K compliant on all
critical internal business systems before December 31, 1999. But in any event,
the Company will have contingency plans in place to continue critical business
operations should some part of the internal business systems fail.
Some non-critical systems may not be addressed until after January 2000.
However, the Company believes such systems will not cause significant
disruptions in the Company's operations.
Compliance by External Customers and Providers
The Company has substantially completed the inventory phase and is in the final
stages of the assessment phase with the Company's critical suppliers, service
providers and contractors to determine the extent to which the interface systems
are susceptible to those third parties' failure to remedy their own Y2K issues.
To the extent that responses to Y2K readiness responses have been
unsatisfactory, the Company is working with these parties to remediate the
issues.
The Company has been in discussions with its cable affiliates with regard to the
status of their Y2K readiness; Cable affiliates representing over 50% of our
cable-based Internet customers have provided written or verbal assurances of
their Y2K readiness. However, there can be no guarantee that the Y2K compliance
efforts of any of the Company's cable affiliates will be successful.
<PAGE>
Risks Associated with Y2K
The Company believes a major risk associated with the Y2K issue is the ability
of the its key business partners and vendors to resolve their own Y2K issues.
The Company has spent a great deal of time over the past several months, working
closely with suppliers and vendors to assure their compliance. However, should
any problems occur the Company may lose significant revenue and incur
unanticipated expenses to remedy the problem, and such problems could divert
management's time and attention, any of which could have a material effect on
the Company's business, results of operation and financial condition.
To the extent any of our cable affiliates experience Y2K failures, the Company's
Internet service customers could experience an interruption or total or partial
failure of service. Should this occur, the Company could lose significant
revenue as a direct result of the Y2K failure or indirectly due to the loss of
customers, either of which could have material effect on the Company's business
results of operations and financial condition.
Costs to Address Y2K issues
Because the Company is implementing new enterprise-wide business solutions to
replace existing manual processes and/or "home grown" applications, there will
be little, if any, Y2K changes required to existing business applications. All
of the new business applications implemented (or in the process of being
implemented in 1999) are represented as being Y2K compliant.
The Company does not separately track the internal costs incurred for the Y2K
project, which costs are principally related to payroll costs for the Company's
information systems staff. The external costs, primarily consultants, has been
approximately $50,000 through November 30, 1999 and is estimated that the
Company will spend an additional $250,000 on its remediation and contingency
plans.
Contingency Plan
The Company has formulated a contingency plan which includes maintaining
staffing during the most critical times during which the Company might
experience Y2K failures. In addition, the Company will have field personnel on
standby to assist cable affiliates and VSAT customers should assistance be
required if the interface systems fail. However, the Company's contingency plan
can not address problems should its cable affiliates fail to be Y2K compliant.
Summary
There can be no assurance that the systems of the Company's customers, other
companies or government entities, on which the Company rely for supplies, cash
payments, and future business, will be timely converted, or that a failure to
convert by the Company's customers, other companies or government entities,
would not have a material adverse effect on the Company's financial position or
results of operations. Further, if, due to Y2K issues, third-party suppliers,
service providers and contractors fail to provide the Company with components,
materials, or services which are necessary to deliver the Company's service and
product offerings, with sufficient electrical power and transportation
infrastructure to deliver the Company's service and product offerings, then any
such failure could have a material adverse effect on the Company's ability to
conduct business, as well as the Company's financial position and results of
operations.
The Company is continuing to seek verification from the Company's cable
affiliates, critical suppliers, service providers and contractors that they are
Y2K compliant. To the extent that any of these business partners fail to be Y2K
compliant, it may have a significant impact on the Company's business. Should
the Company's Internet service customers or VSAT customers fail to be Y2K
compliant, it may have a significant impact on the Company's revenues. The
Company's inability to correct a significant Y2K problem, if one exists, could
result in an interruption in or a failure of, certain of the Company's normal
business activities and operations. In addition, a significant Y2K problem
concerning the Company's cable modem Internet services or the Company's VSAT
services could cause the Company's users to consider seeking alternate providers
of Internet services. Any significant Y2K problem could require the Company to
incur significant unanticipated expenses to remedy the problem and could divert
management's time and attention, either of which could have a material effect on
the Company's business, results of operation and financial condition.
<PAGE>
Item 2. Properties
The Company maintains office space for its corporate headquarters and marketing
activities at 650 Townsend Street, San Francisco, California, in a state of the
art facility of approximately 33,700 square feet under lease through December
2005. ISP Channel leases office space in three buildings totaling approximately
40,000 square feet in Mountain View, California, for its Internet network
operation center and call center through July 2005. The Intellicom facilities at
264 Wright Brothers Avenue, Livermore, California, consists of approximately
10,000 square feet of leased space. In October 1999, Intellicom committed to
lease through December 2004, for approximately 6,700 additional square feet of
office space across the street from its current facilities. Additionally, the
Company leases office space in Bethesda, Maryland; Atlanta, Georgia; Los
Angeles, California; Chicago, Illinois; Denver ,Colorado; and Chippewa Falls,
Wisconsin.
Item 3. Legal Proceedings
The Company has no material pending litigation
Item 4. Submission Of Matters To A Vote of Security Holders
None
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Since April 14, 1999, the common stock of the Company has been listed and traded
on the NASDAQ National Market ("NASDAQ") under the symbol "SOFN". Prior to that
date, the common stock was traded and listed on the American Stock Exchange
("AMEX") under the symbol "SOF". The high and low sale prices for the common
stock, as reported on NASDAQ or AMEX, as applicable, for each quarter over the
two years ended September 30, 1999 are as follows:
Quarter Ending: High Low
1998
December 31, 1997............. $8 7/16 $ 6 9/16
March 31, 1998................ 7 1/4 6 3/16
June 30, 1998................. 15 3/8 7 3/16
September 30, 1998............ 18 3/8 7 3/4
1999
December 31, 1998............. $18 7/8 $ 5 9/16
March 31, 1999................ 40 3/8 14 1/2
June 30, 1999................. 69 1/2 19 1/8
September 30, 1999............ 34 3/4 16 5/8
There were 377 record holders of the stock as of November 30, 1999. The closing
price for the common stock on November 30, 1999 was $30 3/4. The Company paid no
dividends on its common stock during the four year period ended September 30,
1999. Other than restrictions that may be part of various debt instruments, the
Company does not have any legal restriction on paying dividends. However, the
Company does not intend to pay dividends on its common stock in the foreseeable
future.
Recent Sales of Unregistered Securities
On April 12, 1999, the Company issued 660,000 shares of common stock to an
investor in exchange for $15.0 million in cash and a modification of the
affiliate agreement between the Company and Teleponce Cable TV, which is
controlled by that investor. Proceeds from the sale are being used to fund the
expenditures incurred in the continuing expansion of the Company's Internet
business, particularly the ISP Channel service, and for general corporate
purposes. These shares of common stock were issued in a nonpublic offering
pursuant to transactions exempt under Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act").
On March 22, 1999, the Company issued warrants to purchase 3,013 shares of
common stock to an institutional lender in connection with a $3.0 million credit
facility. The credit facility will be used to fund certain capital equipment
acquisitions. The warrants have an exercise price of $29.875 and expire on March
22, 2003. These securities were issued in a nonpublic offering pursuant to
transactions exempt under Section 4(2) of the Securities Act.
On February 22, 1999, the Company entered into a license agreement with Inktomi
Corporation ("Inktomi", the "Inktomi Licensing Agreement") allowing the Company
rights to install certain Inktomi caching technology into the Company's cable
and satellite network infrastructure. The Inktomi Licensing Agreement is valued
at $4.0 million for a total of 500 licenses, of which the first $1.0 million was
paid with 65,843 shares of the Company's common stock with the remaining amount
payable in cash in eight quarterly payments of $375,000. These shares of common
stock were issued in a nonpublic offering pursuant to transactions exempt under
Section 4(2) of the Securities Act.
On February 9, 1999, a wholly-owned subsidiary of the Company merged with and
into Intelligent Communications, Inc. ("Intellicom" and the "Intellicom
Acquisition"). The purchase price of $14.9 million was comprised of: (i) a cash
component of $500,000 (the "Cash Consideration"); (ii) a promissory note in the
amount of $1.0 million bearing interest at 7.5% per annum and due one year after
closing (the "First Promissory Note"); (iii) a promissory note in the amount of
$2.0 million bearing interest at 8.5% per annum and due two years after closing
(the "Second Promissory Note", together with the First Promissory Note, the
"Debt Consideration"); (iv) the issuance of 500,000 shares of the Company's
common stock (adjustable upwards after one year in certain circumstances),
valued at $14.938 per share, for a total value of $7.5 million (the "Closing
Shares"); (v) additional shares of the Company's common stock issuable upon the
first, second and third anniversaries of the closing, valued at a total of $3.5
million (the "Anniversary Shares", together with the Closing Shares, the "Equity
Consideration"); and (vi) certain direct acquisition costs totaling $400,000. In
addition, a demonstration bonus of $1.0 million payable in cash or shares of the
Company's common stock at the Company's option within one year after closing if
certain conditions are met is also a part of the purchase price. The Debt
Consideration may be partially or wholly converted into the Company's common
stock, under certain circumstances. The conversion price of the Debt
<PAGE>
Consideration is based upon the average closing price of the Company's common
stock for the 15 days immediately preceding the conversion date. Both the Debt
Consideration and the Equity Consideration were issued in a nonpublic offering
pursuant to transactions exempt under Section 4(2) of the Securities Act. During
fiscal 1999, the First Promissory Note, including all related interest, was paid
in full, net of certain associated expenses, with a combination of cash and
6,118 shares of the Company's common stock.
On January 12, 1999, the Company issued $12.0 million of its 9% Senior
Subordinated Convertible Notes (the "Notes") to a group of institutional
investors. These Notes were convertible into the Company's common stock with an
initial conversion price of $17.00 per share until July 1, 1999 and, thereafter,
at the lower of $17.00 per share (the "Initial Conversion Price") and the lowest
five-day average closing bid price of the Company's common stock during the
30-day trading period ending one day prior to the applicable conversion date
(the "Conversion Price"). In connection with these Notes, the Company issued to
these investors warrants to purchase an aggregate of 300,000 shares of the
Company's common stock. These warrants have an exercise price of $17.00 per
share and expire in 2003. In April 1999, as a result of the Company's
underwritten secondary public offering (the "Secondary Offering"), and in
conjunction with an anti-dilution provision associated with the Notes, the
Initial Conversion Price was reduced from $17.00 to $16.49 per share.
Furthermore, in order to secure three month lock-up agreements from the holders
of the Notes in conjunction with the Secondary Offering, the Company entered
into a new arrangement with the holders of the Notes to issue all future
interest payments, beginning with the third fiscal quarter of 1999, in the form
of convertible notes with substantially the same form and features as the
original Notes. Therefore, the Company has issued an additional $549,000 in
notes, representing interest for the third and fourth quarters of fiscal 1999
(the "Interest Notes"). Proceeds from the sale of these Notes are being used to
fund the expenditures incurred in the continuing expansion of the Company's
Internet business, particularly the ISP Channel service, and for general
corporate purposes. The Notes and warrants were issued in a nonpublic offering
pursuant Regulation D under the Securities Act. Subsequent to the end of fiscal
1999, on October 22, 1999, all of the 9% Senior Subordinated Convertible Notes,
related Interest Notes and accrued interest were converted into 765,201 shares
of the Company's common stock.
As of September 30, 1999, the Company has granted options to seven separate
non-employee consultants to purchase an aggregate of 140,500 shares of common
stock. The options were granted as partial consideration for services rendered.
The options vest over the period of contracted service. The exercise price of
these options range from $7.375 to $23.8125. In the aggregate, the options have
a weighted average exercise price of $13.08. These options for shares of common
stock were granted in a nonpublic offering pursuant to transactions exempt under
Section 4(2) of the Securities Act.
During fiscal 1999, the Company issued an aggregate of 13,574 shares of common
stock to eight separate cable affiliates under the Company's Cable Affiliate
Incentive Program. This Program provides an additional incentive to the
Company's cable affiliates to launch the Company's ISP Channel Internet
services. These shares of common stock were issued in a nonpublic offering
pursuant to transactions exempt under Section 4(2) of the Securities Act.
Since December 31, 1997, the Company has issued three series of its 5%
convertible preferred stock denominated Series A Convertible Preferred Stock
(the "Series A Preferred Stock"), Series B Convertible Preferred Stock (the
"Series B Preferred Stock") and Series C Convertible Preferred Stock (the
"Series C Preferred Stock"), together (the "Preferred Stock"). In connection
with the issuance of the 5% Preferred Stock, the Company has also issued
warrants to purchase its common stock (the "Preferred Warrants"). Proceeds from
the sale of the Preferred Stock and the Preferred Warrants are being used to
fund the expenditures incurred in the continuing expansion of the Company's
Internet business, particularly the ISP Channel service, and for general
corporate purposes.
On December 31, 1997, the Company issued to RGC International Investors, LDC
("RGC"), 5,000 shares of its Series A Preferred Stock and warrants to purchase
150,000 shares of common stock (the "Series A Warrants") for an aggregate
purchase price of $5,000,000. $435,000 of the purchase price has been allocated
to the value of the Series A Warrants. The conversion price of the Series A
Preferred Stock was equal to the lower of $8.28 per share and the lowest
consecutive two-day average closing price of the common stock during the 20-day
trading period immediately prior to such conversion. The sale was arranged by
Shoreline Pacific Institutional Finance ("SPIF"), the Institutional Division of
Financial West Group, which received a fee of $250,000 plus warrants to purchase
20,000 shares of common stock, which are exercisable at $6.625 and expire on
December 31, 2000. The Series A Preferred Stock was issued in a nonpublic
offering pursuant to transactions exempt under Section 4(2) of the Securities
Act of 1933, as amended (the "Securities Act"). During fiscal 1998, RGC received
101 shares of Series A Preferred Stock as dividends paid in kind.
On May 28, 1998, the Company issued to RGC and Shoreline Associates I, LLC
("Shoreline"), 9,000 and 1,000 shares, respectively, of its Series B Preferred
Stock and warrants to purchase 180,000 and 20,000 shares, respectively, of
common stock (the "Series B Warrants") for an aggregate purchase price of
$10,000,000. $900,000 of the purchase price has been allocated to the value of
the Series B Warrants. Prior to February 28, 1999, the conversion price of the
Series B Preferred Stock was equal to $13.20 per share. Thereafter, the
<PAGE>
conversion price of the Series B Preferred Stock was 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
sale was arranged by SPIF, which received a fee of $500,000 plus warrants to
purchase 50,000 shares of common stock, which are exercisable at $11.00 and
expire on May 28, 2002. The Series B Preferred Stock was issued in a nonpublic
offering pursuant to transactions exempt under Section 4(2) of the Securities
Act. During fiscal 1998, RGC and Shoreline received 112.5 and 12.5 shares,
respectively, of Series B Preferred Stock as dividends paid in kind. During
fiscal 1999, RGC and Shoreline received 113.9 and 12.7 shares, respectively, of
Series B Preferred Stock as dividends paid in kind.
On August 31, 1998, the Company issued to RGC 7,500 shares of its Series C
Preferred Stock and warrants to purchase 93,750 shares of common stock (the
"Series C Warrants") for an aggregate purchase price of $7,500,000. $277,000 of
the purchase price has been allocated to the value of the Series C Warrants.
Prior to May 31, 1999, the conversion price of the Series C Preferred Stock was
equal to $9.00 per share. Thereafter, the conversion price of the Series C
Preferred Stock was 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 sale was arranged by SPIF,
which received a fee of $375,000 plus warrants to purchase 26,250 shares of
common stock, which are exercisable at $7.50 and expire on August 31, 2002. The
Series C Preferred Stock was issued in a nonpublic offering pursuant to
transactions exempt under Section 4(2) of the Securities Act. During fiscal
1998, RGC received 31 shares of Series C Preferred Stock as dividends paid in
kind. During fiscal 1998, RGC received 94 shares of Series C Preferred Stock as
dividends paid in kind.
Each series of the Preferred Stock has similar rights and privileges, and each
share of the Preferred Stock has a par value of $0.10 and a face amount of
$1,000. The Preferred Stock is convertible into the number of shares of common
stock determined by dividing the face amount of the Preferred Stock being
converted by the applicable conversion price. A holder of the Series A Preferred
Stock or the Series B Preferred Stock cannot convert its Series A Preferred
Stock or Series B Preferred Stock in the event such conversion would result in
its beneficially owning more than 4.99% of the Company's common stock (not
including shares underlying the Series A Preferred Stock or the Series A
Warrants for the Series A Preferred Stock conversions, or the Series B Preferred
Stock or the Series B Warrants for the Series B Preferred Stock conversions),
but they may waive this prohibition by providing the Company a notice of
election to convert at least 61 days prior to such conversion. Similarly, a
holder of the Series C Preferred Stock cannot convert its Series C Preferred
Stock in the event such conversion would result in beneficially owning more than
4.99% of the Company's common stock (not including shares underlying the Series
C Preferred Stock or the Series C Warrants for the Series C Preferred stock
conversion). Notwithstanding this limitation, the holders of the Preferred Stock
cannot convert into an aggregate of more than 19.99% of the Company's common
stock without the approval of the Company's common stockholders or NASDAQ. In
addition, the Series B Preferred Stock and Series C Preferred Stock each cannot
convert into more than 2,000,000 shares of common stock. As of September 30,
1999, all of the Preferred Stock, including dividends paid-in-kind and accrued
interest, has been converted into an aggregate of 2,404,464 shares of the
Company's common stock.
In January 1998, the Company issued $1,443,750 principal amount of its 5%
Convertible Subordinated Debentures due September 30, 2002 to Mr. R. C. W.
Mauran, a beneficial owner of more than 5% of the Company's common stock, in
exchange for the assignment to the Company of certain equipment leases and other
consideration, all of which have been assimilated into the business of
Micrographic Technology Corporation. The debentures are convertible into common
stock of the Company, at $8.25 per share, after December 31, 1998. These
securities were issued in a non-public offering pursuant to transactions exempt
under Section 4(2) of the Securities Act.
On July 31, 1997 and August 15, 1997, the Company issued 250,000 shares of
common stock and 1,000 shares of common stock, respectively, to two separate
warrant holders, upon the exercise of outstanding warrants at an exercise price
of $1.75 per share ($439,250 in the aggregate). These shares were issued in a
nonpublic offering pursuant to transactions exempt under Section 4(2) of the
Securities Act.
On December 20, 1996, the Company issued 10,000 shares of common stock to Cleary
Gull Reiland and McDevitt ("Cleary") in consideration for services rendered by
Cleary in the approximate amount of $44,000 in connection with certain
acquisitions made by the Company. These shares were issued in a nonpublic
offering pursuant to transactions exempt under Section 4(2) of the Securities
Act.
In September 1995, the Company issued $2,856,700 of its 9% Convertible
Subordinated Debentures due September 2000 in conjunction with the acquisition
of MTC. The debentures were issued to the shareholders of MTC as partial
consideration for the acquisition. These 9% debentures have a conversion price
of $6.75. These securities were issued in a non-public offering pursuant to
transactions exempt under Section 4(2) of the Securities Act. During fiscal
1997, the Company issued 35,104 shares of common stock pursuant to the
conversion of $236,952 of convertible debt by four separate holders of these
debentures. During fiscal 1998, the Company issued 123,377 shares of common
<PAGE>
stock pursuant to the conversion of $832,806 of convertible debt by seven
separate holders of these debentures. During fiscal 1999, the Company issued
63,719 shares of common stock pursuant to the conversion of $430,124 of
convertible debt by five separate holders of these debentures.
Also during September 1995, in association with the acquisition of MTC, the
Company assumed $1,800,000 of 6% Convertible Subordinated Secured Debentures due
February 2002. These 6% debentures are subject to redemption at the option of
the Company at face value, provided however, that the Company issues common
share purchase warrants to purchase the same number of shares as would have been
issued if the debentures were converted. These debentures are convertible into
the Company's common stock at $8.10 per share. These securities were issued in a
non-public offering pursuant to transactions exempt under Section 4(2) of the
Securities Act. During fiscal 1996, the Company issued 125,925 shares of common
stock pursuant to the conversion of $1,020,000 of these convertible debentures
by ten separate holders of these debentures. During fiscal 1998, the Company
issued 7,407 shares of the Company's common stock pursuant to the conversion of
$60,000 of these convertible debentures by a single holder of these debentures.
During fiscal 1999, the Company issued 7,407 shares of common stock pursuant to
the conversion of $60,000 of these convertible debentures by a single holder of
these debentures.
In December 1994, the Company issued $2,189,500 of its 9% Convertible
Subordinated Notes due December 1998 in a private placement transacted without
the use of an underwriter. The proceeds were used for general corporate
purposes. These 9% notes have a conversion price of $5.00. These securities were
issued in a non-public offering pursuant to transactions exempt under Section
4(2) of the Securities Act. During fiscal 1996, the Company issued 422,898
shares of common stock pursuant to the conversion of $2,114,500 of these
convertible notes by seventeen individual holders of these notes. During fiscal
1997, the Company issued 10,000 shares of common stock pursuant to the
conversion of $50,000 of these convertible notes by a single holder of these
notes. During fiscal 1998, the Company issued 5,000 shares of common stock
pursuant to the conversion of the remaining $25,000 of these convertible notes
by the final holder of these notes.
In October 1994, the Company issued $1,250,000 of its 10% Convertible
Subordinated Notes due October 1999 in a private placement transacted without
the use of an underwriter. The notes were issued in association with the
Company's purchase of Communicate Direct, Inc. ("CDI"). The proceeds were used
to perfect the CDI acquisition and for general corporate purposes. These 10%
notes have a conversion price of $4.10. These securities were issued in a
non-public offering pursuant to transactions exempt under Section 4(2) of the
Securities Act. During fiscal 1996, the Company issued 231,708 shares of common
stock pursuant to the conversion of $950,000 of these convertible notes by a
single holder of these notes. During fiscal 1997, the Company issued 24,390
shares of common stock pursuant to the conversion of $100,000 of these
convertible notes by a single holder of these notes. During fiscal 1998, the
Company issued 48,780 shares of common stock pursuant to the conversion of the
remaining $200,000 of these convertible notes by the final holder of these
notes.
<PAGE>
Item 6. Selected Financial Data
The following table sets forth for the periods selected consolidated financial
and operating data for the Company. The statement of operations and balance
sheet data as of and for the year ended September 30, 1999 have been derived
from the Company's consolidated financial statements audited by KPMG LLP. The
statement of operations and balance sheet data for the periods as of and through
September 30, 1998 were derived from the Company's consolidated financial
statements audited by PricewaterhouseCoopers LLP. The selected consolidated
financial data should be read in conjunction with "Management's Discussions and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and the notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------
------------- ------------ ------------- ------------- -------------
1999 (b) 1998 1997 1996 (c) 1995
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data (a):
Net sales......................................... $ 4,135 $ 1,018 $ 1,008 $ 167 $ -
Cost of sales..................................... 4,215 1,040 885 - -
----------- ----------- ----------- ----------- -----------
Gross profit (loss)............................ (80) (22) 123 167 -
----------- ----------- ----------- ----------- -----------
Operating expenses:
Selling and marketing, engineering, and general
and administrative........................... 29,429 9,141 1,942 2,022 638
Depreciation and amortization.................. 6,190 1,005 535 416 39
Compensation related to stock options.......... 12,934 27 - - -
Acquisition costs and other.................... - - - 321 543
----------- ----------- ----------- ----------- -----------
Total operating expenses..................... 48,553 10,173 2,477 2,759 1,220
----------- ----------- ----------- ----------- -----------
Loss from continuing operations................... (48,633) (10,195) (2,354) (2,592) (1,220)
Other income (expenses):
Interest expense............................... (4,944) (1,022) (1,030) (1,124) (448)
Interest income................................ 3,617 112 - - -
Gain on sale of available-for-sale securities.. - - - 5,689 -
Other income (expense)......................... (1,406) (172) (72) 30 3
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations before
income taxes................................... (51,366) (11,277) (3,456) 2,003 (1,665)
Provision for income taxes........................ - - - - -
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations.......... (51,366) (11,277) (3,456) 2,003 (1,665)
Income (loss) from discontinued operations........ (463) (5,725) 1,311 (2,039) (7,347)
Gain on sale of discontinued operations........... 1,820 - - - -
Estimated loss on disposal of discontinued operations - - - - (644)
Extraordinary item - loss on sale of business..... - - (486) (6,061) -
----------- ----------- ----------- ----------- -----------
Net loss.......................................... (50,009) (17,002) (2,631) (6,097) (9,656)
Preferred dividends............................... (473) (343) - - -
----------- ----------- ----------- ----------- -----------
Net loss applicable to common shares.............. $ (50,482) $ (17,345) $ (2,631) $ (6,097) $ (9,656)
=========== =========== =========== =========== ===========
Loss from continuing operations per common share.. $ (4.20) $ (1.58) $ (0.52) $ (0.34) $ (0.38)
=========== =========== =========== =========== ===========
Basic and diluted loss per common share........... $ (4.09) $ (2.35) $ (0.40) $ (1.05) $ (2.22)
=========== =========== =========== =========== ===========
Balance Sheet Data (a):
Working capital (deficit)......................... $ 128,398 $ 5,361 $ (1,205) $ (1,129) $ 731
Total assets...................................... 205,824 29,625 12,611 15,299 25,091
Long-term liabilities............................. 22,726 9,517 8,877 9,477 10,265
Redeemable convertible preferred stock............ - 18,187 - - -
Stockholders' equity (deficit).................... 163,709 (6,171) 2,028 3,793 11,685
<FN>
- ----------------------------------------------------------------------
(a) Restated to reflect the document management and telecommunications
segments as discontinued operations.
(b) Includes Intellicom, Inc. since its acquisition on February 9, 1999.
(c) Includes ISP Channel (formerly MediaCity World, Inc.) since its
acquisition on June 21, 1996.
</FN>
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with, and is qualified in its entirety
by reference to, the Consolidated Financial Statements of the Company and the
related Notes thereto appearing elsewhere in Form 10-K. The Company's fiscal
year ends on September 30th of each year. "Fiscal 1999" refers to the twelve
months ended September 30, 1999 with comparable references for other twelve
month periods ending September 30th. This discussion contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in the forward-looking statements
as a result of certain factors including, but not limited to, those discussed in
"Risk Factors", "Business" and elsewhere in this Form 10-K. The Company
disclaims any obligation to update information contained in any forward-looking
statement.
Overview
The Company currently operates through two subsidiaries. The first, ISP Channel,
Inc. (`ISP Channel") is a leading provider of high speed Internet access over
cable to both residential and commercial customers while the second, Intellicom,
provides two-way broadband satellite connectivity to a wide variety of business
customers, the majority of whom are rural ISPs which use Intellicom's service to
connect from remote points of presence, through Intellicom's network operations
center in Livermore, California, to the Internet. ISP Channel is currently one
of Intellicom's larger customers and, as of December 1999, 24 of the 69 systems
deployed by ISP Channel, utilized Intellicom's service in preference to
terrestrial lines such as T1s.
On July 2, 1999, SoftNet entered into a letter agreement with Mediacom LLC, one
of the top-ten cable operators in the US, which was formalized in definitive
agreements dated November 4, 1999. Under the agreements, the Company will issue
to Mediacom an aggregate 3.5 million shares of common stock in exchange for
Mediacom entering into an affiliate agreement of up to 10 years but with a 5
year minimum with ISP Channel that provides for Mediacom delivering to ISP
Channel 900,000 two-way upgraded homes passed on a minimum schedule of 150,000
homes each 6 months over the first three years of the contract. In the event
that Mediacom fails to deliver the agreed number of homes within the contractual
time period, a portion of the stock issued to Mediacom will be returned to the
Company. In the event that Mediacom acquires or upgrades more than 900,000
two-way homes, then both parties are obligated to extend the original agreement
on similar terms for such incremental homes subject to a cap on the total
aggregate number of shares that the Company is obligated to issue to Mediacom.
In addition, Mediacom gained the right to nominate one member to the Company's
board of directors, who shall be Rocco Commisso, Mediacom's chairman and chief
executive officer.
On December 13, 1999, the Company received a $129 million investment from Hong
Kong-based, Pacific Century. This investment followed an earlier announcement in
October 1999 whereby Pacific Century and the Company agreed to form a joint
venture that, save for certain exceptions, would offer services similar to those
currently provided by ISP Channel to cable operators throughout Asia. These
exceptions comprise certain components, including content and connectivity,
which will, in general, be provided by either Pacific Century or the Company
directly to the cable operator. At this time, the Company has signed a
memorandum of understanding with Pacific Century outlining the areas of business
this joint venture will pursue. The Company is in the process of drafting
definitive agreements and establishing the strategy, business plan and
operational processes of this joint venture.
The revenue for ISP Channel comprises (i) monthly access fees received from
cable modem customers, (ii) one-off installation charges, (iii) revenue from
cable modem rental and sales, and (iv) revenue generated by traditional dial-up
ISP services and business services. Revenue generated through the cable modem
business is generally split equally with the cable operator (though ISP Channel
takes a higher split for the first 200 customers on any given system) and is
reported in our financial statements net of the portion paid to the cable
operator.
The revenue for Intellicom comprises (i) monthly fees paid by users of the
satellite service on a per VSAT basis, (ii) VSAT-related equipment sales, (iii)
revenue from sub-leasing of excess satellite transponder space and (iv) data
center processing fees. The last category represents legacy business that
Intellicom exited at the beginning of fiscal 2000 to focus on its core business
of providing high speed Internet access using two-way satellite technology.
While Intellicom receives revenue from ISP Channel in return for satellite
services, such revenue is not reported as it is eliminated in the consolidated
financial statements.
Cost of sales is reported as a single line item and primarily consists of the
cost of connectivity for both ISP Channel and Intellicom. Within ISP Channel,
these costs include the links between the cable headends where it has systems
deployed and a central office of the public switched telephone network, links
between the central office and ISP Channel's network operations center in
Mountain View and, in the case of one-way cable systems where the return path
from the customer to the cable headend is through a dial-up connection, the cost
of telephone lines into the headend. It is ISP Channel's intention to minimize
further deployments of one-way systems, however, due to the higher cost to the
<PAGE>
Company in providing such service and the fact that the customer offering is
substantially less compelling than in a two-way system. Intellicom's principal
cost of sales comprises satellite transponder fees. Currently, the Company has
transponder space on two satellites, GE-3 and SatMex 5, both of which provide
coverage over the continental United States and beyond.
The Company reports operating expenses in several categories: (i) selling and
marketing includes, in addition to the costs of selling and marketing the
Company's services to end users, customer care, content production, and cable
partnering costs; (ii) engineering which includes the costs of maintaining and
manning the network operations center, field engineering and information
technology; and (iii) general and administrative costs. Amortization primarily
comprises the write off of the cost of launch incentives which are paid to cable
operators, usually in the form of stock in the Company, to enter into long term
contracts with the Company. These payments are amortized over the life of the
contract between the cable operator and the Company. Compensation expense
relates to stock options granted between October 1998 and March 1999. Although
these options were granted at the then fair market value of the Company's common
stock at the time of grant, the underlying option plan was not formally approved
by the stockholders of the Company until April 13, 1999, the date of the
Company's annual meeting. Under APB 25, the Company must recognize as a charge
the difference between these various grant prices and $59.875, the closing price
on the date of stockholder approval of the stock option plan. This charge,
totaling approximately $79 million, will be recognized as a non-cash charge
amortized over a vesting period of approximately four years.
Results of Operations Fiscal 1999 versus Fiscal 1998
The 1998 and 1997 consolidated financial statements have been restated for the
effects of the discontinued operations of the document management and
telecommunications segments.
Net Sales. Consolidated net sales increased $3.1 million, or 306%, to $4.1
million for fiscal 1999, as compared to $1.0 million for fiscal 1998. Net sales
for ISP Channel increased $1.5 million, or 150%, to $2.5 million for fiscal
1999, as compared to $1.0 million for fiscal 1998, as a result of signing up new
cable affiliates and obtaining new subscribers. Net sales associated with ISP
Channel's subscriber fees increased $783,000, or 253%, to $1.1 million for
fiscal 1999, as compared to $309,000 for fiscal 1998. Net sales associated with
the installation of cable modems to ISP Channel subscribers increased $610,000
to $675,000 for fiscal 1999, as compared to $65,000 for fiscal 1998. The Company
believes that subscriber fee and cable modem installation revenues will continue
to increase as ISP Channel continues to rollout its business plan. Net sales
associated with the segment's non-cable based dial-up and business-to-business
Internet access offerings increased $139,000 to $783,000 as compared to $644,000
for fiscal 1998.
In addition to the net sales of ISP Channel, the Company's consolidated net
sales for fiscal 1999 now include the results of Intellicom, which the Company
acquired on February 9, 1999. Net sales for Intellicom from the date of
acquisition through September 30, 1999, was $1.6 million. Of this total,
$742,000 represents net sales from Intellicom's core business of satellite-based
Internet services. The remaining $843,000 represents other sources of revenue,
of which the biggest component was $524,000 from non-satellite-based data
processing, a legacy business for Intellicom. The Company believes that
satellite-based revenues will grow in the future while data processing revenues
have ended during the fourth fiscal quarter of 1999.
Cost of Sales. Consolidated cost of sales increased $3.2 million, or 305%, to
$4.2 million for fiscal 1999, as compared to $1.0 million for fiscal 1998. Cost
of sales for ISP Channel increased $1.8 million, or 166%, to $2.8 million for
fiscal 1999, as compared to $1.0 for fiscal 1998, as a result of the
corresponding growth in net sales. The single largest component of ISP Channel's
cost of sales are telephony costs, which amounted to $2.2 million for fiscal
1999 as compared to $781,000 for fiscal 1998. The Company believes that these
costs will remain the same or decrease as a percentage of total net sales as ISP
Channel expects to realize some degree of cost savings in its telephony charges
due to the replacement of expensive T1 lines in certain areas with Intellicom's
satellite-based technology, which has a lower cost basis in most cases.
In addition to the cost of sales of ISP Channel, the Company's consolidated cost
of sales for fiscal 1999 now include the results of Intellicom, which the
Company acquired on February 9, 1999. Cost of sales for Intellicom from the date
of acquisition through September 30, 1999 was $1.4 million. The single largest
component of Intellicom's cost of sales are the transponder fees that it pays
for leased satellite capacity, which amounted to $788,000 for fiscal 1999. The
Company believes that these costs will increase as Intellicom has plans to lease
segment space on additional satellites in the future in anticipation of a more
aggressive roll-out of Intellicom's business plan.
Selling and Marketing. Consolidated selling and marketing expenses increased
$11.0 million to $13.8 million for fiscal 1999, as compared to $2.7 million for
fiscal 1998. Selling and marketing expenses for ISP Channel increased $10.5
million to $13.2 million for fiscal 1999, as compared to $2.7 million for fiscal
1998. The significant growth in ISP Channel's selling and marketing expense is a
result of the significant hiring that the Company has done to properly staff
<PAGE>
these departments. In addition, ISP Channel launched numerous national and
regional marketing campaigns in an effort to add subscribers, as well as to
attract new cable affiliates. The Company believes that these costs will
continue to increase as ISP Channel continues to develop its business and
enhance its sales efforts with recurring nationwide marketing campaigns.
In addition to the selling and marketing expenses of ISP Channel, the Company's
consolidated selling and marketing expenses now include the results of
Intellicom, which the Company acquired on February 9, 1999. Selling and
marketing expenses for Intellicom from the date of acquisition through September
30, 1999 were $552,000. The Company believes that these costs will increase as
Intellicom begins to staff these functions in anticipation of rolling out its
business plan to generate new customers.
Engineering. Consolidated engineering expenses increased $5.2 million, or 920%,
to $5.8 million for fiscal 1999, as compared to $567,000 for fiscal 1998.
Engineering expenses for ISP Channel increased $4.8 million, or 844%, to $5.4
million for fiscal 1999, as compared to $567,000 for fiscal 1998. The growth in
ISP Channel's engineering expense is largely a result of round-the-clock
staffing of the Company's Network Operating Center and the introduction of field
engineering services. The Company believes that these costs will continue to
increase as ISP Channel continues to develop its business.
In addition to the engineering expenses of ISP Channel, the Company's
consolidated engineering expenses now include the results of Intellicom, which
the Company acquired on February 9, 1999. Engineering expenses for Intellicom
from the date of acquisition through September 30, 1999 was $429,000. The
Company believes that these costs will increase as Intellicom begins to staff
these functions in anticipation of rolling out its business plan to generate new
customers.
General and Administrative. Consolidated general and administrative expenses
increased $4.0 million, or 69%, to $9.8 million for fiscal 1999, as compared to
$5.8 million for fiscal 1998. The Company's corporate and ISP Channel general
and administrative expenses increased $3.2 million, or 54%, to $9.0 million for
fiscal 1999, as compared to $5.8 million for fiscal 1998. The growth in the
Company's corporate and ISP Channel general and administrative expenses are a
result of the hiring that the Company has done to properly staff the Company's
administrative, executive and finance departments as the Company continues to
grow. The Company believes that these costs will continue to increase as a
result of the continued expansion of the Company's administrative staff and
facilities to support growing operations.
In addition to the general and administrative expenses of ISP Channel and the
Company's corporate operations, the Company's consolidated general and
administrative expenses now include the results of Intellicom, which the Company
acquired on February 9, 1999. General and administrative expenses for Intellicom
from the date of acquisition through September 30, 1999 was $896,000. The
Company believes that these costs will increase as Intellicom begins to staff
these functions to support growing operations.
Depreciation and Amortization. Consolidated depreciation and amortization
expenses increased $5.2 million, or 516%, to $6.2 million for fiscal 1999, as
compared to $1.0 million for fiscal 1998. Depreciation and amortization for ISP
Channel and corporate increased $3.5 million, or 346%, to $4.5 million for
fiscal 1999, as compared to $1.0 million for fiscal 1998 as a result of
increased depreciation on expanded property, plant and equipment as well as
amortization of costs associated with ISP Channel's Cable Affiliates Incentive
Program. The Company believes that these expenses will increase as the Company
continues to expand the Company's facilities and continues to offer additional
incentives to acquire new cable affiliates. In particular, the Company expects
the amortization of the intangible asset associated with ISP Channel's Cable
Affiliates Incentive Program to increase significantly as a result of the
agreement with Mediacom and other new cable affiliates. Additionally,
depreciation increases as additional headends and cable modems are deployed.
In addition to the depreciation and amortization expenses of ISP Channel and the
Company's corporate operations, the Company's consolidated depreciation and
amortization expenses now include the results of Intellicom, which the Company
acquired on February 9, 1999. Depreciation and amortization expenses for
Intellicom from the date of acquisition through September 30, 1999 was $1.7
million, of which $1.5 million represents amortization of acquired technology,
the intangible asset created by the acquisition of Intellicom. The Company
believes that depreciation will increase as Intellicom continues to expand its
facilities, while amortization is expected to remain the same.
Compensation Expense Related to Stock Options. For fiscal 1999, the Company
recognized a non-cash compensation expense related to stock options of $12.9
million, of which $11.3 million related to employee stock options and $1.6
million to non-employees. Generally accepted accounting principles require that
options issued to non-employees be "marked-to-market" until such time as the
options have been earned. Therefore, the Company expects this amount to either
increase or decrease based on the fluctuations in the trading price of the
Company's common stock. The amount related to employee stock options is also
expected to increase in future periods as this expense only began to be incurred
in April of 1999.
<PAGE>
Interest Expense. Consolidated interest expense increased $3.9 million, or 384%,
to $4.9 million for fiscal 1999, as compared to $1.0 million for fiscal 1998.
This was a result of increased lease financing associated with the capital
expansion needs of ISP Channel as well as increased debt at the corporate level,
including the $12.0 million of convertible subordinated loan notes issued in
January 1999, amortization of deferred debt issuance costs associated with these
loan notes including the value attributed to the beneficial conversion feature
of the loan notes, and finally the promissory notes issued in connection with
the acquisition of Intellicom on February 9, 1999.
Interest Income. Consolidated interest income was $3.6 million for fiscal 1999,
as compared to $112,000 for fiscal 1998. This increase was primarily due to the
increased cash and cash equivalent balances from the proceeds of the Secondary
Offering.
Other Income (Expense). Other expense was $1.4 million for fiscal 1999, as
compared to $172,000 for fiscal 1998. This increase was primarily a result of
the indirect expenses associated with the Company's financing activities,
including the Secondary Offering, as well as the penalty incurred in connection
with the Series C redeemable convertible preferred stock.
Income Taxes. The Company made no provision for income taxes for fiscal 1999 and
fiscal 1998, as a result of the Company's continuing losses.
Loss from Discontinued Operations. The Company recognized a net loss of $463,000
from operations of the Company's discontinued telecommunications and document
management segments for fiscal 1999 as compared to a net loss of $5.7 million
for fiscal 1998. This consisted of a net loss in the Company's document
management segment of $633,000 for fiscal 1999, as compared to $5.6 million for
fiscal 1998 and net income in the Company's telecommunications segment of
$169,000 for fiscal 1999, as compared to a net loss of $73,000 for fiscal 1998.
The Company's telecommunications segment, KCI, sold substantially all of its
assets in February 1999. Net income from this discontinued operation is only
through the date of disposition. The Company's document management segment was
sold on September 30, 1999, and therefore the net loss of $633,000 reflects the
operations for the full fiscal 1999.
Preferred Dividends. The Company paid aggregate dividends of $473,000 during
fiscal 1999 on its outstanding 5% Redeemable Convertible Preferred Stock.
Net Loss. For fiscal 1999, the Company had a net loss applicable to common
shares of $50.5 million, or a loss per share of $4.09, compared to a net loss of
$17.3 million for fiscal 1998, or a loss per share of $2.35.
Results of Operations Fiscal 1998 versus Fiscal 1997
Net Sales. Consolidated net sales, all attributable to ISP Channel, remained at
$1.0 million for fiscal 1998 and fiscal 1997. Net sales of the ISP Channel
service increased $289,000 to $309,000 for fiscal 1998, as compared to $20,000
for fiscal 1997. ISP Channel introduced its cable-based services to the market
in the fourth quarter of fiscal 1997. Traditional dial-up and dedicated Internet
service sales increased $42,000, or 7.0%, to $644,000 for fiscal 1998, as
compared to $602,000 for fiscal 1997. This business also experienced a decrease
in miscellaneous and one-time service sales of $321,000, or 83.2% to $65,000 for
fiscal 1998, as compared to $386,000 for fiscal 1997. This decrease in
miscellaneous and one-time service sales is the result of the Company's decision
to re-focus its sales efforts on its cable-based ISP Channel services.
Cost of Sales. Consolidated cost of sales, all attributable to ISP Channel,
increased $155,000, or 18%, to $1.0 million for fiscal 1998, as compared to
$885,000 for fiscal 1997, primarily as the result of the build-out of the
segment's Internet operations used to support its cable-based service offering.
Selling and Marketing. Consolidated selling and marketing expenses increased
$2.5 million or 1,182%, to $2.7 million for fiscal 1998, as compared to $214,000
for fiscal 1997, primarily as a result of the increased efforts to support the
cable-based service offerings.
Engineering. Consolidated engineering expenses increased $353,000, or 165%, to
$567,000 for fiscal 1998, as compared to $214,000 for fiscal 1997, as a result
of providing additional technical support to the cable-based services customers.
General and Administrative. Consolidated general and administrative expenses
increased $4.3 million, or 285%, to $5.8 million for fiscal 1998, as compared to
$1.5 million for fiscal 1997. The increases are attributable to ISP Channel's
efforts supporting the cable-based service offering and corporate expenses
related to the management changes and financing activities associated with the
Company's strategic refocusing towards the ISP Channel cable-based service
offering.
<PAGE>
Depreciation and Amortization. Consolidated depreciation and amortization
increased $470,000, or 88%, to $1.0 million for fiscal 1998, as compared to
$535,000 for fiscal 1997. The increase is primarily due to increased
depreciation expense resulting from the $6.1 million increase in property and
equipment at ISP Channel. Amortization expense associated with goodwill remained
at $415,000.
Interest Expense. Consolidated interest expense remained at $1.0 million.
Interest Income. Consolidated interest income was $112,000 for fiscal 1998. For
fiscal 1997, there was no interest income. Interest income for fiscal 1998 was
earned on available funds resulting from the issuance of the redeemable
convertible preferred stock.
Other Income (Expense). Other expense was $172,000 for fiscal 1998, as compared
to $72,000 for fiscal 1997.
Income Taxes. The Company made no provision for income taxes for fiscal 1998 and
fiscal 1997, as a result of the Company's continuing losses.
Loss from Discontinued Operations. The Company recognized a net loss of $5.7
million from operations of the Company's discontinued telecommunications and
document management segments for fiscal 1998 as compared to a net income of $1.3
million for fiscal 1997. This consisted of a net loss in the Company's document
management segment of $5.6 for fiscal 1998, as compared to net income of
$572,000 for fiscal 1997 ,and a net loss in the Company's telecommunications
segment of $73,000 for fiscal 1998, as compared to a net income of $739,000 for
fiscal 1997. The Company's telecommunications segment, KCI, sold substantially
all of its assets in February 1999. Net income from this discontinued operation
is only through the date of disposition.
Preferred Dividends. The Company paid aggregate dividends of $343,000 during
fiscal 1998 on its outstanding 5% Redeemable Convertible Preferred Stock.
Net Loss. For fiscal 1998, the Company had a net loss applicable to common
shares of $17.3 million, or a loss per share of $2.35, compared to a net loss of
$2.6 million for fiscal 1997, or a loss per share of $0.40.
Liquidity and Capital Resources
Since September 1998, the Company has funded the significant negative cash flows
from its operating activities and the associated capital expenditures through a
combination of public and private equity sales, convertible debt issues and
equipment leases. As of September 30, 1999, and before giving effect to the $129
million received in December, 1999, the Company had $142.1 million in cash, cash
equivalents and short-term investments compared with $12.5 million one year
prior. In January 1999, the Company issued $12.0 million in senior subordinated
convertible notes to two investors. These notes, which were issued in
conjunction with warrants to purchase 300,000 shares of the Company's common
stock at a price of $17.00 per share were converted at the Company's request
into 765,201 shares of the Company's common stock in October 1999. The
associated warrants still remain outstanding. In April 1999, the Company sold
4,600,000 shares of its common stock in an underwritten secondary offering at a
price per share of $33. Net proceeds to the Company from this offering were
approximately $141.5 million. To date, the Company has procured an aggregate of
$23.5 million in capital lease lines and credit facilities from various
equipment vendors and financial sources, of which, approximately $13.3 million
remains unutilized.
Net cash used in operating activities of continuing operations during fiscal
1999 was $25.2 million. Of this amount, approximately $50.0 million stemmed from
the Company's net loss from continuing operations as reduced by approximately
$22.9 million, for non-cash charges, primarily depreciation ($3.9 million),
amortization ($2.3 million) and compensation expense related to stock options
($12.9 million). This was offset in part by approximately $1.9 million which was
generated from an overall decrease in operating assets and liabilities.
Operating activities of discontinued operations provided approximately $1.3
million of net cash.
Net cash used in investing activities of continuing operations during fiscal
1999 was approximately $66.6 million. Of this amount, $53.0 million was used to
purchase net short term investments and $19.7 million in cash investments in
property, plant and equipment. Gross purchases of property, plant and equipment
amounted to $24.0 million, the difference being funded through capital lease
lines and credit facilities from various equipment vendors and financial
sources. The sale of net assets of discontinued operations, provided
approximately $8.9 million in net cash.
Net cash provided by financing activities during fiscal 1999 was $168.9 million
primarily through the $12.0 million sale of senior subordinated convertible
notes, the $141.5 million secondary offering and a further $15.0 million
received by the Company in April 1999 through the sale of 660,000 shares of the
Company's common shares to one of its cable partners. Financing activities of
discontinued operations used approximately $1.3 million of net cash. On December
13, 1999, the Company received approximately $129 million in unrestricted cash
from the sale of 5 million shares of its common stock to Pacific Century.
<PAGE>
The Company believes it has sufficient cash and unutilized lease facilities to
meet its presently anticipated business requirements over the next twelve months
including the funding of net operating losses, working capital requirements,
capital investments and strategic investments.
Acquisition of Intellicom. On February 9, 1999, the Company completed the
purchase of Intellicom. The purchase price was comprised of: (i) a cash
component of $500,000, less payment of certain expenses, paid at closing; (ii) a
promissory note in the amount of $1.0 million due one year after closing, which
was paid in full with a combination of cash and common stock in April 1999;
(iii) a promissory note in the amount of $2.0 million due two years after
closing; (iv) the issuance of 500,000 shares of the Company's common stock
(adjustable upwards after one year in certain circumstances); (v) additional
shares of the Company's common stock issuable upon the first, second and third
anniversaries of the closing, valued at a total of $3.5 million (the
"Anniversary Shares", together with the Closing Shares, the "Equity
Consideration"); and (vi) a demonstration bonus of $1.0 million payable in cash
or shares of the Company's common stock at the Company's option within one year
after closing if certain conditions are met. Approximately $300,000 of the $1.0
million note is payable in cash or in the Company's common stock at the
Company's option, while the balance of this note is payable in cash or in the
Company's common stock at the option of the holders. The entire amount of the
$2.0 million note is payable in cash or in the Company's common stock at the
Company's option. It is currently anticipated that payment of the demonstration
bonus is highly unlikely.
Sale of KCI. On February 12, 1999, substantially all of the assets of KCI were
sold to Convergent Communications for an aggregate purchase price of
approximately $6.3 million subject to adjustment in certain events. Convergent
Communications paid $100,000 in cash in November 1998 upon execution of the
letter of intent to purchase and paid the remainder of the purchase price on the
closing date as follows: (i) $1.4 million in cash; (ii) approximately 30,000
shares of Convergent Communications' parent company common stock with an agreed
value of approximately $300,000 (the "Convergent Shares"); (iii) a promissory
note in the amount of $2.0 million, bearing simple interest at the rate of
eleven percent per annum, which was paid in full in July 1999; (iv) a promissory
note in the amount of $1.0 million which was payable 12 months following the
closing date and bearing simple interest at the rate of eight percent per annum,
was prepaid in full subsequent to September 30, 1999; and (v) a promissory note
in an amount of $1.5 million, bearing simple interest at the rate of eight
percent per annum, which was paid in full in July 1999. Furthermore, a purchase
price adjustment subsequent to closing provided the Company with additional
Convergent Shares with an agreed value of $198,000. The initial cash proceeds
received from the sale of KCI were used to pay down the Company's revolving
credit facility with West Suburban Bank.
Sale of MTC. On September 30, 1999, the Company sold the Company's document
management business, MTC to Global Information Distribution GmbH ("GID") for an
aggregate purchase price of approximately $4.9 million. GID paid $100,000 as a
non-refundable deposit upon acceptance of the GID term sheet. GID paid the
Company the remaining $4.8 million at the closing. The cash proceeds from the
sale of MTC were used in part to repay the Company's revolving credit facility
with West Suburban Bank. As of September 30, 1999 there was nothing outstanding
under this facility. The balance of the proceeds will be used to pay for
transaction costs associated with the sale of MTC and to increase the Company's
cash position.
Year 2000 Issues
Many computer programs have been written using two digits rather than four to
define the applicable year. This poses a problem at the end of the century
because such computer programs would not properly recognize a year that begins
with "20" instead of "19". This, in turn, could result in major system failures
or miscalculations that could disrupt the Company's business. The Company has
formulated a year 2000 ("Y2K") plan (the "Y2K Plan") to address the Company's
Y2K issues and have created a Y2K Task Force headed by the Director of
Information Systems and Data Services to implement the plan. The Company's Y2K
Plan has six phases:
1. Organizational Awareness: educate the Company's employees, senior
management, and the board of directors about the Y2K issue.
2. Inventory: complete inventory of internal business systems and their
relative priority to continuing business operations. In addition, this
phase includes a complete inventory of products and services, critical
vendors, suppliers and services providers and their Y2K compliance
status.
3. Assessment: assessment of internal business systems and external
customers (including cable affiliates), critical vendors, suppliers
and service providers and their Y2K compliance status.
4. Planning: preparing the individual project plans and project teams and
other required internal and external resources to implement the
required solutions for Y2K compliance.
5. Execution: implementation of the solutions and fixes.
6. Validation: testing the solutions for Y2K compliance.
<PAGE>
The Company's Y2K Plan will apply to two areas:
1. Internal business systems
2. Compliance by external customers and providers
During the course of addressing all Y2K issues, the Company also added
remediation and contingency planning processes.
Internal Business Systems
The Company's internal business systems and workstation business applications
will be a primary area of focus. The Company is in completing the implementation
of new enterprise-wide business solutions to replace existing manual processes
and/or "home grown" applications during 1999. These solutions are represented by
their vendors as being fully Y2K compliant. The Company has few, if any,
"legacy" applications that needed to be evaluated for Y2K compliance.
The Company completed the Inventory, Assessment and Planning Phases of
substantially all critical internal business systems. The Execution and
Validation Phases have begun. The Company expects to be Y2K compliant on all
critical internal business systems before December 31, 1999. But in any event,
the Company will have contingency plans in place to continue critical business
operations should some part of the internal business systems fail.
Some non-critical systems may not be addressed until after January 2000.
However, the Company believes such systems will not cause significant
disruptions in the Company's operations.
Compliance by External Customers and Providers
The Company has substantially completed the inventory phase and are in the final
stages of the assessment phase with the Company's critical suppliers, service
providers and contractors to determine the extent to which the interface systems
are susceptible to those third parties' failure to remedy their own Y2K issues.
To the extent that responses to Y2K readiness responses have been
unsatisfactory, the Company is working with these parties to remediate the
issues.
The Company has been in discussions with the Company's cable affiliates with
regard to the status of their Y2K readiness. Cable affiliates representing over
50% of our cable based Internet customers have provided written or verbal
assurances of their Y2K readiness. However, there can be no guarantee that the
Y2K compliance efforts of any of the Company's cable affiliates will be fully
successful.
Risks Associated with Y2K
The Company believes a major risk associated with the Y2K issue is the ability
of the Company's key business partners and vendors to resolve their own Y2K
issues. The Company has spent a great deal of time over the past several months
working closely with suppliers and vendors to assure their compliance. However,
should any problems occur the Company may lose significant revenue and incur
unanticipated expenses to remedy the problem and such problems could divert
management's time and attention, any of which could have a material effect on
the Company's business, results of operation and financial condition.
To the extent any of our cable affiliates experience Y2K failures, the Company's
Internet service customers could experience an interruption or total or partial
failure of service. Should this occur, the Company could lose significant
revenue as a direct result of the Y2K failure or indirectly due to the loss of
customers, either of which could have material effect on the Company's business
results of operations and financial condition.
Costs to Address Y2K issues
Because the Company is implementing new enterprise-wide business solutions to
replace existing manual processes and/or "home grown" applications, there will
be little, if any, Y2K changes required to existing business applications. All
of the new business applications implemented (or in the process of being
implemented in 1999) are represented as being Y2K compliant.
The Company does not separately track the internal costs incurred for the Y2K
project, which costs are principally related to payroll costs for the Company's
information systems staff. The external costs, primarily consultants, has been
approximately $50,000 through November 30, 1999 and it is estimated that the
Company will spend an additional $250,000 on its remediation and contingency
plans.
Contingency Plan
The Company has formulated a contingency plan which includes maintaining
staffing during the most critical times during which the Company might
experience Y2K failures. In addition, the Company will have field personnel on
standby to assist cable affiliates and VSAT customers should assistance be
required if the interface systems fail. However, the Company's contingency plan
can not address problems should its cable affiliates fail to be Y2K compliant.
<PAGE>
Summary
There can be no assurance, that the systems of the Company's customers, other
companies or government entities, on which the Company rely for supplies, cash
payments, and future business, will be timely converted, or that a failure to
convert by the Company's customers, other companies or government entities,
would not have a material adverse effect on the Company's financial position or
results of operations. Further, if, due to Y2K issues, third-party suppliers,
service providers and contractors fail to provide the Company with components,
materials, or services which are necessary to deliver the Company's service and
product offerings, with sufficient electrical power and transportation
infrastructure to deliver the Company's service and product offerings, then any
such failure could have a material adverse effect on the Company's ability to
conduct business, as well as the Company's financial position and results of
operations.
The Company is continuing to seek verification from the Company's cable
affiliates, critical suppliers, service providers and contractors that they are
Y2K compliant. To the extent that any of these business partners fail to be Y2K
compliant, it may have a significant impact on the Company's business. Should
the Company's Internet service customers or VSAT customers fail to be Y2K
compliant, it may have a significant impact on the Company's revenues. The
Company's inability to correct a significant Y2K problem, if one exists, could
result in an interruption in or a failure of, certain of the Company's normal
business activities and operations. In addition, a significant Y2K problem
concerning the Company's cable modem Internet services or the Company's VSAT
services could cause the Company's users to consider seeking alternate providers
of Internet services. Any significant Y2K problem could require the Company to
incur significant unanticipated expenses to remedy the problem and could divert
management's time and attention, either of which could have a material effect on
the Company's business, results of operation and financial condition.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the increase or decrease in the amount of interest income the
Company can earn on its investment portfolio and on the increase or decrease in
the amount of interest expense the Company must pay with respect to its various
outstanding debt instruments. The risk associated with fluctuating interest
expense is limited, however, to the exposure related to those debt instruments
and credit facilities, which are tied to market rates. The Company does not use
derivative financial instruments in its investment portfolio. The Company
ensures the safety and preservation of its invested principal funds by limiting
default risks, market risk and reinvestment risk. The Company mitigates default
risk by investing in safe and high-credit quality securities.
We had short-term investments of $52.6 million at September 30, 1999. These
short-term investments consist of highly liquid investments with original
maturities at the date of purchase of between three and eighteen months. These
investments are subject to interest rate risk and will fall in value if market
interest rates increase. The Company believes a hypothetical increase in market
interest rates by 10 percent from levels at September 30, 1999 would cause the
fair value of these short-term investments to fall by an immaterial amount.
Since we are not required to sell these investments before maturity, we have the
ability to avoid realizing losses on these investments due to a sudden change in
market interest rates. On the other hand, declines in the interest rates over
time will reduce our interest income.
We had outstanding convertible debt instruments of approximately $16.0 million
at September 30, 1999. These instruments have fixed interest rates ranging from
5.0% to 9.0%. Because the interest rates of these instruments are fixed, a
hypothetical 10 percent decrease in interest rates will not have a material
effect on us. Increases in interest rates, however, increase the interest
expense associated with future borrowing by us, if any. We do not hedge against
interest rate fluctuations.
Equity Price Risk
We own 24,925 shares of common stock of Convergent Communications, Inc. These
shares were obtained as partial consideration with respect to the sale of our
wholly-owned subsidiary, Kansas Communications, Inc. At September 30, 1999, the
closing price of Convergent's common stock was $10.375, as listed on the NASDAQ
stock exchange. As a result, we value this investment on our balance sheet at
September 30, 1999 at its market value of $258,000. Unrealized gains and losses
are excluded from earnings and are reported in the "Accumulated Other
Comprehensive Income" component of stockholders' equity. We do not hedge against
equity price changes.
<PAGE>
Recent Accounting Pronouncements
Effective October 1, 1998, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 130 ("SFAS 130"), Reporting Comprehensive Income, which
requires the Company to report and display certain information related to
comprehensive income. Comprehensive income includes net income and other
comprehensive income. Other comprehensive income is unrealized gains and losses
on the Company's short-term investments. The adoption of SFAS 130 had no impact
on the Company's financial position, results of operations or cash flows.
Effective October 1, 1998, the Company adopted the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 98-1 ("SOP
98-1"), Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use and for determining when
specific costs should be capitalized and when they should be expensed. There was
no impact as a result of adopting SOP 98-1.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 requires that all start-up costs related to new operations
must be expensed as incurred. In addition, upon adoption of SOP 98-5 all
start-up costs that were capitalized in the past must be written off. The
Company expects that the adoption of SOP 98-5 will not have a material impact on
its financial position, results of operations or cash flows. Effective October
1, 1999, the Company will be required to implement SOP 98-5.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities.
SFAS 133 establishes methods of accounting for derivative financial instruments
and hedging activities. The Company anticipates that the adoption of SFAS 133
will not have a material impact on its financial position, results of operations
or cash flows. Implementation of this standard has recently been delayed by the
FASB for a twelve month period.
<PAGE>
Item 8. Financial Statements and Supplementary Data
SoftNet Systems, Inc. and Subsidiaries
Index To Consolidated Financial Statements
September 30, 1999
Page
Report of Independent Accountants KPMG LLP................................ 47
Report of Independent Accountants PricewaterhouseCoopers LLP.............. 48
Consolidated Balance Sheets as of September 30, 1999 and 1998............. 49
Consolidated Statements of Operations for the three years
ended September 30, 1999............................................... 50
Consolidated Statements of Stockholders' Equity (Deficit)
for the three years ended September 30, 1999........................... 51
Consolidated Statements of Cash Flows for the three years
ended September 30, 1999............................................... 52
Notes to Consolidated Financial Statements................................ 53-71
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of SoftNet Systems, Inc.:
We have audited the accompanying consolidated balance sheet of SoftNet Systems,
Inc. and Subsidiaries as of September 30, 1999 and the related consolidated
statement of operations, stockholders' equity (deficit) and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of SoftNet
Systems, Inc. and Subsidiaries as of September 30, 1999, and the results of
their operations and cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/KPMG LLP
Mountain View, California
November 30, 1999
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of SoftNet Systems, Inc.:
In our opinion, the accompanying consolidated balance sheet and related
consolidated statements of operations, stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
SoftNet Systems, Inc. and its subsidiaries at September 30, 1998, and the
results of their operations and their cash flows for each of the two years in
the period ended September 30, 1998 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
San Jose, California
December 1, 1998, except for Note 9 regarding the
Senior Subordinated Convertible Notes for which the
date is January 13, 1999 and Note 5 regarding the discontinuance
of the document management segment for which the date is April 13, 1999
<PAGE>
SoftNet Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
As of September 30,
--------------------------
------------- ------------
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents....................... $ 89,499 $ 12,504
Short-term investments.......................... 52,586 -
Accounts receivable, net of
allowance of $333 (1999) and $56 (1998)...... 935 110
Notes receivable................................ 1,000 -
Inventory....................................... 1,991 268
Other current assets............................ 1,776 571
------------ -----------
Total current assets............................... 147,787 13,453
Restricted cash.................................... 922 800
Property and equipment, net........................ 26,743 5,981
Acquired technology and other
intangibles, net................................ 24,500 311
Other assets....................................... 5,872 150
Net assets associated with
discontinued operations......................... - 8,930
------------ -----------
$ 205,824 $ 29,625
============ ===========
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses........... $ 15,545 $ 6,938
Current portion of long-term debt............... 2,084 541
Current portion of capital lease obligation..... 1,760 613
------------ -----------
Total current liabilities.......................... 19,389 8,092
Long-term debt, net of current portion............. 17,281 9,220
Capital lease obligation, net of current portion... 1,945 297
Business acquisition liability..................... 3,500 -
Commitments and contingencies
Redeemable convertible preferred stock,
$.10 par value, 30,000 shares designated;
no shares (1999) and 20,757 shares (1998)
issued and outstanding.......................... - 18,187
Stockholders' equity (deficit):
Preferred stock, $.10 par value, 3,970,000
shares designated, no shares (1999 and 1998)
issued and outstanding..................... - -
Common stock, $.01 par value, 100,000,000 (1999)
and 25,000,000 (1998) shares authorized;
17,225,523 (1999) and 8,191,550 (1998)
shares issued and outstanding................. 172 82
Additional paid in capital...................... 327,445 43,700
Deferred stock compensation..................... (63,346) (188)
Accumulated other comprehensive loss............ (315) -
Accumulated deficit............................. (100,247) (49,765)
------------ -----------
Total stockholders' equity (deficit) 163,709 (6,171)
------------ -----------
$ 205,824 $ 29,625
============ ===========
See accompanying notes to consolidated financial statements.
<PAGE>
SoftNet Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
---------- ------------ -------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales...................................................................... $ 4,135 $ 1,018 $ 1,008
Cost of sales.................................................................. 4,215 1,040 885
----------- ----------- -----------
Gross profit (loss)......................................................... (80) (22) 123
----------- ----------- -----------
Operating expenses:
Selling and marketing....................................................... 13,786 2,744 214
Engineering................................................................. 5,785 567 214
General and administrative.................................................. 9,858 5,830 1,514
Depreciation................................................................ 3,903 590 120
Amortization................................................................ 2,287 415 415
Compensation related to stock options....................................... 12,934 27 -
----------- ----------- -----------
Total operating expenses....................................................... 48,553 10,173 2,477
----------- ----------- -----------
Loss from continuing operations................................................ (48,633) (10,195) (2,354)
Other income (expenses):
Interest expense............................................................ (4,944) (1,022) (1,030)
Interest income............................................................. 3,617 112 -
Other expense, net.......................................................... (1,406) (172) (72)
----------- ----------- -----------
Loss from continuing operations before income taxes............................ (51,366) (11,277) (3,456)
Provision for income taxes..................................................... - - -
----------- ----------- -----------
Loss from continuing operations................................................ (51,366) (11,277) (3,456)
Income (loss) from discontinued operations, net of tax......................... (463) (5,725) 1,311
Gain on sale of discontinued operations, net of tax............................ 1,820 - -
Extraordinary item - loss on sale of business.................................. - - (486)
----------- ----------- -----------
Net loss....................................................................... (50,009) (17,002) (2,631)
Preferred dividends............................................................ (473) (343) -
----------- ----------- -----------
Net loss applicable to common shares........................................... $ (50,482) $ (17,345) $ (2,631)
=========== =========== ===========
Basic and diluted earnings (loss) per common share:
Loss from continuing operations applicable to common shares................. $ (4.20) $ (1.58) $ (0.52)
Discontinued operations..................................................... 0.11 (0.77) 0.19
Extraordinary item - loss on sale of business............................... - - (0.07)
----------- ----------- -----------
Net loss applicable to common shares........................................ $ (4.09) $ (2.35) $ (0.40)
=========== =========== ===========
Shares used to compute basic and diluted loss per common share................. 12,342 7,391 6,627
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SoftNet Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
(In thousands)
<TABLE>
<CAPTION>
--------------- ------------- ------------ ------------- --------------- -------------
Accumulated Total
Deferred Additional other stockholders'
Common Stock stock paid in Accumulated comprehensive equity
Shares Amount compensation capital deficit loss (deficit)
------- ------- ------------- ------------ ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996..... 6,540 $ 65 $ - $ 33,517 $ (29,789)$ - $ 3,793
Exercise of warrants......... 251 3 - 432 - - 435
Conversion of convertible
subordinated notes......... 70 1 - 386 - - 387
Common stock issued to pay
acquisition costs.......... 10 - - 44 - - 44
Net loss..................... - - - - (2,631) - (2,631)
-------- -------- ------------- ----------- ------------- --------------- -------------
Balance, September 30, 1997..... 6,871 69 - 34,379 (32,420) - 2,028
Exercise of warrants......... 684 7 - 3,879 - - 3,886
Exercise of options.......... 152 1 - 830 - - 831
Conversion of convertible
subordinated notes......... 185 2 - 1,116 - - 1,118
Common stock warrants issued
with preferred stock....... - - - 1,612 - - 1,612
Dividends paid on preferred
shares -
Additional preferred shares - - - - (257) - (257)
Cash....................... - - - - (80) - (80)
Common stock............... 1 - - 6 (6) - -
Conversion of preferred shares
to common stock............ 299 3 - 1,663 - - 1,666
Deferred stock compensation.. - - (215) 215 - - -
Amortization of deferred stock
compensation............... - - 27 - - - 27
Net loss..................... - - - - (17,002) - (17,002)
-------- -------- ------------- ----------- ------------- --------------- -------------
Balance, September 30, 1998..... 8,192 82 (188) 43,700 (49,765) - (6,171)
Comprehensive loss:
Net loss................... - - - - (50,009) - (50,009)
Unrealized loss on
short-term investments, net - - - - - (315) (315)
-------- -------- ------------- ----------- ------------- ---------------- --------------
Total comprehensive loss..... - - - - (50,009) (315) (50,324)
-------- -------- ------------- ----------- ------------- ---------------- --------------
Sales of common stock, net of
selling costs.............. 5,260 53 - 165,364 - - 165,417
Common stock issued for
acquisition of Intelligent 500 5 - 7,464 - - 7,469
Communications, Inc........
Exercise of warrants......... 572 6 - 5,273 - - 5,279
Exercise of options.......... 441 4 - 2,785 - - 2,789
Conversion of convertible
subordinated notes......... 71 1 - 489 - - 490
Common stock warrants issued
with new debt.............. - - - 4,334 - - 4,334
Value assigned to beneficial
conversion feature of new - - - 1,529 - - 1,529
debt.......................
Dividends paid on preferred
shares -
Additional preferred shares - - - - (221) - (221)
Cash....................... - - - - (95) - (95)
Common stock............... 15 - - 157 (157) - -
Conversion of preferred shares
to common stock............ 2,034 20 - 18,234 - - 18,254
Penalty paid on preferred 55 - - 498 - - 498
shares.....................
Deferred stock compensation.. - - (76,092) 76,092 - - -
Amortization of deferred stock
compensation............... - - 12,934 - - - 12,934
Common stock issued related to
purchase of prepaid license 66 1 - 999 - - 1,000
fees.......................
Common stock issued related to
repayment of short-term debt 6 - - 190 - - 190
Common stock issued with cable
incentive program.......... 14 - - 337 - - 337
-------- -------- ------------- ----------- ------------- --------------- -------------
Balance, September 30, 1999..... 17,226 $ 172 $ (63,346)$ 327,445 $ (100,247)$ (315) $ 163,709
======== ======== ============= =========== ============= =============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SoftNet Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
------------ ------------ -----------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................................... $ (50,009) $ (17,002) $ (2,631)
Adjustments to reconcile net loss to net cash used in operating activities:
(Income) loss from discontinued operations................................ 463 5,725 (1,311)
Gain on disposal of discontinued operations............................... (1,820) - -
Depreciation and amortization............................................. 6,190 1,005 535
Amortization of deferred stock compensation............................... 12,934 27 -
Amortization of deferred debt issuance costs.............................. 3,181 - -
Interest paid with additional convertible notes........................... 549 - -
Provision for bad debts................................................... 298 131 74
Loss on disposition of short-term investment.............................. 600 - -
Penalty related to conversion of redeemable convertible preferred stock... 498 - -
Loss on disposition of net assets......................................... - 118 36
Deferred financing amortization........................................... - - 19
Changes in operating assets and liabilities (net of effect of acquisitions
and discontinued operations):
Decrease (increase) in accounts receivable, net......................... (936) 100 (171)
Decrease (increase) in inventory........................................ (1,723) (260) 155
Decrease (increase) in other current assets............................. (2,163) (456) (48)
Increase (decrease) in accounts payable and accrued expenses............ 6,737 5,627 (774)
----------- ----------- -----------
Net cash used in operating activities of continuing operations................. (25,201) (4,985) (4,116)
----------- ----------- -----------
Net cash provided by operating activities of discontinued operations........... 1,282 67 1,648
----------- ----------- -----------
Cash flows from investing activities:
Purchase of short-term investments.......................................... (53,002) - -
Purchase of property and equipment.......................................... (19,742) (5,015) (373)
Purchase of Intellicom including acquisition costs, net of cash acquired.... (803) - -
Sale of net assets of discontinued operations, net of selling costs......... 8,871 - -
Acquired technology and other intangibles................................... (1,140) - -
Proceeds from sale of property and equipment................................ - - 15
Increase in restricted cash................................................. (122) (800) -
Other assets................................................................ (670) 48 8
----------- ----------- -----------
Net cash used in investing activities of continuing operations................. (66,608) (5,767) (350)
----------- ----------- -----------
Net cash used in investing activities of discontinued operations............... (30) (759) (831)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of deferred financing costs... 13,088 371 278
Principal payments of long-term debt........................................ (1,972) (227) (440)
Borrowings under revolving credit facility.................................. 18,285 16,089 9,685
Payments under revolving credit facility.................................... (23,383) (16,891) (9,884)
Net proceeds from issuance of redeemable convertible preferred stock........ - 21,208 -
Additional costs of issuance of redeemable convertible preferred stock...... (152) - -
Proceeds from sale of common stock, net of selling costs.................... 156,492 - -
Proceeds from exercise of warrants.......................................... 5,279 3,886 435
Proceeds from exercise of options........................................... 2,789 831 -
Preferred dividends paid in cash............................................ (95) (80) -
Principal payments of capital lease obligations............................. (1,444) (168) (63)
----------- ----------- -----------
Net cash provided by financing activities of continuing operations............. 168,887 25,019 11
----------- ----------- -----------
Net cash provided by (used in) financing activities of discontinued operations. (1,335) (1,108) 3,249
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........................... 76,995 12,467 (389)
Cash and cash equivalents, beginning of period................................. 12,504 37 426
----------- ----------- -----------
Cash and cash equivalents, end of period....................................... $ 89,499 $ 12,504 $ 37
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SoftNet Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business
SoftNet Systems, Inc. ("SoftNet") and Subsidiaries (collectively referred to as
the "Company") is engaged in the business of providing Internet access and World
Wide Web and database development. The Company operates principally in two
business segments: (i) cable-based Internet services through its wholly-owned
subsidiary, ISP Channel, Inc. ("ISP Channel"), and (ii) satellite-based Internet
services through its wholly-owned subsidiary, Intelligent Communications, Inc.
("Intellicom"). Intellicom was acquired on February 9, 1999 (see Note 3) and the
results of its operations have been included in the consolidated financial
statements since acquisition. The Company previously reported two other business
segments: document management and telecommunications. However, these two
segments have been sold and are now reported as discontinued operations (see
Note 5).
Dependence on Cable Companies and Key Technology Suppliers
The Company has strategic relationships with 43 cable companies to provide,
through their cable systems, the principal distribution network for the
Company's services to its subscribers. Subject to certain exceptions, the
Company's cable partners have granted the Company the right to offer high-speed
Internet services over their cable systems. However, these cable partners are
under no obligation to carry the Company's services. In addition, the cable
partner agreements expire beginning in July, 2000, and may be terminated earlier
under certain circumstances. Further, the transmission of data over cable is
dependent on the availability of high-speed two-way hybrid fiber coaxial cable
infrastructure. The Company believes, approximately 63% of its cable affiliates
either have upgraded their infrastructure, or have announced and begun to
implement infrastructure investments, in order to deploy data-over-cable
services. However, there can be no assurance that such infrastructure
improvements will be completed.
Also, the Company currently depends on a limited number of suppliers for certain
key technologies used to build and manage the Company's services. Although the
Company believes that there are alternative suppliers for each of these
technologies, the Company has established favorable relationships with each of
its current suppliers and it could take a significant period of time to
establish relationships with alternative suppliers and substitute their
technologies.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of SoftNet and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in the preparation of the consolidated
financial statements.
Restatements and Reclassifications
The financial statements have been restated for the effects of the discontinued
operations of the document management and telecommunications segments (see Note
5). Certain reclassifications have been made to prior years' financial
statements in order to conform to the current year presentation.
Use of Estimates and Assumptions
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of the revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents, Short-term Investments and Restricted Cash
The Company considers all highly liquid investments with insignificant interest
rate risk and maturities of three months or less from date of purchase to be
cash equivalents. Short-term investments generally consist of highly liquid
securities with original maturities in excess of three months. The Company has
classified its short-term investments as available-for-sale securities. These
short-term investments are carried at fair value based on quoted market prices
with unrealized gains and losses, which are considered to be temporary reported
in accumulated other comprehensive loss. Realized gains and losses on short-term
investments are computed using the specific identification method.
The Company has pledged cash as collateral on several letters of credit relating
to certain operating leases. These amounts are classified as restricted cash in
the accompanying consolidated balance sheets.
<PAGE>
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables, cash and cash equivalents,
and short-term investments. Credit risk is minimized as a result of the large
number and diverse nature of the Company's customers. One cable company customer
comprised 14% and 31% of the Company's net revenue for the years ended September
30, 1999 and 1998. Accounts receivable from this customer as of September 30,
1999 and 1998 were $175,000 and $14,000, respectively. The non-exclusive
contract with this customer expires in April 2001. For the years ended September
30, 1999 and 1998 no other customer accounted for greater than 10% of revenues.
Cash, cash equivalents and short-term investments are managed by recognized
financial institutions which follow the Company's investment policy. Such
investment policy limits the amount of credit exposure in any one issue and the
maturity date of the investment securities that typically comprise investment
grade short-term debt instruments.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
Property and Equipment
Property and equipment, including leasehold improvements, are recorded at cost.
When property and equipment is retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts and the resulting
gain or loss is included in income. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets generally
three to seven years or the life of the lease, whichever is shorter.
Property and equipment includes internal labor and related costs associated with
the installation of certain equipment, including that equipment at the cable
company headends and the Company's network operations center. For the year ended
September 30, 1999 capitalized labor approximated $1.3 million.
Acquired Technology and Other Intangible Assets
The Company has various intangible assets, including acquired technology, cable
affiliate launch incentives and goodwill (see Note 4). Amortization is
calculated using the straight-line method over the estimated useful lives of the
respective assets, generally three to ten years which represents the exclusivity
period for launch incentives and the life of the average cable affiliation
agreement for acquired technology. Amortization for launch incentives commences
upon launch of the affiliate program.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments (including cash and cash
equivalents, short-term investments, trade receivables, accounts payable, and
current and long-term debt) is estimated to approximate the carrying value of
these liabilities based upon borrowing rates currently available to the Company
for borrowings with similar terms.
Revenue Recognition
Revenue from the cable-based Internet services segment is generated from initial
and recurring monthly Internet access and Web and database development. Set-up
fees for Internet access customers, net of related direct and incremental costs,
are deferred and amortized over the estimated service period. Monthly access
fees and cable modem rentals are recognized in the month of service.
Revenue from the satellite-based Internet services segment consists primarily of
monthly service fees, equipment sales and installation charges. Service fees
consist of fixed monthly amounts and/or hourly amounts based on usage. Service
fees are recognized as the service is provided. Payments received in advance of
providing services are deferred until the period such services are provided.
Equipment sales and installation charges are recognized when installation is
complete.
Income Taxes
The Company recognizes the amount of taxes payable or refundable for the current
year and recognizes deferred tax liabilities and assets for the expected future
tax consequences of events and transactions that have been recognized in the
Company's financial statements or tax returns. The Company currently has
substantial net operating loss carryforwards. The Company has recorded a 100%
valuation allowance against net deferred tax assets due to uncertainty of their
ultimate realization (see Note 14).
<PAGE>
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed using the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
(loss) per common share is computed using the weighted average number of shares
of common stock and common stock equivalents shares outstanding during the
period. Common stock equivalents consist of convertible preferred stock (using
the if converted method) and stock options and warrants (using the treasury
stock method). Common stock equivalents are excluded from the computation for
all periods presented as their effect would have been anti-dilutive.
Stock Option Plans
The Company accounts for employee stock-based compensation using the intrinsic
value method, as prescribed by Accounting Principles Board Opinion No. 25 ("APB
25"), Accounting for Stock Issued to Employees. As such, deferred compensation
is recorded only if the exercise price of the option is below the current market
price of the Company's common stock on the date of grant. Deferred compensation
expense for employee stock options is amortized on a straight-line basis over
the vesting term of the option, which typically is four years.
The Company accounts for non-employee stock-based compensation using the fair
value method, as required by Statement of Financial Accounting Standard No. 123
("SFAS 123"), Accounting for Stock-Based Compensation. As such, deferred
compensation is recorded for all non-employee stock options as of the date of
grant. Deferred compensation expense for non-employee stock options is amortized
on an accelerated basis, as prescribed by Financial Interpretation No. 28 ("FIN
28"), Accounting for Stock Appreciation Rights and Other Variable Stock Option
or Award Plans, over the contractual life of the option.
Impairment of Long-lived Assets
The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable based on expected undiscounted cash flows attributable to that
asset. The amount of any impairment is measured as the difference between the
carrying value and the fair value of the impaired asset. The Company does not
have any long-lived assets it considers to be impaired.
Recent Accounting Pronouncements
Effective October 1, 1998, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 130 ("SFAS 130"), Reporting Comprehensive Income, which
requires the Company to report and display certain information related to
comprehensive income. Comprehensive income includes net income and other
comprehensive income. Other comprehensive income is unrealized gains and losses
on the Company's short-term investments. The adoption of SFAS 130 had no impact
on the Company's financial position, results of operations or cash flows.
Effective October 1, 1998, the Company adopted the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 98-1 ("SOP
98-1"), Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use and for determining when
specific costs should be capitalized and when they should be expensed. There was
no impact as a result of adopting SOP 98-1.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 requires that all start-up costs related to new operations
must be expensed as incurred. In addition, upon adoption of SOP 98-5 all
start-up costs that were capitalized in the past must be written off. The
Company expects that the adoption of SOP 98-5 will not have a material impact on
its financial position, results of operations or cash flows. Effective October
1, 1999, the Company will be required to implement SOP 98-5.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities.
SFAS 133 establishes methods of accounting for derivative financial instruments
and hedging activities. The Company anticipates that the adoption of SFAS 133
will not have a material impact on its financial position, results of operations
or cash flows. Implementation of this standard has recently been delayed by the
FASB for a twelve month period.
3. Acquisition of Intellicom
On February 9, 1999, a wholly-owned subsidiary of the Company merged with and
into Intellicom. (the "Intellicom Acquisition"). Intellicom is a provider of
two-way satellite Internet access options using very small aperture terminal
technology ("VSAT"). The entire purchase price of $14.9 million was comprised
of: (i) a cash component of $500,000 (the "Cash Consideration"); (ii) a
promissory note in the amount of $1.0 million bearing interest at 7.5% per annum
<PAGE>
and due one year after closing (the "First Promissory Note"); (iii) a promissory
note in the amount of $2.0 million bearing interest at 8.5% per annum and due
two years after closing (the "Second Promissory Note", together with the First
Promissory Note, the "Debt Consideration"); (iv) the issuance of 500,000 shares
of the Company's common stock (adjustable upwards after one year in certain
circumstances), valued at $14.938 per share, for a total value of $7.5 million
(the "Closing Shares"); (v) additional shares of the Company's common stock
issuable upon the first, second and third anniversaries of the closing, valued
at a total of $3.5 million (the "Anniversary Shares"; together with the Closing
Shares, the "Equity Consideration"); and (vi) certain direct acquisition costs
totaling $400,000. The Company has recorded the $3.5 million anniversary shares
liability as a component of the purchase price. Such payment is not based on
performance, but rather solely on the passage of time. The liability is
reflected on the consolidated balance sheet as business acquisition liability.
In addition, a demonstration bonus of $1.0 million payable in cash or shares of
the Company's common stock at the Company's option within one year after closing
if certain conditions are met is also a part of the purchase price; however, due
to the uncertainty as to whether or not such performance criteria will be met,
the Company has not accrued for such contingent consideration.
The purchase price, including direct merger costs, has been allocated to assets
acquired and liabilities assumed based on fair market value at the date of
acquisition. The fair value of assets and liabilities assumed is summarized as
follows (in thousands):
Current assets........................... $ 503
Property and equipment................... 684
Acquired technology...................... 16,075
Other assets............................. 77
Current liabilities...................... 2,470
The Company accounted for the Intellicom Acquisition using the purchase method
and allocated the purchase price of $14.5 million to acquired technology.
Additionally, due to the negative fair value of Intellicom net assets at the
time of acquisition, the Company recognized additional acquired technology in
Intellicom totaling $1.2 million. Furthermore, in connection with the Intellicom
Acquisition, the Company incurred certain fees and expenses. Such costs, which
total $400,000, were capitalized and have also been allocated to acquired
technology, bringing the total amount allocated to acquired technology to $16.1
million. The results of operations of Intellicom are included in the
accompanying financial statements from the date of acquisition.
The nature of the developed technology acquired provides the Company with a
proprietary satellite system, involving both hardware and software, which
provides a high-performance, two-way satellite-based Internet access service.
The nature of the acquired technology will, among other things, allow the
Company to lower the costs of bringing the Internet to small- and medium-sized
independent cable operators. The technology acquired has already been tested and
proven to be a viable business. Therefore, the Company believes that the
underlying technology acquired in the Intellicom Acquisition is not subject to
rapid change, and such acquired technology will support the Company's business
plan over the typical length of its contracts without having to significantly
change or enhance the acquired technology. The Company's contracts with its
cable affiliates typically run from five to ten years. In determining how much
of the purchase price in excess of the tangible book value of Intellicom to
allocate to acquired technology, the Company considered that there was little
value ascribable to other intangible assets, such as customer lists or
workforce. Rather, the Company, after careful consideration, determined that the
fair market value of the acquired technology is equivalent to the intangible
assets acquired in this acquisition. The Company amortizes this amount using the
straight-line method over a period of seven years, the average term of a typical
cable affiliate contract as well as the anticipated useful life of this acquired
technology.
The following unaudited pro forma financial information presents the
consolidated results of the Company as if the Intellicom Acquisition had
occurred as of October 1, 1997, and includes adjustments for amortization of
acquired technology and interest expense related to the Debt Consideration. This
pro forma financial information does not necessarily reflect the results of
operations as they would have been if the Company had acquired the entity as of
October 1, 1997. Unaudited pro forma consolidated results of operations are as
follows (in thousands, except per share data):
Year Ended September 30,
1999 1998
Net sales................................. $ 4,915 $ 3,551
=========== ===========
Net loss applicable to common shares...... $ (51,860) $ (20,742)
=========== ===========
Basic and diluted net loss applicable to
common shares.......................... $ (3.99) $ (2.63)
=========== ===========
<PAGE>
In April 1999, the Company paid the First Promissory Note and related interest
in full with a combination of cash and equity. The Company paid $832,000 in cash
and the remainder, after expenses, with 6,118 shares of common stock, which had
a value of $190,000.
4. Acquired Technology and Other Intangibles
Acquired technology and other intangibles consist of the following (in
thousands):
As of September 30,
1999 1998
----------- -----------
Acquired technology (see Note 3).......... $ 16,075 $ -
Cable affiliate launch incentives......... 10,651 -
Goodwill, fully amortized in 1999......... - 1,244
----------- -----------
26,726 1,244
Accumulated amortization.................. (2,226) (933)
----------- -----------
$ 24,500 $ 311
=========== ===========
In fiscal 1998, the Company adopted its Cable Affiliate Incentive Program (the
"Program"). This Program provides an additional incentive to the Company's cable
affiliates to launch the ISP Channel's Internet services. Under the Program, the
Company offers to pay incentive bonuses, in cash or shares of common stock, to
qualifying cable affiliates who enter into exclusive, multiple-year contracts
with ISP Channel. These launch incentives are paid out over the life of the
contract in relation to the roll-out of ISP Channel services at each installed
cable headend. In accordance with these terms, the Company capitalizes these
cable affiliate launch incentives and amortizes them over the life of each
respective contract commencing with the launch of each contract, typically five
to ten years.
In fiscal 1999, the Company entered into an agreement with Teleponce Cable TV,
("Teleponce", the "Teleponce Agreement"), a cable operator in Puerto Rico and
issued 660,000 shares of common stock to an investor in exchange for $15.0
million in cash and a modification of the affiliate agreement between the
Company and Teleponce, which is controlled by that investor. The Company
recognized an intangible asset, a cable affiliate launch incentive, in the
amount of $8.9 million. This intangible asset represents the difference between
the market value of the common shares issued as of the date the Teleponce
Agreement and the cash consideration provided in the Teleponce Agreement.
5. Discontinued Operations
Document Management Segment
On September 30, 1999, the Company sold its document management business,
Micrographic Technology Corporation ("MTC") to Global Information Distribution
GmbH ("GID") for an aggregate purchase price of approximately $4.9 million in
cash which, after selling costs, resulted in a loss of $321,000. The sale
proceeds were used to reduce outstanding indebtedness and provide additional
working capital. The operating results of the document management segment have
been segregated from continuing operations and reported as a separate line item
on the statement of operations. The assets and liabilities of such operations
were reflected as a net asset as of September 30, 1998.
Operating results of the discontinued document management segment are as follows
(in thousands):
Year Ended September 30,
1999 1998 1997
---- ---- ----
Revenues........................... $ 13,690 $ 13,043 $ 20,330
=========== =========== ===========
Income (loss) before income taxes.. $ (633) $ (5,652) $ 572
Provision for income taxes......... - - -
----------- ----------- -----------
Net income (loss).................. $ (633) $ (5,652) $ 572
=========== =========== ===========
Interest expense allocated to the discontinued document management segment
totaled $155,000, $394,000 and $115,000 for the years ended September 30, 1999,
1998 and 1997, respectively.
<PAGE>
Assets and liabilities of the discontinued document management segment at
September 30, 1998 were as follows (in thousands):
Current assets:
Accounts receivable, net............................ $ 2,995
Current portion of gross investment in leases....... 1,579
Inventory........................................... 1,078
Other current assets................................ 310
-----------
Total current assets................................... 5,962
Gross investment in leases, net of current portion..... 1,863
Property, plant and equipment, net..................... 541
Goodwill, net.......................................... 644
Other assets........................................... 974
-----------
Total assets........................................... $ 9,984
===========
Current liabilities:
Accounts payable and accrued expenses............... $ 2,485
Current portion of long-term debt................... 1,280
Current portion of capital leases................... 19
Deferred revenue.................................... 100
-----------
Total current liabilities.............................. 3,884
Long-term debt, net of current portion................. 1,015
Capital lease obligation, net of current portion....... 30
-----------
Total liabilities...................................... $ 4,929
===========
Net assets associated with discontinued operations..... $ 5,055
===========
Telecommunications Segment
On February 12, 1999, substantially all of the assets of Kansas Communications,
Inc. ("KCI") were sold to Convergent Communications Services, Inc. ("Convergent
Communications") for an aggregate purchase price of approximately $6.3 million
subject to adjustment in certain events. Convergent Communications paid $100,000
in cash in November 1998 upon execution of the letter of intent to purchase and
paid the remainder of the purchase price on the closing date as follows: (i)
$1.4 million in cash; (ii) approximately 30,000 shares of Convergent
Communications' parent company common stock with an agreed value of
approximately $300,000 ($10.00 per share) (the "Convergent Shares"); (iii) a
promissory note in the amount of $2.0 million which is payable on July 1, 1999
and bears simple interest at the rate of 11% per annum (the "First Convergent
Note"); (iv) a promissory note in the amount of $1.0 million which is payable on
the date that is 12 months following the closing date and bears simple interest
at the rate of 8% per annum (the "Second Convergent Note"); and (v) a promissory
note in an amount of $1.5 million which is payable on the date which is 12
months following the closing date and bears simple interest at the rate of 8%
per annum and is subject to mandatory prepayment in certain events (the "Third
Convergent Note"). Furthermore, a purchase price adjustment subsequent to
closing provided the Company with additional Convergent Shares with an agreed
value of $198,000 for a total investment in Convergent Shares of $498,000,
which, after reduction to its current market value of $258,000 is classified as
a short-term investment in the accompanying consolidated balance sheet. The sale
of KCI's assets resulted in a gain of $2.1 million. During fiscal 1999, the
First and Third Convergent Notes were paid in full. Subsequent to the end of the
fiscal year, in November 1999, the Second Convergent Note was paid in full. The
Company had previously deferred the recognition of gain due to the uncertainty
of Convergent's ability to perform. As a result of Convergent's successful
initial public offering during the Company's fiscal fourth quarter of 1999, the
Company recognized the gain on sale.
The operating results of the telecommunications segment have been segregated
from continuing operations and reported as a separate line item on the statement
of operations. The assets and liabilities of such operations were reflected as a
net asset as of September 30, 1998.
<PAGE>
Operating results of the discontinued telecommunications segment are as follows
(in thousands):
Year Ended September 30,
1999 (a) 1998 1997
Revenues......................... $ 4,730 $ 16,065 $ 17,218
=========== =========== ===========
Income before income taxes....... $ 242 $ 277 $ 739
Provision for income taxes....... (72) (350) -
----------- ----------- -----------
Net income (loss)................ $ 170 $ (73))$ 739
=========== =========== ===========
----------------------------------------------------------------------
(a) Operating results are only through the date of disposition.
Interest expense allocated to the discontinued telecommunications segment
totaled $2,000, $5,000 and $49,000 for the years ended September 30, 1999, 1998
and 1997, respectively.
The provisions for income taxes recorded for the years ended September 30, 1999
and 1998 are related to prior period adjustments in deferred maintenance revenue
for KCI.
Assets and liabilities of the discontinued telecommunications segment at
September 30, 1998 were as follows (in thousands):
Current assets:
Accounts receivable, net............................ $ 1,734
Inventory........................................... 2,248
Other current assets................................ 36
-----------
Total current assets................................... 4,018
Property, plant and equipment, net..................... 427
Goodwill, net.......................................... 1,663
Other assets........................................... 21
-----------
Total assets........................................... $ 6,129
===========
Current liabilities:
Accounts payable and accrued expenses............... $ 1,582
Current portion of capital leases................... 32
Deferred revenue.................................... 593
-----------
Total current liabilities.............................. 2,207
Capital lease obligation, net of current portion....... 47
-----------
Total liabilities...................................... $ 2,254
===========
Net assets associated with discontinued operations..... $ 3,875
===========
6. Divestitures of Communicate Direct, Inc.
On October 31, 1994, the Company acquired Communicate Direct, Inc. ("CDI") in a
business combination accounted for as a purchase. CDI, a Chicago-based company,
sold and serviced telephone systems, third-party computer hardware and
application oriented peripheral products. During fiscal 1996, the Company sold a
significant portion of the CDI business and, during fiscal 1997, all of the
remaining operation was sold. The disposition of CDI was not contemplated at the
time of the pooling with KCI. The loss resulting from the disposition of certain
assets and the assumption of certain liabilities of CDI, within a two year
period following a pooling of interests has been classified as an extraordinary
item as required by generally accepted accounting principles.
During fiscal 1997, CDI sold all other remaining assets associated with CDI and
incurred a loss (accounted for as an extraordinary loss) of $486,000 on the
disposition.
<PAGE>
7. Financial Statement Details
Cash, Cash Equivalents and Short-term Investments
Cash equivalents consist of securities with maturities of three months or less
at date of purchase. Short-term investments as of September 30, 1999 consisted
of $30,323,000 of securities which mature in less than one year and $22,263,000
of securities which mature in one to five years. Cash and cash equivalents, and
short-term investments consisted of the following as of September 30, 1999 (in
thousands):
<TABLE>
<CAPTION>
Unrealized Unrealized
Cost gain loss Market
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash and cash equivalents:
Cash................................ $ 40,650 $ - $ - $ 40,650
Municipal securities................ 40,156 - - 40,156
US Government Agency Notes.......... 5,785 - - 5,785
Money market funds.................. 2,159 - - 2,159
Foreign debt securities............. 749 - - 749
------------- ------------- ------------- -------------
$ 89,499 $ - $ - $ 89,499
============= ============= ============= =============
Short-term investments:
Municipal securities................ $ 23,496 $ - $ (44) $ 23,452
US Treasury securities.............. 11,219 - (11) 11,208
Auction market preferreds........... 9,114 - - 9,114
Foreign debt securities............. 8,574 - (20) 8,554
Common stock........................ 498 - (240) 258
------------- ------------- ------------- -------------
$ 52,901 $ _ $ (315) $ 52,586
============= ============ ============ ============
</TABLE>
As of September 30, 1999, cost approximated market for cash equivalents;
realized and unrealized gains and losses were not significant.
As of September 30, 1998, cash and cash equivalents totaled $12,504,000
primarily consisting of cash in banks.
Property and Equipment, Net
Balances of major classes of fixed assets and allowances for depreciation are as
follows (in thousands):
As of September 30,
1999 1998
---- ----
Leasehold improvements.................... $ 5,853 $ 1,172
Furniture and fixtures.................... 1,894 25
Equipment................................. 23,454 5,341
----------- -----------
Property and equipment, gross............. 31,201 6,538
Less allowance for depreciation........... (4,458) (557)
----------- -----------
Property and equipment, net............... $ 26,743 $ 5,981
=========== ===========
Included in the above fixed assets are asset amounts representing capitalized
leases of $5,193,000 and $1,032,000 at September 30, 1999 and 1998,
respectively. The accumulated depreciation related to these leased assets was
$1,392,000 and $111,000 at September 30, 1999 and 1998, respectively.
Accounts Payable and Accrued Expenses
The major components of accounts payable and accrued expenses are as follows (in
thousands):
As of September 30,
1999 1998
Accounts payable.......................... $ 6,063 $ 2,728
Accrued compensation and related expenses.
2,846 343
Accrued capital expenditures.............. 2,284 220
Other accrued expenses.................... 4,352 3,647
----------- -----------
$ 15,545 $ 6,938
=========== ===========
<PAGE>
8. Long-term Debt and Debt Issuance Costs
Long-term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
As of September 30,
1999 1998
----------- -----------
<S> <C> <C>
9% Senior Subordinated Convertible Notes due January 2001, interest payable quarterly,
convertible into the Company's common stock (see below)................................... $ 12,549 $ -
9% Convertible Subordinated Debentures due September 2000, interest payable quarterly,
convertible into the Company's common stock at $6.75 per share............................ 1,357 1,787
6% Convertible Subordinated Secured Debentures, due February 2002 with semi-annual
interest payments, convertible into the Company's common stock at $8.10 per share......... 660 720
5% Convertible Subordinated Debentures, due September 2002, interest payable annually,
convertible into the Company's common stock at $8.25 per share after December 31, 1998.... 1,444 1,444
Promissory note bearing interest at 8.5%, due February 2001, principal and interest due and
payable at maturity or at date of prepayment or acceleration of note (see Note 3)......... 2,000 -
Promissory note bearing interest at 7.96%, due February 2002, principal and interest payable
in 36 monthly payments with final payment due February 2002............................... 771 -
Promissory note bearing interest at 15.3%, due February 2002, principal and interest payable
in 36 monthly payments with final payment due February 2002............................... 250 -
Promissory note bearing interest at 9.4%, principal and interest due in 5 quarterly payments
with final payment due February 2000...................................................... 160 372
Promissory note bearing interest at 12.24%, principal and interest due in 24 monthly payments
with final payment due October 1999....................................................... 13 157
Revolving Credit Note with maximum borrowings of $9.5 million bearing interest,
payable monthly, at the bank's prime rate plus 1%. The note was repaid on
September 29, 1999 and
the credit arrangement was subsequently terminated........................................ - 5,098
Other........................................................................................ 161 183
----------- -----------
Total long-term debt......................................................................... 19,365 9,761
Less current portion......................................................................... (2,084) (541)
----------- -----------
Long-term debt, net of current portion....................................................... $ 17,281 $ 9,220
=========== ===========
</TABLE>
In January 1999, the Company issued $12.0 million of its 9% Senior Subordinated
Convertible Notes (the "Notes"). These Notes were convertible into the Company's
common stock with an initial conversion price of $17.00 per share until July 1,
1999 and, thereafter, at the lower of $17.00 per share (the "Initial Conversion
Price") and the lowest five-day average closing bid price of the Company's
common stock during the 30-day trading period ending one day prior to the
applicable conversion date (the "Conversion Price"). Upon issuance of the Notes,
the Company's market price of its common stock exceeded the Conversion Price,
thereby creating a beneficial conversion feature (the "Note Conversion
Benefit"). Accordingly, the Company recorded additional interest expense of $1.2
million, representing the value of the Note Conversion Benefit. The Company
recognized this interest expense upon issuance of the convertible notes due to
its immediate convertibility. In connection with these Notes, the Company issued
to these investors warrants to purchase an aggregate of 300,000 shares of the
Company's common stock. These warrants have an exercise price of $17.00 per
share and expire in 2003. The fair value of these warrants, based on market
value at date of issuance of $4.3 million, is treated as deferred debt issuance
costs (see below and note 11).
In April 1999, as a result of the Secondary Offering (see Note 10), and in
conjunction with an anti-dilution provision associated with the Notes, the
Initial Conversion Price was reduced from $17.00 to $16.49 per share.
Furthermore, in order to secure three month lock-up agreements from the holders
of the Notes in conjunction with the Company's Secondary Offering, the Company
entered into a new arrangement with the holders of the Notes to issue all future
interest payments, beginning with the third fiscal quarter of 1999, in the form
of convertible notes with substantially the same form and features as the
original Notes. Therefore, the Company has issued an additional $549,000 in
<PAGE>
notes, representing interest for the third and fourth quarters of fiscal 1999
(the "Interest Notes"). The issuance of these Interest Notes also resulted in a
Note Conversion Benefit. As a result, an additional $294,000 was recognized as
interest expense due to this additional Note Conversion Benefit.
Subsequent to the end of the fiscal year, on October 22, 1999, all of the 9%
Senior Subordinated Convertible Notes, related Interest Notes and accrued
interest were converted into 765,201 shares of the Company's common stock.
In connection with the fiscal 1995 acquisition of MTC, the Company issued $2.9
million of its 9% Convertible Subordinated Debentures due September 2000. These
debentures, which may be prepaid in whole or in part at face value, are
subordinated to senior indebtedness of the Company and are convertible into the
Company's common shares at $6.75 per share. During fiscal 1999, $430,000 of
these 9% debentures were converted into 63,720 shares of the Company's common
stock. During fiscal 1998, $833,000 of these 9% debentures were converted into
123,377 shares of the Company's common stock.
Also in connection with the fiscal 1995 acquisition of MTC, the Company assumed
$1.8 million of 6% Convertible Subordinated Secured Debentures due February
2002. These debentures are convertible into the Company's common stock at $8.10
per share and are subject to redemption at the option of the Company at face
value, provided, however, that the Company issues common share purchase warrants
to purchase the same number of shares as would have been issuable if the
debentures were converted. During fiscal 1999, $60,000 face amount of these
debentures were converted into 7,407 shares of the Company's common stock.
During fiscal 1998, $60,000 face amount of these Debentures were converted into
7,407 shares of the Company's common stock.
In fiscal 1998, the Company issued $1.4 million principal amount of its 5%
Convertible Subordinated Debentures due September 2002 to Mr. R.C.W. Mauran, a
beneficial owner of more than 5% of the Company's common stock at the time, in
exchange for the assignment to the Company of certain equipment leases and other
consideration. After December 31, 1998 the debentures are convertible into
common stock of the Company at $8.25 per share.
The Company's scheduled maturities of long-term debt as of September 30, 1999,
are as follows (in thousands):
Year Ending September 30,
2000................................... $ 2,084
2001................................... 14,983
2002................................... 2,298
-----------
$ 19,365
Of the debt maturing in 2001, $12.5 million was converted in the Company's
common stock in October 1999.
Deferred Debt Issuance Costs
The fiscal 1999 costs related to the issuance of new debt, including the value
of the warrants issued in connection with such debt, were capitalized and are
being amortized to interest expense using the effective interest method over the
life of the debt. These debt issuance costs of $2.8 million, net of
amortization, are included in other assets in the accompanying consolidated
balance sheet as of September 30, 1999.
<PAGE>
9. Commitments and Contingencies
The Company has entered into capital leases for computer equipment and certain
other office equipment. Additionally, the Company has entered into operating
leases for office space and manufacturing facilities. These operating leases
provide for minimum rents and generally include options to renew for additional
periods.
Future minimum lease payments under non-cancelable operating leases and capital
leases as of September 30, 1999 are as follows (in thousands):
Operating Capital Leases
Leases
Year ending September 30,
2000................................... $ 3,333 $ 1,910
2001................................... 3,088 1,396
2002................................... 2,511 581
2003................................... 2,542 -
2004................................... 2,387 -
2005 and thereafter.................... 2,200 -
----------- -----------
Total minimum lease payments........... $ 16,061 3,887
===========
Amount representing interest........... (182)
-----------
Present value of minimum capital lease
obligations.......................... 3,705
Less current portion................... (1,760)
-----------
Non current portion.................... $ 1,945
===========
The Company's rent expense for continuing operations for the years ended
September 30, 1999, 1998 and 1997 was $2,690,000, $407,000 and $158,000,
respectively.
In February 1999, the Company entered into a license agreement with Inktomi
Corporation ("Inktomi", the "Inktomi Licensing Agreement") allowing the Company
rights to install certain Inktomi caching technology into the Company's cable
and satellite network infrastructure. The Inktomi Licensing Agreement is valued
at $4.0 million for a total of 500 licenses, of which the first $1.0 million was
paid with 65,843 shares of the Company's common stock with the remaining amount
payable in cash in eight quarterly payments of $375,000. As of September 30,
1999 advance payments totaling $1,875,000 are yet to be paid under this
agreement.
As part of the Intellicom Acquisition in February 1999, the Company agreed to
pay a demonstration bonus of $1.0 million payable in cash or shares of the
Company's stock, at the Company's option, within one year after closing if
certain conditions are met. Due to the uncertainty as to whether or not such
performance criteria will be met, the Company has not accrued for such
contingent consideration. To the extent such conditions are met, the payment
will increase intangible assets associated with acquired technology.
10. Redeemable Convertible Preferred Stock and Common Stock
Redeemable Convertible Preferred Stock
As of September 1999, all of the issued 5% convertible preferred stock had been
converted to common stock.
In fiscal 1998, the Company issued three series of its 5% convertible preferred
stock (Series A, B and C). In connection with the issuance of the preferred
stock, the Company also issued warrants to purchase shares of its common stock.
The holders of the preferred stock received dividends at a rate of 5% per annum
at the Company's option, in cash or additional shares of the applicable series
of preferred stock. Proceeds from the sale of the preferred stock and warrants
were used to fund the expenditures incurred in the continuing expansion of the
Company's Internet segment, particularly the ISP Channel service, and for
general corporate purposes.
<PAGE>
The fiscal 1998 and 1999 activity in convertible preferred stock and related
warrants is summarized as follows (in thousands, except per share prices):
<TABLE>
<CAPTION>
Series A Series B Series C
----------------- ----------------- -----------------
<S> <C> <C> <C>
Date issued.................................. December 1997 May 1998 August 1998
Gross proceeds............................ $ 5,000 $ 10,000 $ 7,500
Issuance costs............................ (400) (572) (472)
----------------- ----------------- -----------------
Net proceeds.............................. $ 4,600 9,428 7,028
================= ================= =================
Dividends paid:
Additional preferred shares............... $ 101 $ 252 $ 125
Common shares issued upon conversion...... 29 75 59
Cash...................................... 38 42 95
Conversion dates............................. April 1998 and February 1999 May 1999
November 1998
Shares of common issued upon conversion...... 709 777 847
Conversion price per share................... $6.69 and $7.56 $13.20 $9.00
Warrants issued to preferred stockholders:...
Shares of common stock.................... 150 200 94
Exercise price per share.................. $7.950 $13.750 $9.375
Expiration date........................... December 2001 May 2002 August 2002
Warrants issued to sales agents:
Shares of common stock.................... 20 50 26
Exercise price per share.................. $6.625 $11.000 $7.500
Expiration date........................... December 2000 May 2002 August 2002
</TABLE>
In fiscal 1999, the Company incurred a penalty of $498,000, included in other
expense in the consolidated statement of operations, as a result of a delay in
its ability to register the underlying common stock of the Series C redeemable
convertible preferred stock with the Securities and Exchange Commission. This
penalty was paid to the holders of the Series C redeemable convertible preferred
stock through the issuance of an additional 55,378 shares of common stock.
Common Stock
In February 1999, the Company entered into a license agreement with Inktomi
Corporation ("Inktomi", the "Inktomi Licensing Agreement") allowing the Company
rights to install certain Inktomi caching technology into the Company's cable
and satellite network infrastructure. The Inktomi Licensing Agreement is valued
at $4.0 million for a total of 500 licenses, of which the first $1.0 million was
paid with 65,843 shares of the Company's common stock and the remaining amount
payable in cash in eight subsequent quarterly payments of $375,000. Three
quarterly payments totaling $1,125,000 have been paid through September 30,
1999. The Inktomi Licensing Agreement allows the Company to purchase up to 500
additional licenses during the first four years of the agreement. The first
licenses were installed in the fourth quarter of fiscal 1999. The remaining
prepaid license fees of $2.1 million are presented as other assets on the
accompanying consolidated balance sheet as of September 30, 1999.
On April 12, 1999, the Company issued 660,000 shares of common stock to an
investor in exchange for $15.0 million in cash and a modification of the
affiliate agreement between the Company and Teleponce (see Note 4).
On April 13, 1999, the Company held its Annual Stockholders' Meeting. At this
meeting, the following proposals, among others, were approved: (i) an increase
in the number of common shares authorized was increased from 25,000,000 to
100,000,000; (ii) the Company's 1998 Stock Incentive Plan under which 3,350,668
shares of common stock were reserved for issuance; (iii) the sale of the
Company's document management segment (see Note 5); and (iv) the Company's
reincorporation in Delaware.
In April 1999, the Company completed a secondary public offering (the "Secondary
Offering"), in which it sold 4,600,000 shares of common stock at $33.00 per
share. The Company received $141.5. million in cash, net of underwriting
discounts, commissions and other offering costs.
<PAGE>
11. Stock Options and Warrants
1998 Stock Incentive Plan ("1998 Plan")
In October 1998, the Company adopted the 1998 Plan, which the Company's
stockholders approved during April 1999. Concurrent with such stockholder
approval, all outstanding options under the Company's 1995 Long Term Incentive
Plan (the "Incentive Plan") were incorporated into the 1998 Plan, and no further
option grants or stock issuances will be made under the Incentive Plan. However,
the incorporated options will continue to be governed by their existing terms,
unless the Administrator of the 1998 Plan elects to extend one or more features
of the 1998 Plan to those options. Stock options granted under the Incentive
Plan have an exercise price not less than the fair market value of the option
shares on the grant date and generally become exercisable in three successive
equal installments over the optionee's period of continued service with the
Company. The 1998 Plan provides for the grants of non-statutory and incentive
stock option grants, stock appreciation rights, restricted stock awards,
performance shares, and other awards to officers, employees and other
individuals. Under the terms of the 1998 Plan, options have a maximum term of
ten years from the date of grant. The granted options have various vesting
criteria depending on the grantee; however, most grants having a vesting period
of four years. A total of 3,350,668 shares are reserved for issuance under the
1998 Plan. In addition, the number of shares of common stock reserved for
issuance under the 1998 Plan will automatically be increased on the first
trading day of each calendar year, beginning in calendar year 2000, by an amount
equal to four percent of the total number of shares of common stock outstanding
on the last trading day of the preceding calendar year, but in no event will any
such annual increase exceed 2,000,000 shares, subject to adjustment for
subsequent stock splits, stock dividends and similar transactions. As of
September 30, 1999, options for 2,840,458 shares were outstanding, 496,787
shares of common stock were vested and 80,543 shares of common stock remained
available for future option grants and other awards.
1999 Supplemental Stock Incentive Plan ("1999 Plan")
The Company's 1999 Plan is an equity incentive program for employees and
consultants who are neither officers nor directors of the Company. Awards under
the 1999 Plan may, in general, be made in the form of non-statutory stock option
grants, stock appreciation rights, restricted stock awards or performance
shares. Each stock option grant will have an exercise price not less than the
fair market value of the option shares on the grant date and will generally have
a vesting period of four years. A total of 750,000 shares of common stock are
reserved for issuance under the 1999 Plan. As of September 30, 1999, options for
387,150 shares were outstanding, 5,000 shares of common stock were vested,
362,850 shares of common stock remained available for future option grants and
other awards.
Micrographic Technology Corporation Employee Stock Option Plan ("MTC Plan")
The Company's former MTC Plan was an equity incentive program which was
established for the employees of Micrographic Technology Corporation. The
Company sold Micrographic Technology Corporation on September 30, 1999 (See Note
5). A total of 40,000 shares of common stock were reserved for issuance under
the MTC Plan. All options granted under the MTC Plan are designed to qualify as
incentive stock options under the federal tax laws. Each granted option became
exercisable for the option shares in a series of three successive equal annual
installments over the optionee's period of continued service with Micrographic
Technology Corporation. As of September 30, 1999, options for 8,295 shares of
common stock were outstanding and fully vested and no shares of common stock
remained available for future options grants.
Non-Plan Consultant and Employee Stock Options
The Company has granted stock options to certain consultants as partial
consideration for services rendered. These options were granted outside of any
plan because certain consultants are ineligible to be issued stock options out
of plans whose shares are registered with the Securities & Exchange Commission
using Form S-8, such as the Company's 1998 and 1999 Plans. As of September 30,
1999, options for 107,500 non-plan consultant options were outstanding and
74,721 were vested. The Company has also granted non-plan employee stock options
to certain employees in order to comply with employment offer letter terms not
available under the 1998 or 1999 Plans. As of September 30, 1999, options for
49,500 non-plan employee options were outstanding and none of these option
shares were vested.
Common Stock Warrants
During fiscal 1999, the Company issued warrants to purchase an aggregate of
303,013 shares of its common stock in association with two separate rounds of
financing. Warrants to purchase 300,000 shares were issued in connection with
the issuance of the Company's 9% Senior Subordinated Convertible Notes (see Note
8). Additionally, warrants to purchase 3,013 shares were issued in connection
with the procurement of a $3 million credit facility.
The fair value of the warrants on the issuance date was estimated using the
Black-Scholes option pricing model with the following assumptions: volatility of
108%, risk free interest rate of 4.78%, no dividend yield, and an expected
contractual life of four years. The total fair value of $4.3 million has been
recorded as deferred debt issuance costs in the accompanying consolidated
financial statements and is being amortized to interest expense over the
contractual life of the associated debt instruments.
<PAGE>
Options and Warrants Outstanding
The following table summarizes the outstanding options and warrants to purchase
shares of common stock for the three years ended September 30, 1999:
<TABLE>
<CAPTION>
Outstanding
Outstanding Options Outstanding Warrants Options and Warrants
----------------------- --------------------------- --------------------------
Weighted
Average Weighted Weighted
Exercise Average Average
Shares Price Shares Exercise Price Shares Exercise Price
---------- -------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding as of September 30, 1996 366,167 $ 8.30 1,203,400 $ 5.16 1,569,567 $ 5.89
Granted......................... 400,000 5.00 - - 400,000 5.00
Exercised....................... - - (251,000) 1.75 (251,000) 1.75
Canceled........................ (283,215) 4.95 - - (283,215) 4.95
---------- ---------- ----------
Outstanding as of September 30, 1997 482,952 5.14 952,400 6.06 1,435,352 5.75
Granted......................... 1,143,533 8.07 576,559 10.32 1,720,092 8.82
Exercised....................... (152,540) 5.47 (683,941) 5.81 (836,481) 5.75
Canceled........................ (103,820) 6.76 (12,619) 2.52 (116,439) 6.30
---------- ---------- ----------
Outstanding as of September 30, 1998 1,370,125 7.42 832,399 9.27 2,202,524 8.12
Granted......................... 2,618,700 16.68 303,013 17.13 2,921,713 16.73
Exercised....................... (440,730) 6.33 (572,064) 9.87 (1,012,794) 8.33
Canceled........................ (155,192) 13.89 (60,335) 8.72 (215,527) 12.44
---------- ---------- ----------
Outstanding as of September 30, 1999 3,392,903 $ 14.43 503,013 $ 13.38 3,895,916 $ 14.29
========== ========== ==========
</TABLE>
On November 15, 1996, the Compensation/Stock Option Committee approved a stock
option repricing program to provide employee option holders additional
opportunity and incentive to achieve business plan goals. A total of 297,000
options held by employees on that date were repriced to $4.94 per share, which
was the market price on such date. All other terms of the options remained the
same and, accordingly, there was no change to the vesting or term of any option.
The following table summarizes information regarding stock options outstanding
at September 30, 1999:
<TABLE>
<CAPTION>
Outstanding Options Vested Options
------------------------------------------- ------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Contractual Life Exercise Exercise
Range of Exercise Price Shares (Years) Price Shares Price
----------- ------------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 4.94 - $ 6.88 469,842 6.24 $ 6.39 332,006 $ 6.29
7.19 - 7.38 941,100 9.15 7.37 63,956 7.37
8.44 - 17.00 700,384 8.81 11.32 155,414 10.35
17.13 - 23.81 709,927 9.39 20.25 33,427 19.92
23.88 - 42.75 571,650 9.72 29.21 - -
---------- ----------
4.94 - 42.75 3,392,903 8.82 $14.43 584,803 $8.26
========== ==========
</TABLE>
Stock Option Compensation, on a Pro Forma Basis
During fiscal 1997, the Company was required to adopt SFAS No. 123 ("SFAS 123"),
Accounting for Stock-Based Compensation, which encourages entities to adopt a
fair value based method of accounting for stock based compensation plans in
place of the provisions of Accounting Principles Board Opinion No. 25 ("APB
25"), Accounting for Stock Issued to Employees, for all arrangements under which
employees receive shares of stock or other equity instruments of the employer.
As allowed by SFAS 123, the Company will continue to apply the provisions of APB
25 in accounting for its stock based employee compensation arrangements, and
will disclose the pro forma net loss and loss per share information in its
footnotes as if the fair value method suggested in SFAS 123 had been applied.
<PAGE>
Had compensation cost for the Company's stock-based compensation arrangements
for employees been determined based on the fair value at grant date for awards
in fiscal 1999, 1998 and 1997 consistent with the provisions of SFAS 123, the
Company's net loss and loss per share would have been increased to the pro forma
amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss applicable to common shares, as reported.......... $ (50,482) $ (17,345) $ (2,631)
=========== =========== ===========
Net loss applicable to common shares, pro forma............ $ (54,030) $ (18,889) $ (3,207)
=========== =========== ===========
Basic and diluted loss per common share, as reported....... $ (4.09) $ (2.35) $ (0.40)
=========== =========== ===========
Basic and diluted loss per common share, pro forma......... $ (4.38) $ (2.56) $ (0.48)
=========== =========== ===========
</TABLE>
The fair value of each stock option grant on the date of grant was estimated
using the Black-Scholes option pricing model with the following average
assumptions for the years ended September 30:
Year Ended September 30,
1999 1998 1997
------- ------- ---------
Volatility....................... 85.00% 63.00% 58.00%
Risk-free interest rate.......... 5.74% 5.28% 6.10%
Dividend yield................... - - -
Expected lives................... 4 4 4
Weighted average fair value...... $ 39.81 $ 4.62 $ 4.26
12. Deferred Compensation
During the period from October 1998 to April 1999, the Company, pursuant to the
1998 Plan, granted to certain employees, pending stockholder approval, an
aggregate of 1,618,550 incentive and non-qualified common stock options at a
weighted average exercise price of $12.74 per share. Primarily as a result of
the adoption of the 1998 Plan (see Note 11), and in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, the
Company will recognize a non-cash compensation charge totaling approximately
$74.0 million relating to the issuance of these stock options. Although all of
the options issued under the 1998 Plan were granted at what was then the fair
market value of the Company's common stock on the date of grant, the Company
must recognize a non-cash compensation charge for the difference between the
various grant prices and $59.875, the closing price of the Company's common
stock on the date of stockholder approval of the plan. Accordingly, the Company
will record a total charge of approximately $74.0 million, which will be
amortized on a straight-line basis as a non-cash compensation expense over the
remaining vesting period of such stock options. In 1999, the Company recognized
$11.3 million as compensation expense related to these stock options.
Also, in accordance with SFAS 123 the Company recognized deferred compensation
charges of approximately $2.1 million with respect to the 140,500 option shares
it has issued to certain consultants. These deferred compensation charges are
being amortized, on an accelerated basis over the vesting period of such
options, in accordance with Financial Accounting Standards Board Interpretation
No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option
or Award Plans. The Company has recognized $1.6 million and $27,000 of these
charges in 1999 and 1998, respectively.
13. Related Party Transactions
In fiscal 1998, the Company issued $1,443,750 principal amount of its 5%
Convertible Subordinated Debentures due September 30, 2002 to Mr. R. C. W.
Mauran, a beneficial owner of more than 5% of the Company's common stock at the
time, in exchange for the assignment to the Company of certain equipment leases
and other consideration. The debentures are convertible into common stock of the
Company, at $8.25 per share, after December 31, 1998.
<PAGE>
14. Income Taxes
The Company made no provision for income taxes for the Company's continuing
businesses due to losses incurred.
The tax effects of the components of deferred taxes are as follows (in
thousands):
As of September 30,
1999 1998
Inventory and other operating reserves.... $ 562 $ 352
Allowance for doubtful accounts........... 234 282
Unpaid accruals........................... 175 509
Deferred revenue.......................... 26 303
Other..................................... (108) (17)
Net operating loss carryforward........... 21,576 5,848
----------- -----------
Total deferred tax asset.................. 22,465 7,277
Valuation allowance....................... (22,465) (7,277)
----------- -----------
Net deferred tax asset.................... $ - $ -
=========== ===========
The Company has established a valuation allowance for the portion of the
deferred tax assets for which realization is uncertain. The valuation allowance
for deferred tax assets as of September 30, 1999 and 1998 was $22,465,000 and
$7,277,000, respectively. The change in valuation allowance for the years ended
September 30, 1999 and 1998 was $15,188,000 and $4,119,000, respectively.
The Company has net operating loss carryforwards for federal and state income
tax purposes of approximately $65,000,000 and $26,000,000, respectively,
available to reduce future income subject to income taxes. The federal net
operating loss carryforwards expire in fiscal years 2000 to 2019. The state net
operating loss carryforwards expire in fiscal years 2000 to 2004.
For the year ended September 30, 1999, $8,300,000 of the net operating loss
related to stock option exercises; these will be charged to equity, for tax
purposes, when utilized.
Federal and California tax laws impose substantial restrictions on the
utilization of net operating loss and credit carryforwards in the event of an
"ownership change" for tax purposes, as defined in Section 382 of the Internal
Revenue Code. For tax purposes, the acquisition and disposition of certain
subsidiaries has triggered Section 382 ownership changes and, as a result,
utilization of the net operating losses will be subject to an annual limitation
in future years.
<PAGE>
15. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash paid during the year for:
Interest..................................................................... $ 1,093 $ 1,013 $ 960
Income taxes................................................................. - - -
Non-cash investing and financing activities:
Acquisition of Intelligent Communications, Inc. -
Equity consideration....................................................... 7,469 - -
Business acquisition liability............................................. 3,500 - -
Debt consideration......................................................... 3,000 - -
Debt acquired.............................................................. 600 - -
Disposal of telecommunications segment -
Notes receivable received.................................................. 4,500 - -
Shares of purchaser received............................................... 498 - -
Common stock issued for-
Conversion of redeemable convertible preferred stock....................... 18,254 1,666 -
Conversion of subordinated notes........................................... 490 1,118 387
Repayment of short-term debt............................................... 190 - -
Payment of acquisition costs............................................... - - 44
Payment of prepaid license fees............................................ 1,000 - -
Payment of cable affiliate launch incentives............................... 337 - -
Value assigned to common stock warrants issued upon the issuance of -
Long-term debt............................................................. 4,334 - -
Redeemable convertible preferred stock....................................... - 1,612 -
Value assigned to intangible assets in connection with common stock issued for
cable affiliate launch incentives.......................................... 8,925 - -
Value assigned to conversion feature of new debt............................. 1,529 - -
Equipment acquired by capital lease.......................................... 4,239 965 -
Deferred compensation associated with the issuance of common stock options... 76,092 - -
Preferred dividends paid with the issuance of -
Additional redeemable convertible preferred stock.......................... 221 257 -
Common stock............................................................... 157 6 -
Unrealized loss on short-term investments.................................... 315 - -
Convertible debt issued for acquisition of equipment leases.................. - 1,444 -
Note received in sale of a portion of CDI's operations....................... - - 209
</TABLE>
<PAGE>
16. Segment Information
The Company operates principally in two business segments: (i) cable-based
Internet services through its wholly-owned subsidiary, ISP Channel, and (ii)
satellite-based Internet services through its wholly-owned subsidiary,
Intellicom. The Company entered the Internet business in June 1996 with the
purchase of the Internet services business and only began offering cable-based
Internet services in the fourth quarter of fiscal 1997. In February 1999, the
Company completed the purchase of Intellicom and its operating results are
included since it was acquired. See Note 5 for information for the discontinued
operations. Segment information for continuing operations as of and for the
years ended September 30, is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Internet Services - cable based......................... $ 2,550 $ 1,018 $ 1,008
Internet Services - satellite based..................... 1,585 - -
----------- ----------- -----------
$ 4,135 $ 1,018 $ 1,008
=========== =========== ===========
Loss from continuing operations before income taxes:
Internet Services - cable based......................... $ (25,492) $ (8,272) $ (1,152)
Internet Services - satellite based..................... (3,150) - -
Corporate............................................... (7,066) - -
Compensations expense related to stock options.......... (12,934) (27) -
Other................................................... (2,724) (2,978) (2,304)
----------- ----------- -----------
$ (51,366) $ (11,277) $ (3,456)
=========== =========== ===========
Depreciation and Amortization Expense:
Internet Services - cable based......................... $ 4,352 $ 921 $ 459
Internet Services - satellite based..................... 1,713 - -
Corporate............................................... 125 84 76
----------- ----------- -----------
$ 6,190 $ 1,005 $ 535
=========== =========== ===========
As of September 30,
1999 1998 1997
----------- ----------- -----------
Identifiable Assets:
Internet Services - cable based......................... $ 38,645 $ 7,443 $ 1,364
Internet Services - satellite based..................... 16,410 - -
Corporate............................................... 150,769 13,252 473
Discontinued Businesses................................. - 8,930 22,540
----------- ----------- -----------
$ 205,824 $ 29,625 $ 24,377
=========== =========== ===========
Capital Expenditures:
Internet Services - cable based......................... $ 16,813 $ 5,014 $ 362
Internet Services - satellite based..................... 767 - -
Corporate............................................... 2,162 2 11
----------- ----------- -----------
$ 19,742 $ 5,015 $ 373
=========== =========== ===========
</TABLE>
<PAGE>
17. Subsequent Events
On October 22, 1999, all of the outstanding 9% Senior Subordinated Convertible
Notes, related Interest Notes and accrued interest were converted into 765,201
shares of the Company's common stock.
In connection with the sale of the telecommunications segment, various notes
from the purchaser were received as part of purchase price. Subsequent to the
end of the fiscal year, in November 1999, the Second Convergent Note in the
amount of $1 million was prepaid by Convergent in full. (See Note 5)
In November, the Company entered into definitive agreements with Mediacom LLC.
Under the agreements, the Company will issue to Mediacom an aggregate 3.5
million shares of common stock in exchange for Mediacom entering into an
affiliate agreement of up to 10 years, but with a 5 year minimum, with ISP
Channel that provides for Mediacom delivering to ISP Channel 900,000 two-way
upgraded homes passed on a minimum schedule of 150,000 homes every 6 months over
the first three years of the contract. In the event that Mediacom fails to
deliver the agreed number of homes within the contractual time period, a portion
of the stock issued to Mediacom will be returned to the Company. In the event
that Mediacom acquires or upgrades more than 900,000 two-way homes, then both
parties are obligated to extend the original agreement on similar terms for such
incremental homes subject to a cap on the total aggregate number of shares that
the Company is obligated to issue to Mediacom. In addition, Mediacom gained the
right to nominate one member to the Company's board of directors.
(Unaudited)
In December 1999, the Company completed a private placement to Pacific Century
Cyberworks ("Pacific Century") of 5 million shares of the Company's common stock
for $129 million and, at the same time, Pacific Century agreed to form a joint
venture with the Company to provide certain services relating to cable-based
Internet access throughout up to 63 countries in Asia. As a result of the
Pacific Century placement, Pacific Century will have the right to appoint two
directors to the Company's board of directors.
<PAGE>
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
On July 7, 1999, we filed a current report on Form 8-K regarding our dismissal
of PricewaterhouseCoopers LLP as our independent accountants and the engagement
of KPMG LLP as our independent accountants, which is hereby incorporated herein
by reference.
<PAGE>
PART III
Item 10. Directors and Executive Officers of Registrant
The information required by this Item is set forth in registrant's Proxy
Statement for the 2000 Annual Meeting of Stockholders under the captions
"Election of Directors", "Executive Officers" and "Compliance with Section 16(a)
of the Exchange Act", which information is hereby incorporated herein by
reference.
Item 11. Executive Compensation
The information required by this Item is set forth in registrant's Proxy
Statement for the 2000 Annual Meeting of Stockholders under the captions
"Executive Compensation" and "Board of Directors", which information is hereby
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is set forth in registrant's Proxy
Statement for the 2000 Annual Meeting of Stockholders under the caption
"Beneficial Security Ownership of Management and Certain Beneficial Owners",
which information is hereby incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is set forth in registrant's Proxy
Statement for the 2000 Annual Meeting of Stockholders under the caption "Certain
Relationships and Related Transactions", which information is hereby
incorporated herein by reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Exhibits:
(1) Financial Statements. The following consolidated financial statements
of the registrant and its subsidiaries are included in Part II Item 8:
Page
Report of Independent Accountants KPMG LLP........................ 47
Report of Independent Accountants PricewaterhouseCoopers LLP...... 48
Consolidated Balance Sheets as of September 30, 1999 and 1998..... 49
Consolidated Statements of Operations for the three years
ended September 30, 1999....................................... 50
Consolidated Statements of Shareholders' Equity (Deficit)
for the three years ended September 30, 1999................... 51
Consolidated Statements of Cash Flows for the
three years ended September 30, 1999........................... 52
Notes to Consolidated Financial Statements....................... 53-71
(2) Financial Statement Schedule. The following schedules for the
three years ended September 30, 1999 are submitted herewith:
Schedule II - Valuation and Qualifying Accounts.................... 79
All other schedules are omitted due to the required information is not
applicable or is shown in the financial statements or notes thereto.
(3) Exhibits. See Index to Exhibits included in this
Form 10-K on pages 76 to 78.
(b) Reports on Form 8-K:
Current report on Form 8-K filed with the Commission on July 7, 1999
Current report on Form 8-K filed with the Commission on July 20, 1999
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SOFTNET SYSTEMS, INC.
/s/ Douglas S. Sinclair
- ----------------------
Douglas S. Sinclair
Chief Financial Officer
/s/ Susan Dolce
- ----------------------
Susan Dolce
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Lawrence B. Brilliant
- --------------------------
Dr. Lawrence B. Brilliant Chairman of the Board December 28, 1999
of Directors Directors
and Chief Executive Officer
/s/ Ronald I. Simon
- --------------------------
Ronald I. Simon Vice Chairman of December 28, 1999
the Board of Directors
/s/ Garrett J. Girvan
- --------------------------
Garrett J. Girvan Chief Operating Officer December 28, 1999
/s/ Ian B. Aaron
- --------------------------
Ian B. Aaron President, Director December 28, 1999
/s/ Edward A. Bennett
- --------------------------
Edward A. Bennett Director December 28, 1999
/s/ Sean P. Doherty
- --------------------------
Sean P. Doherty Director December 28, 1999
/s/ Robert C. Harris, Jr.
- --------------------------
Robert C. Harris, Jr. Director December 28, 1999
<PAGE>
SoftNet Systems, Inc. and Subsidiaries
Index to Exhibits
Item 14(a)(3)
Exhibit No.
Description of Document
2.1 Agreement and Plan of Reorganization, dated as of November 22,
1998, by and among SoftNet, Acquisition Sub and Intellicom.
Incorporated by reference to the Company's Current Report on Form
8-K, dated February 24, 1999.
2.2 First Amendment and Waiver of Agreement and Plan of Reorganization,
dated as of December 23, 1998, by and among SoftNet, Acquisition
Sub, Intellicom and the Principal Stockholders. Incorporated by
reference to the Company's Current Report on Form 8-K, dated
February 24, 1999.
2.3 Second Amendment and Waiver of Agreement and Plan of
Reorganization, dated as of February 5, 1999, by and among SoftNet,
Acquisition Sub, Intellicom and the Principal Stockholders.
Incorporated by reference to the Company's Current Report on Form
8-K, dated February 24, 1999.
2.4 Asset Purchase Agreement, dated as of February 4, 1999, by and
between the Meachim & Raines Partnership and Intellicom.
Incorporated by reference to the Company's Current Report on Form
8-K, dated February 24, 1999.
2.5 Asset Purchase Agreement, dated as of February 12, 1999, by and
between Convergent and KCI. Incorporated by reference to the
Company's Current Report on Form 8-K, dated February 26, 1999.
2.6 Agreement and Plan of Merger, dated as of September 19, 1999, by
and among SoftNet Systems, Inc., Micrographic Technology
Corporation, Global Information Distribution GmbH and Micrographic
Acquisition Corp. Incorporated by reference to the Company's
Current Report on Form 8-K, dated October 15, 1999.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant. Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999.
3.2 By-Laws of the Company. Incorporated by reference to the Company's
Registration Statement on Form S-3/A dated April 22, 1999.
4.1 Form of Indenture between SoftNet Systems, Inc. and U.S. Trust
Company of California, as Trustee, including Form of Note, relating
to the 9% Debentures. Incorporated by reference to exhibit 4.2 to
the Company's Registration Statement on Form S-4.
10.1 SoftNet Systems, Inc. 1995 Long Term Incentive Plan Incorporated
by reference to exhibit 10.3 to the Company's Annual Report on
Form 10-KSB for the year ended September 30, 1995.
10.2 SoftNet Systems, Inc. 1998 Stock Incentive Plan. Incorporated by
reference to exhibit 99.1 to the Company's Registration Statement
on Form S-8, dated May 10, 1999.
10.3 SoftNet Systems, Inc. 1999 Supplemental Stock Incentive Plan.
Incorporated by reference to exhibit 99.1 to the Company's
Registration Statement on Form S-8, dated June 8, 1999.
10.4 Form of SoftNet Systems, Inc. 9% Convertible Subordinated
Debentures due 2000. Incorporated by reference to exhibit 10.9 to
the Company's Annual Report on Form 10-KSB for the year ended
September 30, 1995.
10.5 $660,000 principal amount of Micrographic Technology Corporation 6%
Convertible Subordinated Secured Debentures due 2002 to R.C.W.
Mauran. Incorporated by reference to exhibit 10.10 to the Company's
Annual Report on Form 10-KSB for the year ended September 30, 1995.
10.6 Form of SoftNet Systems, Inc. Common Stock Purchase Warrant.
Incorporated by reference to exhibit 10.39 to the Company's Annual
Report on Form 10-KSB for the year ended September 30, 1995.
10.7 Form of SoftNet Systems, Inc. Promissory Note. Incorporated by
reference to exhibit 10.40 to the Company's Annual Report on Form
10-KSB for the year ended September 30, 1995.
10.8 Form of SoftNet Systems, Inc. Note Extension Agreement.
Incorporated by reference to exhibit 10.41 to the Company's Annual
Report on Form 10-KSB for the year ended September 30, 1995.
<PAGE>
10.9 Form of SoftNet Systems, Inc. Warrant to Purchase Common Stock
granted to holders of SoftNet Systems, Inc. Promissory Notes.
Incorporated by reference to exhibit 10.42 to the Company's Annual
Report on Form10-KSB for the year ended September 30, 1995.
10.10 Form of Common Stock Purchase Warrant Certificate issued to
purchasers of the Series A Preferred Stock, dated December 31,
1997. Incorporated by reference to the Company's Form 8-K, dated
January 12, 1998.
10.11 Form of Common Stock Purchase Warrant Certificate issued to
assignees of Shoreline Pacific Institutional Finance, dated
December 31, 1997 (Series A). Incorporated by reference to the
Company's Form 8-K, dated January 12, 1998.
10.12 List of recipients of Common Stock Purchase Warrants issued in
connection with Series A Preferred Stock transaction. Incorporated
by reference to the Company's Registration Statement on Form S-3
(No. 333-65593).
10.13 Form of Common Stock Purchase Warrant Certificate issued to
purchasers of the Series B Preferred Stock, dated May 28, 1998.
Incorporated by reference to the Company's Registration Statement
on Form S-3 (No.333-57337).
10.14 Form of Common Stock Purchase Warrant Certificate issued to
assignees of Shoreline Pacific Institutional Finance, dated May 28,
1998 (Series B). Incorporated by reference to the Company's
Registration Statement on Form S-3 (No. 333-57337).
10.15 List of recipients of Common Stock Purchase Warrants issued in
connection with Series B Preferred Stock transaction. Incorporated
by reference to the Company's Registration Statement on Form S-3
(No. 333-65593).
10.16 Common Stock Purchase Warrant Certificate issued to RGC
International Investors, LDC dated August 31,1998 (Series C).
Incorporated by reference to the Company's Registration Statement
on Form S-3 (No. 333-65593).
10.17 Common Stock Purchase Warrant Certificate issued to Shoreline
Pacific Equity, Ltd. dated August 31, 1998 (Series C). Incorporated
by reference to the Company's Registration Statement on Form S-3
(No. 333-65593).
10.18 Common Stock Purchase Warrant Certificate issued to Steven M. Lamar
dated August 31, 1998 (Series C). Incorporated by reference to the
Company's Registration Statement on Form S-3 (No. 333-65593).
10.19 Securities Purchase Agreement dated as of January 12, 1999, by and
among the Company and the Buyers listed therein. Incorporated by
reference to exhibit 10.38 to the Company's Current Report on Form
8-K, dated January 26, 1999.
10.20 Registration Rights Agreement dated as of January 12, 1999 by and
among the Company and the Buyers listed therein. Incorporated by
reference to the Company's Current Report on Form 8-K dated January
26, 1999.
10.21 Form of Warrant to purchase shares of Common Stock, dated as of
January 12, 1999, issued by the Company to each of the Buyers
listed therein. Incorporation by reference to the Company's Current
Report on Form 8-K dated January 26, 1999.
10.22 Stock Purchase Agreement dated April 12, 1999 between SoftNet
Systems, Inc. and Hector R. Gonzalez. Incorporated by reference to
the Company's Current Report on Form 8-K, dated April 27, 1999.
10.23 Registration Rights Agreement dated April 12, 1999 between SoftNet
Systems, Inc. and Hector R. Gonzales. Incorporated by reference to
the Company's Current Report on Form 8-K, dated April 27, 1999.
10.24 Stock Purchase Agreement by and between SoftNet Systems, Inc and
Pacific Century Cyberworks Limited, dated October 12, 1999.
Incorporated by reference to the Company's Form 8-K, dated October
21, 1999.
10.25 Stock Purchase Agreement by and between SoftNet Systems, Inc. and
Mediacom, LLC, dated November 4, 1999.
10.26 Registration Rights Agreement by and between SoftNet Systems, Inc.
and Mediacom, LLC, dated November 4, 1999.
10.27 Stockholder Agreement by and between SoftNet Systems, Inc, and
Mediacom, LLC, date November 4, 1999.
<PAGE>
10.28 Letter confirming employment of Dr. Lawrence B. Brilliant, dated
April 7, 1998. Incorporated by reference to the Company's Form
10-Q for the quarter ended June 30, 1998.
16.1 Letter from PricewaterhouseCoopers LLP to the Securities and
Exchange Commission re: change in the Registrant's certifying
accountant dated July 6, 1999. Incorporated by reference to the
Company's Current Report on Form 8-K dated July 7, 1999.
21 Subsidiaries
23.1 Report of Independent Accounts on Schedule and Consent of KPMG LLP
23.2 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
<PAGE>
SoftNet Systems, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
Charged to Charged to
Balance at Costs Other Balance at
Beginning and Accounts Deductions End of
Description of Period Expenses Describe Describe Period
- ----------------------------------------------- ------------ ------------ ------------ -------------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended September 30, 1999............... $ 56 $ 298 $ 313 (a) $ 334 (b) $ 333
Year ended September 30, 1998............... 74 131 - 149 (b) 56
Year ended September 30, 1997............... - 74 - - 74
Valuation Allowance on Deferred Tax Asset:
Year ended September 30, 1999............... $ 7,277 $ 15,188 $ - $ - $ 22,465
Year ended September 30, 1998............... 3,158 4,119 - - 7,277
Year ended September 30, 1997............... 4,246 (1,088) - - 3,158
<FN>
- ----------------------------------------------------------------------
(a) Reserve acquired related to Intelligent Communications, Inc. acquisition.
(b) Amounts written off, net of recoveries.
</FN>
</TABLE>
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
SOFTNET SYSTEMS, INC.,
AND
MEDIACOM LLC
dated
November 4, 1999
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made as of November 4, 1999,
by and between SOFTNET SYSTEMS, INC., a Delaware corporation (the "Company"),
and MEDIACOM LLC, a New York limited liability company ("Mediacom").
W I T N E S S E T H:
WHEREAS, the Company wishes to issue to Mediacom, and Mediacom
wishes to purchase from the Company, the Common Shares on the terms and subject
to the conditions set forth herein; and
WHEREAS, the Common Shares are being issued in order to induce
Mediacom to enter into an affiliate agreement pursuant to which, subject to the
terms and provisions contained therein, Mediacom will agree to use the Company's
subsidiary, ISP Channel, Inc., as the exclusive provider of Internet access to
customers passed by Mediacom's cable infrastructure (the "Affiliate Agreement");
and
WHEREAS, the Company has made a good faith determination that
the Common Shares to be issued hereunder represent the fair market value of
securing Mediacom's obligations under the Affiliate Agreement; and
WHEREAS, concurrently with this Agreement, the parties shall
execute that certain Registration Rights Agreement dated as of the same date as
this Agreement, by and among the Company and Mediacom, the form of which is
attached hereto as Exhibit A (the "Registration Rights Agreement").
NOW, THEREFORE, in consideration of the foregoing and of the
representations, warranties, covenants and agreements contained herein, and for
other good and valuable consideration the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:
1. Definitions.
1.1 "Additional Shares" means shares of Common Stock issued pursuant to Section
2.2.
1.2 "Alternate Cash Consideration" means the difference between "*Filed
separately with the Commission*" and
the product of (a) the sum of (i) the First Shares plus (ii) the Second Shares,
multiplied by (b) the average closing price of the Common Stock for the twenty
trading days prior to the trading day immediately preceding the Third Closing
Date, as reported by the principal exchange or automated quotation system upon
which the Common Stock is then traded.
<PAGE>
1.3 "Ancillary Agreements" means the Affiliate Agreement, the Stockholder
Agreement and the Registration Rights Agreement.
1.4 "Committed Home Passed" has the same meaning as set forth in the Affiliate
Agreement.
1.5 "Common Shares" means the Initial Shares and the Additional Shares.
1.6 "Common Stock" means the common stock, par value $0.01 per share, of the
Company.
1.7 "Default Shares" means "*Filed separately with the Commission*" shares of
Common Stock.
1.8 "First Closing" has the meaning set forth in Section 7.1
1.9 "First Closing Date" has the meaning set forth in Section 7.1.
1.10 "First Shares" means that number of shares of Common Stock derived by
dividing $15,000,000 by the closing price of the Common Stock on the trading day
prior to the date hereof, as reported by the principal exchange or automated
quotation system upon which the Common Stock is then traded, rounding down, and
subtracting one (1).
1.11 "Fully Diluted Common Stock" means, at any given time, the sum of (a) the
number of shares of Common Stock that are outstanding, and (b) the number of
shares of Common Stock that are issuable upon exercise, conversion or exchange
of all outstanding options, warrants and other securities and obligations of the
Company.
1.12 "HSR Approval" means the earlier of (a) the termination or expiration of
the waiting period for filings made under the Hart-Scott-Rodino Antitrust
Improvement Act 1976, as amended (the "HSR Act"), or (b) approval by the Federal
Trade Commission and the Department of Justice pursuant to the HSR Act of the
transactions contemplated hereby.
1.13 "Initial Shares" means the First Shares, the Second Shares and, subject to
Section 6.6, the Third Shares, which shall equal (a) 3.5 million shares of
Common Stock in the aggregate or (b) in the event the Company does not obtain
Stockholder Approval as required by Section 6.5, the sum of the First Shares and
the Second Shares, all as subject to adjustment for Default Shares.
1.14 "ISP Channel Services" has the same meaning as the term "Services" in the
Affiliate Agreement.
1.15 "Material Adverse Effect" means a material adverse effect on the business,
operations, properties, assets, condition (financial or otherwise) or results of
operations of the Company and its Subsidiaries, taken as a whole.
<PAGE>
1.16 "Preferred Share" has the meaning set forth in the Stockholder Agreement.
1.17 "Second Closing" has the meaning set forth in Section 7.2.
1.18 "Second Closing Date" has the meaning set forth in Section 7.2.
1.19 "Second Shares" means that number of shares of Common Stock which on the
Second Closing Date will be equal to the maximum number of shares of Common
Stock which the Company is permitted to issue to Mediacom without seeking
Stockholder Approval under the then current rules of the NASDAQ Stock Market.
1.20 "Stockholder Agreement" means that certain Stockholder Agreement by and
between the Company and Mediacom dated the same date as this Agreement, a copy
of which is attached hereto as Exhibit B.
1.21 "Stockholder Approval" has the meaning set forth in Section 6.5.
1.22 "Subsidiary" means any corporation, limited liability company or other
entity of which the Company or Mediacom, as applicable, directly or indirectly,
controls or which the Company or Mediacom, as applicable, owns, directly or
indirectly, more than 50% of the capital stock or other voting and/or equity
interests.
1.23 "Third Closing" has the meaning set forth in Section 7.3.
1.24 "Third Closing Date" has the meaning set forth in Section 7.3.
1.25 "Third Shares" means that number of shares of Common Stock equal to the
difference between 3.5 million and the sum of (a) the First Shares, (b) the
Second Shares and (c) any Default Shares payable to the Company as of the Third
Closing Date.
1.26 "Unrestricted Shares" has the meaning set forth in the Stockholder
Agreement.
1.27 "Year 2000 Issue" means the failure of computer software, hardware and
firmware systems and equipment containing embedded computer ships to properly
receive, transmit, process, manipulate, store, retrieve, re-transmit or in any
other way utilize data and information due to the occurrence of the year 2000 or
the inclusion of dates on or after January 1, 2000.
<PAGE>
2. Issuance of Common Shares. Subject to the terms and conditions set forth in
this Agreement, the Company agrees to issue to Mediacom the Common Shares as
follows:
2.1 Initial Shares.
(a) First Shares. The Company shall issue to Mediacom the First Shares on
the First Closing Date.
(b) Second Shares. The Company shall issue to Mediacom the Second Shares on
the Second Closing Date.
(c) Third Shares. In the event Stockholder Approval is required under
Section 6.5, the Company shall issue to Mediacom the Third Shares, or subject to
Section 6.6, the Alternate Cash Consideration, on the Third Closing Date.
2.2 Additional Shares. For each Committed Home Passed in excess of 900,000 that
Mediacom makes available for ISP Channel Services, the Company shall issue to
Mediacom additional shares of Common Stock equal to the greater of (i) "*Filed
separately with the Commission*" divided by the per share closing price of the
Common Stock on the trading day prior to the date such shares are issued, as
reported by the principal exchange or automated quotation system upon which the
Common Stock is then traded and (ii) the lesser of (x) the quotient derived from
dividing (A) "*Filed separately with the Commission*" multiplied by the per
share closing price of the Common Stock on the trading day prior to the date
such shares are issued, as reported by the principal exchange or automated
quotation system upon which the Common Stock is then traded by (B) 900,000 and
(y) "*Filed separately with the Commission*" shares; provided, that the Company
shall not be obligated to accept more than 3,000,000 Committed Homes Passed for
ISP Channel Services without prior approval by the Board of Directors of the
Company; provided, further, that in no event shall Mediacom acquire more than
35% of the Fully Diluted Common Stock without prior approval by the Board of
Directors of the Company.
(a) Procedure. For each delivery of such excess Committed Homes Passed, Mediacom
shall deliver to the Company a certificate signed by an authorized officer of
Mediacom certifying that (i) Mediacom has delivered such excess Committed Homes
Passed, and (ii) the Affiliate Agreement has been amended to reflect the
delivery of such excess Committed Homes Passed. The Company shall issue to
Mediacom such Additional Shares within 30 days of receipt of such certificate.
(b) Adjustment for Subdivisions and Combinations. In the event at any time the
Company shall, by subdivision, stock split, reverse stock split, dividend,
combination or reclassification of any shares of its capital stock or otherwise
change any of the shares of Common Stock into the same or different number of
securities of any class or classes. The specific share numbers set forth herein
and in the Ancillary Agreements shall be proportionately adjusted to reflect
such change. An adjustment made pursuant to this Section 2.2(b) shall become
effective immediately after the effective date of such subdivision or
combination.
2.3 Shares to be Subject to Transfer Restrictions. The Common Shares shall be
subject to transfer restrictions and other conditions as set forth in the
Stockholder Agreement.
<PAGE>
3. Execution of Ancillary Agreements. In consideration for the issuance of the
Common Shares, Mediacom shall enter into the Ancillary Agreements and use ISP
Channel, Inc. as the exclusive provider of Internet access passed by Mediacom's
cable infrastructure according to the terms of the Affiliate Agreement.
4. Representations and Warranties of the Company. The Company hereby represents
and warrants to Mediacom as follows, except as set forth on a Schedule of
Exceptions (the "Schedule of Exceptions") furnished to Mediacom attached hereto
as Schedule A, which exceptions shall be deemed to be representations and
warranties as if made hereunder:
4.1 Organization and Qualification. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
The Company has all requisite corporate power to carry on its business as it is
now being conducted and is duly qualified to do business as a foreign
corporation and is in good standing in each of the jurisdictions in which the
properties owned, leased or operated by the Company or the nature of the
business conducted by the Company makes such qualification necessary and where
the failure to so qualify (individually or in the aggregate) would have a
Material Adverse Effect.
4.2 Subsidiaries. The Schedule of Exceptions sets forth each Subsidiary of the
Company. Except as set forth in the Schedule of Exceptions, the Company does not
own any capital stock in any other corporation or similar business entity nor is
the Company a partner in any partnership or joint venture. The Schedule of
Exceptions describes the state or other jurisdiction of incorporation or
organization and the percentage ownership interest owned by the Company of each
Subsidiary. Each Subsidiary is a corporation or limited liability company duly
organized, validly existing and in good standing under the laws of its state or
other jurisdiction of incorporation or organization. Each Subsidiary has all
requisite power (corporate or otherwise) to carry on its business as it is now
being conducted and is duly qualified to do business as a foreign corporation or
limited liability company and is in good standing in the jurisdictions in which
the properties owned, leased or operated by such Subsidiary or the nature of the
business conducted by such Subsidiary makes such qualification necessary and
where the failure to so qualify (individually or in the aggregate) would have a
Material Adverse Effect.
4.3 Authorization, Validity and Enforceability. The Company has full power,
authority and legal capacity to execute and deliver this Agreement and each of
the Ancillary Agreements, and subject to the HSR Approval, to perform its
obligations hereunder and thereunder, and to consummate the transactions
contemplated hereby and thereby, including without limitation the issuance of
the Common Shares hereunder and the issuance of the Preferred Share pursuant to
the Stockholder Agreement. This Agreement and each of the Ancillary Agreements
have been duly executed and delivered by the Company and constitutes the legal,
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms, except (a) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors' rights generally, and (b) as limited by laws
relating to the availability of specific performance, injunctive relief or other
equitable remedies.
<PAGE>
4.4 No Conflicts. Subject to the HSR Approval, the execution and delivery by the
Company of this Agreement and each of the Ancillary Agreements and the
performance by the Company of its obligations hereunder and thereunder, and the
consummation of the transactions contemplated hereby and thereby (including,
without limitation, the offer and sale of the Common Shares hereunder and the
issuance of the Preferred Share pursuant to the Stockholder Agreement), do not
and will not conflict with or violate the Certificate of Incorporation or
By-laws of the Company and do not and will not conflict with, result in any
breach or violation of, constitute a default under (or an event which with the
giving of notice or the lapse of time or both would constitute a default under),
give rise to any right of termination or acceleration of any right or obligation
of the Company under, or result in the creation of any lien or encumbrance upon
any assets or properties of the Company by reason of the terms of, (a) any
material contract to which the Company or by or to which the Company or its
assets or properties may be bound or subject, or (b) any order, writ, judgment,
injunction, award, decree, law, statute, ordinance, rule or regulation
applicable to the Company.
4.5 Third-Party Consents and Approvals. Except for the Stockholder Approval and
the HSR Approval, no consent, approval, authorization, license or order of,
registration, qualification, designation, declaration or filing with, or notice
to, any governmental entity or any other person is necessary to be obtained,
made or given by the Company in connection with the execution and delivery of
this Agreement, the performance by the Company of its obligations hereunder, and
the consummation of the transactions contemplated hereby.
4.6 Title to Securities. The Common Shares, when issued and delivered in
accordance with the terms of this Agreement for the consideration expressed
herein, and the Preferred Share, when issued and delivered in accordance with
the terms of the Stockholder Agreement, will be duly and validly issued, fully
paid and nonassessable. The issuance, sale and delivery of the Common Shares is
not subject to any preemptive rights of stockholders of the Company or to any
right of first refusal or other similar right in favor of any person.
4.7 Capitalization and Voting Rights.
(a) The authorized capital of the Company consists of:
(i) Preferred Stock. 4,000,000 shares of Preferred Stock, par value
$.10 per share (the "Preferred Stock"), of which no shares were issued and
outstanding as of October 31, 1999.
(ii) Common Stock. 100,000,000 shares of Common Stock, of which
__________ shares were issued and outstanding as of October 31,
1999.
<PAGE>
(b) All outstanding shares of Common Stock are duly and validly authorized and
issued, fully paid and nonassessable, and were issued in compliance with all
applicable state and federal laws concerning the issuance of securities and not
in violation of any preemptive rights of stockholders of the Company or to any
right of first refusal or other similar right in favor of any person. All shares
of Common Stock issuable upon exercise of all options, warrants or other rights
or agreements for the purchase or acquisition of Common Stock (including
Additional Shares) have been duly reserved for issuance and, upon issuance
thereof in accordance with the respective terms of their governing documents,
will be duly and validly issued, fully paid and non-assessable.
(c) Except as disclosed in the Schedule of Exceptions there are no (i)
outstanding options, warrants, rights (including conversion or preemptive
rights) or agreements or obligations (contingent or otherwise) for the purchase,
repurchase or acquisition or retirement of any shares of its capital stock or
other interests therein, (ii) securities of the Company convertible into or
exchangeable for any capital stock of the Company, (iii) commitments of the
Company to issue any shares, warrants, options or other such rights or to
distribute to holders of any class of its capital stock in respect thereof, any
evidences of indebtedness or assets, or (D) agreements to pay any dividend or
make any other distribution in respect thereof. Between October 31, 1999 and the
Closing Date, the Company has not issued any shares of capital stock or other
securities other than upon conversion or exercise or otherwise as a result of
conversion rights, options, warrants and other rights or agreements for the
purchase of shares of capital stock that were outstanding as of October 31,
1999. The Company is not a party or subject to any agreement and, to the
Company's knowledge, there is no agreement between any persons and/or entities,
which affects or relates to the voting or giving of written consents with
respect to any security or by a director of the Company.
4.8 Governmental Consents. No consent, approval, order or authorization of, or
registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority on the part of the Company or any
of its Subsidiaries is required in connection with (a) the execution, delivery
and performance of this Agreement or any of the Ancillary Agreements, (b) the
issuance, sale and delivery of the Common Shares and the Preferred Share, and
(c) the consummation of the transactions contemplated by this Agreement and the
Ancillary Agreements, except for (i) such filings required pursuant to
applicable federal and state securities laws and blue sky laws, which filings
will be effected within the required statutory period, and (ii) the HSR
Approval.
4.9 Litigation. There is no action, suit, proceeding or investigation pending,
or to the Company's knowledge, currently threatened against the Company that
questions the validity of this Agreement or the right of the Company to enter
into such Agreement or to consummate the transactions contemplated hereby, or
that might result, either individually or in the aggregate, in a Material
Adverse Effect or any change in the current equity ownership of the Company.
<PAGE>
4.10 Certificate of Incorporation, By-laws and Minutes. The Company has
heretofore made available to Mediacom true and complete copies of its
Certificate of Incorporation and By-laws as in effect on the date hereof. The
minute books of the Company and the Subsidiaries, which have been made available
to Mediacom for inspection, contain true and complete records of all meetings
and consents of the Board of Directors and stockholders of the Company and the
Subsidiaries.
4.11 No Violation of Law. To the Company's knowledge, the Company and each
Subsidiary is not in violation of and has not been given notice or been charged
with any violation of any law, statute, order, rule, regulation, ordinance or
judgment (including, without limitation, any applicable environmental law,
ordinance or regulation) of any governmental or regulatory body or authority,
except for violations which, in the aggregate, do not have, and would not
reasonably be expected to have a Material Adverse Effect. Neither the Company
nor any Subsidiary has received any written notice that any investigation or
review with respect to it by any governmental or regulatory body or authority is
pending or threatened, other than, in each case, those the outcome of which, as
far as reasonably can be foreseen, would not reasonably be expected to have a
Material Adverse Effect. The Company and each Subsidiary have all permits,
licenses, franchises, variances, exemptions, orders and other governmental
authorizations, consents and approvals necessary to conduct their businesses as
presently conducted, except for those, the absence of which, alone or in the
aggregate, would not have a Material Adverse Effect (collectively, the
"Permits"). The Company and each Subsidiary (a) have duly and timely filed all
reports and other information required to be filed with any governmental or
regulatory authority in connection with its Permits, and (b) are not in material
violation of the terms of any of its Permits, except for such omissions or
delays in filings, reports or violations which, alone or in the aggregate, would
not have a Material Adverse Effect.
4.12 Registration Rights. Except as set forth in the Schedule of Exceptions, the
Company has not granted or agreed to grant any registration rights under any
applicable securities laws to any person.
4.13 Intellectual Property. The Company and each Subsidiary owns or has the
right to use the patents, unpatented inventions, trademarks, tradenames, service
marks, service names, copyrights, trade secrets, know-how, design, process and
other intangible assets (collectively, "Proprietary Assets") used in the
business of the Company and the Subsidiaries free and clear of liens, claims,
and encumbrances created outside of the ordinary course of business or
identified in agreements referred to in the SEC Reports. Neither the Company nor
any Subsidiary is knowingly violating or infringing the rights of others in any
patent, unpatented invention, trademark, trade name, servicemark, copyright,
trade secret, know-how, design, process or other intangible asset. The Company
has not received any communications alleging that the Company (or any of its
employees or consultants) has violated or infringed or, by conducting its
business as proposed, would violate or infringe, any Proprietary Asset of any
other person or entity. To the Company's knowledge, no third party has any
ownership, right, title, interest, claim or lien on any of the Company's
Proprietary Assets and the Company has taken, and in the future the Company will
use its best efforts to take all steps reasonably necessary to preserve its
legal rights in, and the secrecy of, all its Proprietary Assets, except those
for which disclosure is required for legitimate business or legal reasons.
Except as set forth in the Schedule of Exceptions, the Company has not granted,
and, to the Company's knowledge there are not outstanding, any options, licenses
or agreements of any kind relating to any Proprietary Asset of the Company, nor
is the Company bound by or a party to any option, license or agreement of any
kind with respect to any of its Proprietary Assets. Except as set forth on the
Schedule of Exceptions, the Company is not obligated to pay any royalties or
other payments to third parties with respect to the marketing, sale,
distribution, manufacture, license or use of any of Proprietary Asset or any
other property or rights.
<PAGE>
4.14 Company SEC Reports. Since January 1, 1998, the Company has timely filed
with the Securities and Exchange Commission (the "SEC") all reports,
registrations and other documents, together with any amendments thereto,
required to be filed under the Securities Act of 1933, as amended (the
"Securities Act"), and the Securities Exchange Act of 1934, as amended (the
"Exchange Act")(all such reports, registrations and documents filed with the SEC
since January 1, 1998 are collectively referred to as the "Company SEC
Reports"). As of their respective dates or such later date as the Company filed
an amendment with the SEC, the Company SEC Reports complied in all material
respects with all rules and regulations promulgated by the SEC and did not
contain any untrue statement of a material fact or omit to state a material face
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading. The
consolidated financial statements of the Company (the "Company Financial
Statements") included in the Company SEC Reports present fairly, in all material
respects, the consolidated financial position of the Company and the
Subsidiaries as of their respective dates and the results of their operations
and cash flows for the fiscal years and periods covered in accordance with GAAP
consistently applied and in accordance with Regulation S-X of the SEC (subject,
in the case of unaudited interim period financial statements to normal recurring
year-end adjustments which, individully or collectively, are not material).
Without limiting the generality of the foregoing, (a) as of the date of the most
recent balance sheet included in the Company Fiancial Statements, there was no
material debt, liability or obligation of any nature not fully reflected or
reserved in accordance with GAAP; and (b) there are no assets of the Company or
any Subsidiary, the value of which (in the reasonable judgment of the Company)
is materially overstated in the Company Financial Statements. Except as set
forth in the Company SEC Reports, neither the Company nor any Subsidiary, to
their knowledge, has any liability or obligation of any nature (whether accrued,
absolute, contingent or otherwise) other than liabilities and obligations which
would not, individually or in the aggregate, have a Material Adverse Effect.
4.15 Brokers and Finders. The Company has not, directly or indirectly, employed
any investment banker, broker, finder, consultant or intermediary in connection
with the transactions contemplated by this Agreement which would be entitled to
any investment banking, brokerage, finder's or similar fee or commission in
connection with this Agreement or the transactions contemplated hereby.
<PAGE>
4.16 Year 2000 Issue. The Company has reviewed the effect of the Year 2000 Issue
on the computer software used by the Company and the Subsidiaries in the
business of the Company and the Subsidiaries, as well as those hardware and
firmware systems and equipment containing embedded microchips owned or operated
by the Company and the Subsidiaries or used or relied upon in the conduct of
their business (including systems and equipment supplied by others or with which
such computer systems of the Company and the Subsidiaries interface). The costs
to the Company of any reprogramming required as a result of the Year 2000 Issue
to permit the proper functioning of such systems and equipment and the proper
processing of data, and the testing of such reprogramming, are not reasonably
expected to have a Material Adverse Effect on the Company.
5. Representations and Warranties of Mediacom. Mediacom hereby represents and
warrants to the Company that:
5.1 Authorization. Mediacom has full power and authority to enter into this
Agreement, and such Agreement constitutes its valid and legally binding
obligation, enforceable in accordance with its terms.
5.2 Purchase Entirely for Own Account. This Agreement is made with Mediacom in
reliance upon Mediacom's representation to the Company, which by Mediacom's
execution of this Agreement Mediacom hereby confirms, that the Common Shares to
be received by Mediacom will be acquired for investment for Mediacom's own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that Mediacom has no present intention of
selling, granting any participation in, or otherwise distributing the same. By
executing this Agreement, Mediacom further represents that Mediacom does not
presently have any contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participation to such person or to any third
person, with respect to any of the Common Shares.
5.3 Disclosure of Information. Mediacom believes it has received all the
information it considers necessary or appropriate for deciding whether to
acquire the Common Shares. Mediacom further represents that it has had an
opportunity to ask questions and receive answers from the Company regarding the
terms and conditions of the offering of the Securities and the business,
properties, prospects and financial condition of the Company. The foregoing,
however, does not limit or modify the representations and warranties of the
Company in Section 4 of this Agreement or the right of Mediacom to rely thereon.
5.4 Investment Experience. Mediacom acknowledges that it can bear the economic
risk of its investment, and has such knowledge and experience in financial or
business matters that it is capable of evaluating the merits and risks of the
investment in the Common Shares. Mediacom has the capacity to protect its own
interests in connection with the transactions contemplated by this Agreement.
Mediacom has not been organized for the purpose of acquiring the Common Shares.
<PAGE>
5.5 No Solicitation. Neither the offer nor the sale of the Common Shares to
Mediacom has been accomplished by the publication of any form of advertisement
or general solicitation.
5.6 Restricted Securities. Mediacom understands that the Common Shares are
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such Securities may be resold without registration under the Securities Act,
only in certain limited circumstances. In this connection, Mediacom represents
that it is familiar with SEC Rule 144, as presently in effect, and understands
the resale limitations imposed thereby and by the Act.
5.7 Legends. Mediacom acknowledges that the Common Shares, and any securities
issued in respect thereof or exchange therefor, may bear one or all of the
following legends:
(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH
ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT."
(b) "THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFER, REPURCHASE RIGHTS
AND OTHER CONDITIONS CONTAINED IN THAT CERTAIN STOCKHOLDER AGREEMENT BETWEEN
MEDIACOM LLC AND THE COMPANY, DATED NOVEMBER 4, 1999."
(c) Any legend required by the laws of the jurisdiction where Mediacom is
domiciled or incorporated.
(d) Any legend required by the Blue Sky laws of any other state to the extent
such laws are applicable to the shares represented by the certificate so
legended.
6. Conditions to the First Closing, Second Closing and Third Closing; Covenants
and Alternate Consideration
6.1 Conditions to the Company's Obligations. The obligations of the Company to
issue the Common Shares shall be subject to the satisfaction of the following
conditions as of the First Closing, the Second Closing and the Third Closing:
(a) Representations and Warranties. The representations and warranties of
Mediacom contained in this Agreement shall be true and correct as of the First
Closing Date, the Second Closing Date and the Third Closing Date with the same
force and effect as though made as of each such respective Closing Date.
<PAGE>
(b) Covenants. Mediacom shall have complied with all covenants and agreements
required to be complied with by Mediacom hereunder and in the Affiliate
Agreement.
(c) Compliance Certificate. The Company shall have received from an officer of
Mediacom a certificate, dated as of the First Closing Date, the Second Closing
Date, or the Third Closing Date, as the case may be, that the conditions
specified in Sections 6.1(a) and 6.1(b) have been fulfilled.
(d) Consents and Approvals. Mediacom shall have obtained, made or given all
consents, approvals, authorizations, licenses or orders of, registrations,
qualifications, designations, declarations or filings with, or notice to any
governmental entity or any other person to the extent necessary to be obtained,
made or given by Mediacom in connection with the transactions contemplated
hereby.
(e) No Injunction or Illegality. No injunction, order, decree or judgment shall
have been issued by any court or other governmental entity and be in effect, and
no statute, rule or regulation shall have been enacted or promulgated by any
governmental entity and be in effect, which in each case restrains or prohibits
any of the transactions contemplated hereby.
(f) Ancillary Agreements. Mediacom shall have executed and delivered to the
Company the Ancillary Agreements and the Ancillary Agreements shall be in full
force and effect.
(g) Delivery of Documents. The Company shall have received from Mediacom:
incumbency certificates and such other evidence of corporate authority for the
transactions contemplated hereby as the Company and its counsel shall reasonably
request. The Company may conclusively rely on such documents.
(h) Celebratory Dinner. Solely as a condition to the First Closing, Rocco
Commisso, the Chairman and Chief Executive Officer of Mediacom, shall have come
to California for a celebratory dinner in his honor.
6.2 Conditions to Mediacom's Obligations. The obligations of Mediacom to
consummate the First Closing, the Second Closing and the Third Closing shall be
subject to the satisfaction of the following conditions:
(a) Representations and Warranties. The representations and warranties of the
Company contained in this Agreement shall be true and correct as of the First
Closing Date, the Second Closing or the Third Closing Date, as the case may be,
(other than representations and warranties made as of a specific date, which
shall be true and correct as of the date specified), with the same force and
effect as though such representations and warranties had been made as of each
such respective Closing Date.
<PAGE>
(b) Covenants. The Company shall have performed and complied with all covenants
and agreements required to be performed or complied with by the Company
hereunder and under the Ancillary Agreements.
(c) Compliance Certificate. Mediacom shall have received from an officer of the
Company a certificate, dated as of the First Closing or Second Closing, as the
case may be (and as to each issuance of Additional Shares, the date of issuance
of such shares), that the conditions specified in Sections 6.2(a) and 6.2(b)
have been fulfilled.
(d) Consents and Approvals. All consents, approvals, authorizations, licenses or
orders of, registrations, qualifications, designations, declarations or filings
with, or notice to any governmental entity or any other person necessary to be
obtained, made or given in connection with the transactions contemplated hereby
shall have been duly obtained, made or given and shall be in full force and
effect.
(e) No Injunction or Illegality. No injunction, order, decree or judgment shall
have been issued by any court or other governmental entity and be in effect, and
no statute, rule or regulation shall have been enacted or promulgated by any
governmental entity and be in effect, which in each case restrains or prohibits
any of the transactions contemplated hereby.
(f) Ancillary Agreements. The Company shall have entered into each of the
Ancillary Agreements and the Ancillary Agreements shall be in full force and
effect.
(g) Share Certificates; Alternate Cash Consideration. Mediacom shall have
received stock certificates of the Company representing the First Shares for the
First Closing, the Second Shares for the Second Closing, or the Third Shares, or
subject to Section 6.6, the Alternate Cash Consideration, for the Third Closing,
in such denominations as may be requested by Mediacom.
(h) Delivery of Documents. Mediacom shall have received from the Company: (i) a
copy of the Amended and Restated Certificate of Incorporation of the Company in
effect at the time of the Closing, certified as having been filed with the
Delaware Secretary of State, (ii) a copy of the By-laws of the Company in effect
at the time of the Closing, certified as being true and correct by the Secretary
of the Company, and (iii) incumbency certificates, board resolutions and such
other evidence of corporate authority for the transactions contemplated hereby
as Mediacom and its counsel shall reasonably request. Mediacom may conclusively
rely on such documents.
<PAGE>
(i) Opinion of Counsel. Mediacom shall have received an opinion from Latham &
Watkins, corporate counsel to the Company, dated as of the First Closing Date,
the Second Closing Date or the Third Closing Date, as the case may be, in form
reasonably satisfactory to Mediacom.
6.3 Additional Conditions to the Second Closing. The obligations of the Company
and Mediacom to consummate the Second Closing shall be subject to HSR Approval.
The obligation of Mediacom to consummate the Second Closing shall also be
subject to the Company's amending its Bylaws as set forth in Section 5.3 of the
Stockholder Agreement.
6.4 HSR Filings. Each of the parties hereto covenants and agrees to use its
reasonable commercial efforts to comply promptly with any applicable
requirements under the HSR Act, and rules and regulations promulgated
thereunder, relating to filing and furnishing of information to the Federal
Trade Commission ("FTC") and the Antitrust Division of the Department of Justice
("DOJ"), the parties' actions to include, without limitation, (a) filing or
causing to be filed the Notification and Report (the "HSR Report") required to
be filed by them, or by any other person that is part of the same "person" (as
defined in the HSR Act) or any of them, and taking all other action required by
the HSR Act; (b) coordinating the filing of such HSR Reports (and exchanging
drafts thereof) so as to present both HSR Reports to the FTC and the DOJ within
10 business days after the date of execution of this Agreement, or as soon
thereafter as reasonably practicable, and to avoid substantial errors or
inconsistencies between the two in the description of the transaction; and (c)
using their reasonable commercial efforts to comply with any additional request
for documents or information made by the FTC or the DOJ or by a court and
assisting the other party to so comply. Notwithstanding anything herein to the
contrary, in the event that the consummation of the transactions contemplated
under this Agreement is challenged by the FTC, the DOJ or any agency or
instrumentality of the federal government by an action to stay or enjoin such
consummation, then the parties shall cooperate with each other, as reasonably
requested, until either party does not reasonably believe that there are
reasonable grounds to contest such action, at which time such party shall have
the right to terminate this Agreement and the Ancillary Agreements, unless the
other party, at its sole cost and expense, elects to contest such action, in
which case the noncontesting party shall cooperate with the contesting party and
assist the contesting party, as reasonably requested, to contest such action
until such time as any party terminates this Agreement under this Section. In
the event that a stay or injunction is granted (preliminary or otherwise), then
either party may terminate this Agreement by prompt written notice to the other.
If any other form of equitable relief affecting any party is granted to the FTC,
the DOJ or other such agency or instrumentality, then the noncontesting party
may terminate this Agreement by prompt written notice to the other party. Upon
any termination pursuant to this Section 6.4 other than as a result of a breach
of this Agreement, no party shall have any further obligation or liability to
the other party under this Agreement or the Ancillary Agreements. To effectuate
the intent of the foregoing provisions of this Section 6.4, the parties agree to
exchange requested or required information in making the filings and in
complying as above provided, and the parties agree to take all reasonable steps
to preserve the confidentiality of the information set forth in any filings.
<PAGE>
6.5 Stockholder Approval. The Company covenants and agrees to submit to its
stockholders for approval at the 2000 Annual Meeting of Stockholders, duly
called and held as promptly as reasonably possible, but not later than March 31,
2000 (the "Stockholders Meeting"), and the Company will recommend to, and will
use its best efforts to solicit and obtain from such stockholders, the approval
of (a) the issuance of the Common Shares, as contemplated by this Agreement, but
only in the event stockholder approval is necessary to issue the Third Shares in
order to comply with the rules of the NASDAQ Stock Market ("Shareholder
Approval") and (b) the election of Mediacom's designee to the Company's Board of
Directors consistent with Mediacom's percentage ownership of the Common Stock,
as set forth in Section 5 of the Stockholder Agreement. The Company shall timely
prepare and file with the SEC a preliminary proxy statement in connection with
the Stockholders Meeting, and shall endeavor to obtain prompt review of such
proxy statement by the SEC, to respond to comments receive and to mail the
definitive version thereof (together with any supplements thereto, the "Proxy
Statement") promptly to its stockholders. The Proxy Statement will comply as to
form in all material respects with all applicable rules and regulations under
the Exchange Act . Copies of all preliminary proxy material to be submitted to
the SEC, and all SEC responses, comments or inquiries related thereto shall be
sent or communicated to Mediacom and its counsel sufficiently in advance of
filing or other formal action with respect thereto to provide them with a
reasonable opportunity to review and comment thereon.
6.6 Alternate Cash Consideration. In the event that, despite its best efforts,
the Company shall not obtain Stockholder Approval, at the Third Closing the
Company shall deliver to Mediacom the Alternate Cash Consideration, at
Mediacom's option, by the delivery of a certified or cashier's check or by
federal wire transfer to an account designated by Mediacom.
6.7 Additional Shares. Solely as a condition to issuing Additional Shares, the
Company shall be reasonably satisfied that Mediacom has made available for ISP
Channel Services the number of Committed Homes Passed that requires the issuance
of Additional Shares.
7. Closing Dates.
7.1 First Closing. Subject to the satisfaction (or waiver) of the conditions
thereto set forth in Section 6.1 and 6.2, the date and the time of the issuance
and sale of the First Shares pursuant to this Agreement (the "First Closing")
shall be 10:00 a.m., on November 3, 1999 at 650 Townsend Street, Suite 225, San
Francisco, CA, or at such other date, time and place as the Company and Mediacom
mutually agree upon orally or in writing (the "First Closing Date").
7.2 Second Closing. Subject to the satisfaction (or waiver) of the conditions
thereto set forth in Section 6.1, 6.2, 6.3 and 6.4, the date and the time of the
issuance and sale of the Second Shares pursuant to this Agreement (the "Second
Closing") shall be no later than the fifth business day following HSR Approval
at 650 Townsend Street, Suite 225, San Francisco, CA, or at such other date,
time and place as the Company and Mediacom mutually agree upon orally or in
writing (the "Second Closing Date").
<PAGE>
7.3 Third Closing. Subject to the satisfaction (or waiver) of the conditions
thereto set forth in Section 6, the date and the time of the issuance and sale
of the Third Shares, or delivery of the Alternate Cash Consideration, pursuant
to this Agreement (the "Third Closing") shall be within five business days after
the earlier of (a) Stockholder Approval or (b) March 31, 2000, at 650 Townsend
Street, Suite 225, San Francisco, CA, or at such later date, time and place as
the Company and Mediacom mutually agree upon orally or in writing (the "Third
Closing Date"); provided, that the Third Closing shall be unnecessary in the
event Stockholder Approval is not required by Section 6.5.
8. Protective Provision. In the event ISP Channel, Inc. or the Company enter
into agreements with any other cable operator that have, in the aggregate,
terms, rates and conditions more favorable than set forth in this Agreement and
the Ancillary Agreements, taken as a whole, then such party shall offer to
Mediacom such set of terms, rates and conditions offered to the other cable
operator; provided, however, that this provision shall not apply to agreements
for test or demonstration purposes.
9. Miscellaneous.
9.1 Survival of Representations and Warranties; Indemnity.
(a) The representations and warranties contained in this Agreement shall survive
the execution and delivery of this Agreement regardless of any investigation
made by or on behalf of either party hereto, until the fifth anniversary of the
date hereof.
(b) The Company hereby agrees to indemnify, defend and hold harmless Mediacom,
any affiliate of Mediacom, and any director, officer, employee, representative
or agent of any of them (an "Indemnified Party") from and against, and agrees to
pay or cause to be paid to such Indemnified Party the amounts ("Losses") equal
to the sum of any and all claims, demands, costs, expenses or other liabilities
of any kind that any Indemnified Party may incur or suffer, directly or
indirectly, including without limitation the cost of investigation (including
without limitation attorneys' fees) which arise out of, result from or relate to
(i) any misrepresentation or breach by the Company of any of its representations
or warranties or covenants contained in this Agreement, or in any schedule,
certificate, exhibit, or other instrument furnished by, or on behalf of, the
Company under this Agreement or (ii) any claim by any stockholders of the
Company arising under or in connection with this Agreement. Each Indemnified
Party shall give prompt notice to the Company of the commencement of any suit,
action or proceeding against such Indemnified Party in respect of which
indemnity may be sought hereunder. The Company may, at its own expense,
participate in and upon notice to the Indemnified Party, assume the defense any
such suit, action or proceeding; provided that (A) the Company's counsel is
reasonable satisfactory to such Indemnified Party and (B) the Company shall
<PAGE>
thereafter consult with such Indemnified Party upon such Indemnified Party's
reasonable request for such consultation from time to time with respect to such
suit, action or proceeding. If the Company assumes such defense, such
Indemnified Party shall have the right (but not the duty) to participate in the
defense thereof and to employ counsel, at its own expense, separate from the
counsel employed by the Company. The Company shall be liable for the fees and
expenses of counsel employed by such Indemnified Party for any period during
which the Company has not assumed the defense thereof. Whether or not the
Company chooses to defend or prosecute any claim, all of the parties hereto
shall cooperate in the defense or prosecution thereof. The Company shall not be
liable hereunder for any settlement effected without its consent or resulting
from a proceeding against an Indemnified Party in which the Company was not
permitted an opportunity to participate unless "*Filed separately with the
Commission*" such settlement includes an unconditional release of the Company
from all liability on claims that are the subject matter of such claim,
litigation or proceeding, and (2) such settlement shall not require that the
Company incur any obligation (monetary or otherwise) or forego any rights. The
Company shall not effect any settlement relating to a proceeding against any
Indemnified Party without the consent of such Indemnified Party (which consent
shall not be unreasonably withheld) unless such settlement includes (as to such
Indemnified Party) money damages only and an unconditional release of such
Indemnified Party from all Losses related to such proceeding.
9.2 Notices. All notices, demands or other communications to be given or
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable overnight courier service (charges
prepaid), mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid, or transmitted by facsimile (with request
for immediate confirmation of receipt in a manner customary for communications
of such type and with physical delivery of the communication being made by one
of the other means specified in this Section as promptly as practicable
thereafter). Such notices, demands and other communications shall be addressed
as follows:
If to the Company:
SOFTNET SYSTEMS, INC.
650 Townsend Street, Suite 225
San Francisco, California 94103
Attn: Steven Harris, Secretary
Telephone: (415) 365-2500
Telecopy: (415) 365-2556
If to Mediacom
MEDIACOM LLC
100 Crystal Run Road
Middletown, NY 10941
Attention: Rocco B. Commisso
Chairman and Chief Executive Officer
Telephone: (914) 695-2600
Telecopy: (914) 695-2639
<PAGE>
with a copy to:
Cooperman Levitt Winikoff Lester & Newman, P.C.
800 Third Avenue
New York, NY 10022
Attention: Robert L. Winikoff, Esq.
Telephone: (212) 688-7000
Telecopy: (212) 755-2839
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party
(provided that notice of a change of address shall be effective only upon
receipt thereof).
9.3 Expenses. The Company shall pay, and hold Mediacom harmless from and against
liability for the payment of, stamp and other taxes which may be payable in
respect of the execution and delivery of this Agreement or the delivery or
acquisition of any Common Shares.
9.4 Remedies. The parties shall have all rights and remedies set forth in this
Agreement and all rights which such holders have under any law. Any person
having any rights under any provision of this agreement shall be entitled to
enforce such rights specifically (without posting a bond or other security), to
recover damages by reason of any breach of any provision of this Agreement and
to exercise all other rights granted by law. The losing party shall pay the
reasonable fees and expenses incurred by the prevailing party for the
enforcement of the rights granted under this Agreement.
9.5 Entire Agreement; Waivers and Amendments. This Agreement (including the
exhibits and schedules hereto and the documents and instruments referred to
herein) contains the entire agreement and understanding of the parties with
respect to the subject matter hereof and supersedes all prior written or oral
agreements and understandings with respect thereto. This Agreement may only be
amended or modified, and the terms hereof may only be waived, by a writing
signed by both parties hereto or, in the case of a waiver, by the party entitled
to the benefit of the terms being waived.
<PAGE>
9.6 Assignment; Binding Effect. This Agreement may not be assigned or delegated,
in whole or in part, by either party hereto without the prior written consent of
the other party hereto, except by operation of law in connection with a merger,
consolidation or other reorganization or sale of all or substantially all of the
assets of Mediacom; provided, that Mediacom may assign, in its sole discretion,
all of its rights, interests and obligations under this Agreement to any buyer
who assumes all of Mediacom's obligations under this Agreement and the Ancillary
Agreements. Mediacom may assign any or all of its rights and obligations
hereunder to its direct or indirect wholly-owned Subsidiaries if such
Subsidiaries agrees in writing in form satisfactory to the Company to be bound
by this agreement and make the representations and warranties hereunder to the
same extent as Mediacom. In the event Mediacom assigns such rights to any such
Subsidiary, such Subsidiary shall be deemed to be "Mediacom" for all purposes of
this Agreement, and the Company shall re-issue the applicable Common Shares in
the name of any such Subsidiary at the direction in writing by Mediacom. The
assignment by Mediacom of any rights, interest or obligations under the
Registration Rights Agreement to a transferee of the Unrestricted Shares
acquired hereunder shall not affect or diminish the rights or obligations of
Mediacom under this Agreement. Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
9.7 Severability. In the event that any provision of this Agreement shall be
declared invalid or unenforceable by a court of competent jurisdiction in any
jurisdiction, such provision shall, as to such jurisdiction, be ineffective to
the extent declared invalid or unenforceable without affecting the validity or
enforceability of the other provisions of this Agreement, and the remainder of
this Agreement shall remain binding on the parties hereto.
9.8 Governing Law; Jurisdiction and Venue. This Agreement shall be governed by,
construed and enforced in accordance with the internal laws of the State of
Delaware, excluding the conflict of laws provisions thereof that would otherwise
require the application of the law of any other jurisdiction. The parties hereto
acknowledge and agree that the state and federal courts sitting in the State of
Delaware shall have jurisdiction in any matter arising out of this Agreement,
and the parties hereby consent to such jurisdiction and agree that the venue of
any such matter shall also be proper in such state and federal courts sitting in
the State of Delaware.
9.9 Captions. The Section and subsection headings in this Agreement are inserted
for convenience of reference only, and shall not affect the interpretation of
this Agreement.
9.10 Counterparts. This Agreement may be executed in counterparts, each of which
shall be deemed an original and both of which together shall be considered one
and the same agreement.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed on its behalf as of the date first written above.
SOFTNET SYSTEMS, INC.
-------------------------------
By: Lawrence B. Brilliant
Title: Chief Executive Officer
MEDIACOM LLC
-------------------------------
By:
Title:
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), is made
as of November 4, 1999, by and among SoftNet Systems, Inc., a Delaware
corporation (the "Company"), with headquarters located at 650 Townsend Street,
Suite 225, San Francisco, CA 94103 and Mediacom LLC, a New York limited
liability company (the "Initial Purchaser"), with headquarters located at 100
Crystal Run Road, Middletown, New York 10941.
WHEREAS, in connection with the Stock Purchase Agreement dated of even
date herewith by and between the Company and the Initial Purchaser (the "Stock
Purchase Agreement"), the Company has agreed, upon the terms and subject to the
conditions contained therein, to issue to the Initial Purchaser 3,500,000 shares
of common stock of the Company, par value $0.01 per share (the "Common Stock"),
and to issue additional shares of Common Stock under certain circumstances set
forth in the Stock Purchase Agreement (collectively, the "Shares").
WHEREAS, the Shares are being issued in order to induce the Initial
Purchaser to enter into an affiliate agreement pursuant to which, subject to the
terms and provisions contained therein, the Initial Purchaser agrees to use the
Company's subsidiary, ISP Channel, Inc., as the exclusive provider of Internet
access and other Internet services to customers passed by the Initial
Purchaser's cable infrastructure; and
WHEREAS, to induce the Initial Purchaser to execute and deliver the
Stock Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), and applicable state securities laws.
WHEREAS, the Shares are subject to a Stockholder Agreement by and
between the Company and the Initial Purchaser, of even date herewith (the
"Stockholder Agreement"), that governs certain rights and obligations with
respect to the parties.
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company, and the
Initial Purchaser hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions.
(a) "Purchaser" means, collectively, the Initial Purchaser and any transferees
or assignees who agree to become bound by the provisions of this Agreement in
accordance with Article IX hereof or who otherwise take rights under this
Agreement in accordance with the terms hereof.
<PAGE>
(b) "register," "registered," and "registration" refer to a registration
effected by preparing and filing a Registration Statement or Statements in
compliance with the Securities Act, and the declaration or ordering of
effectiveness of such Registration Statement by the United States Securities and
Exchange Commission (the "SEC").
(c) "Registrable Securities" means the Unrestricted Shares (as defined in the
Stockholder Agreement), and any shares of capital stock issued or issuable, from
time to time (with any adjustments) on or in exchange for or otherwise with
respect to the Unrestricted Shares or any other Registrable Securities. The
Unrestricted Shares shall cease to be Registrable Securities to the extent that
they (in the reasonable opinion of counsel to the Purchaser) have been sold to
the public without registration and without restriction, whether pursuant to
Rule 144 or otherwise.
(d) "Registration Statement" means any registration statement of the Company
under the Securities Act subject to or pursuant to Article II or another
provision of this Agreement, as applicable.
ARTICLE II
REGISTRATION
2.1 Demand Registration. At any time after December 31, 1999 and subject to
Section 2.5 of the Stockholder Agreement, if the Purchaser holds at least
500,000 shares of Registrable Securities, the Purchaser shall have the right to
request that the Company prepare, and file with the SEC a Registration Statement
on Form S-3 covering the resale of all or any portion of the then issued
Registrable Securities (a "Demand Registration"). The Registration Statement
shall have a minimum aggregate offering price (as set forth on the facing page
of the Registration Statement) to the public of $10,000,000. The Purchaser may
demand that any Registration Statement be a shelf-registration in accordance
with Rule 415 under the Securities Act or any successor rule providing for
offering securities on a continuous basis ("Rule 415"). The Company shall send
to all other Purchasers, if any, written notice of such request and if any such
Purchasers respond within fifteen (15) days after the effective date of such
notice (in accordance with Section 2.6 below), the Company shall include all
Registrable Securities requested by any such Purchaser to be registered in the
Demand Registration in accordance with this Section 2.1. The Registration
Statement (and each amendment or material supplement thereto, and each request
for acceleration of effectiveness thereof) shall be provided to (and subject to
the approval of (which approval shall not be unreasonably withheld or denied))
the Purchaser and its counsel prior to its filing. After receiving the
Registration Statement, the Purchaser shall provide the Company with either its
approval of the Registration Statement or its comments or corrections to the
Registration Statement within five (5) business days of receipt of the draft
Registration Statement. If the Purchaser does not respond with approval or
comments within five business days, it shall be deemed to approve the
Registration Statement. Without limiting the Company's obligations under this
Section, if Form S-3 is not available to the Company in connection with
re-sales, the Company shall file a Registration Statement on such form as is
then available to effect a registration, subject to the consent of the Purchaser
(as determined pursuant to Section 11.10 hereof) as to the form used for such
filing. The Purchaser shall have the right to request the filing of one
Registration Statement under this Section 2.1 in any twelve (12) month period;
provided, however, that if the Purchaser requests the filing of more than one
Registration Statement in a twelve month period then the Purchaser shall pay for
all expenses of such Registration.
<PAGE>
2.2 Underwritten Offering. If any offering pursuant to a Registration Statement
pursuant to Section 2.1 hereof involves an underwritten offering, the Purchaser
who holds a majority in interest of the Registrable Securities subject to such
underwritten offering shall have the right to select the investment banker or
bankers and manager or managers to administer the offering, which investment
banker or bankers or manager or managers shall be reasonably satisfactory to the
Company. If the underwriter of an underwritten offering advises the Company that
in its opinion the number of Registrable Securities requested to be included in
such offering exceeds the number of Registrable Securities which can be sold in
an orderly manner in such offering within a price range acceptable to the
Purchaser initially requesting such registration, then the Company shall include
in such registration prior to the inclusion of any securities which are not
Registrable Securities the number of Registrable Securities requested to be
included which, in the opinion of such underwriters, can be sold in an orderly
manner within the price range of such offering without adversely affecting the
marketability of the offering, pro rata among the holders of such Registrable
Securities. The Company shall agree to such reasonable lock-up provisions as may
be requested by such underwriter.
2.3 Registration and Permitted Delays. The Company shall file the Registration
Statement within thirty (30) days of a demand pursuant to Section 2.1 above, and
shall use its best efforts to cause the Registration Statement to become
effective as soon as practicable, but in no event later than the sixtieth (60th)
day following the date of the filing of the Registration Statement, except in
instances representing Permitted Delay (as defined below); provided, however,
that if, notwithstanding such best efforts, the Registration Statement is not
declared effective on or prior to the 60th day following the date of the filing
of the Registration Statement as a result of the SEC review process, the Company
shall, so long as it continues to use such best efforts, have an additional
sixty (60) days to cause the registration statement to become effective. The
Company shall respond to each item of correspondence from the SEC or the staff
of the SEC relating to such registration statement as promptly as practicable.
If to the actual knowledge of a senior officer of the Company or the Company's
outside counsel the SEC and the staff of the SEC have no comments (or no further
comments) concerning such Registration Statement, the Company shall as soon as
practicable request acceleration of effectiveness of the Registration Statement
from the SEC. For purposes of this Agreement, "Permitted Delay" shall mean the
suspension of, or delay in filing of in response to a demand, of the
Registration Statement for up to seventy-five (75) days upon the good faith
determination by the Company's Board of Directors that such Registration
Statement would have a material adverse effect on any proposed material
financing, acquisition or other extraordinary corporate transaction as a result
of which such suspension or delay is in the best interest of the Company and the
holders of its outstanding Common Stock, provided, however, that no more than
two (2) such Permitted Delays may be imposed during any period of twelve (12)
consecutive months; and provided, however that no Permitted Delay shall be
imposed with respect to a demand by the Purchaser where such Permitted Delay is
not imposed on all other stockholders, and only to the same extent it is imposed
on all other stockholders holding registration rights with respect to shares of
capital stock of the Company; and provided further, that in the event of a
Permitted Delay, the holders of Registrable Securities initially requesting
registration shall be entitled to withdraw such request and, if such request is
withdrawn, such Demand Registration shall not count as one of the permitted
Demand Registrations hereunder and the Company shall pay all expenses in
connection with such registration in accordance with Article V.
<PAGE>
2.4 "Piggyback" Registration. If, after the date hereof, the Company shall
decide to file with the SEC a Registration Statement relating to an offering for
its own account or the account of others (other than a registration statement on
Form S-4 or Form S-8 or their then equivalents relating to equity securities to
be issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option, stock purchase or
other employee benefit plans), including a Demand Registration pursuant to
Section 2.1 (unless inclusion therein would require the consent of such other
party, and the Company is unable, despite exercise of good faith efforts, to
obtain such consent) under the Securities Act of any of its equity securities
(any such Registration Statement, a "Company Registration Statement"), the
Company shall send to the Purchaser written notice of such determination and, if
within fifteen (15) days after the effective date of such notice (in accordance
with Section 2.6 below), the Purchaser shall so request in writing, the Company
shall include in such Company Registration Statement all or any part of the
Registrable Securities the Purchaser requests to be registered, except that if,
in connection with any underwritten public offering for the account of the
Company the managing underwriter(s) thereof shall impose a limitation on the
number of shares of Common Stock which may be included in a Company Registration
Statement because, in such underwriter(s)' judgment, marketing or other factors
dictate such limitation is necessary to facilitate public distribution, then the
Company shall be obligated to include in such Company Registration Statement
only such limited portion of the Registrable Securities with respect to which
the Purchaser has requested inclusion hereunder as the underwriter shall permit;
provided, however, that the Company shall not exclude any Registrable Securities
unless the Company has first excluded all outstanding securities, the holders of
which are not entitled to inclusion of such securities in such Company
Registration Statement; and provided, further, however, that, after giving
effect to the immediately preceding proviso, any exclusion of Registrable
Securities shall be made pro rata with holders of other securities having the
right to include such securities in a Company Registration Statement and holders
of securities not subject to a similar cut-back provision.
(b) If an offering in connection with which a Purchaser is
entitled to registration under this Section 2.4 is an underwritten offering,
then each Purchaser whose Registrable Securities are included in such Company
Registration Statement shall, unless otherwise agreed by the Company, offer and
sell such Registrable Securities in an underwritten offering using the same
underwriter or underwriters and, subject to the provisions of this Agreement, on
the same terms and conditions as other shares of Common Stock included in such
underwritten offering.
2.5 Eligibility for Form S-3. The Company represents and warrants that it
currently meets the requirements for the use of Form S-3 for registration of the
re-sale by the Purchaser and that the Company shall use its best efforts to
continue to meet such requirements, and that such re-sales may currently be
effected pursuant to Form S-3; the Company shall file all reports required to be
filed by the Company with the SEC in a timely manner so as to maintain such
eligibility for the use of Form S-3 and shall use its best efforts in all other
respects to maintain such eligibility.
<PAGE>
2.6 Notices. Upon receipt of a request for a Demand Registration, the
Company shall give all other Purchasers, if any, prompt written notice of such
Demand Registration, which other Purchasers shall otherwise have the right to
participate in such Demand Registration either pursuant to (i) Section 2.1, in
the case of the Initial Purchaser, any affiliates of the Initial Purchaser, or
Purchasers holding at least 500,000 shares of Common Stock, or (ii) Section 2.4,
hereof, in the case of Purchasers not otherwise described in (i).
ARTICLE III
OBLIGATIONS OF THE COMPANY
In connection with the registration of the Registrable
Securities, the Company shall have the following obligations:
3.1 Availability of Registration Statement. The Company shall prepare promptly
and file with the SEC the Registration Statement required by Section 2.1, and
use its best efforts to cause such Registration Statement relating to
Registrable Securities to become effective as soon as practicable after such
filing, and, if shelf-registration under Rule 415 is requested by Purchaser,
keep the Registration Statement continuously effective pursuant to Rule 415 and
available for use at all times, except as set forth herein, until such date as
all of the Registrable Securities covered by such Registration Statement have
been sold (the "Registration Period").
3.2 Amendments to Registration Statement. The Company shall prepare and file
with the SEC such amendments (including post-effective amendments) and
supplements to a Registration Statement and the prospectus used in connection
with the Registration Statement as may be necessary to keep the Registration
Statement effective and, subject to Section 3.7, available for use at all times
during the Registration Period, (including, without limitation, amendments and
supplements necessary in connection with a change in the "Plan of Distribution"
section in any Registration Statement or prospectus) and, during such period,
comply with the provisions of the Securities Act with respect to the disposition
of all Registrable Securities of the Company covered by the Registration
Statement until the termination of the Registration Period or, if earlier, such
time as all of such Registrable Securities have been disposed of in accordance
with the intended methods of disposition by the seller or sellers thereof as set
forth in the Registration Statement. The Company shall cause such amendment
and/or new Registration Statement to become effective as soon as practicable
following the filing thereof.
3.3 Information. Upon written request, the Company shall furnish to the
Purchaser whose Registrable Securities are included in the Registration
Statement and its legal counsel promptly after the same is prepared and publicly
distributed, filed with the SEC, or received by the Company, one copy of the
Registration Statement and any amendment thereto, each preliminary prospectus
and prospectus and each amendment or supplement thereto and, such number of
copies of a prospectus, including a preliminary prospectus, and all amendments
and supplements thereto and such other documents as the Purchaser may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned (or to be owned) by the Purchaser. The Company shall promptly notify the
Purchaser of the effectiveness of any Registration Statement or post-effective
amendments thereto.
<PAGE>
3.4 Blue Sky. The Company shall (a) register and qualify the Registrable
Securities covered by the Registration Statement under securities laws of such
jurisdictions in the United States (including Puerto Rico) as each Purchaser who
holds (or has the right to hold) Registrable Securities being offered reasonably
requests, (b) prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof and
availability for use during the Registration Period, (c) take such other actions
as may be reasonably necessary to maintain such registrations and qualifications
in effect at all times during the Registration Period, and (d) take all other
actions reasonably necessary or advisable to qualify the Registrable Securities
for sale in such jurisdictions; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto to (i) qualify to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this Section 3.4, (ii) subject itself to general taxation in any such
jurisdiction, (iii) file a general consent to service of process in any such
jurisdiction, (iv) provide any undertakings that cause the Company material
expense or burden, or (v) make any change in its charter or by-laws, which in
each case the board of directors of the Company determines to be contrary to the
best interests of the Company and its stockholders.
3.5 Underwriters. In the event the Purchaser, holding a majority in interest of
the Registrable Securities being offered in an offering pursuant to a
Registration Statement or any amendment or supplement thereto under Section 2.1
or 2.4 hereof, selects underwriters for the offering, the Company shall enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, including, without limitation, customary indemnification and
contribution obligations, with the underwriters of such offering.
3.6 Correction of Statements or Omissions. As soon as practicable after becoming
aware of such event, the Company shall publicly announce or notify by facsimile
the Purchaser (at the facsimile number for such Purchaser set forth on the
signature page hereto) of the happening of any event, of which the Company has
actual knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and use its best
efforts as soon as possible to (but in any event within five (5) business days)
prepare a supplement or amendment to the Registration Statement (and make all
required filings with the SEC) to correct such untrue statement or omission if
not otherwise satisfied through the filing of a report with the SEC or otherwise
pursuant to applicable securities laws (but such a supplement or amendment or
other filing shall not be required if, notwithstanding the Company's best
efforts to so prepare and file such supplement, amendment or other filing, such
a supplement, amendment or other filing is no longer required by applicable law
to correct such untrue statement or omission because such untrue statement or
omission no longer exists) and the Company shall simultaneously (and thereafter
as requested) deliver such number of copies of such supplement or amendment to
each Purchaser (or other applicable document) as such Purchaser may request in
writing. Unless such an event is publicly announced, the Company shall not,
without the consent of a Purchaser, give such Purchaser any material non-public
information, but shall inform the Purchaser that the prospectus includes an
untrue statement of a material fact or omission to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading.
<PAGE>
3.7 Material Non-Public Information. If at any time during the Registration
Period, counsel to the Company should determine in good faith that the
compliance by the Company with its disclosure obligations in connection with the
Registration Statement may require the disclosure of information which the Board
of Directors of the Company has identified as material and which the Board of
Directors has determined that the Company has a bona fide business purpose for
preserving as confidential, the Company shall promptly, (i) notify the
Purchasers in writing of the existence of material non-public information (but
in no event, without the prior written consent of a Purchaser, shall the Company
disclose to such Purchasers any of the facts or circumstances regarding such
information) and (ii) advise the Purchasers in writing to cease all sales under
the Registration Statement until such information is disclosed to the public or
ceases to be material.
3.8 Stop Orders. The Company shall use its best efforts to prevent the issuance
of any stop order or other suspension of effectiveness of a Registration
Statement, and, if such an order is issued, to obtain the withdrawal of such
order at the earliest practicable time, and the Company shall immediately notify
by facsimile the Purchaser (at the facsimile number set forth on the signature
page hereto) or, in the event of an underwritten offering, the managing
underwriters, of the issuance of such order and the resolution thereof.
3.9 Opinions of Counsel. If reasonably requested by the Purchaser in writing
(taking into account any applicable legal precedent and any SEC staff
positions), the Company shall use its reasonable efforts to furnish, on the date
of effectiveness of the Registration Statement and thereafter from time to time
on such dates as the Purchaser may reasonably request (a) an opinion, dated as
of such applicable date, from counsel representing the Company addressed to the
Purchaser and in form, scope and substances as is customarily given in an
underwritten public offering and reasonably satisfactory to such counsel and (b)
a letter, dated as of such applicable date, from the Company's independent
certified public accountants addressed to the Purchaser and in form, scope and
substance as is customarily given to underwriters in an underwritten public
offering; provided, however, that the Purchaser shall only be entitled to the
foregoing to the extent it is reasonably requested by the Purchaser and
consented to by the Company after consultation with its counsel (which consent
will not be unreasonably withheld based upon all relevant facts and
circumstances and taking into account the advice of such counsel) and in any
event no more than one time in any three-month period (unless a shorter period
would otherwise be reasonable under the applicable circumstances).
3.10 Inspection of Records. The Company shall provide the Purchaser, and any
underwriter who may participate in the distribution of Registrable Securities,
registered pursuant to the Registration Statement and their respective
representatives, the opportunity, each at its own expense, to conduct a
reasonable inquiry of the Company's financial and other records during normal
business hours and make available its officers, directors and employees for
questions regarding information which the Purchaser may reasonably request in
connection with the Registration Statement; provided, however, the Purchaser
shall hold in confidence and shall not make any disclosure of any record or
other information which the Company determines in good faith to be confidential,
and of which determination the inspectors are so notified in writing, unless (a)
the disclosure of such records is necessary to avoid or correct a misstatement
or omission in any Registration Statement, (b) the release of such records is
ordered pursuant to a subpoena or other order from a court or government body of
competent jurisdiction, or is otherwise required by applicable law or legal
process or (c) the information in such records has been made generally available
to the public other than by disclosure in violation of this or any other
agreement (to the knowledge of the relevant inspector); provided further, that
the Company is not required to waive the attorney-client privilege and the
Company shall not provide the Purchaser with material non-public information in
connection with such inquiry.
<PAGE>
3.11 Purchaser Information. The Company shall hold in confidence and not make
any disclosure of non-public information concerning the Purchaser provided to
the Company by the Purchaser unless (a) disclosure of such information is
necessary to comply with federal or state securities laws, rules, statutes or
regulations, (b) the disclosure of such information is necessary to avoid or
correct a misstatement or omission in any Registration Statement or other public
filing by the Company, (c) the release of such information is ordered pursuant
to a subpoena or other order from a court or governmental body of competent
jurisdiction or is otherwise required by applicable law or legal process, (d)
such information has been made generally available to the public other than by
disclosure in violation, to the knowledge of the Company, of this or any other
agreement, or (e) the Purchaser consents to the form and content of any such
disclosure. The Company agrees that it shall, upon learning that disclosure of
such information concerning the Purchaser is sought in or by a court or
governmental body of competent jurisdiction in or through other means, give
prompt notice to the Purchaser prior to making such disclosure, and allow the
Purchaser, at its expense, to undertake appropriate action to prevent disclosure
of, or to obtain a protective order for, such information.
3.12 Listing. The Company shall use its best efforts to cause the listing and
the continuation of listing of all the Registrable Securities covered by the
Registration Statement on the American Stock Exchange, The Nasdaq National
Market System, The Nasdaq SmallCap Market or the New York Stock Exchange, and
cause the Registrable Securities to be quoted or listed on each additional
national securities exchange or quotation system upon which the other Common
Stock of the Company is then listed or quoted.
3.13 Transfer Agent. The Company shall provide a transfer agent and registrar,
which may be a single entity, for the Registrable Securities not later than the
effective date of the Registration Statement.
3.14 Delivery of Certificates. The Company shall cooperate with the Purchaser
who holds Registrable Securities being offered and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing Registrable
Securities to be offered pursuant to the Registration Statement and enable such
certificates to be in such denominations or amounts, as the case may be, as the
managing underwriter or underwriters, if any, or the Purchaser may reasonably
request and registered in such names as the managing underwriter or
underwriters, if any, or the Purchaser may request, and, within two (2) business
days after a Registration Statement which includes Registrable Securities is
ordered effective by the SEC, the Company shall cause legal counsel selected by
the Company to deliver, to the transfer agent for the Registrable Securities
(with copies to the Purchaser whose Registrable Securities are included in such
Registration Statement) an opinion of such counsel substantially in the form
attached hereto as Exhibit 1.
3.15 Compliance with Laws. The Company shall comply with all applicable laws
related to a Registration Statement and offering and sale of securities covered
by the Registration Statement and all applicable rules and regulations of
governmental authorities in connection therewith (including, without limitation,
the Securities Act and the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated by the SEC).
<PAGE>
3.16 Other Registration Rights. The Company has not and shall not hereafter
enter into any other registration agreement with respect to its securities which
is inconsistent with or violates or adversely affects the rights granted to the
holders of Registrable Securities in this Agreement.
ARTICLE IV
OBLIGATIONS OF THE PURCHASER
In connection with the registration of the Registrable
Securities, the Purchaser shall have the following obligations:
4.1 Information Concerning Purchasers. Purchaser shall furnish to the Company
such information regarding itself, the Registrable Securities held by it and the
intended method of disposition of the Registrable Securities held by it as shall
be required to effect the registration of such Registrable Securities. At least
five (5) business days prior to the first anticipated filing date of the
Registration Statement, the Company shall notify each Purchaser of the
information the Company so required from each such Purchaser.
4.2 Cooperation. Purchaser, by such Purchaser's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statements hereunder, unless such Purchaser has notified the Company in writing
of such Purchaser's election to exclude all of such Purchaser's Registrable
Securities from the Registration Statement.
4.3 Prospectus Delivery Requirements. The Purchaser understands that the
Securities Act may require delivery of a prospectus relating thereto in
connection with any sale thereof pursuant to such Registration Statement, and
each such Purchaser shall comply with any applicable prospectus delivery
requirements of the Securities Act in connection with any such sale.
4.4 Discontinuance of Distribution. The Purchaser agrees that, upon receipt of
written notice from the Company of the happening of any event of the kind
described in Sections 3.6 and 3.7, the Purchaser will immediately discontinue
disposition of Registrable Securities pursuant to the Registration Statement
covering such Registrable Securities until such Purchaser's receipt of the
copies of the supplemented or amended prospectus contemplated by Sections 3.6 or
3.7 or advice that a supplement or amendment is not required and, if so directed
by the Company, the Purchaser shall deliver to the Company (at the expense of
the Company) or destroy (and deliver to the Company a certificate of
destruction) all copies in such Purchaser's possession (other than a limited
number of permanent file copies), of the prospectus covering such Registrable
Securities current at the time of receipt of such notice.
<PAGE>
4.5 Underwriting Agreements. Without limiting Purchaser's rights under Section
2.1 or 2.4 hereof, no Purchaser may participate in any underwritten distribution
hereunder unless such Purchaser (a) agrees to sell the Purchaser's Registrable
Securities on the basis provided in any underwriting agreements in usual and
customary form entered into by the Company pursuant to Section 3.5 hereof, (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements, and (c) agrees to pay its pro rata share of
all underwriting discounts and commissions and any expenses in excess of those
payable by the Company pursuant to Article V.
4.6 SEC. The Purchaser agrees to use reasonable efforts to cooperate with the
Company (at the Company's expense) in responding to comments of the staff of the
SEC, provided nothing in this Section 4.6 shall affect any obligations of the
Company under this Agreement or otherwise create any liability on the part of
the Purchaser or require any change to the terms and conditions of this
Agreement or the Stock Purchase Agreement.
ARTICLE V
EXPENSES OF REGISTRATION
Subject to Section 2.1, all reasonable expenses, other than
underwriting discounts and commissions, incurred by Purchaser in connection with
registrations, filings or qualifications pursuant to Articles II and III,
including, without limitation, the reasonable fees and disbursements of one
counsel to the Purchaser, including any of its transferees (such fees and
expenses not to exceed $5,000), and all registration, listing and qualification
fees, printers and accounting fees, and the fees and disbursements of counsel
for the Company and other expenses of the Company, shall be borne by the
Company.
ARTICLE VI
INDEMNIFICATION
In the event any Registrable Securities are included in a
Registration Statement under this Agreement:
6.1 Indemnification. To the extent permitted by law, the Company will indemnify,
hold harmless and defend (a) the Purchaser, (b) each underwriter of Registrable
Securities and (c) the directors, officers, partners, members, employees, agents
and persons who control the Purchaser and any such underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), if any (each, an
"Indemnified Person"), against any losses, claims, damages, liabilities or
expenses (collectively, together with actions, proceedings or inquiries whether
or not in any court, before any administrative body or by any regulatory or
self-regulatory organization, whether commenced or threatened, in respect
thereof, "Claims") to which any of them may become subject insofar as such
Claims arise out of or are based upon: (i) any untrue statement or alleged
untrue statement of a material fact in a Registration Statement or the omission
or alleged omission to state therein a material fact required to be stated or
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus if used prior to the effective date of such Registration
Statement, or contained in the final prospectus (as amended or supplemented, if
the Company files any amendment thereof or supplement thereto with the SEC) or
the omission or alleged omission to state therein any material fact necessary to
make the statements made therein, in light of the circumstances under which the
statements therein were made, not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any other law,
including, without limitation, any state securities law, or any rule or
regulation thereunder relating to the offer or sale of the Registrable
Securities (the matters in the foregoing clauses (i) through (iii) being,
collectively, "Violations"). The Company shall reimburse each such Indemnified
Person, promptly as such expenses are incurred and are due and payable, for any
reasonable legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6.1: (x) shall not apply to an Indemnified Person with
respect to a Claim arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by such Indemnified Person expressly for use in the Registration
Statement or any such amendment thereof or supplement thereto; (y) shall not
apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of the Company, which consent shall not be
unreasonably withheld; and (z) with respect to any preliminary prospectus, shall
not inure to the benefit of any Indemnified Person if the untrue statement or
omission of material fact contained in the preliminary prospectus was corrected
on a timely basis in the prospectus, as then amended or supplemented, if such
corrected prospectus was timely made available by the Company pursuant to
Section 3.3 hereof, and the Indemnified Person was promptly advised in writing
not to use the incorrect prospectus prior to the use giving rise to a Violation
and such Indemnified Person, notwithstanding such advice, used it. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Indemnified Person and shall survive the transfer of
the Registrable Securities by a Purchaser pursuant to Article IX.
<PAGE>
6.2 Claims. To the extent permitted by law, the Purchaser agrees to indemnify,
hold harmless and defend, to the same extent and in the same manner set forth in
Section 6.1, the Company, each of its directors, each of its officers who signs
the Registration Statement, its employees, agents and persons, if any, who
control the Company within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, and any other stockholder selling securities
pursuant to the Registration Statement, together with its directors, officers
and members, and any person who controls such stockholder or underwriter within
the meaning of the Securities Act or the Exchange Act (such an "Indemnified
Party"), against any Claim to which any of them may become subject, under the
Securities Act, the Exchange Act or otherwise, insofar as such Claim arises out
of or is based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished to the Company by the Purchaser expressly for use
in connection with such Registration Statement; and the Purchaser will reimburse
any legal or other expenses (promptly as such expenses are incurred and are due
and payable) reasonably incurred by them in connection with investigating or
defending any such Claim; provided, however, that the indemnity agreement
contained in this Section 6.2 shall not apply to amounts paid in settlement of
any Claim if such settlement is effected without the prior written consent of
the Purchaser, which consent shall not be unreasonably withheld; provided,
further, however, that the Purchaser shall be liable under this Agreement
(including this Section 6.2 and Article VII) for only that amount as does not
exceed the net proceeds actually received by the Purchaser as a result of the
sale of Registrable Securities pursuant to such Registration Statement. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of such Indemnified Party and shall survive the transfer of
the Registrable Securities by the Purchaser pursuant to Article IX.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6.2 with respect to any preliminary
prospectus shall not inure to the benefit of any Indemnified Party if the untrue
statement or omission of material fact contained in the preliminary prospectus
was corrected on a timely basis in the prospectus, as then amended or
supplemented, and the Indemnified Party failed to utilize such corrected
prospectus.
6.3 Notices. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Article VI of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Article VI, deliver to the indemnifying party a
written notice of the commencement thereof, and the indemnifying party shall
have the right (at its expense) to participate in, and, to the extent the
indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume and continue control of the defense thereof with
counsel mutually satisfactory to the indemnifying party and the Indemnified
Person or the Indemnified Party, as the case may be; provided, however, that
such indemnifying party shall diligently pursue such defense and an indemnifying
party shall not be entitled to assume (or continue) such defense if the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
conflicts of interest between such Indemnified Person or Indemnified Party and
any other party represented by such counsel in such proceeding or the actual or
potential defendants in, or targets of, any such action include both the
Indemnified Person or the Indemnified Party and the indemnifying party, and any
such Indemnified Person or Indemnified Party reasonably determines that there
may be legal defenses available to such Indemnified Person or Indemnified Party
which are different from or in addition to those available to such indemnifying
party. Notwithstanding any assumption of such defense and without limiting any
indemnification obligation provided for in Section 6.1 or 6.2, the Indemnified
Party or Indemnified Person, as the case may be, shall be entitled to be
represented by counsel (at its own expense if the indemnifying party is
permitted to assume and continue control of the defense and otherwise at the
expense of the indemnifying party) and such counsel shall be entitled to
participate in such defense. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Article VI, except to the
extent that the indemnifying party is actually prejudiced in its ability to
defend such action. The indemnification required by this Article VI shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
ARTICLE VII
CONTRIBUTION
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Article VI to the fullest extent permitted by law; provided, however, that
(i) no party shall be liable for contribution if it is not liable for
indemnification pursuant to the provisions of Article VI hereof; (ii) no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation; and (iii) contribution
(together with any indemnification or other obligations under this Agreement) by
any Purchaser of Registrable Securities shall be limited in amount to the net
amount of proceeds received by such Purchaser from the sale of its Registrable
Securities.
<PAGE>
ARTICLE VIII
REPORTS UNDER THE EXCHANGE ACT
With a view to making available to each Purchaser the benefits
of Rule 144, the Company agrees that so long as a Purchaser holds Registrable
Securities, the Company shall use its best efforts to:
(a) Not terminate its status as an issuer required to file reports under the
Exchange Act even if the Exchange Act or the rules and regulations thereunder
would permit such termination;
(b) File with the SEC in a timely manner and make and keep available all reports
and other documents required of the Company under the Securities Act and the
Exchange Act so long as the filing and availability of such reports and other
documents is required for the applicable provisions of Rule 144; and
(c) Furnish to the Purchaser promptly upon written request, (i) a copy of the
most recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may be
reasonably requested to permit the Purchaser to sell such securities pursuant to
Rule 144 without registration.
(d) Take such further action as the Purchaser may reasonably request to enable
the Purchaser to sell Registrable Securities without registration under Rule
144, including any opinion of counsel to the Company required by the Company's
transfer agent.
ARTICLE IX
ASSIGNMENT OF REGISTRATION RIGHTS
The rights of the Purchaser hereunder as to Registrable
Securities transferred by the Purchaser, including the right to have the Company
register Registrable Securities pursuant to this Agreement, shall be
automatically assigned by the Purchaser to any transferee of all or any portion
of the Registrable Securities who either (x) is an affiliate or subsidiary of
the Purchaser or (y) acquires at least 1,000,000 shares of Common Stock of the
Company, whether such transfer occurs before or after the Registration Statement
becomes effective, if: (a) the Purchaser agrees in writing with the transferee
or assignee to assign such rights, and a copy of such agreement is furnished to
the Company within a reasonable time after such assignment, (b) the Company is,
within a reasonable time after such transfer or assignment, furnished with
written notice of (i) the name and address of such transferee or assignee, and
(ii) the securities with respect to which such registration rights are being
transferred or assigned, (c) following such transfer or assignment, the further
disposition of such securities by the transferee or assignee is restricted under
the Securities Act or applicable state securities laws, and (d) at or before the
time the Company receives the written notice contemplated by clause (ii) of this
sentence, the transferee or assignee agrees in writing for the benefit of the
Company to be bound by all of the provisions contained herein. The rights of the
Purchaser hereunder with respect to any Registrable Securities not shall not be
assigned by virtue of the transfer of other Registrable Securities or
transferred Registrable Securities.
<PAGE>
ARTICLE X
AMENDMENT OF REGISTRATION RIGHTS
Provisions of this Agreement may be amended and the observance
thereof may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with written consent of the Company and
the Purchaser. Any amendment or waiver effected in accordance with this Article
X shall be binding upon the Purchaser and the Company.
ARTICLE XI
MISCELLANEOUS
11.1 Registered Holders. A person or entity is deemed to be a holder (or a
holder in interest) of Registrable Securities whenever such person or entity
owns of record such Registrable Securities. If the Company receives conflicting
instructions, notices or elections from two or more persons or entities with
respect to the same Registrable Securities, the Company shall act upon the basis
of instructions, notice or election received from the registered owner of such
Registrable Securities.
11.2 Notices. Any notices herein required or permitted to be given shall be in
writing and may be personally served or delivered by courier or by machine
generated confirmed telecopy, and shall be deemed delivered at the time and date
of receipt (which shall include telephone line facsimile transmission). The
addresses for such communications shall be:
If to the Company:
SoftNet Systems, Inc.
650 Townsend Street, Suite 225
San Francisco, California 94103
Telecopy: (415) 365-2556
Attention: Steven Harris, Secretary
If to the Purchaser, as shown on the signature page hereto and
if to any other Purchaser, at such address as such Purchaser shall have provided
in writing to the Company, or at such other address as each such party furnishes
by notice given in accordance with this Section 11.2.
11.3 Waiver. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
<PAGE>
11.4 Governing Law; Jurisdiction and Venue. This Agreement shall be governed by,
construed and enforced in accordance with the internal laws of the State of
Delaware, excluding the conflict of laws provisions thereof that would otherwise
require the application of the law of any other jurisdiction. The parties hereto
acknowledge and agree that the state and federal courts sitting in the State of
Delaware shall have jurisdiction in any matter arising out of this Agreement,
and the parties hereby consent to such jurisdiction and agree that the venue of
any such matter shall also be proper in such state and federal courts sitting in
the State of Delaware.
11.5 Entire Agreement. This Agreement and the Stock Purchase Agreement
(including all schedules and exhibits thereto and all certificates and opinions
and other documents required thereby) constitute the entire agreement among the
parties hereto with respect to the subject matter hereof and thereof. There are
no restrictions, promises, warranties or undertakings, other than those set
forth or referred to herein and therein. This Agreement and the Stock Purchase
Agreement supersede all prior agreements and understandings among the parties
hereto with respect to the subject matter hereof and thereof.
11.6 Successors and Assigns. Subject to the requirements of Article IX hereof,
this Agreement shall inure to the benefit of and be binding upon the successors
and assigns of each of the parties hereto.
11.7 Headings. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
11.8 Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original but all of which shall constitute one
and the same agreement. This Agreement, once executed by a party, may be
delivered to the other party hereto, by facsimile transmission of a copy of this
Agreement bearing the signature of the party so delivering this Agreement.
11.9 Further Assurances. Each party shall do and perform, or cause to be done
and performed, all such further acts and things, and shall execute and deliver
all such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
11.10 Consents. Unless otherwise provided herein, all consents and other
determinations to be made pursuant to this Agreement shall be made on the basis
of a majority in interest with respect to the Registrable Securities.
11.11 Transferees. The number of Registrable Securities included in any
Registration Statement pursuant to Section 2.4 shall be allocated pro rata among
the Purchasers based on the number of Registrable Securities held by each
Purchaser at the time of establishment of such number. In the event a Purchaser
shall sell or otherwise transfer any of such holder's Registrable Securities,
each transferee shall be allocated a pro rata portion of the number of
Registrable Securities included on a Registration Statement for such transferor.
Any shares of Common Stock included on a Registration Statement and which remain
allocated to any person or entity which does not hold any Registrable Securities
shall be allocated to the remaining Purchasers, pro rata based on the number of
shares of Registrable Securities then held by such remaining Purchasers.
<PAGE>
11.12 Severability. If any provision of this Agreement shall be invalid or
unenforceable, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement.
* * *
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration
Rights Agreement to be duly executed as of the date first above written.
SOFTNET SYSTEMS, INC.
By: ---------------------------
Lawrence B. Brilliant
Chief Executive Officer
MEDIACOM LLC
By: -------------------------------
Name: -------------------------------
Title -------------------------------
Address: 100 Crystal Run Road
Middletown, NY 10941
Telecopy: (914) 695-2639
with a copy to:
Cooperman Levitt Winikoff Lester & Newman, P.C.
800 Third Avenue
New York, NY 10022
Attention: Robert L. Winikoff, Esq.
Facsimile: (212) 755-2839
<PAGE>
EXHIBIT 1
to Registration
Rights Agreement
[Date]
[Name and address
of transfer agent]
RE: SoftNet Systems, Inc.
Ladies and Gentlemen:
We are counsel to SoftNet Systems, Inc., a Delaware corporation (the
"Company"), and we understand that [Name of Purchaser] (the "Holder") has
purchased from the Company Common Stock of the Company, par value $.01 per share
(the "Common Stock"). The Common Stock was purchased by the Holder pursuant to a
Stock Purchase Agreement, dated as of November 4, 1999, by and among the Company
and the signatories thereto (the "Agreement"). Pursuant to a Registration Rights
Agreement, dated as of November 4, 1999, by and among the Company and the Holder
(the "Registration Rights Agreement"), the Company agreed with the Holder, among
other things, to register the Registrable Securities (as that term is defined in
the Registration Rights Agreement) under the Securities Act of 1933, as amended
(the "Securities Act"), upon the terms provided in the Registration Rights
Agreement. In connection with the Company's obligations under the Registration
Rights Agreement, on __________ __, ____, the Company filed a Registration
Statement on Form S-3 (File No. 333- __________) (the "Registration Statement")
with the Securities and Exchange Commission (the "SEC") relating to the
Registrable Securities, which names the Holder as a selling stockholder
thereunder.
[Other customary introductory and scope of examination language to be
inserted, in each case as acceptable to Holders.]
Based on the foregoing, we are of the opinion that the Registrable
Securities have been registered under the Securities Act.
[Other appropriate customary language to be included, in each case as
acceptable to Holders.]
Very truly yours,
cc: [Name of Purchaser]
STOCKHOLDER AGREEMENT
BY AND BETWEEN
SOFTNET SYSTEMS, INC.,
AND
MEDIACOM LLC
dated
November 4, 1999
<PAGE>
STOCKHOLDER AGREEMENT
THIS STOCKHOLDER AGREEMENT is made as of November 4, 1999, by
and between SOFTNET SYSTEMS, INC., a Delaware corporation (the "Company"), and
MEDIACOM LLC, a New York limited liability company ("Mediacom").
W I T N E S S E T H:
WHEREAS, the parties desire to set forth certain rights and
restrictions related to the ownership and disposition of certain shares of
Common Stock owned by Mediacom;
WHEREAS, the Company and Mediacom, are parties to that certain
Stock Purchase Agreement of even date herewith (the "Stock Purchase Agreement")
and have agreed, pursuant to the Stock Purchase Agreement, to enter into this
Agreement; and
WHEREAS, in order to induce the parties to enter into the
Stock Purchase Agreement, that certain ISP Channel Affiliate Agreement by and
between the Company's wholly-owned subsidiary, ISP Channel, Inc., and Mediacom,
of even date herewith (the "Affiliate Agreement") and that certain Registration
Rights Agreement by and between the Company and Mediacom of even date herewith
(the "Registration Rights Agreement"), the parties hereby agree that this
Agreement shall govern certain rights and restrictions related to the ownership
and disposition of such shares of Common Stock and certain other matters as set
forth herein.
NOW, THEREFORE, in consideration of the foregoing and of the
representations, warranties, covenants and agreements contained herein, and for
other good and valuable consideration the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:
1. Definitions.
1.1 "Alternate Cash Consideration" has the same meaning as set forth in the
Stock Purchase Agreement.
1.2 "Cause" means, with respect to termination of the Affiliate Agreement,
termination pursuant to Section 8.2 of the Affiliate Agreement.
1.3 "Change of Control" means any of the following:
(a) the acquisition, directly or indirectly by any person or related group of
persons (other than the Company or a person that directly or indirectly
controls, is controlled by, or is under common control with, the Company), of
beneficial ownership of securities possessing more than fifty percent (50%) of
the total combined voting power of the Company's outstanding securities, or
<PAGE>
(b) a change in the composition of the Board of the Company over a period of
twelve (12) consecutive months or less such that a majority of the Board members
ceases to be comprised of individuals who either (A) have been Board members
continuously since the beginning of such period or (B) have been elected or
nominated for election as Board members during such period by at least a
majority of the Board members described in clause (A) who were still in office
at the time the Board approved such election or nomination, or
(c) a merger or consolidation in which securities possessing more than fifty
percent (50%) of the total combined voting power of the Company's outstanding
securities are transferred to a person or persons different from the persons
holding those securities immediately prior to such transaction, or
(d) the sale, transfer or other disposition, in one transaction or a series of
related transactions, of all or substantially all of the Company's assets
determined on a consolidated basis.
1.4 "Committed Home Passed" has the same meaning as set forth in the Affiliate
Agreement.
1.5 "Common Stock" means the common stock, par value $0.01, of the Company.
1.6 "Common Shares" has the same meaning as set forth in the Stock Purchase
Agreement.
1.7 "Default Amount" means an amount equal the product of (a) "*Filed separately
with the Commission*" and (b) the difference between "*Filed separately with the
Commission*" and that number of shares available for payment as Default Shares.
1.8 "Default Shares" means "*Filed separately with the Commission*" shares of
Common Stock.
1.9 "Default Notice" means written notice of default under Section 2 delivered
by the Company to Mediacom.
1.10 "Delivery Dates" mean the six dates that an installment of Committed Homes
Passed are due to be delivered for ISP Channel services, with the first such
Delivery Date occurring on the sixth month anniversary of the Effective Date and
then occurring on each of the five consecutive six-month anniversary dates
thereafter.
1.11 "Effective Date" has the same meaning as set forth in the Affiliate
Agreement.
1.12 "Fully Diluted Common Stock" has the same meaning as set forth in the Stock
Purchase Agreement.
1.13 "Initial Shares" has the same meaning as set forth in the Stock Purchase
Agreement.
<PAGE>
1.14 "Mediacom Designee" means the person or persons designated by Mediacom for
nomination to the Company's Board of Directors.
1.15 "Preferred Share" means the share of Preferred Stock issued pursuant to
Section 5.4.
1.16 "Preferred Stock" means the preferred stock, par value $0.10 per share, of
the Company.
1.17 "Restricted Shares" means the Initial Shares that are subject to payment to
the Company as liquidated damages under Section 2.
1.18 "Second Shares" has the same meaning as set forth in the Stock Purchase
Agreement.
1.19 "Stockholder Approval" has the same meaning as set forth in the Stock
Purchase Agreement.
1.20 "Third Shares" has the same meaning as set forth in the Stock Purchase
Agreement.
1.21 "Unrestricted Shares" means any and all shares of Common Stock now held or
hereafter held by Mediacom that are not subject to payment to the Company as
liquidated damages under Section 2, it being understood that 10% of the Initial
Shares (350,000 shares of Common Stock) shall be Unrestricted Shares immediately
upon the execution of this Agreement.
2. Delivery of Committed Homes Passed. Pursuant to the Affiliate Agreement,
Mediacom is obligated to make available for ISP Channel services 150,000
Committed Homes Passed on or before each Delivery Date. In the event Mediacom
fails to make available for ISP Channel services the required number of
Committed Homes Passed by the one year anniversary of any applicable Delivery
Date, then Mediacom shall pay to the Company Default Shares as liquidated
damages for each such failure, and such payment shall be the Company's sole
remedy for such failure. Mediacom shall make such payment by delivering to the
Company one or more certificates representing such Default Shares no later than
five business days after the date the Company gives Mediacom a Default Notice.
In the event the Second Shares have not been delivered to Mediacom at the time
of the Default Notice, then the Company shall deduct the Default Shares from the
Second Shares to be delivered to Mediacom. In the event the Third Shares have
not been delivered to Mediacom at the time of the Default Notice, then the
Company shall deduct the Default Shares from the Third Shares to be delivered to
Mediacom; provided, that in the event the Company does not obtain Stockholder
Approval and there are not "*Filed separately with the Commission*" shares of
Common Stock available for payment of the Default Shares, then the Company shall
deduct (a) the number of shares of Common Stock available for payment of the
Default Shares from the Third Shares, and (b) the Default Amount from the
Alternate Cash Consideration, to be delivered to Mediacom.
<PAGE>
2.1 Early Delivery. If Mediacom makes available for ISP Channel services the
required number of Committed Homes Passed prior to an applicable Delivery Date,
then the related number of Default Shares shall then immediately become
Unrestricted Shares.
2.2 Restrictions on Transfer. Mediacom will not sell, assign, transfer, pledge
hypothecate, or otherwise encumber or dispose of in any way, all or any part of
any interest in the Initial Shares; provided that, this provision shall not
apply to (i) 10% of the Initial Shares (350,000 shares of Common Stock) and (ii)
all Unrestricted Shares. Any sale, assignment, transfer, pledge, hypothecation
or other encumbrance or disposition of Shares not made in conformance with this
Agreement shall be null and void, shall not be recorded on the books of the
Company and shall not be recognized by the Company.
2.3 Federal and State Securities Laws. Notwithstanding anything to the contrary
in this Section 2, Mediacom shall transfer the Initial Shares only in conformity
with applicable federal and state laws.
2.4 Legends. Mediacom acknowledges that the Common Shares may bear one or more
of the following legends:
(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH
ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT."
(b) "THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFER, REPURCHASE RIGHTS
AND OTHER CONDITIONS CONTAINED IN THAT CERTAIN STOCKHOLDER AGREEMENT BETWEEN
MEDIACOM LLC AND SOFTNET SYSTEMS, INC., DATED NOVEMBER 4, 1999."
(c) Any legend required by the laws of the jurisdiction where Mediacom is
domiciled or organized.
(d) Any legend required by the Blue Sky laws of any other state to the extent
such laws are applicable to the shares represented by the certificate so
legended.
(e) Whenever, in the opinion of counsel to Mediacom (which opinion shall be in
writing and shall be in form and substance reasonably satisfactory to the
Company) the restrictions described in any legend set forth above cease to be
applicable to any Common Shares, the holder thereof shall be entitled to receive
from the Company, without expense to such holder, a new certificate not bearing
a legend stating such restriction.
2.5 Acceleration of Demand Registration Rights. In the event of the occurrence
of (i) a Change of Control that is not approved by the Mediacom Designee, or
(ii) Mediacom terminates the Affiliate Agreement for Cause, then all
Unrestricted Shares shall have immediate demand registration rights as set forth
in the Registration Rights Agreement, without regard to the 500,000 share
threshold therein.
<PAGE>
3. Other Liquidated Damages. In the event Mediacom (i) terminates the Affiliate
Agreement without Cause or (ii) sells all or substantially all of its cable
systems, without providing for assignment of the Affiliate Agreement to the
purchaser of such systems or making available for ISP Channel services at least
900,000 Committed Homes Passed on the same terms as the Affiliate Agreement,
then Mediacom shall pay to the Company liquidated damages equal to (x) if such
event occurs prior to the third anniversary of the Effective Date, (A) 90% of
the Initial Shares if a Change of Control under Section 2.5(i) shall not have
previously occurred or (B) all Restricted Shares if such Change of Control shall
have occurred, or (y) if such event occurs on or after the third anniversary of
the Effective Date, all Restricted Shares.
(a) Mediacom shall make such payment by delivering to the Company one or more
certificates representing such liquidated damages under this Section 3 within
three business days of such event.
(b) Such liquidated damages shall be in addition to the liquidated damages, if
any, that ISP Channel, Inc. may have under Section 8 of the Affiliate Agreement.
4. Covenants of the Company Regarding the Common Shares. The Company shall
comply with the following covenants as long as Mediacom owns any Common Shares:
4.1 Reporting Status. The Company shall timely file all reports required to be
filed with the SEC pursuant to the Exchange Act, and the Company shall not
terminate its status as an issuer required to file reports under the Exchange
Act even if the Exchange Act or the rules and regulations thereunder would
permit such termination.
4.2 Listing. The Company shall use its best efforts to continue the listing and
trading of its Common Stock on the Nasdaq National Market or the New York Stock
Exchange.
4.3 Corporate Existence. The Company shall maintain its corporate existence, and
in the event of a merger, consolidation or sale of all or substantially all of
the Company's assets, the Company shall ensure that the surviving or successor
entity in such transaction assumes (a) the Company's obligations hereunder and
in the agreements and instruments entered into in connection herewith, and (b)
is a publicly traded corporation whose common stock is listed for trading on the
Nasdaq National Market or the New York Stock Exchange.
4.4 Legal Compliance. The Company shall conduct its business and the business of
its subsidiaries in compliance with all laws, ordinances or regulations of
governmental entities applicable to such businesses.
4.5 Other Affiliations. The Company represents, covenants and agrees that the
set of terms, rates and conditions set forth in this Agreement and the Ancillary
Agreements are no less favorable than those extended to any third party cable
operator in connection with the provision of ISP Channel services. If the
Company or any of its affiliates offer ISP Channel services to any third party
cable operator on a set of terms, rates and conditions more favorable than those
specified in this Agreement and the Ancillary Agreements, taken as a whole, then
the Company shall offer to Mediacom such set of terms, rates and conditions.
<PAGE>
5. Board of Directors. Subject to Sections 5.1 and 5.2, the Company shall use
its best efforts to elect or cause to be elected to its Board of Directors such
number of Mediacom Designees in the same proportion to the total number of
directors that the number of shares of Common Stock owned by Mediacom bears to
the total number of outstanding shares of Common Stock on the last day of the
Company's fiscal year.
5.1 Five Percent Ownership. So long as the Common Shares held by Mediacom
represent more than 5% but less than 10% of the outstanding shares of Common
Stock, or the Affiliate Agreement covers at least 500,000 Committed Homes
Passed, then the Company shall use its best efforts to (a) elect or cause to be
elected at least one Mediacom Designee to the Board of Directors, and (b) cause
its Bylaws to provide that 75% of the Board of Directors must approve the
election of the President, Chief Executive Officer, Chief Operating Officer and
Chief Financial Officer of the Company, which election shall be held at least
annually
5.2 Ten Percent Ownership. So long as the Common Shares held by Mediacom
represent 10% or more of the outstanding shares of Common Stock, then (i) the
Company shall use its best efforts to appoint one Mediacom Designee who is
serving as a director to the Executive Committee of the Board of Directors; and
(ii) the Company shall use its best efforts to cause its Bylaws to provide that
the Company shall have no more than ten directors and the Executive Committee of
the Board of Directors shall have no more than five members.
5.3 Amendment of Bylaws. The Company shall use its best efforts promptly after
the Effective Date to cause an amendment to its Bylaws to provide that members
constituting no less than 75% of the Board of Directors must approve the
election of the President, Chief Executive Officer, Chief Operating Officer and
Chief Financial Officer of the Company, which election shall be held at least
annually.
5.4 Preferred Share. In the event the stockholders of the Company do not elect
the Mediacom Designees as provided for in Section 5.1 or 5.2, as applicable,
then the Company shall duly authorize, designate and issue to Mediacom the
Preferred Share having the voting rights set forth in the Certificate of
Designation attached hereto as Exhibit A.
5.5 Termination of Rights. In the event Mediacom is required to pay liquidated
damages under Section 3, then Mediacom's rights under this Section 5 shall
terminate, Mediacom shall cause all Mediacom Designees to resign immediately
from the Board of Directors, the Preferred Stock referenced in Section 5.4, if
issued, shall be canceled by the Company, and Mediacom shall return all shares
representing such Preferred Stock to the Company.
<PAGE>
6. Restriction on Ownership. Mediacom shall not acquire, either pursuant to the
Stock Purchase Agreement or otherwise, more than 35% of the Fully Diluted Common
Stock without the approval of the Board of Directors.
7. Miscellaneous.
7.1 Notices. All notices, demands or other communications to be given or
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable overnight courier service (charges
prepaid), mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid, or transmitted by facsimile (with request
for immediate confirmation of receipt in a manner customary for communications
of such type and with physical delivery of the communication being made by one
of the other means specified in this Section as promptly as practicable
thereafter). Such notices, demands and other communications shall be addressed
as follows:
If to the Company:
SOFTNET SYSTEMS, INC.
650 Townsend Street, Suite 225
San Francisco, California 94103
Attn: Steven Harris, Secretary
Telephone: (415) 365-2500
Telecopy: (415) 365-2556
If to Mediacom
MEDIACOM LLC
100 Crystal Run Road
Middletown, NY 10941
Attention: Rocco B. Commisso
Chairman and Chief Executive Officer
Telephone: (914) 695-2600
Telecopy: (914) 695-2639
with a copy to:
Cooperman Levitt Winikoff Lester & Newman, P.C.
800 Third Avenue
New York, NY 10022
Attention: Robert L. Winikoff, Esq.
Telephone: (212) 688-7000
Telecopy: (212) 755-2839
<PAGE>
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party
(provided that notice of a change of address shall be effective only upon
receipt thereof).
7.2 Remedies. The parties shall have all rights and remedies set forth in this
Agreement and all rights which such holders have under any law. Any person
having any rights under any provision of this agreement shall be entitled to
enforce such rights specifically (without posting a bond or other security), to
recover damages by reason of any breach of any provision of this Agreement and
to exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that either party may, in its sole
discretion, apply to any court of law or equity of competent jurisdiction for
specific performance or injunctive relief (without posting a bond or other
security) in order to enforce or prevent any violation of the provisions of this
Agreement. The losing party shall pay the reasonable fees and expenses incurred
by the prevailing party for the enforcement of the rights granted under this
Agreement.
7.3 Entire Agreement; Waivers and Amendments. This Agreement (including the
exhibits and schedules hereto and the documents and instruments referred to
herein) contains the entire agreement and understanding of the parties with
respect to the subject matter hereof and supersedes all prior written or oral
agreements and understandings with respect thereto. This Agreement may only be
amended or modified, and the terms hereof may only be waived, by a writing
signed by both parties hereto or, in the case of a waiver, by the party entitled
to the benefit of the terms being waived.
7.4 Assignment; Binding Effect. This Agreement may not be assigned or delegated,
in whole or in part, by either party hereto without the prior written consent of
the other party hereto, except by operation of law in connection with a merger,
consolidation or other reorganization or sale of all or substantially all of the
assets of Mediacom; provided, that Mediacom may assign, in its sole discretion,
all of its rights, interests and obligations under this Agreement to any buyer
who assumes all of Mediacom's obligations under this Agreement and the Ancillary
Agreements; and provided further, that Mediacom may assign its rights pursuant
to Section 5 only if such assignment includes a transfer to such assignee of all
of the Common Shares then owned by Mediacom and the Preferred Share, if issued.
Mediacom may assign any or all of its rights and obligations hereunder to its
direct or indirect wholly-owned subsidiaries if such subsidiaries agree in
writing in form satisfactory to the Company to be bound by this Agreement. In
the event Mediacom assigns such rights to any such subsidiary, such subsidiary
shall be deemed to be "Mediacom" for all purposes of this Agreement. The
assignment by Mediacom of any rights, interest or obligations under the
Registration Rights Agreement to a transferee of the Unrestricted Shares
acquired hereunder shall not affect or diminish the rights or obligations of
Mediacom under this Agreement. Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
7.5 Severability. In the event that any provision of this Agreement shall be
declared invalid or unenforceable by a court of competent jurisdiction in any
jurisdiction, such provision shall, as to such jurisdiction, be ineffective to
the extent declared invalid or unenforceable without affecting the validity or
enforceability of the other provisions of this Agreement, and the remainder of
this Agreement shall remain binding on the parties hereto.
<PAGE>
7.6 Governing Law; Jurisdiction and Venue. This Agreement shall be governed by,
construed and enforced in accordance with the internal laws of the State of
Delaware, excluding the conflict of laws provisions thereof that would otherwise
require the application of the law of any other jurisdiction. The parties hereto
acknowledge and agree that the state and federal courts sitting in the State of
Delaware shall have jurisdiction in any matter arising out of this Agreement,
and the parties hereby consent to such jurisdiction and agree that the venue of
any such matter shall also be proper in such state and federal courts sitting in
the State of Delaware.
7.7 Captions. The Section and subsection headings in this Agreement are inserted
for convenience of reference only, and shall not affect the interpretation of
this Agreement.
7.8 Counterparts. This Agreement may be executed in counterparts, each of which
shall be deemed an original and both of which together shall be considered one
and the same agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed on its behalf as of the date first written above.
SOFTNET SYSTEMS, INC.
--------------------------------------
By: Lawrence B. Brilliant
Its: Chief Executive Officer
MEDIACOM LLC
--------------------------------------
By: ----------------------------------
Title: -------------------------------
EXHIBIT 21 Subsidiaries
SoftNet Systems, Inc.
List of Subsidiaries of the Registrant
September 30, 1999
The following companies are wholly-owned operating subsidiaries of the Company:
Subsidiary State of Incorporation
-------------------------------- ----------------------
ISP Channel Inc. Delaware
Intelligent Communications, Inc. Delaware
SoftNet Ventures, Inc. Delaware
Intellicom ISP (1) Delaware
(1) A wholly-owned subsidiary of Intelligent Communications, Inc.
Report of Independent Accountants on Schedule and Consent
The Board of Directors
Softnet Systems, Inc.
The audit referred to in our report dated November 30, 1999 included the related
financial statement schedule as of September 30, 1999 and for the year then
ended, included in the Company's annual report on Form 10-K. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audit. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
We consent to incorporation by reference in the registration statements (Nos.
333-45335, 333-57337, 333-65593, 333-71887, and 333-86415) on Forms S-3 and
(Nos. 333-78177, 333-80197, and 333-84625) on Forms S-8 of Softnet Systems, Inc.
of our report dated November 30, 1999, relating to the consolidated balance
sheet of Softnet Systems, Inc and subsidiaries as of September 30, 1999 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended and related schedule, which report appears in the
September 30, 1999, annual report on Form 10-K of Softnet Systems, Inc.
/KPMG LLP/
Mountain View, California
December 22, 1999
Consent of Independent Accountants
We hereby consent to incorporation by reference in the Registration Statements
(Nos. 333-45335, 333-57337, 333-65593, 333-71887, and 333-86415) on Forms S-3
and (Nos. 333-78177, 333-80197, and 333-84625) on Forms S-8 of Softnet Systems,
Inc. of our report dated December 1, 1998 except for Note 9 regarding Senior
Subordinated Convertible Notes for which the date is January 13, 1999 and Note
5, regarding the discontinuance of the document management segment for which the
date is April 13, 1999, relating to the financial statements and financial
statement schedule as of September 30, 1997 and 1998 and for the two years in
the period ended September 30, 1998 which appear in this Form 10-K.
/PricewaterhouseCoopers LLP/
San Jose, California
December 21, 1999
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<LEGEND>
This schedule contains summary information extracted from Form 10-K for the year
ended September 30, 1999 and is qualified in its entirety by reference to such
Form 10-K.
</LEGEND>
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<NAME> SOFTNET SYSTEMS INC.
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