PROSPECTUS 424(b)(3)
SOFTNET SYSTEMS, INC.
2,120,000 Shares of Common Stock
The shareholders of SoftNet Systems, Inc. described
on page 23 are offering and selling up to 2,120,000 shares of
SoftNet common stock under this prospectus. SoftNet will not
receive any of the proceeds from the sale of the SoftNet
common stock by the selling shareholders.
The SoftNet common stock is listed on the American
Stock Exchange under the symbol "SOF." On March 9, 1999, the
last reported sales price of the SoftNet common stock on the
American Stock Exchange was $21.375 per share.
______________________________
You should carefully consider the risk factors
beginning on page 1 of this Prospectus before purchasing any
of the SoftNet common stock being offered by the selling
shareholders.
______________________________
Neither the Securities and Exchange Commission nor
any state securities commission has approved or disapproved of
these securities or passed upon the accuracy or adequacy of
this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is March 22, 1999.
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TABLE OF CONTENTS
Page
RISK FACTORS..................................................................1
USE OF PROCEEDS..............................................................25
THE SELLING SHAREHOLDERS.....................................................25
Description of certain provisions of the preferred stock...............26
Relationships with SoftNet.............................................28
PLAN OF DISTRIBUTION.........................................................29
LEGAL........................................................................30
EXPERTS......................................................................30
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RISK FACTORS
You should carefully consider the risks described below before making
an investment decision. The risks and uncertainties described below are not the
only ones facing us. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also impair our business operations.
If any of the following risks actually occur, our business, financial
condition or results of operations could be materially adversely affected. In
such case, the trading price of our common stock could decline, and you may lose
all or part of your investment.
We cannot assure you that we will be profitable because we have operated our
Internet services business only for a short period of time
We are in the process of selling our non-Internet related subsidiaries
to focus on substantial expansion of our Internet subsidiary, ISP Channel, Inc.
We cannot assure you that our ability to develop or maintain strategies and
business operations for the ISP Channel services will achieve positive cash flow
and profitability. We acquired ISP Channel, Inc. in June 1996. As such, we have
very limited operating history and experience in the Internet services business.
The successful expansion of the ISP Channel services will require strategies and
business operations that differ from those we have historically employed. To be
successful, we must develop and market products and services that are widely
accepted by consumers and businesses at prices that provide cash flow sufficient
to meet our debt service, capital expenditures and working capital requirements.
Our business may fail if the industry as a whole fails or our 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, we cannot predict whether our
pricing model will prove to be viable, whether demand for our services will
materialize at the prices we expect to charge, or whether current or future
pricing levels will be sustainable. If we do not achieve or sustain such pricing
levels or if our services do not achieve or sustain broad market acceptance,
then our business, financial condition, and prospects will be materially
adversely affected.
Our continued negative cash flow and net losses may depress stock prices
Our continued negative cash flow and net losses may result in depressed
market prices for our common stock. We cannot assure you that we will ever
achieve favorable operating results or profitability. We have sustained
substantial losses over the last five fiscal years. For the fiscal year ended
September 30, 1998, we had a net loss of $17.3 million and for the three months
ended December 31, 1998, we had a net loss of $6.5 million. As of December 31,
1998, we had an accumulated shareholders' deficit of approximately $9.8 million.
We expect to incur substantial additional losses and experience substantial
negative cash flows as we expand the ISP Channel service. The costs of expansion
will include expenses incurred in connection with:
o inducing cable affiliates to enter into exclusive multi-year
contracts with us;
o installing the equipment necessary to enable our cable
affiliates to offer our services;
o research and development of new product and service
offerings;
o the continued development of our direct and indirect selling
and marketing efforts; and
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o possible charges related to acquisitions, divestitures,
business alliances or changing technologies, including the
acquisition of Intelligent Communications, Inc.
If we do not achieve cash flows sufficient to support our operations, we may be
unable to implement our business plan
The development of our business will require substantial capital
infusions as a result of:
o our need to enhance and expand product and service offerings
to maintain our 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 service.
In addition, we anticipate that the majority of cable affiliates with
one-way cable systems will eventually upgrade their cable infrastructure to
two-way cable systems, at which time we will have to upgrade our equipment on
any affected cable system to handle two-way transmissions. We cannot accurately
predict whether or when we will ultimately achieve cash flow levels sufficient
to support our operations, development of new products and services, and
expansion of the ISP Channel service. Unless we reach such cash flow levels, we
will require additional financing to provide funding for operations. In the
event we complete a long-term debt financing, we will be highly leveraged and
such debt securities will have rights or privileges senior to those of our
current shareholders. In the event that equity securities are issued to raise
additional capital, the percentage ownership of our shareholders will be
reduced, shareholders may experience additional dilution and such securities may
have rights, preferences and privileges senior to those of our common stock. In
the event that we cannot generate sufficient cash flow from operations, or are
unable to borrow or otherwise obtain additional funds on favorable terms to
finance operations when needed, our business, financial condition, and prospects
would be materially adversely affected.
The unpredictability of our quarter-to-quarter results may adversely affect the
trading price of our common stock
We cannot predict with any significant degree of certainty our
quarter-to-quarter operating results. As a result, we believe that
period-to-period comparisons of our revenues and results of operations are not
necessarily meaningful and you should not rely upon them as indicators of future
performance. It is likely that in one or more future quarters our results may
fall below the expectations of analysts and investors. In such event, the
trading price of our common stock would likely decrease. Many of the factors
that cause our quarter-to-quarter operating results to be unpredictable are
largely beyond our control.
These factors include, among others:
o the number of subscribers who retain our Internet services;
o our ability and that of our cable affiliates to coordinate
timely and effective marketing strategies, in particular,
our strategy for marketing the ISP Channel service to
subscribers in such affiliates' local cable areas;
o the rate at which our cable affiliates can complete the
installations required to initiate service for new
subscribers;
o the amount and timing of capital expenditures and other
costs relating to the expansion of the ISP Channel service;
o competition in the Internet or cable industries; and
o changes in law and regulation.
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We will record an expense related to our issuance of stock options pursuant to
our 1998 Stock Incentive Plan that may have a negative impact on our financial
condition
Through March 2, 1999, we have committed to grant stock options to
purchase 1,309,800 shares of common stock under our 1998 Stock Option Plan at
prices ranging from $7.38 to $17.13. Our shareholders have not approved the 1998
Stock Option Plan and we are unable to grant options to which we have committed
until the 1998 Stock Option Plan is approved. As a result, upon approval of the
1998 Stock Option Plan, we will record a compensation expense equal to the
excess, if any, of the fair market price on the date of shareholder approval
over the exercise price of the committed option grants. The expense will be
recognized over the vesting period of the option. The expense may have a
negative impact on our financial condition.
Existing contractual obligations allow for additional issuances of common stock
upon a market price decline, which could further adversely affect the market
price for our common stock
The total number of shares of our common stock underlying all of our
convertible securities, assuming the maximum amounts that we could be obligated
to issue without our consent, is 6,175,993, which would have been 38.8% of our
outstanding common stock as of March 2, 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
our common stock. We are obligated to issue up to 2,758,406 shares of our common
stock on the exercise of warrants and options and the conversion of certain of
our convertible debt. Our preferred stock and 9% senior subordinated convertible
notes due 2001 could convert into an additional 3,417,587 shares of common stock
without our consent. However, we do not know the exact number of shares of our
common stock that we will issue upon conversion of these securities because they
potentially have floating conversion prices based on the average market prices
of the common stock for a number of trading days immediately prior to
conversion.
The floating conversion price feature of the Series C Preferred Stock,
and 9% senior subordinated convertible notes due 2001 begin May 29, 1999 and
July 1, 1999, respectively. Generally, decreases in the market price of the
common stock below their initial conversion prices would result in more shares
of common stock being issued upon their conversion. The 3,417,587 shares
underlying our preferred stock and 9% senior subordinated convertible notes due
2001 assumes that the stockholders approve the issuance of in excess of 19.99%
of our outstanding common stock in connection with conversion of our preferred
stock. We are seeking such approval at our 1999 Annual Meeting.
The following table sets forth the number of shares of common stock
issuable upon conversion of the outstanding preferred stock and our 9% senior
subordinated convertible notes due 2001 and percentage ownership (as determined
in accordance with the rules of the SEC) that each represents assuming:
o the market price of the common stock is 25%, 50%, 75% and
100% of the market price of the common stock on March 2,
1999, which was $21.06 per share;
o the floating conversion price feature of the preferred stock
and 9% senior subordinated convertible notes due 2001 was in
effect;
o the maximum conversion prices of the preferred stock was not
adjusted as provided in our certificate of incorporation;
o the conversion price was equal to the market price at the
time of conversion in the event the market price was less
than the maximum conversion price; and
o the 1,717,587 share limit with respect to the 9% senior
subordinated convertible notes was not in effect. See "Risks
associated with 9% senior subordinated convertible note
financing.
On March 2, 1999, there were 9,741,931 shares of common stock, 7,625.39
shares of Series C Preferred Stock and $12,000,000 principal amount under the 9%
senior subordinated convertible notes due 2001 outstanding. In the event that
more than 2,000,000 shares of common stock would be required to fully convert
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the Series C Preferred Stock, we must either honor conversion requests over the
2,000,000 share limit or redeem the remaining Series C Preferred Stock for cash,
at its stated value of $1,000 per share plus accrued but unpaid dividends.
Series C 9% Senior Subordinated
Preferred Stock Convertible Notes Total
--------------- ----------------- -----
Percentage of Shares Shares Shares
Market Price Underlying % Underlying % Underlying %
------------ ---------- - ---------- - ---------- -
25% ($5.27) 1,448,318 12.9 2,227,040 18.9 3,725,358 27.7
50% ($10.53) 847,266 8.0 1,139,601 10.5 1,986,867 16.9
75% ($15.80) 847,266 8.0 759,494 7.2 1,606,760 14.2
100% ($21.06) 847,266 8.0 705,882 6.8 1,553,148 13.8
Dilution may result in a decrease in the market price of our common
stock
To the extent any of these shares of common stock are issued, the
market price of our common stock may decrease because of the additional shares
on the market. If the actual price of the common stock decreases, the holders of
our preferred stock and 9% senior subordinated convertible notes could convert
into greater amounts of common stock, the sales of which could further depress
the stock price. In addition, any significant downward pressure on the market
price of the common stock that may be caused by the holders of the preferred
stock or 9% senior subordinated convertible notes converting and selling
material amounts of common stock could encourage short sales by such holders or
others. Such short sales could place further downward pressure on the price of
our common stock. There are several factors that influence the market price of
our common stock. See " - Our stock price is volatile."
The ownership limitations in our certificate of incorporation may not
protect against dilution
Our certificate of incorporation does not allow us to issue shares of
our common stock to holders of our preferred stock or 9% senior subordinated
convertible notes if such issuance would result in such holders beneficially
owning more than 4.99% of our outstanding common stock. The 4.99% ownership
limitation does not prevent the holders from converting into common stock and
then selling such common stock to stay below the limitation, except that such
holders cannot convert into more than 19.99% of our common stock unless we have
received shareholder approval. We are seeking shareholder approval for
conversions of our preferred stock in excess of 19.99% at our 1999 Annual
Meeting.
We may be required to make cash payments to holders of preferred stock
We may be required to make cash payments to holders of the Series C
Preferred Stock if we do not obtain shareholder approval prior to issuing in the
aggregate more than 19.99% of our common stock upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and related
warrants. Such cash payments would adversely affect our financial condition and
ability to implement our business plan for ISP Channel. In addition, we will be
required to raise funds elsewhere, which could be difficult in the event
shareholder approval is not obtained. If we do not receive shareholder approval
as we are required, there can be no assurance that we would be able to obtain
adequate sources of additional capital. We would be required to make such cash
payments in the event the holders of the Series C Preferred Stock attempted to
convert over the 19.99% limit. The cash payments would be equal to the number of
shares of common stock that we could not issue because of the 19.99% limit
multiplied by the market price at the time of the attempted conversion.
In addition, in the event the 2,000,000 share limit is reached with
respect to the Series C Preferred Stock, we must either honor conversion
requests or redeem in cash the remaining Series C Preferred Stock. The market
price of our common stock would have to fall to $3.75 or below for five days
within a thirty day trading period to reach the 2,000,000 share limit.
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The following table sets forth the amount of such cash payment
assuming:
o the market price of the common stock is 25%, 50%, 75%, 100%,
125%, 150% and 175% of the market price of the common stock
on March 2, 1999, which was $21.06 per share;
o the floating conversion price feature of the Series C
Preferred Stock was in effect;
o the maximum conversion price of the Series C Preferred Stock
was not increased; and
o the conversion price was equal to the market price at the
time of conversion in the event the market price was less
than the maximum conversion price.
The actual cash payments may be significantly greater than those listed
if the market price of our common stock increases above $36.86. In addition, the
floating conversion price feature is based on the average market prices of the
common stock for a number of trading days immediately prior to conversion.
Therefore, cash payments may also be significantly greater than those listed if
the market price of our common stock at the time of attempted conversion was not
equal to the conversion price.
Cash Payment for Attempted
Percentage of Conversions of Series C
Market Price Preferred Stock
------------ ---------------
25% ($5.27) $7,491,577
50% ($10.53) 8,654,079
75% ($15.80) 12,981,119
100% ($21.06) 17,308,159
125% ($26.33) 21,635,199
150% ($31.59) 25,962,238
175% ($36.86) 30,289,278
Risks associated with 9% senior subordinated convertible note financing
The agreements with the purchasers of the 9% senior subordinated
convertible notes and warrants contain terms and covenants that could result in
substantial dilution to our stockholders. The financing could also make future
financings and loans and merger and acquisition activities more difficult and
could require us to expend substantial amounts of cash in order to satisfy our
obligations under the financing agreements.
Restrictions on Mergers and Consolidations
Certain provisions could discourage some potential purchasers by making
an acquisition of our Company or an asset sale more difficult and expensive,
including:
o participation by the holders of the 9% senior subordinated
convertible notes due 2001 with the holders of the common
stock in the proceeds of a merger or consolidation with a
public company as if the 9% senior subordinated convertible
notes due 2001 were fully converted into common stock on the
trading day immediately preceding the public announcement of
such merger or consolidation;
o similar participation by the holders of the related warrants
in the event our merger or consolidation with another
company would constitute a dilutive event under the terms of
the warrants; and
o prohibition against selling or transferring all or
substantially all of our assets without prior approval of
the holders of the 9% senior subordinated convertible notes
due 2001.
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Certain covenants made and default provisions agreed to, in connection
with the issuance of the 9% senior subordinated convertible notes may also have
the effect of limiting our ability to obtain additional financing and issue
other securities. We have also agreed, until July 1, 1999, to grant the holders
of the 9% senior subordinated convertible notes a right of first refusal with
respect to certain issuances of common stock or securities convertible,
exchangeable or exercisable for common stock. In addition, we are prohibited
from obtaining additional senior indebtedness for borrowed money in excess of an
aggregate of $12.0 million unless such indebtedness expressly provides that it
is not senior or superior to the 9% senior subordinated convertible notes.
Conversion of the 9% senior subordinated convertible notes would result
in dilution to the holders of our common stock
After six months from the date of issuance, the 9% senior subordinated
convertible notes are convertible into shares of our common stock at variable
rates based on future trading prices of our common stock and on events that may
occur in the future. The number of shares of common stock that may ultimately be
issued upon conversion is therefore presently indeterminable and could fluctuate
significantly based on the issuance by us of other securities. The 9% senior
subordinated convertible notes and related warrants also have anti-dilution
protection and may require the issuance of more shares than originally
anticipated. These factors may result in substantial future dilution to the
holders of our common stock.
Certain provisions of the 9% senior subordinated convertible notes may
have negative accounting consequences
In addition to the foregoing, the cross default provisions to our debt
instruments and other terms of the 9% senior subordinated convertible notes,
under certain circumstances, could lead to a significant accounting charge to
earnings and could materially adversely affect our business, results of
operations and condition. Such a charge and potential other future charges
relating to the provisions of the 9% senior subordinated convertible notes
financing agreements may negatively impact our earnings (loss) per share and the
market price of our common stock both currently and in future periods. The
convertibility features of such 9% senior subordinated convertible notes and
subsequent sales of the common stock underlying both it and the warrants could
materially adversely affect our valuation and the market trading price of our
shares of common stock.
We may be required to make cash payments to the holders of the 9%
senior subordinated convertible notes
In addition, the terms of the 9% senior subordinated convertible notes
prohibit their holders from converting such notes into more than 1,717,587
shares of our common stock. In the event that we cannot honor conversions of the
9% senior subordinated convertible notes because they would result in greater
than an aggregate of 1,717,587 shares of common stock being issued upon such
conversions, then we must convert such outstanding principal amount up to the
1,717,587 limit and prepay the remaining outstanding principal amount.
We may be required to prepay the 9% senior subordinated convertible
notes if:
o the holders of the 9% senior subordinated convertible notes
have already converted into 1,717,587 shares of common stock
and there remains a balance of such notes unconverted; or
o the holders of the 9% senior subordinated convertible notes
cannot otherwise convert or resell the common stock issued
upon conversion.
Such cash payments would adversely affect our financial condition and
ability to implement the business plan for ISP Channel, Inc. In addition, we
would be required to raise funds elsewhere, and we cannot assure you that we
would be able to obtain adequate sources of additional capital.
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We would not reach the 1,717,587 share limit unless the floating
conversion price feature were in effect and the market price of the common stock
fell below $6.99. If the market price of the common stock was $4.35, which is
25% of the market price of the common stock as of March 2, 1999 we would be
required to make cash payments of $5,887,046. This amount does not take into
account any interest that accrues on the outstanding principal amount of the 9%
senior subordinated convertible notes. This amount also assumes that the market
price at the time of conversion and the conversion price were equal. The market
price at the time of conversion and the conversion price potentially could not
be equal because the conversion price is calculated using market prices during
the thirty days prior to conversion.
In addition, if the holders of the 9% senior subordinated convertible
notes cannot convert or resell the common stock issued upon conversion other
than because the 1,717,587 share limit is reached, the terms of the 9% senior
subordinated convertible notes, in addition to other remedies, permit the
holders to require us to make cash payments. The maximum amount of such cash
payments, assuming the market price and the conversion price were equal, is
$13,440,000, without taking into account any interest that would accrue. If the
market price and the conversion price are not equal, then the maximum amount of
such cash payments could be significantly higher.
We may not be able to successfully implement our business plan if our
relationship with our cable affiliates is negatively impacted
The success of our business depends upon our relationship with our
cable affiliates. Therefore, our success and future business growth will be
substantially affected by economic and other factors affecting our cable
affiliates.
We do not have direct contact with our subscribers
Because subscribers to the ISP Channel service must subscribe through a
cable affiliate, the cable affiliate (and not SoftNet) will substantially
control the customer relationship with the subscriber. For example, under many
of our 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 our cable affiliates. Currently, most 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 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 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 we expect will
continue to be, subject to change, delay or cancellation. Cable operators'
failure to complete these upgrades in a timely and satisfactory manner, or at
all, would adversely affect the market for our products and services in any such
operators' franchise area. In addition, cable operators may roll-out Internet
access systems that are incompatible with our high-speed Internet access
services. Any of these actions could have a material adverse effect on our
business, financial condition, and prospects.
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The unavailability of two-way capability in certain markets may negatively
affect subscription levels
We provide Internet services to both one-way and two-way cable systems.
For one-way cable systems, subscribers receive Internet services over cable
systems and transmit data to the Internet using a telephone line return path. In
those circumstances, our services may not provide the high speed access, quality
of experience and availability of certain applications necessary to attract and
retain subscribers to the ISP Channel service. Subscribers using a conventional
telephone line return path will experience upstream data transmission speeds to
the Internet that are provided by their analog modems which is typically 56 kbps
or less. It is not clear what impact the lack of two-way capability will have on
subscription levels for the ISP Channel service.
If we do not obtain exclusive access to cable subscribers, we may not be able to
sustain any meaningful growth
The success of the ISP Channel service is dependent, in part, on our
ability to gain exclusive access to cable consumers. Our ability to gain
exclusive access to cable customers depends upon our ability to develop
exclusive relationships with cable operators that are dominant within their
geographic markets. We cannot assure you that affiliated cable operators will
not face competition in the future or that we will be able to establish and
maintain exclusive relationships with cable affiliates. Currently, a number of
our contracts with cable operators do not contain exclusivity provisions. Even
if we are able to establish and maintain exclusive relationships with cable
operators, we cannot assure the ability to do so on favorable terms or in
sufficient quantities to be profitable. In addition, we will be excluded from
providing Internet over cable in those areas served by cable operators with
exclusive arrangements with other Internet service providers. Our contracts with
cable affiliates typically range from three to seven years, and we cannot assure
you that such contracts will be renewed on satisfactory terms. If the exclusive
relationship between either us and our cable affiliates or between our cable
affiliates and their cable subscribers is impaired, if we do not become
affiliated with a sufficient number of cable operators, or if we are not able to
continue our relationship with a cable affiliate once the initial term of its
contract has expired, our business, financial condition and prospects could be
materially adversely affected.
Failure to increase revenues from new products and services, whether due to lack
of market acceptance, competition, technological change or otherwise, would have
a material adverse effect on our business, financial condition and prospects
We expect to continue extensive research and development activities and
to evaluate new product and service opportunities. These activities will require
our continued investment in research and development and sales and marketing,
which could adversely affect our short-term results of operations. We believe
that future revenue growth and profitability will depend in part on our ability
to develop 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 our business financial condition and prospects.
If we fail to manage our expanding business effectively, our business, financial
condition and prospects could be adversely affected
To exploit fully the market for our products and services, we must
rapidly execute our sales strategy while managing anticipated growth through the
use of effective planning and operating procedures. To manage our anticipated
growth, we must, among other things:
o continue to develop and improve our operational, financial
and management information systems;
o hire and train additional qualified personnel;
o continue to expand and upgrade core technologies; and
o effectively manage multiple relationships with various
customers, suppliers and other third parties.
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Consequently, such expansion could place a significant strain on our
services and support operations, sales and administrative personnel and other
resources. We may, in the future, also experience difficulties meeting demand
for our products and services. Additionally, if we are unable to provide
training and support for our products, it will take longer to install our
products and customer satisfaction may be lower. We cannot assure that our
systems, procedures or controls will be adequate to support our operations or
that management will be able to exploit fully the market for our products and
services. Our failure to manage growth effectively could have a material adverse
effect on our business, financial condition and prospects.
If cable affiliates are unable to renew their franchises or we are unable to
affiliate with replacement operators, our 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
prohibits franchising authorities from granting exclusive cable television
franchises and from unreasonably refusing to award additional competitive
franchises. This Act also permits municipal authorities to operate cable
television systems in their communities without franchises. We cannot assure
that cable television companies having contracts with us will retain or renew
their franchises. Non-renewal or termination of any such franchises would result
in the termination of our contract with the applicable cable operator. If an
affiliated cable operator were to lose its franchise, we would seek to affiliate
with the successor to the franchisee. We cannot, however, assure an affiliation
with such successor. In addition, affiliation with a successor could result in
additional costs to us. If we cannot affiliate with replacement cable operators,
our business, financial condition and prospects could be materially adversely
affected.
We may lose cable affiliates through their acquisition which could have a
material adverse effect on our business, financial condition and prospects
Under many of our contracts, if a cable affiliate is acquired and the
acquiring company chooses not to enter into a contract with us, we may lose our
ability to offer Internet services in the area served by such former cable
affiliate entirely or on an exclusive basis. Such a loss could have a material
adverse effect on our business, financial condition and prospects.
We depend on third-party technology to develop and introduce technology we use
and the absence of or any significant delay in the replacement of third-party
technology would have a material adverse effect on our business, financial
condition and prospects
The markets for the products and services we use are characterized by
the following:
o intense competition;
o rapid technological advances;
o evolving industry standards;
o changes in subscriber requirements;
o frequent new product introductions and enhancements; and
o alternative service offerings.
Because of these factors, we have chosen to rely upon third parties to
develop and introduce technologies that enhance our current product and service
offerings. If our relationship with such third parties is impaired or
terminated, then we would have to find other developers on a timely basis or
develop our own technology. We cannot predict whether we will be able to obtain
the third-party technology necessary for continued development and introduction
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of new and enhanced products and services. In addition, we cannot predict
whether we will obtain third-party technology on commercially reasonable terms
or replace third-party technology in the event such technology becomes
unavailable, obsolete or incompatible with future versions of our products or
services. The absence of or any significant delay in the replacement of third-
party technology would have a material adverse effect on our business, financial
condition and prospects.
We depend 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 our product
shipments
We currently depend on a limited number of suppliers for certain key
products and services. In particular, we depend on Excite, Inc. for national
content aggregation, 3Com Corporation and Com21, Inc. for headend and cable
modem equipment, Cisco Systems, Inc. for specific network routing and switching
equipment, and, among others, MCIWorldCom, Inc. for national Internet backbone
services. Excite recently announced that it is being acquired by one of our
primary competitors, @Home. If, due to this acquisition, Excite were to
terminate its contract with us prior to the contract's expiration in November
1999, or not to extend the contract at that time, we would need to find a new
provider of national content aggregation. Additionally, certain of our cable
modem and headend equipment suppliers are in litigation over their patents. We
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. We cannot predict when delays in the delivery of key
components and other products may occur due to shortages resulting from the
limited number of suppliers, the financial or other difficulties of such
suppliers or the possible limited availability in the suppliers' underlying raw
materials. In addition, we may not have adequate remedies against such third
parties as a result of breaches of their agreements with us. The inability to
obtain sufficient key components or to develop alternative sources for such
components could result in delays or reductions in our product shipments. If
that were to happen, it could have a material adverse effect on our customer
relationships, business, financial condition, and prospects.
We depend on third-party carriers to maintain their cable systems which
carry our data and any interruption of our operations due to the failure to
maintain their cable systems would have a material adverse effect on our
business, financial condition and prospects
Our success will depend upon the capacity, reliability and security of
the network used to carry data between our subscribers and the Internet. A
significant portion of such network is owned by third parties, and accordingly
we have no control over its quality and maintenance. We rely on cable operators
to maintain their cable systems. In addition, we rely on other third parties to
provide a connection from the cable system to the Internet. Currently, we have
transit agreements with MCIWorldCom, Sprint, and others to support the exchange
of traffic between our network operations center, cable system and the Internet.
The failure of any other link in the delivery chain resulting in an interruption
of our operations would have a material adverse effect on our business,
financial condition and prospects.
Any increase in competition could reduce our gross margins, require increased
spending by us on research and development and sales and marketing, and
otherwise materially adversely affect our business, financial condition and
prospects
The markets for our products and services are intensely competitive,
and we expect competition to increase in the future. Many of our competitors and
potential competitors have substantially greater financial, technical and
marketing resources, larger subscriber bases, longer operating histories,
greater name recognition and more established relationships with advertisers and
content and application providers than we do. Such competitors may be able to
undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and devote substantially more resources to developing Internet services
or online content than we can. Our ability to compete may be further impeded if,
as evidenced by the recent merger between AT&T and TCI, competitors utilizing
different or the same technologies seek to merge to enhance their competitive
strengths. We cannot predict whether we will be able to compete successfully
against current or future competitors or that competitive pressures faced by us
will not materially adversely affect our business, financial condition,
prospects or ability to repay our debts. Any increase in competition could
reduce our gross margins, require increased spending by us on research and
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development and sales and marketing, and otherwise materially adversely affect
our business, financial condition and prospects.
We face competition from many sources, which include:
o Other cable-based access providers;
o Telephone-based access providers; and
o Alternative technologies.
Cable-based access providers
In the cable-based segment of the Internet access industry, we compete
with other cable-based data services that are seeking to contract with cable
system operators. These competitors include:
o Systems integrators such as Convergence.com, Online System
Services, HSAnet and Frontier Communications' Global Center
business; and
o Internet service providers such as Earthlink Network, Inc.,
MindSpring Enterprises, Inc., and IDT Corporation.
Several cable system operators have begun to provide high-speed
Internet access services over their existing networks. The largest of these
cable system operators are CableVision, Comcast, Cox, MediaOne, TCI and Time
Warner. CableVision, Comcast, Cox and TCI market through @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. In particular,
@Home has announced its intention to compete directly in the small- to
medium-sized cable system market.
Telephone-based access providers
Some of our 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, Netcom, Concentric Network, and PSINet. The result is a
highly competitive and fragmented market.
Some of our potential competitors are offering diversified packages of
telecommunications services to residential customers. If these companies also
offer Internet access service, then we would be at a competitive disadvantage.
Many of these companies are offering (or may soon offer) technologies that will
attempt to compete with some or all of our Internet data service offerings. The
bases of competition in these markets include:
o transmission speed;
o security of transmission;
o reliability of service;
o ease of access;
o ratio of price to performance;
o ease of use;
o content quality;
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o quality of presentation;
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 ("ISDN") and digital subscriber line ("DSL") technologies, and
wireless technologies such as local multipoint distribution service,
multichannel multipoint distribution service and various types of satellite
services. Our prospects may be impaired by Federal Communications Commission
("FCC") rules and regulations, which are designed, at least in part, to increase
competition in video and related services. The FCC has also created a General
Wireless Communications Service 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 our business. Significant market acceptance of alternative solutions for
high-speed data transmission could decrease the demand for our services.
We cannot predict whether and to what extent technological developments
will have a material adverse effect on our competitive position. The rapid
development of new competing technologies and standards increases the risk that
current or new competitors could develop products and services that would reduce
the competitiveness of our products and services. If that were to happen, it
could have a material adverse effect on our business, financial condition and
prospects.
A perceived or actual failure by us to achieve or maintain high speed data
transmission could significantly reduce consumer demand for our services and
have a material adverse effect on our business, financial condition and
prospects
Because the ISP Channel service has been operational for a relatively
short period of time, our ability to connect and manage a substantial number of
online subscribers at high transmission speeds is unknown. In addition, we face
risks related to our ability to scale up to expected subscriber levels while
maintaining superior performance. While peak downstream data transmission speeds
across the cable network approaches 30 megabits per second in each 6 MHz
channel, the actual downstream data transmission speeds for each cable
subscriber will be significantly slower and will depend on a variety of factors,
including:
o actual speed provisioned for the subscriber's cable modem;
o quality of the server used to deliver content;
o overall Internet traffic congestion;
o the number of active subscribers on a given 6 MHz channel at
the same time;
o the capability of cable modems used; and
o the service quality of the cable affiliates' cable networks.
As the number of subscribers increases, it may be necessary for our
cable affiliates to add additional 6 MHz channels in order to maintain adequate
data transmission speeds from the Internet. These additions would render
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such channels unavailable to such cable affiliates for video or other
programming. We cannot assure you that our cable affiliates will provide
additional capacity for this purpose. On two-way cable systems, the transmission
data channel to the Internet 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. We cannot assure you that we will be able achieve
or maintain data transmission speeds high enough to attract and retain our
planned numbers of subscribers, especially as the number of subscribers to our
services grows. Consequently, a perceived or actual failure by us to achieve or
maintain high speed data transmission could significantly reduce consumer demand
for our services and have a material adverse effect on our business, financial
condition and prospects.
Any damage or failure that causes interruptions in our operations could have a
material adverse effect on our business, financial condition and prospects
Our operations are dependent upon our ability to support a highly
complex network and avoid damages from fires, earthquakes, floods, power losses,
telecommunications failures, network software flaws, transmission cable cuts and
similar events. The occurrence of any one of these events could cause
interruptions in the services we provide. In addition, the failure of an
incumbent local exchange carrier or other service provider to provide the
communications capacity we require, as a result of a natural disaster,
operational disruption or any other reason, could cause interruptions in the
services we provide. Any damage or failure that causes interruptions in our
operations could have a material adverse effect on our business, financial
condition and prospects.
We may be vulnerable to unauthorized access, computer viruses and other
disruptive problems which may result in our liability to our subscribers and may
deter others from becoming subscribers
While we have taken substantial security measures, our networks or
those of our 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 our computer systems and those of our subscribers. Such
events may result in our liability to our subscribers and may deter others from
becoming subscribers, which could have a material adverse effect on our
business, financial condition and prospects. Although we intend to continue
using industry-standard security measures, such measures have been circumvented
in the past, and we cannot assure you that these measures will not be
circumvented in the future. Moreover, we have no control over the security
measures that our cable affiliates adopt. Eliminating computer viruses and
alleviating other security problems may cause our subscribers delays due to
interruptions or cessation of service. Such delays could have a material adverse
effect on our business, financial condition and prospects.
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If the market for high-quality content fails to develop, or develops more slowly
than expected, our business, financial condition and prospects will be
materially adversely affected
A key part of our 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. We believe
that, in addition to providing high-speed, high-performance Internet access, to
be successful we must also develop and aggregate high-quality multimedia
content. Our success in providing and aggregating such content will depend in
part on:
o our 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 our ability to aggregate content offerings in a manner
subscribers find attractive.
We cannot assure you that we will be successful in these endeavors.
In addition, the market for high-quality multimedia Internet content
has only recently begun to develop and is rapidly evolving, and there is
significant competition among 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 our
content offerings do not achieve or sustain market acceptance, our business,
financial condition and prospects will be materially adversely affected.
Our failure to attract advertising revenues in quantities and at rates that are
satisfactory to us could have a material adverse effect on our business,
financial condition and prospects
The success of the ISP Channel service depends in part on our ability
to draw advertisers to the ISP Channel. We expect to derive significant revenues
from advertisements placed on co-branded and ISP Channel web pages and "click
through" revenues from products and services purchased through links from the
ISP Channel to vendors. We believe that we can leverage the ISP Channel to
provide demographic information to advertisers to help them better target
prospective customers. Nonetheless, we have not generated any significant
advertising revenue yet and we cannot assure you that advertisers will find such
information useful or will choose to advertise through the ISP Channel.
Therefore, we cannot assure you that we will be able to attract advertising
revenues in quantities and at rates that are satisfactory to us. The failure to
do so could have a material adverse effect on our business, financial condition
and prospects.
If we are unsuccessful in establishing and maintaining the ISP Channel brand, or
if we incur excessive expenses in promoting and maintaining our brand, our
business, financial condition and prospects would be materially adversely
affected
We believe that establishing and maintaining the ISP Channel brand are
critical to attract and expand our subscriber base. Promotion of the ISP Channel
brand will depend on several factors, including:
o our success in providing high-speed, high-quality consumer
and business Internet products, services and content;
o the marketing efforts of our cable affiliates; and
o the reliability of our cable affiliates' networks and
services.
We cannot assure you that any of these factors will be achieved. We
have little control over our cable affiliates' marketing efforts or the
reliability of their networks and services.
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If consumers and businesses do not perceive our existing products and
services as high quality or we introduce new products or services or enter into
new business ventures that are not favorably received by consumers and
businesses, then we will be unsuccessful in building brand recognition and brand
loyalty in the marketplace. In addition, to the extent that the ISP Channel
service is unavailable, we risk frustrating potential subscribers who are unable
to access our products and services.
Furthermore, we may need to devote substantial resources to create and
maintain a distinct brand loyalty among customers, to attract and retain
subscribers, and to promote and maintain the ISP Channel brand in a very
competitive market. If we are unsuccessful in establishing or maintaining the
ISP Channel brand or if we incur excessive expenses in promoting and maintaining
our brand, our business, financial condition and prospects would be materially
adversely affected.
If we encounter significant problems with our billing and collections process,
our business, financial condition and prospects could be materially adversely
affected
We have recently begun the process of designing and implementing our
billing and collections system for the ISP Channel service. We intend to bill
for our services 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, we cannot assure you
that we will be successful in developing and launching the system in a timely
manner or that we will be able to scale the system quickly and efficiently if
the number of subscribers requiring such a billing format increases. Currently,
our cable affiliates are responsible for billing and collection for our Internet
access services. As a result, we have little or no control over the accuracy and
timeliness of the invoices or over collection efforts.
Given our relatively limited history with billing and collection for
Internet services, we cannot predict the extent to which we may experience bad
debts or our ability to minimize such bad debts. If we encounter significant
problems with our billing and collections process, our business, financial
condition and prospects could be materially adversely affected.
We may face potential liability for defamatory or indecent content, which may
cause us to modify the way we provide services
Any imposition of liability on our company for information carried on
the Internet could have a material adverse effect on our business, financial
condition 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 our systems, we may have to implement measures to reduce our exposure to
such liability. Such measures may require the expenditure of substantial
resources or the discontinuation of certain products or services.
We may face potential liability for information retrieved and replicated that
may not be covered by our insurance
Our liability insurance may not cover potential claims relating to
providing Internet services or may not be adequate to indemnify us 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 our
business, financial condition and prospects. Because subscribers download and
redistribute materials that are cached or replicated by us in connection with
our Internet services, claims could be made against us or our cable affiliates
under both U.S. and foreign law for defamation, negligence, copyright or
trademark infringement, or other theories based on the nature and content of
such materials. You should know that these types of claims have been
successfully brought against 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 us to determine who the potential
rights holders may be with respect to all materials available through our
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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 us based upon our services or technologies.
Our success depends upon the development of new products and services in the
face of rapidly evolving technology
Our products and services may not be commercially successful
Our future development efforts may not result in commercially
successful products and services or our products and services may be rendered
obsolete by changing technology, new industry standards or new product
announcements by competitors.
For example, we expect digital set-top boxes capable of supporting
high-speed Internet access services to be commercially available in the next 18
months. 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 our Internet service, the demand for set-top boxes may never
reach the level we and industry experts have estimated. Even if set-top boxes do
reach this level of popularity, we cannot assure you that we will be able to
capitalize on such demand. If this scenario occurs or if other technologies or
standards applicable to our products or services become obsolete or fail to gain
widespread commercial acceptance, then our business, financial condition and
prospects will be materially adversely affected.
Our ability to adapt to changes in technology and industry standards,
and to develop and introduce new and enhanced products and service offerings,
will determine whether we can maintain or improve our competitive position and
our prospects for growth. However, the following factors may hinder our efforts
to introduce and sell new products and services:
o rapid technological changes in the Internet and
telecommunications industries;
o the lengthy product approval and purchase process of our
customers; and
o our reliance on third-party technology for the development
of new products and services.
Our suppliers' products may become obsolete, requiring us to purchase
additional inventory
The technology underlying our capital equipment, such as headends and
cable modems, continues to evolve and, accordingly, our equipment could become
out-of-date or obsolete prior to the time we originally intended to replace it.
If this occurs, we may need to purchase substantial amounts of new capital
equipment, which could have a material adverse effect on our business, financial
condition and prospects.
Our competitors' products may make our products less commercially
viable
The introduction by our competitors of products or services embodying,
or purporting to embody, new technology could also render our existing products
and services, as well as products or services under development, obsolete and
unmarketable. Internet, telecommunications and cable technologies are evolving
rapidly. Many large corporations, including large telecommunications providers,
regional Bell operating companies and telecommunications equipment providers, as
well as large cable system operators, regularly announce new and planned
technologies and service offerings that could impact the market for our
services. The announcements can delay purchasing decisions by our customers and
confuse the marketplace regarding available alternatives. Such announcements
could, in the future, adversely impact our business, financial condition and
prospects.
In addition, we cannot assure you that we 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 our cable- based
consumer and business Internet services. Our services may not achieve widespread
acceptance before competitors offer products and services with speed and
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performance similar to our current offerings. In addition, the widespread
adoption of new Internet or telecommuting technologies or standards, cable-based
or otherwise, could require substantial and costly modifications to our
equipment, products and services and could fundamentally alter the character,
viability and frequency of Internet-based advertising, either of which could
have a material adverse effect on our business, financial condition and
prospects.
Our purchase of Intelligent Communications, Inc. subjects us to risks in a new
market in which we have no experience
On February 9, 1999, we completed our purchase of Intelligent
Communications, Inc., a provider of two-way satellite Internet access options
using very small aperture terminal ("VSAT") technology. As with mergers
generally, this merger presents important challenges and risks. Achieving the
anticipated benefits of the merger will depend, in part, upon whether the
integration of the two companies' businesses is achieved in an efficient,
cost-effective and timely manner, but we cannot assure that this will occur. The
successful combination of the two businesses will require, among other things,
the timely integration of the companies' product and service offerings and the
coordination of the companies' research and development efforts. Because we only
recently completed the acquisition of Intelligent Communications, we cannot
assure you that integration will be accomplished smoothly, on time or
successfully. Although the management teams of both SoftNet and Intelligent
Communications believe that the merger will benefit both companies, we cannot
assure you that the merger will be successful.
The purchase of Intelligent Communications involves other risks
including potential negative effects on our reported results of operations from
acquisition-related charges and amortization of acquired technology and other
intangible assets. As a result of the Intelligent Communications acquisition, we
anticipate recording a significant amount of intangible assets in the second
quarter of fiscal 1999 which will adversely affect our earnings and
profitability for the foreseeable future. If the amount of such recorded
intangible assets is increased or we have future losses and are unable to
demonstrate our 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, our business
and financial condition could be materially and adversely affected. In addition,
the Intelligent Communications acquisition was structured as a purchase by us of
all of the outstanding stock of Intelligent Communications. As a result, we
could be adversely affected by direct and contingent liabilities of Intelligent
Communications. It is possible that we are not aware of all of the liabilities
of Intelligent Communications and that Intelligent Communications has greater
liabilities than we expected. In addition, we have very little experience in the
markets and technology in which Intelligent Communications is focused. As such,
we are faced with risks that are new to us, including the following:
Dependence on VSAT market
One of the reasons we purchased Intelligent Communications was to be
able to provide two-way satellite Internet access options to our 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 our 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
Intelligent Communications, or a temporary or permanent malfunction of any of
these satellites, would likely result in interruption of Internet services we
provide over the satellites which could adversely affect our 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 we cannot assure you that the FCC would grant such
approval.
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Equipment failure and interruption of service
Our operations will require that our 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 we use may from time to time experience interruptions or
equipment failures, which would negatively affect consumer confidence as well as
our business operations and reputation.
Dependence on leases for satellites
Intelligent Communications currently leases satellite space from
General Electric. If for any reason, the leases were to be terminated, we cannot
assure you that we could renegotiate new leases with General Electric or another
satellite provider on favorable terms, if at all. We have not identified
alternative providers and believe that any new leases would probably be more
costly to us. In any case, we cannot assure you that an alternative provider of
satellite services would be available, or, if available, would be available on
terms favorable to us.
Competition
The market for Internet access services is extremely competitive.
Intelligent Communications 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 Intelligent Communications and its competitors. We cannot assure
that Intelligent Communications 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. As a lessee of satellite space, we 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 in the United States.
While we believe that our lessors will be able to obtain all U.S.
licenses and authorizations necessary to operate effectively, we cannot assure
you that we our lessors will be successful in doing so. Our failure to
indirectly obtain some or all necessary licenses or approvals could have a
material adverse effect on our business, financial condition and prospects.
If we are unable to successfully integrate future acquisitions into our
operations, then our results and financial condition may be adversely affected
In addition to the recent acquisition of Intelligent Communications,
Inc., we may acquire other businesses that we believe will complement our
existing business. We cannot predict if or when any prospective acquisitions
will occur or the likelihood that they will be completed on favorable terms.
Acquiring a business involves many risks, including:
o potential disruption of our ongoing business and diversion
of resources and management time;
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;
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o risks of entering markets in which we have little or no
direct prior experience; and
o potential impairment of relationships with employees or
customers as a result of changes in management.
We cannot assure that we will make any acquisitions or that we will be
able to obtain additional financing for such acquisitions, if necessary. If any
acquisitions are made, we cannot assure that we will be able to successfully
integrate the acquired business into our operations or that the acquired
business will perform as expected.
Loss of key personnel may disrupt our operations
The loss of key personnel may disrupt our operations. Our success
depends, in large part, on our ability to attract and retain qualified
technical, marketing, sales and management personnel. With the expansion of the
ISP Channel service, we are currently seeking new employees. However,
competition for such personnel is intense in our business, and thus, we may be
unsuccessful in our hiring efforts. To launch the ISP Channel service concept on
a large-scale basis, we have recently assembled a new management team, most of
whom have been with us for less than six months. The loss of any member of the
new team, or failure to attract or retain other key employees, could have a
material adverse effect on our business, financial condition and prospects.
Direct and indirect government regulation can significantly impact our business
Currently, neither the FCC nor any other federal or state
communications regulatory agency directly regulates Internet access services
provided by our 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 our services. Such changes include
those that directly or indirectly affect costs, limit usage of subscriber-
related information or increase the likelihood or scope of competition from
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. We cannot
predict the outcome or scope of the local approval process. Nor can we predict
the impact, if any, that future federal, state or local legal or regulatory
changes, including open access conditions, might have on our business.
19
<PAGE>
Regulations affecting the cable industry may discourage cable
operators from upgrading their systems
Regulation of cable television may affect the speed at which our cable
affiliates upgrade their cable infrastructures to two-way cable. Currently, our
cable affiliates have generally elected to classify the distribution of our
services as "additional cable services" under their respective franchise
agreements, and accordingly pay franchise fees. However, the election by cable
operators to classify Internet access as an additional cable service may be
challenged before the FCC, the courts or Congress, and any change in the
classification of service could have a potentially adverse impact on our
company.
Our cable affiliates may be subject to multiple franchise fees for
distributing our 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 our services. There are thousands of franchise authorities in
the United States alone, and thus it will be difficult or impossible for us or
our cable affiliates to operate under a unified set of franchise requirements.
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, we could lose our rights
as the exclusive ISP for some of our cable affiliates and we or our 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, we obtain some of the components for our products and
services from foreign suppliers which may be subject to tariffs, duties and
other import restrictions. Any changes in law or regulation including those
discussed above, whether in the United States or elsewhere, could materially
adversely affect our business, financial condition and prospects.
Failure to sell MTC in a timely manner could adversely affect our ability to
implement our business plan
We have announced the planned sale of MTC. We intend to apply the
proceeds of such a sale toward the repayment of debt and the expansion of the
ISP Channel service. However, we cannot assure you that these efforts will be
successful. In the absence of such a sale, management's attention could be
substantially diverted to operate or otherwise dispose of MTC. If a sale of MTC
is delayed, its value could be diminished. Moreover, MTC could incur losses and
operate on a negative cash flow basis in the future. Thus, any delay in finding
a buyer or failure to sell this division could have a material adverse effect on
our business, financial condition and prospects.
We do not intend to pay dividends
We have not historically paid any cash dividends on our common stock
and do not expect to declare any such dividends in the foreseeable future.
Payment of any future dividends will depend upon our earnings and capital
requirements, our debt obligations and other factors the board of directors
deems relevant. We currently intend to retain our earnings, if any, to finance
the development and expansion of the ISP Channel service. Our certificate of
incorporation (1) prohibits the payment of cash dividends on our common stock,
without the approval of the holders of the preferred stock and (2) upon
liquidation of our company, requires us to pay the holders of the convertible
preferred stock before we make any payments to the holders of our common stock.
You should also know that some of our financing agreements restrict our ability
to pay dividends on our common stock.
Our stock price is volatile
The volatility of our 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 our common stock has been volatile in the past, and several factors
could cause the price to fluctuate substantially in the future. These factors
include:
20
<PAGE>
o announcements of developments related to our business;
o fluctuations in our results of operations;
o sales of substantial amounts of our securities into the
marketplace;
o general conditions in our industries or the worldwide
economy;
o an outbreak of war or hostilities;
o a shortfall in revenues or earnings compared to securities
analysts' expectations;
o changes in analysts' recommendations or projections;
o announcements of new products or services by us or our
competitors; and
o changes in our relationships with our suppliers or
customers.
The market price of our common stock may fluctuate significantly in the
future, and these fluctuations may be unrelated to our performance. General
market price declines or market volatility in the future could adversely affect
the price of our common stock, and thus, the current market price may not be
indicative of future market prices.
In addition, in connection with this offering, we are applying to have
our common stock quoted on the Nasdaq National Market. We cannot assure you that
once approved for quotation, an active trading market for our common stock will
develop or be sustained following the closing of the offering.
Prospective anti-takeover provisions could negatively impact our shareholders
We are a New York corporation. We intend to solicit shareholder
approval to reincorporate in Delaware. Both the New York Business Corporation
Law and the Delaware General Corporation Law contain certain provisions that may
discourage, delay or make a change in control of our company more difficult or
prevent the removal of incumbent directors. In addition, our proposed
certificate of incorporation and bylaws for the Delaware corporation would have
certain provisions that have the same effect. These provisions may have a
negative impact on the price of our common stock and may discourage third-party
bidders from making a bid for our company or may reduce any premiums paid to
shareholders for their common stock.
The Year 2000 issue could harm our 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 our business. We have formulated
a Y2K Plan to address our Y2K issues and have created a Y2K Task Force headed by
the Director of Information Systems and Data Services to implement the plan. Our
Y2K Plan has six phases:
1. Organizational Awareness: educate our 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 critical
vendors, suppliers and services providers and their Y2K
compliance status.
3. Assessment: assessment of internal business systems and critical
vendors, suppliers and service providers and their Y2K compliance
status.
21
<PAGE>
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.
Our Y2K Plan will apply to two areas:
1. Internal business systems
2. Compliance by external customers and providers
Internal business systems
Our internal business systems and workstation business applications
will be a primary area of focus. We are in the unique position of 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. We have few, if
any, "legacy" applications that will need to be evaluated for Y2K compliance.
We completed the Inventory and Assessment Phases of substantially all
critical internal business systems in January 1999, with the Planning Phase to
be completed by March 31, 1999. The Execution and Validation Phases will be
completed by August 31, 1999. We expect to be Y2K compliant on all critical
systems, which rely on the calendar year, before December 31, 1999.
Some non-critical systems may not be addressed until after January
2000. However, we believe such systems will not cause significant disruptions in
our operations.
Compliance by external customers and providers
We are in the process of the inventory and assessment phases of our
critical suppliers, service providers and contractors to determine the extent to
which the our interface systems are susceptible to those third parties' failure
to remedy their own Y2K issues. We expect that assessment will be complete by
mid-1999. To the extent that responses to Y2K readiness are unsatisfactory, we
intend to change suppliers, service providers or contractors to those that have
demonstrated Y2K readiness. We cannot be assured that we will be successful in
finding such alternative suppliers, service providers and contractors. We do not
currently have any formal information concerning the status of our customers but
have received indications that most of our customers are working on Y2K
compliance.
Risks associated with Y2K
We believe the major risk associated with the Y2K issue is the ability
of our key business partners and vendors to resolve their own Y2K issues. We
will spend a great deal of time over the next several months, working closely
with suppliers and vendors, to assure their compliance.
Should a situation occur where a key partner or vendor is unable to
resolve their Y2K issue, we expect to be in a position to change to Y2K
compliant partners and vendors.
Costs to address Y2K issues
Because we are in the unique position of 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
22
<PAGE>
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.
We currently believe that implementing our Y2K Plan will not have a
material effect on our financial position.
Contingency Plan
We have not formulated a contingency plan at this time but expect to
have specific contingency plans in place prior to September 30, 1999.
Summary
We anticipate that the Y2K issue will not have a material adverse
effect on the financial position or results of our operations. There can be no
assurance, however, that the systems of other companies or government entities,
on which we rely for supplies, cash payments, and future business, will be
timely converted, or that a failure to convert by another company or government
entities, would not have a material adverse effect on our financial position or
results of operations. If third-party suppliers, service providers and
contractors, due to Y2K issues, fail to provide us with components, materials,
or services which are necessary to deliver our service and product offerings,
with sufficient electrical power and transportation infrastructure to deliver
our service and product offerings, then any such failure could have a material
adverse effect our ability to conduct business, as well as our financial
position and results of operations.
This prospectus contains forward-looking statements that involve risks and
uncertainties
This prospectus contains "forward-looking" statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described above and elsewhere in this
prospectus.
23
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). You
may read and copy any document we file at the public reference facilities of the
SEC located at 450 Fifth Street N.W., Washington D.C. 20549. You may obtain
information on the operation of the SEC's public reference facilities by calling
the SEC at 1-800-SEC-0330. You can also access copies of such material
electronically on the SEC's home page on the World Wide Web at
http://www.sec.gov.
This prospectus is part of a registration statement (Registration No.
333-65593) we filed with the SEC. The SEC permits us to "incorporate by
reference" the information we file with them, which means that we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is considered to be part of this
prospectus, and information that we file with the SEC after the date of this
prospectus will automatically update and supersede this information. We
incorporate by reference the following documents filed by us with the SEC (File
No. 1-5270). We also incorporate by reference any future filings made with the
SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, until the selling shareholders sell all of the shares of
common stock being registered or until such shares can be sold without being
registered.
1. Our Annual Report on Form 10-K for the fiscal year ended September 30,
1998, as amended, filed with the SEC on February 2, 1999, and as
further amended, filed with the SEC on March 4, 1999.
2. Our Definitive Proxy Statement on Schedule 14A, filed with the SEC on
March 17, 1999.
3. Our Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 1998.
4. Our Current Report on Form 8-K filed with the SEC on January 26, 1999.
5. Our Current Report on Form 8-K filed with the SEC on February 24,
1999.
6. Our Current Report on Form 8-K/A filed with the SEC on February 26,
1999.
7. Our Current Report on Form 8-K filed with the SEC on February 26,
1999.
8. Our Current Report on Form 8-K filed with the SEC on March 5, 1999.
9. Our Current Report on Form 8-K/A filed with the SEC on March 12, 1999.
If you request a copy of any or all of the documents incorporated by
reference, then we will send to you the copies you requested at no charge.
However, we will not send exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents. You should direct
requests for such copies to Mr. Steven M. Harris, Secretary, SoftNet Systems,
Inc., 520 Logue Avenue, Mountain View, California 94043, (650) 962-7470.
You should rely only on the information contained in this prospectus
and incorporated by reference into this prospectus. We have not authorized
anyone to provide you with information different from that contained in this
prospectus. The selling shareholders are offering to sell, and seeking offers to
buy, shares of SoftNet common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the shares.
24
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares by the
selling shareholders.
THE SELLING SHAREHOLDERS
RGC International Investors, LDC obtained its shares of our common
stock upon conversion of our Series C Preferred Stock or upon exercise of
warrants to purchase our common stock that it held. Shoreline Pacific Equity,
Ltd. and Steven M. Lamar obtained their shares upon exercise of warrants to
purchase our common stock that they held. Shoreline Pacific Equity, Ltd. and Mr.
Lamar received their warrants from Shoreline Pacific Institutional Finance,
which received the warrants for services it rendered to SoftNet as placement
agent for the Series C Preferred Stock. Shoreline Pacific Institutional Finance
assigned the warrants to Shoreline Pacific Equity, Ltd. and Mr. Lamar as partial
compensation for providing support services to Shoreline Pacific Institutional
Finance. Mr. Lamar was an employee of Shoreline Pacific Equity, Ltd. at the
time.
Messrs. Wayne Bloch, Gary Kaminsky and Steve Katznelson control RGC
International Investors through their ownership and management of RGC General
Partner Corp. RGC General Partner Corp. is the general partner of Rose Glen
Capital Management, L.P., which is the investment manager of RGC International
Investors. Messrs. Bloch, Kaminsky and Katznelson each disclaim beneficial
ownership of our common stock owned by RGC International Investors.
Shoreline Pacific Equity Ltd. is an affiliate of Shoreline Pacific
Institutional Finance. Shoreline Pacific Equity Ltd. provides support services
to Shoreline Pacific Institutional Finance, engaging solely in unregulated
activity. Shoreline Pacific Institutional Finance is a division of Financial
West Group. None of Shoreline Pacific Equity, Ltd., Shoreline Pacific
Institutional Finance or the Financial West Group is related to Shoreline
Associates I, LLC, a holder of the Series B Preferred Stock.
As of March 2, 1999, RGC International Investors owned 7,625.39 shares
of our Series C Preferred Stock. RGC International Investors is the sole holder
of our Series C Preferred Stock and none of the other selling shareholders own
any of our preferred stock.
Each selling shareholder will determine the number of shares of common
stock that such selling shareholder will sell. We cannot estimate the number of
shares of common stock that will be held by the selling shareholders upon
termination of the offering because the selling shareholders may choose to sell
less than the number of common stock shares being offered.
The following table sets forth for each selling shareholder, and for
all selling shareholders in the aggregate, the number of shares of our common
stock underlying the preferred stock and warrants held by such selling
shareholder, the number of shares of our common stock that may be offered under
this prospectus, and the percentage of our outstanding common stock that each
represents as of March 2, 1999. Percentage ownership is based upon 9,741,931
shares of common stock outstanding on March 2, 1999.
The table may not present the beneficial ownership of the selling
shareholders in accordance with Rule 13d-3 under the Exchange Act because of the
floating-rate conversion feature of the preferred stock, the 2,000,000 share
limit for each series of preferred stock and the 4.99% limitation on beneficial
ownership in our certificate of incorporation and warrants. In that regard,
please see "Description of certain provisions of the preferred stock" at page 26
for a more detailed description of these factors.
The shares of common stock underlying the preferred stock presented on
the table is based on the conversion prices in effect as of the date of this
prospectus, which is $9.00 for the Series C Preferred Stock. The actual number
of shares of common stock that we will issue upon conversion of the Series C
Preferred Stock is indeterminable as of the date of this prospectus and is
subject to adjustment. The number of shares underlying the Series C Preferred
Stock would increase if the conversion price decreased. See "Description of
certain provisions of the preferred stock--Conversion prices; Risk
Factors--Existing contractual obligations allow for additional issuances of
common stock upon a market price decline, which could further adversely affect
25
<PAGE>
the market price for our common stock." The number of shares being offered
represents the maximum number of shares into which the Series C Preferred Stock
can be converted.
<TABLE>
<CAPTION>
Series C Preferred Total Shares
Stock Warrants Common Stock
- ------------------- --------------------------------- ------------------------------- ----------------------------------
Shares of
Shares of Shares of Shares of Shares of Common Stock Shares of
Common Stock Common Stock Common Stock Common Stock Owned and Common Stock
Underlying Being Offered Underlying Being Offered Underlying(1) Being Offered
- ------------------- --------------- ----------------- ---------------- -------------- ----------------- ----------------
# % # % # % # % # % # %
- ------------------- --------- ----- --------- ------- --------- ------ --------- ---- ---------- ------ ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RGC International
Investors, LDC 847,266 8.0 2,000,000 17.0 423,750 4.2 93,750 1.0 1,515,484 13.8 2,093,750 17.7
Shoreline Pacific
Equity, Ltd. 0 0 0 0 23,625 * 23,625 * 23,625 * 23,625 *
Steven M. Lamar 0 0 0 0 10,025 * 2,625 * 10,025 * 2,625 *
Selling
Share-holders as
a group 847,266 8.0 2,000,000 17.0 457,400 4.5 120,000 1.2 1,554,134 14.1 2,120,000 17.9
________________________
<FN>
* Less than 1%
(1) For RGC International Investors, this number includes 245,468 shares of common stock.
</FN>
</TABLE>
Description of certain provisions of the preferred stock
Our certificate of incorporation defines the rights and privileges of
the preferred stock. These rights and privileges follow the preferred stock if
it is transferred, but do not affect common stock issued upon conversion.
Certain provisions of our certificate of incorporation are discussed below. The
Series A Preferred Stock and Series B Preferred Stock have been converted, and
there are no shares of either series outstanding.
Dividends
The preferred stock is entitled to dividends of 5% per year, payable
quarterly in cash or additional shares of preferred stock. The dividends are
cumulative. SoftNet has paid non-cash dividends of 100.78 shares of Series A
Preferred Stock, 251.56 shares of Series B Preferred Stock and 125.39 shares of
Series C Preferred Stock.
Limitations on Conversion
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 our common stock. Notwithstanding this limitation, the
holders of the preferred stock cannot convert into an aggregate of more than
19.99% of our common stock without the approval of our common stock shareholders
or the American Stock Exchange. In addition, even if such shareholder approval
is obtained, the Series C Preferred Stock each cannot convert into more than
2,000,000 shares of common stock without our consent. In the event that more
than 2,000,000 shares of common stock would be required to fully convert the
Series C Preferred Stock, we must either honor conversion requests over the
2,000,000 share limit or redeem the remaining Series C Preferred Stock of its
stated value of $1,000 per share plus accrued and unpaid dividends.
The rules of the American Stock Exchange require us to obtain
shareholder or AMEX approval to issue more than 20% of our outstanding common
stock. Shares of common stock issued upon conversion of the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock or exercise of
warrants issued in connection with such preferred stock, would count toward this
20%. As such, the AMEX rule operates as a further restriction on the ability of
the holders of such preferred stock and warrants to convert their preferred
stock or exercise their warrants.
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<PAGE>
We are seeking such approval from our shareholders at our 1999 Annual
Meeting. In the event we obtain such approval, we would be able to issue up to
2,000,000 shares of our common stock upon conversion of the Series C Preferred
Stock, which would result in dilution to the holders of our common stock. See
"Risk Factors--Existing contractual obligations allow for additional issuances
of common stock upon a market price decline, which could further adversely
affect the market price for our common stock." In addition, we could waive the
2,000,000 share limit for our Series C Preferred Stock, which would result in
additional dilution. We will file a Current Report or Form 8-K to disclose the
results of the shareholder vote.
The 2,000,000 share cap provides common shareholders protection against
dilution upon conversion of the Series C Preferred Stock. In the event we obtain
shareholder approval for issuance of more than 19.99% of our common stock upon
conversion of our preferred stock, the 4.99% restriction does not protect common
shareholders from dilution to the extent the selling shareholders convert and
sell shares to keep at or under these relevant limits, and the 2,000,000 share
cap would not provide protection against dilution in the event we decide to
continue to honor conversions of the Series C Preferred Stock after the
2,000,000 share cap is reached.
Conversion Prices
The stated value of each series of outstanding preferred stock is
$1,000 per share. The actual number of shares of common stock issuable upon
conversion of each series of preferred stock will be determined by the following
formula:
(The aggregate stated value of the shares of preferred stock thus being
converted at $1,000 per share)
divided by
(The applicable conversion price of the series of the preferred stock being
converted).
Prior to May 29, 1999, the conversion price of the Series C Preferred
Stock is equal to $9.00 per share. Thereafter, the conversion price of the
Series C Preferred Stock is equal to the lower of $9.00 per share and the lowest
five day average closing price of the common stock during the 30 day trading
period immediately prior to such conversion. The maximum conversion price of the
Series C Preferred Stock would increase to $9.75 in the event the average
closing bid prices of the common stock over the 20 consecutive trading days
immediately prior to May 29, 1999 is greater than $9.75. The conversion price is
subject to adjustment as set forth in the certificate of incorporation.
The following table sets forth the number of shares of common stock
issuable upon conversion of the outstanding preferred stock and percentage
ownership that each represents assuming:
o the market price of the common stock is 25%, 50%, 75% and 100% of
the market price of the common stock on March 2, 1999, which was
$21.06 per share;
o the floating conversion price feature of the preferred stock and
was in effect;
o the maximum conversion prices of the preferred stock was not
adjusted as provided in our certificate of incorporation.
As of March 2, 1999, there were 9,741,931 shares of common stock and
7,625.39 shares of Series C Preferred Stock outstanding. In the event that more
than 2,000,000 shares of common stock would be required to fully convert the
Series C Preferred Stock, we must either honor conversion requests over the
2,000,000 share limit or redeem the remaining Series C Preferred Stock for cash,
at its stated value of $1,000 per share plus accrued but unpaid dividends.
27
<PAGE>
Percent of Market Price Series C Preferred Stock
-------------------------- -------------------------------
Shares
Underlying %
-------------------------- ------------------- -----------
25% 1,448,318 14.9
50% 847,266 8.7
75% 847,266 8.7
100% 847,266 8.7
Redemption
We may redeem or automatically convert the Series C Preferred Stock at
the greater of 120% of stated value per share or the value of the common stock
into which the Series C Preferred Stock would convert. We are subject to
penalties under a variety of circumstances, including failure to list the
underlying common stock on the American Stock Exchange or NASDAQ and failure to
register the resale of the underlying common stock under the Securities Act. At
our option, we may redeem the Series C Preferred Stock on or after the earlier
of:
o an underwritten public offering in an amount greater than
$10,000,000; or
o February 29, 2000,
at a price equal to 110% of its stated value if such redemption is made
prior to September 1, 1999 and 120% of the stated value thereafter. The Series C
Preferred Stock is entitled to dividends, at the rate of 5% per annum, payable
in cash or, at SoftNet's election, in additional shares of Series C Preferred
Stock. Any Series C Preferred Stock outstanding on August 31, 2001 will
automatically convert into common stock.
Please see our Current Report on Form 8-K filed with the SEC on
September 14, 1998 for a more complete description of the preferred stock.
Relationships with SoftNet
On December 31, 1997, we issued to RGC International Investors 5,000
shares of Series A Preferred Stock and warrants to purchase 150,000 shares of
common stock pursuant to a Securities Purchase Agreement. The warrants are
exercisable at $7.95 per share and expire on December 31, 2001. As of the date
of this prospectus all of the shares of Series A Preferred Stock have been
converted to our common stock. The sale of the Series A Preferred Stock and the
warrants was arranged by Shoreline Pacific Institutional Finance, which received
a fee of $250,000 plus warrants to purchase 20,000 shares of common stock,
exercisable at $6.625 and expiring on December 31, 2000. The warrants issued to
Shoreline Pacific Institutional Finance were allocated to Mr. Lamar, Harlan P.
Kleiman and James L. Kropf, employees of Shoreline Pacific Institutional Finance
at the time.
On May 29, 1998, we issued to RGC International Investors and Shoreline
Associates I, LLC, an aggregate of 10,000 shares of Series B Preferred Stock and
warrants to purchase an aggregate 200,000 shares of common stock pursuant to a
Securities Purchase Agreement. The warrants are exercisable at $13.75 per share
and expire on May 28, 2002. The exercise price and the number of shares of
common stock issuable under the warrants will change if we issue additional
shares of common stock at prices less than the then market price. These
adjustments do not apply if we issue common stock under warrants and convertible
securities outstanding as of May 29, 1998 or pursuant to SoftNet's stock option
plans. As of the date of this prospectus, there were no shares of Series B
Preferred Stock outstanding. The sale of the Series B Preferred Stock and the
warrants was arranged by Shoreline Pacific Institutional Finance, which received
a fee of $500,000 plus warrants to purchase 50,000 shares of common stock,
exercisable at $11.00 and expiring on May 28, 2002. The warrants issued to
28
<PAGE>
Shoreline Pacific Institutional Finance were allocated to Mr. Lamar, Harlan P.
Kleiman and James L. Kropf, employees of Shoreline Pacific Institutional Finance
at that time. Shoreline Associates I, LLC is unrelated to Shoreline Pacific
Institutional Finance.
On August 31, 1998, we issued to RGC International Investors 7,500
shares of Series C Preferred Stock and warrants to purchase 93,750 shares of
common stock pursuant to a Securities Purchase Agreement. The warrants are
exercisable at $9.375 per share and expire on August 31, 2002. The exercise
price and the number of shares of common stock issuable under the warrants will
change if we issue additional shares of common stock at prices less than the
then market price. These adjustments do not apply if we issue common stock under
warrants and convertible securities outstanding as of August 31, 1998 or
pursuant to SoftNet's stock option plan. As of the date of this prospectus,
there were 7,625.39 shares of Series C Preferred Stock outstanding. The sale of
the Series C Preferred Stock and the warrants was arranged by Shoreline Pacific
Institutional Finance, which received a fee of $375,000 plus warrants to
purchase 26,250 shares of common stock, exercisable at $7.50 and expiring on
August 31, 2002. The warrants issued to Shoreline Pacific Institutional Finance
were allocated among Mr. Lamar and Shoreline Pacific Equity, Ltd.
Also on August 31, 1998, SoftNet agreed to issue to RGC International
Investors 7,500 shares of the Series D Preferred Stock and warrants to purchase
an additional 93,750 shares of common stock for an aggregate purchase price of
$7,500,000 on terms similar to the Series C and subject to shareholder approval
and other closing conditions. As of the date of this prospectus, there were no
shares of Series D Preferred issued. The sale of the Series D Preferred Stock
and the warrants was arranged by Shoreline Pacific Institutional Finance.
Shoreline Pacific Institutional Finance will receive a fee of $375,000, and
warrants to purchase 26,250 shares of common stock previously issued will vest,
upon issuance of the Series D Preferred Stock.
PLAN OF DISTRIBUTION
We will not receive any proceeds from the sale of the shares of our
common stock offered hereby. The selling shareholders have advised us:
1. that the shares offered by this prospectus may be sold by them or
their respective pledgees, donees, transferees or successors in
interest, in one or more of the following transactions (which may
involve one or more block transactions):
o on the American Stock Exchange;
o in sales occurring in the public market of such exchange;
o in privately negotiated transactions;
o through the writing of options on shares or short sales; or o in
a combination of such transactions.
2. that each sale may be made either at market prices prevailing at
the time of such sale or at negotiated prices or such other price
as the selling shareholders determine from time to time;
3. that some or all of the shares offered by this prospectus may be
sold directly to market makers acting as principals or through
brokers acting on behalf of the selling shareholders or as agents
for themselves or their customers or to dealers for resale by
such dealers; and
4. that in connection with such sales such brokers and dealers may
receive compensation in the form of discounts and commissions
from the selling shareholders and may receive commissions from
the purchasers of shares offered by this prospectus for whom they
act as broker or agent (which discounts and commissions are not
anticipated to exceed those customary in the types of
transactions involved).
The selling shareholders have sole discretion not to accept
any purchase offer or make any sale of shares offered by this prospectus if they
deem the purchase price to be unsatisfactory. Any broker or dealer participating
in any such sale may be deemed to be an "underwriter" within the meaning of the
Securities Act and will be required to deliver a copy of this prospectus to any
person who purchases any of the shares offered by this prospectus from or
through such broker or dealer. We have been advised that, as of the date hereof,
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none of the selling shareholders have made any arrangements with any broker for
the sale of their shares offered by this prospectus. We cannot assure you that
all or any of the Shares being offered hereby will be issued to, or sold by the
selling shareholders. Any profits realized by the selling shareholders and the
compensation of such broker-dealers may be deemed underwriting discounts and
commissions. In addition, any Shares covered by this prospectus that qualify for
sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to
this prospectus.
The selling shareholders may enter into hedging transactions with
broker-dealers in connection with distribution of the shares or otherwise. In
such transactions, broker-dealers may engage in short sales of the shares in the
course of hedging the positions they assume with selling shareholders. The
selling shareholders may also sell shares short and redeliver the shares to
close out such short positions. The selling shareholders may enter into option
or other transactions with broker-dealers which require the delivery to the
broker-dealer of the shares. The broker-dealer may then resell or otherwise
transfer such shores pursuant to this prospectus. The selling shareholders also
may loan or pledge the shares to a broker-dealer. The broker-dealer may sell the
shares so loaned, or upon a default the broker-dealer may sell the pledged
shares pursuant to this prospectus.
To comply with certain states' securities laws, if applicable, the
shares offered by this prospectus will be sold in such jurisdictions only
through registered or licensed brokers or dealers. In certain states, the shares
offered by this prospectus may not be sold unless:
o the shares offered by this prospectus have been registered or
qualified for sale in such state or an exemption from
registration exists; or
o qualification is available and is complied with.
Under the applicable rules and regulations of Regulation M, any person
engaged in the distribution, as defined in Regulation M, of the shares offered
by this prospectus may not simultaneously engage in market making activities,
subject to certain exceptions, with respect to the common stock of SoftNet for a
period of five business days prior to the commencement of such distribution and
until its completion. Also, each selling shareholder will be subject to the
applicable provisions of the Securities Act and Exchange Act and the rules and
regulations of both acts, including Regulation M. Regulation M's provisions may
limit the timing of purchases and sales of shares of the common stock by the
selling shareholders.
We will pay all expenses of the offering of the shares offered by this
prospectus, except that the selling shareholders will pay any applicable
underwriting commissions and expenses, brokerage fees and transfer taxes, as
well as the fees and disbursements of counsel to and experts for the selling
shareholders.
Pursuant to the terms of registration rights agreements with certain
selling shareholders, we have agreed to indemnify and hold harmless such selling
shareholders from certain liabilities under the Securities Act.
LEGAL
The validity of the securities of offered hereby will be passed upon
for SoftNet by Brobeck, Phleger & Harrison LLP, Palo Alto, California.
EXPERTS
The financial statements incorporated in this Prospectus by reference
to the Annual Report on Form 10-K for the year ended September 30, 1998 have
been so incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements incorporated in this Prospectus by reference
to the Current Report or Form 8-K/A, filed with the SEC on February 26, 1999,
have been so incorporated in reliance on the reports of PricewaterhouseCoopers,
LLP and Blanding, Boyer & Rockwell LLP, independent accountants, given on the
authority of such firms as experts in auditing and accounting.
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