As filed with the Securities and Exchange Commission on September 2, 1999
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
SoftNet Systems, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 11-1817252
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
650 Townsend Street, Suite 225
San Francisco, CA 94103
(415) 365-2500
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Dr. Lawrence B. Brilliant
Chairman and Chief Executive Officer
SoftNet Systems, Inc.
650 Townsend Street, Suite 225
San Francisco, CA 94103
(415) 365-2500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From
time to time after the effective date of this Registration Statement
-----------------------------------------
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. /__/
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering./__/
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering./__/
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- --------------------------------- -------------------- -------------------- ------------------------- -----------------
Proposed Proposed
Title of Maximum Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Offering Registration
Registered Registered(1) per Share Price Fee
- --------------------------------- -------------------- -------------------- ------------------------- -----------------
<S> <C> <C> <C> <C>
Common Stock 1,228,786 shares $20.1875(2) $24,806,117.38(2) $6,896.10
- --------------------------------- -------------------- -------------------- ------------------------- -----------------
Options
Common Stock 17,500 shares $20.1875(2) $353,281.25(2) $98.21
- --------------------------------- -------------------- -------------------- ------------------------- -----------------
Warrants
Common Stock 3,013 shares $20.1875(2) $60,824.94(2) $16.91
- --------------------------------- -------------------- -------------------- ------------------------- -----------------
<PAGE>
<FN>
(1) This Registration Statement shall also cover any additional shares of
Common Stock which are issued by reason of any stock dividend, stock
split, recapitalization or other similar transaction effected without
the Registrant's receipt of consideration which results in an increase
in the number of the outstanding shares of Registrant's Common Stock.
(2) Calculated solely for purposes of this offering under Rule 457(h) of
the Securities Act of 1933, as amended, (the "1933 Act"), on the basis
of the average of the high and low selling prices per share of
Registrant's Common Stock on August 31, 1999 as reported by the Nasdaq
National Market.
</FN>
</TABLE>
================================================================================
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 2, 1999
PROSPECTUS
SOFTNET SYSTEMS, INC.
1,249,299 Shares of Common Stock
Certain stockholders of SoftNet Systems, Inc. are
offering for resale and selling under this prospectus up to
1,249,299 shares of SoftNet common stock that has already been
issued or will be issued pursuant to outstanding options and
warrants to purchase SoftNet common stock.
The SoftNet common stock is listed on the Nasdaq
National Market under the symbol "SOFN." On August 31, 1999,
the last reported sales price of the SoftNet common stock on
the Nasdaq National Market was $20.375 per share.
----------------------------
You should carefully consider the risk factors
beginning on page 2 of this Prospectus before purchasing any
of the SoftNet common stock being offered by the selling
stockholders.
----------------------------
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 __, 1999
<PAGE>
TABLE OF CONTENTS
Page
RISK FACTORS................................................... 2
WHERE YOU CAN FIND MORE INFORMATION............................ 22
USE OF PROCEEDS................................................ 24
THE SELLING STOCKHOLDERS....................................... 24
PLAN OF DISTRIBUTION........................................... 26
LEGAL.......................................................... 27
EXPERTS........................................................ 27
RISK FACTORS
The risks and uncertainties described below are not the only ones that
we face. 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 one remaining non-Internet related
subsidiary to focus on substantial expansion of our Internet subsidiaries, ISP
Channel, Inc. and Intelligent Communications, Inc. We cannot assure you that our
ability to develop or maintain strategies and business operations for our
Internet services will achieve positive cash flow and profitability. We acquired
ISP Channel, Inc. in June 1996 and Intelligent Communications, Inc. in February
1999. As such, we have very limited operating history and experience in the
Internet services business. The successful expansion of both the ISP Channel and
Intelligent Communications 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 nine months
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ended June 30, 1999, we had a net loss of $33.2 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
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 stockholders. In the event that equity securities are issued to raise
additional capital, the percentage ownership of our stockholders will be
reduced, stockholders 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;
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<PAGE>
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.
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, including common stock underlying unvested stock
options and grants made under our 1998 Stock Incentive Plan and 1999
Supplemental Stock Incentive Plan, is 6,239,499, which would have been 27.0% of
our outstanding common stock as of June 30, 1999, assuming such shares would
have been issued as of such date. The issuance of common stock as a result of
these obligations could result in immediate and substantial dilution to the
holders of our common stock. We are obligated to issue up to 4,521,912 shares of
our common stock on the exercise of warrants and options and the conversion of
certain of our convertible debt. In addition, our 9% senior subordinated
convertible notes due 2001 can convert into 1,717,587 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
have floating conversion prices based on the average market prices of the common
stock for a number of trading days immediately prior to conversion. 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 following table sets forth the number of shares of common stock
issuable upon conversion of 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 June 30,
1999, which was $27.88 per share;
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 June 30, 1999, there were 16,840,440 shares of common stock and
$12,270,000 principal amount under the 9% senior subordinated convertible notes
due 2001 outstanding.
9% Senior Subordinated
Convertible Notes
-----------------
Percentage of Shares
Market Price Underlying %
------------ ---------- -
25% ($6.97) 1,760,402 9.5
50% ($13.94) 880,201 5.0
75% ($20.91) 744,088 4.2
100% ($27.88) 744,088 4.2
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<PAGE>
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 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 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 the 9% senior subordinated convertible
notes due 2001 may not protect against dilution
The terms of our 9% senior subordinated convertible notes due 2001 do
not allow us to issue shares of our common stock to holders of our 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.
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.
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. 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
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. In addition, we
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<PAGE>
have agreed to pay future interest in additional 9% senior subordinated notes
due 2001. 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.
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 $7.14. 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 $13.7 million, 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.
6
<PAGE>
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 us) 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.
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
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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.
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.
8
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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
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 3Com Corporation and Com21,
Inc. for headend and cable modem equipment, Cisco Systems, Inc. for specific
network routing and switching equipment, and, among others, MCIWorldCom, Inc.
for national Internet backbone services. Additionally, certain of 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.
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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 and the pending merger
between AT&T and MediaOne, 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 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 Excite@Home, Roadrunner and
High Speed Access Corp.; 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 Adelphia, CableVision, Comcast, Cox, MediaOne, TCI
and Time Warner. Comcast, Cox and TCI market through Excite@Home, while Time
Warner plans to market the RoadRunner service through Time Warner's own cable
systems as well as to other cable system operators nationwide. Adelphia provides
high speed Internet access through a wholly owned subsidiary called Powerlink.
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In particular, Excite@Home has announced its intention to compete directly in
the small- to medium-sized cable system market, where High Speed Access Corp.
currently competes as well.
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;
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 and digital subscriber line 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
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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 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 and satellite failures, network software flaws, transmission
cable cuts and similar events. The occurrence of any one of these events could
cause interruptions in the services 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.
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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.
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
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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.
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.
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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
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.
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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
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 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
recorded approximately $16 million of intangible assets 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
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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.
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 GE
American and Satmex. If for any reason, the leases were to be terminated, we
cannot assure you that we could renegotiate new leases with GE American, Satmex
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 you
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.
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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, 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;
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 and Intelligent Communications services, 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
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another, or adopt another regulatory classification altogether, for Internet
access services provided over cable systems. The FCC recently decided to address
Internet access issuers in its February 17, 1999 order approving the merger
between AT&T and TCI, which was announced by the two companies on June 24, 1998.
A number of parties had opposed the merger unless the FCC required the AT&T/TCI
combination to provide unaffiliated ISPs with unbundled, open access to the
cable platform whenever that platform is being used by an AT&T/TCI affiliate to
provide Internet service. Other parties argued that the FCC should examine
industry-wide issues surrounding open access to cable-provided Internet service
in a generic rulemaking, rather than in the specific, adjudicatory context of a
merger evaluation. The FCC decided that it would be imprudent to grant either
request for action at this time given the nascent stage in the development and
deployment of high-speed Internet access services. Certain local jurisdictions
that approved the AT&T/TCI merger have imposed open access conditions on such
approval, while other such local jurisdictions have rejected such conditions or
have reserved the right to impose such conditions in the future. At least one
federal district court has upheld the local jurisdiction's decision to mandate
open access. We cannot predict the ultimate 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.
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 our wholly owned subsidiary,
Micrographic Technology Corporation. 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 subsidiary could have a material adverse effect on our business,
financial condition and prospects.
19
<PAGE>
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:
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.
Prospective anti-takeover provisions could negatively impact our stockholders
We are a Delaware corporation. The Delaware General Corporation Law
contains 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 certificate of incorporation and bylaws 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
stockholders 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
20
<PAGE>
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.
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, Assessment and Planning Phases of
substantially all critical internal business systems. The Execution and
Validation Phases will be completed by the fourth quarter of fiscal 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
the fourth quarter of calendar 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.
21
<PAGE>
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
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.
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-_____) 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
22
<PAGE>
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 stockholders 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 filed with the SEC on January 13, 1999,
as amended on Form 10-K/A, filed with the SEC on February
2, 1999, and as further amended on Form 10-K/A, 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, filed with the SEC on February 16,
1999.
4. Our Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1999, filed with the SEC on May 17, 1999.
5. Our Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1999, filed with the SEC on August 16, 1999.
6. Our Current Report on Form 8-K filed with the SEC on
January 26, 1999.
7. Our Current Report on Form 8-K filed with the SEC on
February 24, 1999.
8. Our Current Report on Form 8-K/A filed with the SEC on
February 26, 1999.
9. Our Current Report on Form 8-K filed with the SEC on
February 26, 1999.
10. Our Current Report on Form 8-K filed with the SEC on March
5, 1999.
11. Our Current Report on Form 8-K/A filed with the SEC on
March 12, 1999.
12. Our Current Report on Form 8-K filed with the SEC on April
14, 1999.
13. Our Current Report on Form 8-K filed with the SEC on April
27, 1999.
14. Our Current Report on Form 8-K filed with the SEC on July
7, 1999.
15. Our Current Report on Form 8-K filed with the SEC on July
20, 1999.
If you request a copy of any or all of the documents incorporated by
reference, 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., 650 Townsend Street, Suite 225, San Francisco, California 94103, (415)
365-2500.
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 stockholders 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.
23
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of our
common stock being offered by the selling stockholders under this prospectus.
THE SELLING STOCKHOLDERS
The following table sets forth for each selling stockholder the number
of shares of our common stock held by such selling stockholder, the percentage
which such shares represent of the total outstanding common stock as of July 31,
1999, and the number of shares of our common stock that may be offered under
this prospectus. Percentage ownership is based upon 16,853,017 shares of common
stock outstanding on July 31, 1999. We cannot give an estimate as to the amount
of shares that will be held by the selling stockholders after completion of this
offering because the selling stockholders may offer all, some or none of the
shares and because there are currently no agreements, arrangements or
understandings with respect to the sale of any of the shares.
This prospectus also covers any additional shares of common stock which
become issuable in connection with shares sold by the prospectus by reason of
stock dividend, stock split, recapitalization or other similar transaction
effected without the receipt of consideration which results in an increase in
the number of our outstanding shares of common stock.
Generally, the rules of the SEC define beneficial ownership to include
securities with respect to which the investor has voting or investment power.
The rules also provide that beneficial ownership includes shares of common stock
underlying options, warrants and convertible securities that can be exercised or
converted within 60 days.
Mr. Gonzalez purchased his shares of common stock being sold by this
prospectus from us in a private transaction. Mr. Gonzalez controls Teleponce
Cable TV, Inc., which is a customer of our wholly-owned subsidiary, ISP Channel,
Inc. Finova obtained its shares of common stock being sold by this prospectus by
exercising warrants that it obtained from us in connection with providing us
with a line of credit. Stern & Co. obtained its shares of common stock being
sold by this prospectus by exercising options that it obtained from us in
connection with consulting services that it provides to us. Inktomi Corporation
obtained its shares of common stock being sold by this prospectus in connection
with a license agreement relating to caching technology which is important to
the products and services offered by our wholly owned subsidiaries, ISP Channel
and Intelligent Communications. Mr. Clements is a financial consultant to the
Company. The remainder of the selling stockholders obtained their shares of
common stock being sold by this prospectus as partial consideration for our
purchase of all of the outstanding capital stock of Intelligent Communications,
Inc.
Messrs. Bresina, Geraty, Giem, Gitow, Hirsch, Meachim, Newton and
Pangilinan and Ms. Leffler and Raines are currently employees of Intelligent
Communications. Messrs. Argenbright, Lanning, Lattner and Wall and Ms. Moncayo
were employees of Intelligent Communications within the past three years.
Messrs. Bush and Frost are consultants to Intelligent Communications and Mr.
Toepfer was a consultant to Intelligent Communications during the past three
years. Messrs. Hertan and Montgomery were employees of Internet Presence
Providers, Inc., a wholly owned subsidiary of Intelligent Communications. Mr.
Hoffman served as legal counsel to Internet Presence Providers, Inc. within the
past three years.
<TABLE>
<CAPTION>
Percent of Number of Shares
Number of Shares Outstanding Registered for
Name of Selling Stockholder Beneficially Owned Shares Resale Hereby
<S> <C> <C> <C>
Hector R. Gonzalez/Millenium Partners 660,000 3.8% 660,000
Inktomi Corporation 65,843 * 65,843
FINOVA Capital Corporation 3,013 * 3,013
Stern & Co. 7,500 * 15,000(1)
William G. Clements 5,900 * 2,500
24
<PAGE>
Bruce Meachim 174,524 1.0% 172,324
Christine Raines 172,324 1.0% 172,324
Rick Lattner 10,998 * 10,998
Bob Wall 779 * 779
Roger T. Montgomery 627 * 627
Scott Z. Brown 586 * 586
Kenneth M. Gabrielson 322 * 322
Dana Paul Bowler(2) 1,615 * 1,615
Hsiao-Chih Wang 3,233 * 3,233
Rainer Bullinger 4,898 * 4,398
Greg Hirsch 606 * 606
Walter M. Meyers 20 * 20
Peter Newton 1,830 * 1,830
Ronald J. Carrey (TTEE), The Joseph & Enes
Carrey Trust U/A dated 7/27/84(3) 3,875 * 3,875
Edgar A. Sack & Eugenia F. Sack, as Trustees
of the Sack Family Trust dated 8/31/90
4,839 * 4,839
Bill Sinclair(2) 4,845 * 4,845
Glenn Argenbright 7,934 * 7,934
John J. Fraher 971 * 971
John Bush 4,138 * 4,138
Sherry Moncayo 1,219 * 1,219
John J. Brackett & Kristen L. Brackett 3,230 * 3,230
Alan B. Frost 1,282 * 1,282
Richard E. Toepfer TR Toepfer Family Trust U/A
5/31/90 2,943 * 2,943
Michael E. Stein 645 * 645
Sandra Leffler 1,098 * 1,098
Amit Bhatia(4) 2,422 * 2,422
Mitchell R. Muniz 1,616 * 1,616
Peter Brim(5) 5,928 * 4,198
Garry S. Giem 2,578 * 2,578
Lars D. Mapstead 9,738 * 9,738
Michael A. Contreras 9,690 * 9,690
Ramius Capital Group, LLC 3,230 * 3,230
Steven D. Hoffman 627 * 627
Mike Bresina 911 * 911
Paul Lanning 3,098 * 3,098
Gregory C. Speth 4,845 * 4,845
Peter L. Hertan 250 * 250
Brian Geraty 15,948 * 15,948
Lowell M. Kasden and Anne Kasden,
Jt. Ten. 879 * 879
Edgar A. Pangilinan 730 * 730
Robert W. Sorensen 645 * 645
William Gitow 35,257 * 34,857
Total 1,249,299
- -----------
<FN>
* Represents beneficial ownership of less than 1%
(1) Includes shares of common stock underlying an option to purchase 7,500
shares of common stock that is not exercisable until August 14, 2000.
(2) The shares being sold may be transferred to Dana Bowler and Desiree Bowler
Trustees, Bowler Family Trust U/A dated 3/1/99 and Bill Sinclair, Tenants
in Common.
(3) The shares being sold may be transferred to Ronald J. Carrey and Nancy M.
Carrey (TTEES), The Carrey Family Trust U/A dated 6/25/97.
(4) The shares being sold may be transferred to the Bhatia Family Trust.
(5) The shares being sold may be transferred to Peter D. Brim and Debra R.
Brim, JTWROS.
</FN>
</TABLE>
25
<PAGE>
PLAN OF DISTRIBUTION
We will not receive any proceeds from the sale of the shares of our
common stock offered hereby.
The shares offered by this prospectus may be sold by the selling
stockholders 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 Nasdaq National Market;
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.
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
stockholders determine from time to time. 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 stockholders or as agents for
themselves or their customers or to dealers for resale by such dealers. In
connection with such sales such brokers and dealers may receive compensation in
the form of discounts, commissions or concessions from the selling stockholders
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 stockholders 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. 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 stockholders may enter into hedging transactions with
broker-dealers or other financial institutions in connection with distribution
of the shares or otherwise. In such transactions, broker-dealers or other
financial institutions may engage in short sales of the shares in the course of
hedging the positions they assume with selling stockholders. The selling
stockholders may also sell shares short and redeliver the shares to close out
such short positions. The selling stockholders may enter into option or other
transactions with broker-dealers or other financial institutions which require
the delivery to the broker-dealer or other financial institutions of the shares.
The broker-dealer or other financial institutions may then resell or otherwise
transfer such shares pursuant to this prospectus. The selling stockholders 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 (1) the shares offered by this
prospectus have been registered or qualified for sale in such state or an
exemption from registration exists or (2) qualification is available and is
complied with. Also, each selling stockholder 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
stockholders.
We will pay all expenses of the offering of the shares offered by this
prospectus, except that the selling stockholders will pay any applicable
underwriting commission, discount and transfer taxes, as well as the fees and
disbursements of counsel to and experts for the selling stockholders.
26
<PAGE>
Pursuant to the terms of the registration rights agreement with the
selling stockholders, we have agreed to indemnify and hold harmless such selling
stockholders from, among other things, certain liabilities under the Securities
Act.
LEGAL
The validity of the securities offered hereby will be passed upon for
the company 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 of SoftNet Systems, Inc. for the year ended
September 30, 1998 and the audited historical financial statements included on
the Company's Form 8K/A dated February 26 and March 12, 1999 have been so
incorporated in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts.
The financial statements incorporated in this Prospectus by reference to
the Current Reports on Form 8-K/A, filed with the SEC on February 26 and March
12, 1999, have been so incorporated in reliance on the reports of Blanding,
Boyer & Rockwell L.L.P, independent accountants, given on the authority of said
firms as experts in auditing and accounting.
27
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the expenses (estimated except for the SEC
registration fee) for the issuance and distribution of the securities being
registered, all of which will be paid by the Registrant.
SEC registration fee $7,012
Fees and expenses of counsel 5,000
Fees and expenses of accountants. 10,000
Listing fees 17,500
Transfer agent fees 5,000
Miscellaneous 15,488
------
Total $60,000
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law provides
that a director of a corporation will not be personally liable for monetary
damages for breach of such individual's fiduciary duties as a director except
for liability for (i) any breach of such director's duty of loyalty to the
corporation, (ii) any acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) any unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law, or (iv) any transaction
from which a director derives an improper personal benefit.
The Registrant's Bylaws provide that the Registrant will indemnify its
directors and may indemnify its officers, employees and other agents to the full
extent permitted by law. The Registrant believes that indemnification under its
Bylaws covers at least negligence and gross negligence on the part of an
indemnified party and permits the Registrant to advance expenses incurred by an
indemnified party in connection with the defense of any action or proceeding
arising out of such party's status or service as a director, officer, employee
or other agent of the Registrant upon an undertaking by such party to repay such
advances if it is ultimately determined that such party is not entitled to
indemnification.
The Registrant has entered into separate indemnification agreements
with each of its directors and officers. These agreements require the
Registrant, among other things, to indemnify such director or officer against
expenses (including attorney fees), judgments, fines and settlements
(collectively, "Liabilities") paid by such individual in connection with any
action, suit or proceeding arising out of such individual's status or service as
a director or officer of the Registrant (other than Liabilities arising from
willful misconduct or conduct that is knowingly fraudulent or deliberately
dishonest) and to advance expenses incurred by such individual in connection
with any proceeding against such individual with respect to which such
individual may be entitled to indemnification by the Registrant. The Registrant
believes that its Certificate of Incorporation and Bylaw provisions and
indemnification agreements are necessary to attract and retain qualified persons
as directors and officers.
The Registrant maintains directors and officers liability insurance
covering all directors and officers of the Registrant against claims arising out
of the performance of their duties.
1
<PAGE>
ITEM 16. EXHIBITS.
Exhibit Number Description of Exhibit
2.1* Agreement and Plan of Reorganization, dated as of
November 22, 1998, by and among SoftNet,
Acquisition Sub and Intellicom
2.2* First Amendment and Waiver of Agreement and Plan
of Reorganization, dated as of December 23, 1998,
by and among SoftNet, Acquisition Sub, Intellicom
and the Principal Stockholders
2.3* Second Amendment and Waiver of Agreement and Plan
of Reorganization, dated as of February 5, 1999,
by and among SoftNet, Acquisition Sub, Intellicom
and the Principal Stockholders
3.1** Amended and Restated Certificate of
Incorporation.
3.2*** Bylaws
4.1+ Warrant Certificate, dated March 22, 1999, issued
by the Company to Finova Capital Corporation
4.2+ Notice of Grant and Option Agreement, dated as of
August 23, 1999, issued by the Company to Stern &
Co.
5+ Opinion of Brobeck, Phleger & Harrison L.L.P.
10.1**** Securities Purchase Agreement dated as of April
12, 1999 by and among the Company and Hector
Gonzalez
10.2**** Registration Rights Agreement dated as of April
12, 1999 by and among the Company and Hector
Gonzalez
23.1+ Consent of Brobeck, Phleger & Harrison LLP
(included as part of Exhibit 5).
23.2+ Consent of PricewaterhouseCoopers, LLP
24.1+ Powers of Attorney (included on signature page of
the Registration Statement).
---------------
+ Filed herewith
++ Filed previously
* Filed as an exhibit to the Company's Current Report on
Form 8-K filed February 24, 1999
** Filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1999
*** Filed as an exhibit to the Company's Registration Statement on
Form S-3 (No. 333-74767)
**** Filed as an exhibit to the Company's Current Report on
Form 8-K filed April 27, 1999
ITEM 17. UNDERTAKINGS.
1. (a) The undersigned Registrant hereby undertakes to file, during any
period in which offers or sales are being made, a post-effective amendment to
this Registration Statement:
2
<PAGE>
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933 (the "Securities Act");
(ii) To reflect, in the prospectus any facts or events arising
after the date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in any information in the
Registration Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
provided, however, that the undertakings set forth in paragraph (i) and
(ii) above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by the Registrant pursuant to section 13 or section 15(d) of the Exchange
Act that are incorporated by reference in this Registration Statement.
(b) The undersigned Registrant hereby undertakes that, for determining
any liability under the Securities Act, each post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to file a
post-effective amendment to remove from registration any of the securities that
remain unsold at the termination of the offering.
(d) The undersigned Registrant hereby undertakes that for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act that- is incorporated by reference in this Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered herein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
2. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the undersigned Registrant pursuant to the foregoing provisions, or
otherwise, the undersigned Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the undersigned Registrant of expenses incurred or paid by a
director, officer or controlling person of the undersigned Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the undersigned Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3, and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in San Francisco, California on September 2, 1999.
SOFTNET SYSTEMS, INC.
By:/s/Douglas S. Sinclair
----------------------------
Douglas S. Sinclair
Chief Financial Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below does hereby constitute and appoint, jointly and severally, Dr.
Lawrence B. Brilliant and Douglas S. Sinclair, or either of them, as his or her
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign the Registration Statement filed herewith and
any and all amendments to said Registration Statement (including post-effective
amendments and registration statements filed pursuant to Rule 462 and
otherwise), and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated.
Signature Title Date
- --------- ----- ----
/s/Dr. Lawrence B. Brilliant
- --------------------------
Dr. Lawrence B. Brilliant Chairman of the Board and September 2, 1999
Chief Executive Officer
/s/Ronald I. Simon
- --------------------------
Ronald I. Simon Vice Chairman of the Board September 2, 1999
/s/Douglas S. Sinclair
- --------------------------
Douglas S. Sinclair Chief Financial Officer September 2, 1999
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<PAGE>
/s/Ian B. Aaron
- --------------------------
Ian B. Aaron Director and President September 2, 1999
/s/Edward A. Bennett
- --------------------------
Edward A. Bennett Director September 2, 1999
/s/Sean P. Doherty
- --------------------------
Sean P. Doherty Director September 2, 1999
/s/Robert C. Harris, Jr.
- --------------------------
Robert C. Harris, Jr. Director September 2, 1999
5
<PAGE>
Exhibit Number Description of Exhibit
2.1* Agreement and Plan of Reorganization, dated as of
November 22, 1998, by and among SoftNet,
Acquisition Sub and Intellicom
2.2* First Amendment and Waiver of Agreement and Plan
of Reorganization, dated as of December 23, 1998,
by and among SoftNet, Acquisition Sub, Intellicom
and the Principal Stockholders
2.3* Second Amendment and Waiver of Agreement and Plan
of Reorganization, dated as of February 5, 1999,
by and among SoftNet, Acquisition Sub, Intellicom
and the Principal Stockholders
3.1** Amended and Restated Certificate of
Incorporation.
3.2*** Bylaws
4.1+ Warrant Certificate, dated March 22, 1999, issued
by the Company to Finova Capital Corporation
4.2+ Notice of Grant and Option Agreement, dated as of
August 23, 1999, issued by the Company to Stern &
Co.
5+ Opinion of Brobeck, Phleger & Harrison L.L.P.
10.1**** Securities Purchase Agreement dated as of April
12, 1999 by and among the Company and Hector
Gonzalez
10.2**** Registration Rights Agreement dated as of April
12, 1999 by and among the Company and Hector
Gonzalez
23.1+ Consent of Brobeck, Phleger & Harrison LLP
(included as part of Exhibit 5).
23.2+ Consent of PricewaterhouseCoopers, LLP
24.1+ Powers of Attorney (included on signature page of
the Registration Statement).
---------------
+ Filed herewith
++ Filed previously
* Filed as an exhibit to the Company's Current Report on
Form 8-K filed February 24, 1999
** Filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1999
*** Filed as an exhibit to the Company's Registration Statement on
Form S-3 (No. 333-74767)
**** Filed as an exhibit to the Company's Current Report on
Form 8-K filed April 27, 1999
6
EXHIBIT 4.1
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE HEREUNDER HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED UNLESS REGISTERED UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS UNLESS OFFERED, SOLD OR OTHERWISE
TRANSFERRED PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF THOSE LAWS.
COMMON STOCK PURCHASE WARRANT
Company: SOFTNET SYSTEMS, INC., a New York corporation
("Company")
Number of Shares: 3,013 (Three Thousand Thirteen Shares)
Class of Stock: Common Stock
Initial Exercise Price: $29.875 per share
Issued as of: March 22, 1999
Expiration Date: As described in Section 1
FOR VALUE RECEIVED, the adequacy and receipt of which are hereby
acknowledged, SOFTNET SYSTEMS, INC., a New York corporation, hereby certifies
that subject to the terms and conditions herein set forth, FINOVA Capital
Corporation, a Delaware corporation, and its successors and assigns, as the
registered holder of this Warrant is entitled upon surrender of this Warrant to
purchase from the Company at its principal offices, at any time and from time to
time on and after the date hereof until 6:00 p.m. California local time on the
Expiration Date at an initial Exercise Price (as described in Section 1), fully
paid and nonassessable shares of Common Stock of the Company (the "Shares"). The
number of such shares of Common Stock and the Exercise Price are subject to
adjustment as provided in the Warrant.
1. Certain Definitions. As used in this Warrant, the following terms
have the following definitions:
"Common Stock" means the Company's Common Stock, $.01 par
value, and includes any common stock of the Company of any class or classes
resulting from any reclassification or reclassifications thereof.
"Company" means SOFTNET SYSTEMS, INC., a New York corporation.
"Convertible Securities" means evidence of indebtedness,
shares of stock or other securities that are at any time directly or indirectly
convertible into or exchangeable for shares of Common Stock.
<PAGE>
"Current Market Price" of a share of Common Stock or of any
other security as of a relevant date means with respect to such Common Stock or
other securities,: (i) the Fair Value thereof as determined in accordance with
clause (ii) of the definition of Fair Value with respect to Common Stock or any
other security that is not listed on a national securities exchange or traded on
the over-the-counter market or quoted on NASDAQ, or (ii) the Closing Price on
such date (excluding any trades which are not bona fide arm's length
transactions) with respect to Common Stock or any other security that is listed
on a national securities exchange or traded on the over-the-counter market or
quoted on NASDAQ. The closing price for each day shall be defined as (i) the
last sale price of shares of Common Stock or such other security on such date
or, if no such sale takes place on such date, the average of the closing bid and
asked prices thereof on such date, in each case as officially reported on the
principal national securities exchange on which the same are then listed or
admitted to trading, or (ii) if no shares of Common Stock or if no securities of
the same class as such other security are then listed or admitted to trading on
any national securities exchange, the average of the reported closing bid and
asked prices thereof on such date in the over-the-counter market as shown by
NASDAQ or, if no shares of Common Stock or if no securities of the same class as
such other security are then quoted in such system, as published by the National
Quotation Bureau, Incorporated or any similar successor organization, and in
either case as reported by any member firm of the New York Stock Exchange
selected by the Warrantholders.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exercise Period" means the period commencing on the date
hereof and ending at 6:00 p.m. California local time on the Expiration Date.
"Exercise Price" means initially Twenty-nine and 87.5/100
Dollars ($29.875) per share, subject to adjustment as provided in this Warrant.
"Expiration Date" means the date that is four (4) years after
the date hereof.
"Fair Value" means: (i) with respect to a share of Common
Stock or any other security, the Current Market Price thereof, or (ii) with
respect to any other property, assets, business or entity, or if the Shares have
not been registered under the Securities Act, an amount determined in good faith
by the Board of Directors of the Company.
"Indemnified Party" and "Indemnifying Party" have the meanings
set forth in Section 11(e)(iii).
"Registrable Stock" means: (i) all Warrant Shares which are
issuable to the Warrantholders pursuant to the Warrants, whether or not the
Warrants have in fact been exercised and whether or not such Warrant Shares have
in fact been issued, (ii) all Warrant Shares acquired by the Warrantholders
pursuant to the Warrants, and (iii) any shares of Common Stock, whether or not
such shares of Common Stock have in fact been issued, and stocks or other
securities of the Company issued upon conversion of, in a stock split or
reclassification of, or a stock dividend or other distribution on, or in
substitution or exchange for, or otherwise in connection with, such Warrant
Shares or in a merger or consolidation involving the Company or its assets;
2
<PAGE>
provided, however, that the foregoing securities shall not be considered
Registrable Stock if they were previously registered pursuant to Section 11
hereunder or if they are transferable without registration pursuant to Rule
144(k) under the Securities Act. For purposes of Section 11, a Warrantholder of
record shall be treated as the record holder of the related Warrant Shares and
other securities issuable pursuant to the Warrants.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Warrant(s)" means this Warrant and any warrants issued in
exchange or replacement of this Warrant or upon transfer hereof.
"Warrantholder(s) and "Holder" means FINOVA Capital
Corporation, a Delaware corporation, and its successors and assigns.
"Warrant Shares" means shares of Common Stock or other
securities issuable to Warrantholders pursuant to the Warrants.
2. Exercise of Warrant. This Warrant may be exercised, in whole or in
part, at any time and from time to time during the Exercise Period by written
notice to the Company (accompanied by physical surrender of this Warrant) and
upon payment to the Company of the Exercise Price (subject to adjustment as
provided herein) for the Warrant Shares.
3. Form of Payout of Exercise Price. Anything contained herein to the
contrary notwithstanding, at the option of the Warrantholders, the Exercise
Price may be paid in any one or a combination of the following forms: (a) by
wire transfer to the Company, (b) by a certified or cashier's check to the
Company, (c) by the cancellation of any indebtedness owed by the Company and/or
any subsidiaries of the Company to the Warrantholder, as evidenced by documents
or instruments effecting such cancellation and/or (d) by the surrender to the
Company of that number of Warrant Shares having a Fair Value equal to the
Exercise Price in accordance with Section 4 below.
4. Cashless Exercise. In lieu of exercising this Warrant as specified
in Sections 2 and 3 above, the Warrantholders may from time to time at the
Warrantholders' option convert this Warrant, in whole or in part, into a number
of shares of Common Stock of the Company determined by dividing (A) the
aggregate Fair Value of the exercisable Warrant Shares minus the aggregate
Exercise Price of such Warrant Shares by (B) the Fair Value of one such Warrant
Shares. The Warrantholder and the Company shall execute such documents as the
Company deems reasonably necessary to evidence such cashless exercise.
5. Certificates for Warrant Shares; New Warrant. The Company agrees
that the Warrant Shares shall be deemed to have been issued to the
Warrantholders as the record owners of such Warrant Shares as of the close of
business on the date on which payment for such Warrant Shares has been made (or
deemed to be made by cashless exercise) in accordance with the terms of this
Warrant. Certificates for the Warrant Shares shall be delivered to
Warrantholders within a reasonable time, not exceeding ten (10) days, after this
Warrant has been exercised. A new Warrant representing the number of shares, if
any, with respect to which this Warrant remains exercisable also shall be issued
to the Warrantholders within such time so long as this Warrant has been
surrendered to the Company at the time of exercise.
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<PAGE>
6. Adjustment of Exercise Price, Number of Shares and Nature of
Securities Issuable Upon Exercise of Warrants.
(a) Exercise Price; Adjustment of Number of Shares. The
Exercise Price shall be subject to adjustment from time to time as hereinafter
provided. Upon each adjustment of the Exercise Price, the Warrantholders shall
thereafter be entitled to purchase, at the Exercise Price resulting from such
adjustment, a number of shares determined by multiplying the Exercise Price in
effect immediately prior to such adjustment by the number of shares purchasable
pursuant hereto immediately prior to such adjustment and dividing the product
thereof by the Exercise Price resulting from such adjustment.
(b) Reorganization, Reclassification, Consolidation, Merger or
Sale. If any capital reorganization or reclassification of the capital stock of
the Company, or any consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of Common Stock shall
be entitled to receive cash, stock, securities or assets with respect to or in
exchange for Common Stock, then, upon such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provisions shall be made
whereby the Warrantholders shall thereafter have the same right to purchase and
receive Warrant Shares upon the basis and upon the terms and conditions
specified in this Warrant. Upon exercise, payment of the Exercise Price and
surrender of this Warrant and in lieu of the shares of the Common Stock of the
Company immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby, the Warrantholder shall receive such cash, shares
of stock, securities or assets as may be issued or payable with respect to or in
exchange for a number of outstanding shares of Common Stock equal to the number
of shares of such Common Stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby. In any such case
appropriate provision shall be made with respect to the rights and interests of
the Warrantholders to the end that the provisions hereof (including, without
limitation, provisions for adjustments of the Exercise Price and of the number
of shares purchasable and receivable upon the exercise of this Warrant) shall
thereafter be applicable, as nearly as may be practicable, in relation to any
shares of stock securities or assets thereafter deliverable upon the exercise
hereof.
(c) Stock Splits and Reverse Splits. In the event the Company:
(i) subdivides its outstanding Common Stock into a greater number of shares, or
(ii) combines its outstanding Common Stock into a smaller number of shares, then
(1) the Exercise Price on the record date of such division or distribution or
the effective date of such action shall be adjusted by multiplying such Exercise
Price by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately before such event and the denominator of which is
the number of shares of Common Stock outstanding immediately after such event,
and (2) the number of shares of Common Stock for which this Warrant Certificate
may be exercised immediately before such event shall be adjusted by multiplying
such number by a fraction, the numerator of which is the Exercise Price
immediately before such event and the denominator of which is the Exercise Price
immediately after such event.
4
<PAGE>
(d) Dissolution, Liquidation and Wind-Up. In case the Company
shall, at any time prior to the expiration of this Warrant, dissolve, liquidate
or wind up its affairs, the Warrantholders shall be entitled, upon the surrender
of this Warrant, to receive, in lieu of the shares of Common Stock that such
Warrantholders would have been entitled to receive, the same kind and amount of
assets as would have been issued, distributed or paid to such Warrantholders
upon any such dissolution, liquidation or winding up with respect to such shares
of Common Stock, had such Warrantholders been the holders of record of the
Warrant Shares on the record date for the determination of those persons
entitled to receive any such liquidating distribution. If such Warrantholders
are entitled to receive any liquidating distribution and after any such
dissolution, liquidation or winding up that shall result in any cash
distribution in excess of the Exercise Price provided for by this Warrant, the
Warrantholders may, at each such Warrantholder's option, exercise the same
without making payment of the Exercise Price subject to the following provision:
In such case the Company shall, upon the distribution to said Warrantholders
deduct from the amount payable to such Warrantholders an amount equal to such
Exercise Price and, consider that said Exercise Price has been paid in full to
it and in making settlement to said Warrantholders.
(e) Adjustment Certificate. In each case of an adjustment in
the number of shares of Common Stock or other stock, securities or property
receivable on the exercise of the Warrants, the Company shall compute such
adjustment in accordance with the terms of this Warrant and prepare and duly
execute and deliver to the Warrantholders a certificate setting forth such
adjustment and showing in detail the facts upon which such adjustment is based.
7. Special Agreements of the Company.
(a) Reservation of Shares. The Company covenants and agrees
that all Warrant Shares will, upon issuance, be validly issued, fully paid and
nonassessable and free from all preemptive rights of any stockholder, and from
all taxes, liens and charges with respect to the issue thereof. The Company
further covenants and agrees that during the period within which the rights
represented by this Warrant may be exercised, the Company will at all times have
authorized, and reserved, a sufficient number of shares of Common Stock to
provide for the exercise of the rights represented by this Warrant.
(b) Avoidance of Certain Actions. The Company will not, by
amendment of its Certificate of Incorporation or through any capital
reorganization, transfer of assets, consolidation, merger, issue or sale of
securities or any other voluntary action, avoid or take any action which would
have the effect of avoiding the observance or performance of any of the terms to
be observed or performed hereunder by the Company, but will at all times in good
faith assist in carrying out all of the provisions of this Warrant and in taking
all of such actions as may be necessary or appropriate in order to protect the
rights of the Warrantholders hereunder.
5
<PAGE>
(c) Listing on Securities Exchanges; Registration. If, and so
long as, any class of the Company's Common Stock shall be listed on any national
securities exchange (as defined in the Exchange Act), the Company will, at its
expense, obtain and use its best efforts to maintain the approval for listing
upon official notice of issuance of all Warrant Shares and maintain the listing
of Warrant Shares after their issuance; and the Company will use its best
efforts to list on such national securities exchange, and will use its best
efforts to maintain such listing of, any other securities that at any time are
issuable upon exercise of this Warrant if and at the time any securities of the
same class shall be listed on such national securities exchange by the Company.
8. Fractional Shares. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon exercise hereof, such
fraction shall be rounded down to the nearest whole share. A fraction
represented as of .51 or higher shall be rounded up to the next highest integer.
9. Notices of Stock Dividends, Subscriptions, Reclassifications,
Consolidations, Mergers, etc. If at any time: (i) the Company shall declare a
cash or stock dividend (or an increase in the then existing dividend rate), or
declare a dividend on Common Stock payable otherwise than in cash out of its net
earnings after taxes for the prior fiscal year, or (ii) the Company shall
authorize the granting to the holders of Common Stock of rights to subscribe for
or purchase any shares of capital stock of any class or of any other rights; or
(iii) there shall be any capital reorganization, or reclassification, or
redemption of the capital stock of the Company, or consolidation or merger of
the Company with, or sale of all or substantially all of its assets to, another
corporation or firm; or (iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Company, then the Company shall
give to the Warrantholders at the addresses of such Warrantholders as shown on
the books of the Company, at least ten (10) days prior to the applicable record
date hereinafter specified, a written notice summarizing such action or event
and stating the record date for any such dividend or rights (or, if a record
date is not to be selected, the date as of which the holders of Common Stock of
record entitled to such dividend or rights are to be determined), the date on
which any such reorganization, reclassification, consolidation, merger, sale of
assets, dissolution, liquidation or winding up is expected to become effective,
and the date as of which it is expected the holders of Common Stock of record
shall be entitled to effect any exchange of their shares of Common Stock for
cash (or cash equivalent), securities or other property deliverable upon any
such reorganization, reclassification, consolidation, merger, sale of assets,
dissolution, liquidation or winding up.
Any notice or written communication required or permitted to be given
to the holders and the names and addresses of all registered holders of the
Warrants may be given by certified or overnight mail delivery to the holder at
the address shown on such register.
10. Registered Holder, Transfer of Warrants or Warrant Shares.
(a) Maintenance of Registration Books; Ownership of this
Warrant. The Company shall keep at its principal office a register in which the
Company shall provide for the registration, transfer and exchange of this
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<PAGE>
Warrant and the names and addresses of all registered holders of the Warrants.
The Company shall not at any time, except upon the dissolution, liquidation or
winding-up of the Company, close such register so as to result in preventing or
delaying the exercise or transfer of this Warrant.
(b) Exchange and Replacement. To the extent permissible under
any applicable securities laws, this Warrant is exchangeable upon surrender
hereof by the registered holder to the Company at its principal office for new
Warrants of like tenor and date representing in the aggregate the right to
purchase the number of shares purchasable hereunder, each of such new Warrants
to represent the right to purchase such number of shares as shall be designated
by said registered holder at the time of surrender. This Warrant and all rights
hereunder are transferable in whole or in part upon the books of the Company by
the registered holder hereof in person or by duly authorized attorney, and new
Warrants shall be made and delivered by the Company, of the same tenor and date
as this Warrant but registered in the name of the transferee(s), upon surrender
of this Warrant, duly endorsed, to said office of the Company. Upon receipt by
the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and upon surrender and cancellation
of this Warrant, if mutilated, the Company will make and deliver a new Warrant
of like tenor, in lieu of this Warrant, without requiring the posting of any
bond or the giving of any other security. This Warrant shall be promptly
canceled by the Company upon the surrender hereof in connection with any
exchange, transfer or replacement. The Company shall pay all expenses, taxes and
other charges payable in connection with the preparation, execution and delivery
of Warrants pursuant to this Section 10.
11. Registration.
(a) Incidental Registration. Each time the Company shall
determine to file a registration statement under the Securities Act (other than
on Form S-8 or Form S-4, or any successor form thereof) in connection with the
proposed offer and sale for money of any of its equity securities by it or by
any of its security holders, the Company will give written notice of its
determination to all holders of Registrable Stock. Upon the written request of a
holder of any Registrable Stock delivered to the Company within fifteen (15)
days following the Company's notice (except with respect to an initial public
offering), the Company will cause all such Registrable Stock, the holders of
which have so requested registration thereof, to be included in such
registration statement, all to the extent requisite to permit the sale or other
disposition by the prospective seller or sellers of the Registrable Stock to be
so registered in accordance with the terms of the proposed offering. If the
registration statement is to cover an underwritten distribution, the Company
shall use its best efforts to cause the Registrable Stock requested for
inclusion pursuant to this Section 11(a) to be included in the underwriting on
the same terms and conditions as the securities otherwise being sold through the
underwriters. If, in the good faith judgment of the managing underwriter of such
public offering, the inclusion of all of the Registrable Stock requested to be
registered would materially and adversely affect the successful marketing of the
other shares proposed to be offered, then the amount of the Registrable Stock to
be included in the offering shall be reduced and the Registrable Stock and the
other shares to be offered (excluding shares to be offered by or for the account
of the Company) shall participate in such offering as follows: the Registrable
Stock to be included in such offering and the other shares of Common Stock to be
included in such offering shall each be reduced pro rata in proportion to the
number of shares of Common Stock proposed to be included in such offering by
each holder of such shares; and provided further, however, that, after giving
effect to the immediately preceding proviso, any exclusion of Registrable Stock
shall be made pro rata with holders of other securities having the right to
include such securities in a Company registration statement other than the RGC
Investors (as defined below) and holders of securities not subject to a similar
cut-back provision.
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<PAGE>
Notwithstanding the immediately preceding paragraph, the registered
holder hereunder hereby acknowledges that the Company is party to a Registration
Rights Agreement (the "RGC Agreement") dated as of August 31, 1998 granting
certain Registration Rights to the investors set forth therein (the "RGC
Investors"), and further acknowledges and agrees that the rights of the holder
to include their shares in any registration by the Company shall expressly be
made subordinate to the right of the RGC Investors to include all of their
"Registrable Securities" as defined by the RGC Agreement, in such registration .
(b) Registration Procedures. If and whenever the Company is
able, pursuant to the provisions of Section 11(a), to effect the registration of
Registrable Stock under the Securities Act, the Company will, at its expense, as
expeditiously as possible:
(i) In accordance with the Securities Act and
the rules and regulations of the Commission, prepare and file with the
Commission a registration statement on the form of registration statement
appropriate with respect to such securities and use its best efforts to cause
such registration statement to become and remain effective until the securities
covered by such registration statement have been sold, and prepare and file with
the Commission such amendments to such registration statement and supplements to
the prospectus contained therein as may be necessary to keep such registration
statement effective and such registration statement and prospectus accurate and
complete until the securities covered by such registration statement have been
sold; provided, however, that in no event shall the Company be required to keep
any such registration statement effective for a period in excess of twelve (12)
months (plus the number of days, if any, during such twelve (12) month period
that the Warrantholders shall be restricted from selling shares pursuant to
Section 11(d) hereof);
(ii) If the offering is to be underwritten, in
whole or in part, enter into a written underwriting agreement with the holders
of the Registrable Stock participating in such offering and the underwriter in
form and substance reasonably satisfactory to the Company, the managing
underwriter of the public offering and the holders of the Registrable Stock
participating in such offering;
(iii) Furnish to the holders of securities
participating in such registration and to the underwriters of the securities
being registered such reasonable number of copies of the registration statement,
preliminary prospectus, final prospectus and such other documents as such
underwriters and holders may reasonably request in order to facilitate the
public offering of such securities;
(iv) Use its best efforts to register to qualify
the securities covered by such registration statement under such state
securities or blue sky laws of such jurisdictions as such participating holders
and underwriters may reasonably request;
8
<PAGE>
(v) Notify the holders participating in such
registration, promptly after it shall receive notice thereof, of the date and
time when such registration statement and each post-effective amendment thereto
has become effective or a supplement to any prospectus forming a part of such
registration statement has been filed;
(vi) Notify such holders promptly of any request
by the Commission for the amending or supplementing of such registration
statement or prospectus or for additional information;
(vii) Prepare and promptly file with the
Commission, and promptly notify such holders of the filing of, such amendments
or supplements to such registration statement or prospectus as may be necessary
to correct any statements or omissions if, at the time when a prospectus
relating to such securities is required to be delivered under the Securities
Act, any event has occurred as the result of which any such prospectus or any
other prospectus as then in effect may include an untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading;
(viii) In case any of such holders or any
underwriter for any such holders is required to
deliver a prospectus at a time when the prospectus then in circulation is not in
compliance with the Securities Act or the rules and regulations of the
Commission, prepare promptly upon request such amendments or supplements to such
registration statement and such prospectus as may be necessary in order for such
prospectus to comply with the requirements of the Securities Act and such rules
and regulations;
(ix) Advise such holders, promptly after it
shall receive notice or obtain knowledge thereof, of the issuance of any stop
order by the Commission suspending the effectiveness of such registration
statement or the initiation or threatening of any proceedings for that purpose
and promptly use its best efforts to prevent the issuance of any stop order or
to obtain its withdrawal if such stop order should be issued;
(x) Prepare a prospectus supplement or post-
effective amendment to the registration statement or the related prospectus or
any document incorporated therein by reference or file any other required
documents so that, as thereafter delivered to the purchasers of the Registrable
Stock, the prospectus will not contain an untrue statement of material fact or
omit to state any material fact necessary to make the statements therein not
misleading; and
(xi) Otherwise use its best efforts to comply
with all applicable rules and regulations of the Commission, and make generally
available to the Company's security holders earnings statements satisfying the
provisions of Section 11(a) of the Securities Act, no later than forty-five (45)
days after the end of any twelve (12) month period (or ninety (90) days, if such
a period is a fiscal year) (i) commencing at the end of any fiscal quarter in
which Registrable Stock is sold to underwriters in an underwritten offering, or,
if not sold to underwriters in such an offering, (ii) beginning with the first
month of the Company's first fiscal quarter commencing after the effective date
of a registration statement. The filing of such statements pursuant to the
electronic filing system EDGAR, shall be deemed to have made such information
generally available.
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(c) Expense of Registration. Except where specifically
referenced in this Warrant, all expenses incident to the Company's performance
of or compliance with this Warrant (excluding discounts, commissions or fees of
underwriters, selling brokers, dealer managers or similar securities industry
professionals relating to the distribution of the Registrable Stock or legal
expenses of any person other than the Company) shall be borne by the Company.
The selling holders shall bear any legal expenses incurred by them in connection
with any registration pursuant to this Section 11.
(d) Suspension of Offers and Sales. If, during the
effectiveness of a registration statement filed pursuant to this Section 11, an
intervening event shall have occurred which, in the opinion of the Company's
counsel, makes the prospectus included in such registration statement no longer
comply with the Securities Act, after notice from the Company containing such
fact, the Warrantholders shall make no further sales or other dispositions, or
offers therefor, of securities under such registration statement until it
receives from the Company copies of a new, amended or supplemented prospectus
complying with the Securities Act as soon as practicable after such notice. The
Company shall keep the Warrantholders informed of the status of its efforts,
which shall be prompt and diligent, to cause such new, amended or supplemented
prospectus to be available for use by such Warrantholders.
(e) Indemnification.
(i) The Company hereby agrees to indemnify each
of the holders of Registrable Stock against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any registration statement, preliminary or final prospectus, or other document
incident to any such registration, qualification or compliance (or in any
related registration statement, notification or the like) or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or any violation by
the Company of any rule or regulation promulgated under the Securities Act
applicable to the Company and relating to action or inaction required of the
Company in connection with any such registration, qualification or compliance,
and to reimburse the holders of Registrable Stock (including officers and
directors of the same and controlling persons) for any legal and any other
expenses reasonably incurred in connection with investigating or defending any
such claim, loss, damage, liability or action; provided, however, the Company
will not be liable in any such case to the extent that any such claim, loss,
damage or liability arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by
Warrantholders specifically for use therein.
(ii) The Warrantholders severally and not
jointly agree to indemnify the Company and its officers and directors and each
person, if any, who controls any thereof within the meaning of Section 15 of the
Securities Act and their respective successors against all claims, losses,
damages and liabilities (or actions in respect hereof) arising out of or based
on any untrue statement of a material fact contained in any prospectus, offering
circular or other document incident to any registration, qualification or
compliance relating to securities purchased pursuant to the Warrants (or in any
related registration statement, notification or the like) or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading and will reimburse
the Company and each other person indemnified pursuant to this subsection (ii)
for any legal and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage) liability or action;
provided, however, that this subsection (ii) shall apply only if (and only to
the extent that) such statement or omission was made in reliance upon
information (including, without limitation, written negative responses to
inquiries) furnished to the Company by Warrantholders specifically for use in
such prospectus, or any such other document (or related registration statement,
notification or the like) or any amendment or supplement thereto.
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<PAGE>
(iii) Each party entitled to indemnification
hereunder (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party (at such Indemnifying Party's
expense) to assume the defense of any claim or any litigation resulting
therefrom, provided that counsel for the Indemnifying Party, who shall conduct
the defense of such claim or litigation, shall be reasonably satisfactory to the
Indemnified Party, and the Indemnified Party may participate in such defense at
such party's expense, and provided further, that the omission by any Indemnified
Party to give notice as provided herein shall not relieve the Indemnifying Party
of its obligations under this Section 11(e) except to the extent that the
omission results in a failure of actual notice to the Indemnifying Party and
such Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation.
(iv) If the indemnification provided for in this
Section 11(e) is unavailable or insufficient to hold harmless an Indemnified
Party in respect of any losses, claims, damages, liabilities, expenses or
actions in respect thereof referred to herein, then the Indemnifying Party shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such losses, claims, damages, liabilities, expenses or actions in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party on the one hand, and the Indemnified Party on the other, in connection
with the statements or omissions which resulted in such losses, claims, damages,
liabilities, expenses or actions as well as any other relevant equitable
considerations, including the failure to give the notice required hereunder. The
relative fault of the Indemnifying Party and the Indemnified Party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact relates to information supplied by the
Indemnifying Party or the Indemnified Party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Warrantholders agree that it would
not be just and equitable if contributions pursuant to this Section 11(e) were
determined by pro rata allocation or by any other method of allocation which did
not take account of the equitable considerations referred to above. The amount
paid or payable to an Indemnified Party as a result of the losses, claims,
damages, liabilities or actions in respect thereof, referred to above, shall be
deemed to include any legal or other expenses reasonably incurred by such
Indemnified Party in connection with investigating or defending any such action
or claim. Notwithstanding the contribution provisions of this Section 11(e), in
no event shall the amount contributed by any seller of Registrable Stock exceed
the aggregate net offering proceeds received by such seller from the sale of
Registrable Stock to which such contribution or indemnification claim relates.
No person guilty of fraudulent misrepresentations (within the meaning of Section
11(e) of the Securities Act) shall be entitled to contribution from any person
who is not guilty of such fraudulent misrepresentation.
11
<PAGE>
(v) The indemnification required by this
Section 11(e) shall be made by periodic payments during the course of the
investigation or defense, as and when bills are received or expenses incurred.
Anything contained herein to the contrary notwithstanding, the liability of any
holder of Registrable Stock under this Section 11(e) shall not exceed the amount
of the net proceeds actually received by such holder from the sale of its
Registrable Stock pursuant to the registration, qualification, notification or
compliance in respect of which such liability arose.
(f) Reporting Requirements Under Exchange Act. The Company
shall use its best efforts to maintain the registration of its Common Stock
under Section 12 of the Exchange Act and shall keep effective such registration
and shall timely file such information, documents and reports the Commission may
require or prescribe under Section 13 of the Exchange Act, or otherwise. The
Company shall forthwith upon request, furnish any holder of Registrable Stock
(i) a written statement by the Company that it has complied with such reporting
requirements, (ii) a copy of the most recent annual or quarterly report of the
Company, and (iii) such other reports and documents filed by the Company with
the Commission as such holder may reasonably request in availing itself of an
exemption for the sale of Registrable Stock without registration under the
Securities Act. The Company acknowledges and agrees that the purpose of the
requirements contained in this Section 11(f) is to enable any such holder to
comply with the current public information requirement contained in Rule 144
under the Securities Act should such holder ever wish to dispose of any of the
securities of the Company acquired by it without registration under the
Securities Act in reliance upon Rule 144 (or any other similar exemptive
provision). In addition, the Company shall take such other measures and file
such other information, documents and reports as shall hereafter be required by
the Commission as a condition to the availability of Rule 144 and Rule 144A
under the Securities Act (or any similar exemptive provision hereafter in
effect).
(g) Stockholder Information. The Company shall require each
holder of Registrable Stock as to which any registration is to be effected
pursuant to this Section 11 to furnish the Company such information with respect
to such holder and the distribution of such Registrable Stock as shall be
required by law or by the Commission in connection therewith.
12. Representation and Warranties of the Company. The Company hereby
represents and warrants to and covenants with Warrantholder, and each holder of
Warrant Shares that:
(a) Organization and Capitalization of the Company. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of New York. As of the date hereof, the authorized
capital of the Company consists of 25,000,000 shares of Common Stock and
4,000,000 of Preferred Stock; 10,397,641 (Common) and 7,625.39 (Preferred) of
which are issued and outstanding. The Company has, and at all times during the
Exercise Period will have, reserved for issuance pursuant to the Warrants that
number of shares of Common Stock that are issuable pursuant to the Warrants. As
of the date hereof, except as otherwise described in Schedule "A" attached
12
<PAGE>
hereto, the Company has not issued or agreed to issue any stock purchase rights
or convertible securities (other than this Warrant), and there are no preemptive
rights in effect with respect to the issuance of any shares of Common Stock. All
the outstanding shares of Common Stock have been validly issued without
violation of any preemptive or similar rights, are fully paid and nonassessable
and have been issued in compliance with all federal and applicable state
securities laws.
(b) Authority. The Company has full corporate power and
authority to execute and deliver this Warrant, to issue the shares of Common
Stock issuable upon exercise of this Warrant, and to perform all of its
obligations hereunder, and the execution, delivery and performance hereof has
been duly authorized by all necessary corporate action on its part. This Warrant
has been duly executed on behalf of the Company and constitutes the legal, valid
and binding obligation of the Company enforceable in accordance with its terms.
(c) No Legal Bar. Neither the execution, delivery or
performance of this Warrant nor the issuance of the shares of Common Stock
issuable upon exercise of this Warrant will (a) conflict with or result in a
violation of the Certificate of Incorporation or By-Laws of the Company, (b)
conflict with or result in a violation of any law, statute, regulation, order or
decree applicable to the Company or any affiliate, (c) require any consent or
authorization or filing with, or other act by or in respect of any governmental
authority, or (d) to the Company's knowledge after reasonable inquiry result in
a breach of, constitute a default under or constitute an event creating rights
of acceleration, termination or cancellation under any mortgage, lease,
contract, franchise, instrument or other material agreement to which the Company
is a party or by which it is bound.
(d) Validity of Shares. When issued upon the exercise of this
Warrant as contemplated herein, the Warrant Shares will have been validly issued
and will be fully paid and nonassessable. On the date hereof, the par value of
the Common Stock is less than the Exercise Price per share of Common Stock.
13. Representations and Warranties of the Warrantholder. This
Warrantholder warrants and covenants as follows:
(i) Investment Purpose. This Warrant and the
Warrant Shares will be acquired for investment for the Warrantholder's own
account, and not as a nominee or agent and not with a view toward or in
connection with to the sale or distribution of any part thereof, and the
Warrantholder has no present intention of selling, granting any participation in
or otherwise distributing the same. The Warrantholder further represents that it
does not have any contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participations to such person, or to any third
person, with respect to this Warrant.
(ii) Private Issue. The Warrantholder
understands (i) that the Warrant and the Warrant Shares issuable upon exercise
of this Warrant are not registered under the Securities Act, (ii) or qualified
under applicable state securities laws. Warrantholder understands that it must
bear the economic risk of this investment until such time as the Warrant Shares
are registered for resale pursuant to the Securities Act or an exemption for
such registration is available. (iii) Reliance on Exemptions. Warrantholder
understands that the Warrant and Warrant Shares are being offered and sold in
reliance on specific exemptions from registration requirements of the United
States federal and state Securities Laws and the Company shall rely upon the
truth and accuracy of, and Warrantholder's compliance with, the representations,
warranties, agreements, acknowledgements and understandings as set forth herein
in order to determine the availability of such exemptions and the eligibility of
Warrantholder to purchase the Warrant Shares.
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<PAGE>
(iv) Legends. Warrantholder understands,
certificates for the Warrant Shares, and until such time as the Warrant Shares
have been registered under the Securities Act or may be sold pursuant to Rule
144 or otherwise, without registration, will bear a restrictive legend (the
"Legend"):
[THE SECURITIES REPRESENTED BY THIS CERTFICIATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED, OR ANY APPLICABLE STATE
SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS
REGISTERED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS UNLESS
OFFERED, SOLD OR OTHERWISE TRANSFERRED PURSUANT TO AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THOSE LAWS.]
(v) Disposition of Warrantholder's Rights. In
no event will the Warrantholder make a disposition of the Warrant Shares
issuable upon exercise of this Warrant unless and until (i) it shall have
notified the Company of the proposed disposition, and (ii) if requested by the
Company, it shall have furnished the Company with an opinion of counsel
satisfactory to the Company and its counsel to the effect that (A) appropriate
action necessary for compliance with the Securities Act has been taken, or (B)
an exemption from the registration requirements of the Securities Act is
available. Notwithstanding the foregoing, the restrictions imposed upon the
transferability of the Warrant Shares shall terminate as to this Warrant and any
particular share of Common Stock when (1) such security shall have been
effectively registered under the Securities Act and sold by the Holder thereof
in accordance with such registration or (2) such security shall have been sold
without registration in compliance with Rule 144 under the Securities Act, or
(3) a letter shall have been issued to the Warrantholder at its request by the
staff of the Securities and Exchange Commission or a ruling shall have been
issued to the Warrantholder at its request by such Commission stating that no
action shall be recommended by the staff or taken by such Commission, as the
case may be, if such security is transferred without registration under the
Securities Act in accordance with the conditions set forth in such letter or
ruling and such letter or ruling specifies that no subsequent restrictions on
transfer are required. Whenever the restrictions imposed hereunder shall
terminate, as hereinabove provided, the Warrantholder or the Holder with respect
to such Warrant Share shall be entitled to receive from the Company, without
expense to such Holder, one or more new certificates for the Warrant or for such
shares of Common Stock not bearing the Legend.
(vi) Rule 144. The Warrantholder acknowledges
that it has received and reviewed a copy of Rule 144 promulgated under the
Securities Act, which permits limited public resales of securities acquired in a
non-public offering, subject to the satisfaction of certain conditions.
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<PAGE>
(vii) Sale of Warrant. The Warrantholder
acknowledges that in the event the applicable requirements of Rule 144 are not
met, registration under the Securities Act or compliance with another exemption
from registration will be required for any disposition of this Warrant or the
Warrant Shares. The Warrantholder understands that although Rule 144 is not
exclusive, the Securities and Exchange Commission has expressed its opinion that
persons proposing to sell restricted securities received in a private offering
other than in a registered offering or pursuant to Rule 144 will have a
substantial burden of proof in establishing that an exemption from registration
is available for such offers or sales and that such persons and the brokers who
participate in the transactions do so at their own risk. The Warrantholder also
acknowledges that it is not receiving any rights with respect to registration of
this Warrant or the Warrant Shares under the Securities Act.
(viii) Financial Risk. The Warrantholder
has such knowledge and experience in financial and business matters as to be
capable of evaluating the merits and risks of its investment, and has the
ability to bear the economic risks of its investment.
(ix) Accredited Investor. The Warrantholder
is an "accredited investor" within the meaning of Rule 501 of Regulation D
promulgated under the Act.
(x) No Public Market. The Warrantholder
understands that no public market now exists for any of the securities issued by
the Company.
(xi) Receipt of Information. The Warrantholder
has received and reviewed this Warrant; it, its attorney and its accountant have
been furnished or given access to, and an opportunity to review all documents
and other materials relating to the sale of Warrants and requested of, the
Company; it and they have been given an opportunity to ask any and all questions
or, and receive answers from, the Company concerning the terms and conditions of
this Warrant and to evaluate the suitability of an investment in this Warrant;
and, in evaluating the suitability of an investment in this Warrant; it and they
have not relief upon any representations or other information (whether oral or
written) other than as set forth herein. Neither such inquiries nor review or
investigation by Warrantholder or its representatives shall modify, amend or
affect any parties' right to rely on the representations and warranties
hereunder.
14. Miscellaneous Provisions.
(a) Governing Law. This Warrant shall be deemed to have been
made in the State of California and the validity of this Warrant, the
construction, interpretation, and enforcement thereof, and the rights of the
parties thereto shall be determined under, governed by, and construed in
accordance with the internal laws of the State of California, without regard to
principles of conflicts of law.
15
<PAGE>
(b) Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been given when personally
delivered to the addressee or five (5) days after being mailed by certified
mail, addressed to the address below stated of the party to which notice is
given, or to such changed address as such party may have fixed by notice:
To the Company:
SOFTNET SYSTEMS, INC.
510 Logue Avenue
Mountain View, CA 94043
Attn:Chief Financial Officer
To the Warrantholders
Or holder of Warrant Shares:
FINOVA Capital Corporation .
10 Waterside Drive
Farmington, Connecticut 06032
Attn: ________________________
provided, however, that any notice of change of address shall be effective five
(5) days after receipt.
(c) Successors and Assigns. This Warrant shall be binding upon
and inure to the benefit of the Company, the Warrantholders and the holders of
Warrant Shares and the successors, assigns and transferees of the Company, the
Warrantholders and the holders of Warrant Shares. This Warrant is intended for
the benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
(d) Attorneys' Fees. The Company agrees to pay, on demand, all
attorneys' fees (include attorneys' fees incurred pursuant to proceedings
arising under the Bankruptcy Code) and all other costs and expenses which may be
incurred by the Warrantholders and the holders of Warrant Shares in connection
with any amendment to this Warrant which may be requested by the Company and/or
in any action or proceeding in which the Company is not the prevailing party, if
such action or proceeding is in connection with, arising out of, or
consequential to the protection, assertion, or enforcement of rights under this
Warrant.
(e) Entire Agreement; Amendments and Waivers. This Warrant
sets forth the entire understanding of the parties with respect to the
transactions contemplated hereby. The failure of any party to seek redress for
the violation or to insist upon the strict performance of any term of this
Warrant shall not constitute a waiver of such term and such party shall be
entitled to enforce such term without regard to such forbearance. This Warrant
may be amended, the Company may take any action herein prohibited or omit to
take action herein required to be performed by it, and any breach of or
compliance with any covenant, agreement, warranty or representation may be
waived, only if the Company has obtained the written amendments, written consent
or written waiver of the majority in interest of the Warrantholders, and then
such consent or waiver shall be effective only in the specific instance and for
the specific purpose for which given.
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(f) Severability. If any term of this Warrant as applied to
any person or to any circumstance is prohibited, void, invalid or unenforceable
in any jurisdiction, such term shall, as to such jurisdiction, be ineffective to
the extent of such prohibition or invalidity without in any way affecting any
other term of this Warrant or affecting the validity or enforceability of the
remainder of this Warrant or of such provision in any other jurisdiction.
(g) Headings. The headings in this Warrant are inserted only
for convenience of reference and shall not be used in the construction of any of
its terms.
(h) Transferability. This Warrant may be assigned, transferred
or sold by Warrantholder only in compliance with the provisions of applicable
securities laws and with the consent of Company which shall not be unreasonably
withheld; provided, however, that no consent of the Company shall be required
for any assignment or transfer of this Warrant to any direct or indirect
subsidiary or parent of the Warrantholders or to any entity in which
Warrantholder has a 50% or greater ownership interest.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officers effective as of the 22nd day of March, 1999.
SOFTNET SYSTEMS, INC.
a New York corporation
By:/s/ Mark Alan Phillips
----------------------
Printed Name: Mark Alan Phillips
Title: Treasurer
Exhibit 4.2
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN
STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT
AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER
OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS
IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
SOFTNET SYSTEMS, INC.
NOTICE OF CONSULTANT GRANT OF STOCK OPTION
Notice is hereby given of the following option grant (the
"Option") to purchase shares of the Common Stock of SoftNet Systems, Inc. (the
"Corporation"):
Optionee: Stern & Co.
Grant Date: June 14, 1999
Vesting Commencement Date: August 14, 1998
Exercise Price: $ 17.3125 per share
Number of Option Shares: 15,000 shares (the "Option Shares")
Expiration Date: June 14, 2002
Type of Option: Non-Statutory Stock Option
Exercise Schedule: The Option shall become immediately
exercisable for Fifty percent (50%) or Seven Thousand Five
Hundred (7,500) shares as of the date of this agreement. The
balance of the Option Shares or Seven Thousand Five Hundred
(7,500) shares shall fully vest on the Optionee's completion
of two (2) complete years of service as measured from the
Vesting Commencement Date. Subject to the terms and conditions
of this Notice of Grant Agreement and any other ancillary
documents, the balance of the Option Shares shall become
exercisable on, but not before, August 14, 2000. In no event
shall the Option become exercisable for any additional Option
Shares after Optionee's cessation of Service.
Optionee understands and agrees that the Option is granted
outside of the SoftNet Systems, Inc. 1998 Stock Incentive Plan (the "Plan").
Optionee further understands that many of the terms and conditions of the Plan
apply to the Option. Optionee agrees to be bound by the terms of the Option as
set forth in the Stock Option Agreement attached hereto as Exhibit A. Optionee
hereby acknowledges the receipt of a copy of the official prospectus for the
Plan in the form attached hereto as Exhibit B.
<PAGE>
Definitions. All capitalized terms in this Notice shall have
the meaning assigned to them in this Notice or in the attached Stock Option
Agreement.
DATED: August 23, 1999
SOFTNET SYSTEMS, INC.
By: _________________________________
Title: ______________________________
OPTIONEE: Stern & Co.
By: _________________________________
Title: ______________________________
Address: ____________________________
_____________________________________
Exhibit A - Stock Option Agreement
Exhibit B - 1998 Stock Incentive Plan Prospectus
<PAGE>
Exhibit A
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN
STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT
AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER
OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS
IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
SOFTNET SYSTEMS, INC.
STOCK OPTION AGREEMENT
RECITALS
A. Optionee is to render valuable services to the Corporation
(or a Parent or Subsidiary).
B. As partial compensation for such services, the Corporation
has agreed to grant Optionee an option to purchase 15,000 shares of its Common
Stock.
C. All capitalized terms in this Agreement shall have the
meaning assigned to them in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. Grant of Option. The Corporation hereby grants to Optionee,
as of the Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice. The Option Shares shall be purchasable from time
to time during the option term specified in Paragraph 2 at the Exercise Price.
This option is not being granted under the Plan, however, the terms and
conditions of the Plan, as they apply to Non-Statutory Options, shall apply to
this option, even if the Plan is not adopted by the Corporation's shareholders.
2. Option Term. This option shall have a maximum term of three
(3) years measured from the Grant Date and shall accordingly expire at the close
of business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5 or 6.
3. Limited Transferability. This option may only be
transferred with the consent of the Corporation, which consent may be withheld
in its absolute discretion.
4. Dates of Exercise. This option shall become exercisable for
the Option Shares in one or more installments as specified in the Grant Notice.
As the option becomes exercisable for such installments, those installments
shall accumulate and the option shall remain exercisable for the accumulated
installments until the Expiration Date or sooner termination of the option term
under Paragraph 5 or 6.
<PAGE>
5. Cessation of Service. The option term specified in
Paragraph 2 shall terminate (and this option shall cease to be outstanding)
prior to the Expiration Date should any of the following provisions become
applicable:
(a) Should Optionee cease to remain in Service for any
reason while holding this option, then Optionee shall
have a period of thirty (30) days (commencing with the
date of such cessation of Service) during which to
exercise this option, but in no event shall this option
be exercisable at any time after the Expiration Date.
(b) Should Optionee go bankrupt while holding this Option,
then all the unvested portion(s) of the Option Shares
then outstanding shall terminate and no further shares
shall vest.
(c) Should Optionee's Service be terminated for Misconduct,
then this option shall terminate immediately and cease
to remain outstanding.
6. Special Acceleration of Option.
(a) This option, to the extent outstanding at the time of a
Corporate Transaction, but not otherwise fully exercisable, shall automatically
accelerate so that this option shall, immediately prior to the effective date of
such Corporate Transaction, become exercisable for all of the Option Shares at
the time subject to this option and may be exercised for any or all of those
Option Shares as fully vested shares of Common Stock. No such acceleration of
this option shall occur, however, if and to the extent: (i) this option is, in
connection with the Corporate Transaction, to be assumed by the successor
corporation (or parent thereof) or (ii) this option is to be replaced with a
cash incentive program of the successor corporation which preserves the spread
existing at the time of the Corporate Transaction on the Option Shares for which
this option is not otherwise at that time exercisable (the excess of the Fair
Market Value of those Option Shares over the aggregate Exercise Price payable
for such shares) and provides for subsequent payout in accordance with the same
option exercise/vesting schedule set forth in the Grant Notice.
(b) Immediately following the Corporate Transaction, this
option shall terminate and cease to be outstanding, except to the extent assumed
by the successor corporation (or parent thereof) in connection with the
Corporate Transaction.
(c) If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply to the number and class of securities which
would have been issuable to Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise
Price, provided the aggregate Exercise Price shall remain the same.
<PAGE>
(d) This Agreement shall not in any way affect the right of
the Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
7. Adjustment in Option Shares. Should any change be made to
the Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the total number
and/or class of securities subject to this option and (ii) the Exercise Price in
order to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder.
8. Stockholder Rights. The holder of this option shall not
have any stockholder rights with respect to the Option Shares until such person
shall have exercised the option, paid the Exercise Price and become a holder of
record of the purchased shares.
9. Manner of Exercising Option.
(a) In order to exercise this option with respect to all or
any part of the Option Shares for which this option is at the time exercisable,
Optionee (or any other person or persons exercising the option) must take the
following actions: (i) Execute and deliver to the Corporation a Notice of
Exercise for the Option Shares for which the option is exercised.
(ii) Pay the aggregate Exercise Price for the purchased
shares in one or more of the following forms:
(A) cash or cashier's check made payable to the
Corporation;
(B) shares of Common Stock held by Optionee (or any other
person or persons exercising the option) for the
requisite period necessary to avoid a charge to the
Corporation's earnings for financial reporting purposes
and valued at Fair Market Value on the Exercise Date;
(iii)Furnish to the Corporation reasonabledocumentation
that the person or persons exercising the option (if
other than Optionee) have the right to exercise this
option.
(iv) Make reasonable arrangements with the Corporation (or
Parent or Subsidiary employing or retaining Optionee)
for the satisfaction of all Federal, state and local
income and employment tax withholding requirements
applicable to the option exercise.
(b) As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto.
(c) In no event may this option be exercised for any
fractional shares.
<PAGE>
10. Compliance with Laws and Regulations.
(a) The exercise of this option and the issuance of the Option
Shares upon such exercise shall be subject to compliance by the Corporation and
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock may be listed for trading at the time of
such exercise and issuance.
(b) The inability of the Corporation to obtain approval from
any regulatory body having authority deemed by the Corporation to be necessary
to the lawful issuance and sale of any Common Stock pursuant to this option
shall relieve the Corporation of any liability with respect to the non-issuance
or sale of the Common Stock as to which such approval shall not have been
obtained. The Corporation, however, shall use its best efforts to obtain all
such approvals.
11. Representations of the Corporation. The Corporation hereby
represents and warrants to the Optionee that:
(a) this Option has been duly and validly authorized and
issued;
(b) the grant of this Option has been made in accordance with
applicable laws (including, without limitation, the California Corporations Code
and the Title 10, Chapter 3 of the California Code of Regulations);
(c) no further action is necessary to issue this Option or the
Option Shares (with the exception of proper exercise of the Option and payment
for such shares as provided herein);
(d) the Option Shares will, upon payment of the Exercise Price
and proper exercise and issuance in accordance with the terms of this Agreement,
be validly issued, fully paid and nonassessable and free from all claims, liens
and encumbrances; and
(e) the Corporation has reserved for issuance the Option
Shares.
12. Successors and Assigns. Except to the extent otherwise
provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to
the benefit of, and be binding upon, the Corporation and its successors and
assigns and Optionee, Optionee's assigns, the legal representatives, heirs and
legatees of Optionee's estate and any beneficiaries of this option designated by
Optionee.
13. Notices. Any notice required to be given or delivered to
the Corporation under the terms of this Agreement shall be in writing and
addressed to the Corporation at its principal corporate offices. Any notice
required to be given or delivered to Optionee shall be in writing and addressed
to Optionee at the address indicated below Optionee's signature line on the
Grant Notice. All notices shall be deemed effective upon personal delivery or
upon deposit in the U.S. mail, postage prepaid and properly addressed to the
party to be notified.
14. Financing. The Plan Administrator may, in its absolute
discretion and without any obligation to do so, permit Optionee to pay the
Exercise Price for the purchased Option Shares by delivering a full-recourse
promissory note payable to the Corporation. The terms of any such promissory
note (including the interest rate, the requirements for collateral and the terms
of repayment) shall be established by the Plan Administrator in its sole
discretion.
15. Construction. This Agreement and the option evidenced
hereby are in all respects limited by and subject to the terms of the Plan. All
decisions of the Plan Administrator with respect to any question or issue
arising under the Plan or this Agreement shall be conclusive and binding on all
persons having an interest in this option.
16. Governing Law. The interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California without resort to that State's conflict-of-laws rules.
<PAGE>
Exercise Notice
I hereby notify SoftNet Systems, Inc. (the "Corporation") that
I elect to purchase shares of the Corporation's Common Stock (the "Purchased
Shares") at the option exercise price of $ per share (the "Exercise Price")
pursuant to that certain option (the "Option") granted to me on
, -------.
Concurrently with the delivery of this Exercise Notice to the
Corporation, I shall hereby pay to the Corporation the Exercise Price for the
Purchased Shares in accordance with the provisions of my agreement with the
Corporation (or other documents) evidencing the Option and shall deliver
whatever additional documents may be required by such agreement as a condition
for exercise.
Representations on Exercise of Options
1. REPRESENTATIONS AND WARRANTIES OF OPTIONEE.
Optionee represents and warrants to the Corporation that:
(a) Purchase for Own Account for Investment.
Upon exercise of the stock option, Optionee is purchasing the underlying Common
Stock shares (" Restricted Securities") pursuant to 144(a) for Optionee's own
account for investment purposes only and not with a view to, or for sale in
connection with, a distribution of the Restricted Securities within the meaning
of the Securities Act of 1933, as amended (the "1933 Act"). Optionee has no
present intention of selling or otherwise disposing of all or any portion of the
Restricted Securities and no one other than Optionee has any beneficial
ownership of any of the Restricted Securities.
(b) Access to Information. Optionee has had access to all
information regarding the Corporation and its present and prospective business,
assets, liabilities and financial condition that Optionee reasonably considers
important in making the decision to purchase the Restricted Securities, and
Optionee has had ample opportunity to ask questions of the Corporation's
representatives concerning such matters and this investment.
(c) Understanding of Risks. Optionee is fully aware of: (i)
the highly speculative nature of the investment in the Restricted Securities;
(ii) the financial hazards involved; (iii) the lack of liquidity of the
Restricted Securities and the restrictions on transferability of the Restricted
Securities (e.g., that Optionee may not be able to sell or dispose of the
Restricted Securities or use them as collateral for loans); (iv) the
qualifications and backgrounds of the management of the Corporation; and (v) the
tax consequences of investment in the Restricted Securities.
(d) Optionee's Qualifications. Optionee has a pre-existing
personal or business relationship with the Corporation and/or certain of its
officers and/or directors of a nature and duration sufficient to make Optionee
aware of the character, business acumen and general business and financial
circumstances of the Corporation and/or such officers and directors. By reason
of Optionee's business or financial experience, Optionee is capable of
evaluating the merits and risks of this investment, has the ability to protect
Optionee's own interests in this transaction and is financially capable of
bearing a total loss of this investment.
<PAGE>
(e) No General Solicitation. At no time was Optionee presented
with or solicited by any publicly issued or circulated newspaper, mail, radio,
television or other form of general advertising or solicitation in connection
with the offer, sale and purchase of the Restricted Securities.
(f) Compliance with Securities Laws. Optionee understands and
acknowledges that, in reliance upon the representations and warranties made by
Optionee herein, the Restricted Securities are not being registered with the
Securities and Exchange Commission ("SEC") under the 1933 Act or being qualified
under the California Corporate Securities Law of 1968, as amended (the "Law"),
but instead are being issued under an exemption or exemptions from the
registration and qualification requirements of the 1933 Act and the Law or other
applicable state securities laws which impose certain restrictions on Optionee's
ability to transfer the Restricted Securities.
(g) Restrictions on Transfer. Optionee understands that
Optionee may not transfer any Restricted Securities unless such Restricted
Securities are registered under the 1933 Act or qualified under the Law or
unless, in the opinion of counsel to the Corporation, exemptions from such
registration and qualification requirements are available. Optionee understands
that only the Corporation may file a registration statement with the SEC or the
California Commissioner of Corporations and that the Corporation is under no
obligation to do so with respect to the Restricted Securities. Optionee has also
been advised that exemptions from registration and qualification may not be
available or may not permit Optionee to transfer all or any of the Restricted
Securities in the amounts or at the times proposed by Optionee.
(h) Rule 144. In addition, Optionee has been advised that SEC
Rule 144 promulgated under the 1933 Act, which permits certain limited sales of
unregistered securities, is not presently available with respect to the
Restricted Securities and, in any event, requires that the Restricted Securities
be held for a minimum of one year, and in certain cases two years, after they
have been purchased and paid for (within the meaning of Rule 144), before they
may be resold under Rule 144.
The following or similar legend(s) shall be placed on the stock certificate(s)
representing the shares:
A STATEMENT CONTAINING THE RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF
THE CORPORATION'S PREFERRED AND COMMON STOCK MAY BE OBTAINED, WITHOUT CHARGE, AT
THE CORPORATION'S OFFICE.
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN
STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT
AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER
OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS
IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
<PAGE>
The Optionee agrees that, in order to ensure and enforcement compliance
with the restrictions imposed by applicable law and those referred to in the
foregoing legends, or elsewhere herein, the Corporation may issue appropriate
"stop transfer" instructions to its transfer agent, if any, with respect to any
certificate or other instrument representing Restricted Securities, or if the
Corporation transfers its own securities, that it may make appropriate notations
to the same effect in the Corporation's records.
___________________________ , ________
Date
___________________________________________
Optionee
Address: __________________________________
___________________________________________
Print name in exact manner it is
to appear on the stock certificate: ___________________________________________
Address to which certificate is
to be sent, if different from
address above: ___________________________________________
___________________________________________
Federal Identification Number: ___________________________________________
<PAGE>
APPENDIX
The following definitions shall be in effect under the
Agreement:
A. Agreement shall mean this Stock Option Agreement.
B. Board shall mean the Corporation's Board of Directors.
C. Common Stock shall mean shares of the Corporation's
common stock.
D. Code shall mean the Internal Revenue Code of 1986, as
amended.
E. Corporate Transaction shall mean either of the
following stockholder-approved transactions to which
the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fiftypercent (50%) of the total
combined voting power of the Corporation's outstanding
securities are transferred to a person or persons
different from the persons holding those securities
immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in
complete liquidation or dissolution of the Corporation.
F. Corporation shall mean SoftNet Systems, Inc., a Delaware
corporation, and any successor corporation to all or substantially all of the
assets or voting stock of SoftNet Systems, Inc. which shall by appropriate
action adopt this Agreement.
G. Employee shall mean an individual who is in the employ of
the Corporation (or any Parent or Subsidiary), subject to the control and
direction of the employer entity as to both the work to be performed and the
manner and method of performance.
H. Exercise Date shall mean the date on which the option shall
have been exercised in accordance with Paragraph 9 of the Agreement.
I. Exercise Price shall mean the exercise price per Option
Share as specified in the Grant Notice.
J. Expiration Date shall mean the date on which the option
expires as specified in the Grant Notice.
K. Fair Market Value per share of Common Stock on any relevant
date shall be determined in accordance with the following provisions:
<PAGE>
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be
deemed equal to the closing selling price per share of
Common Stock on the date in question, as the price is
reported by the National Association of Securities
Dealers on the Nasdaq National Market. If there is no
closing selling price for the Common Stock on the date
in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for
which such quotation exists, or
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be deemed
equal to the closing selling price per share of Common
Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is
officially quoted in the composite tape of transactions
on such exchange. If there is no closing selling price
for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on
the last preceding date for which such quotation
exists.
L. Grant Date shall mean the date of grant of the option as
specified in the Grant Notice.
M. Grant Notice shall mean the Notice of Grant of Stock Option
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.
N. Incentive Option shall mean an option which satisfies the
requirements of Code Section 422.
O. Misconduct shall mean the commission of any act of fraud,
embezzlement or dishonesty by Optionee, any unauthorized use or disclosure by
Optionee of confidential information or trade secrets of the Corporation (or any
Parent or Subsidiary), or any other intentional misconduct by Optionee adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
Optionee or any other individual in the Service of the Corporation (or any
Parent or Subsidiary).
P. Non-Statutory Option shall mean an option not intended to
satisfy the requirements of Code Section 422.
Q. Notice of Exercise shall mean the notice of exercise in the
form attached hereto as Exhibit I.
R. Option Shares shall mean the number of shares of Common
Stock subject to the option as specified in the Grant Notice.
<PAGE>
S. Optionee shall mean the person to whom the option is
granted as specified in the Grant Notice.
T. Parent shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations ending with the Corporation,
provided each corporation in the unbroken chain (other than the Corporation)
owns, at the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
U. Permanent Disability shall mean the inability of Optionee
to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which is expected to result in death
or has lasted or can be expected to last for a continuous period of twelve (12)
months or more.
V. Plan shall mean the Corporation's 1998 Stock Incentive
Plan.
W. Plan Administrator shall mean either the Board or a
committee of the Board acting in its capacity as administrator of the Plan.
X. Service shall mean the Optionee's performance of services
for the Corporation (or any Parent or Subsidiary) in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor.
Y. Stock Exchange shall mean the American Stock Exchange or
the New York Stock Exchange.
Z. Subsidiary shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
Exhibit 5
September 1, 1999
SOFTNET SYSTEMS, INC
650 Townsend Street
San Francisco, CA 94103
Re: SoftNet Systems, Inc.
Registration Statement on Form S-3
for 1,249,299 Shares of Common Stock
Ladies and Gentlemen:
We have acted as counsel to SoftNet Systems, Inc., a Delaware
corporation (the "Company"), in connection with the above-referenced
registration statement (the "Registration Statement") filed with the Securities
and Exchange Commission under the Securities Act of 1933, as amended (the
"Act"), under which certain stockholders of the Company intend to sell up to an
aggregate 1,249,299 shares of the Company's common stock, par value $0.01 per
share (the "Shares").
This opinion is being furnished in accordance with the requirements of
Item 16 of Form S-3 and Item 601(b)(5)(i) of Regulation S-K.
We have reviewed the Company's charter documents and the corporate
proceedings taken by the Company in connection with the issuance and sale of the
Shares. Based on such review, we are of the opinion that the Shares have been
duly authorized, and if, as and when issued in accordance with the Registration
Statement and the related prospectus (as amended and supplemented through the
date of issuance) will be legally issued, fully paid and non-assessable.
We consent to the filing of this opinion letter as Exhibit 5 to the
Registration Statement. In giving this consent we do not thereby admit that we
are within the category or persons whose consent is required under Section 7 of
the Act, the rules and regulations of the Securities and Exchange Commission
promulgated thereunder, or Item 509 of Regulation S-K.
This opinion letter is rendered as of the date first written above and
we disclaim any obligation to advise you of facts, circumstances, events or
developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinion expressed herein. Our opinion is expressly
limited to the matters set forth above and we render no opinion, whether by
implication or otherwise, as to any other matters relating to the Company or the
Shares.
Very truly yours,
/s/BROBECK, PHLEGER & HARRISON LLP
Exhibit 23.2
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the prospectus
constituting part of this Registration Statement of SoftNet Systems, Inc. on
Form S-3 (No. 333-71887) of our report dated December 1, 1998, except for Note
18 which is dated January 13, 1999, which appears on the 1998 Annual Report to
Shareholders of SoftNet Systems, Inc., which is incorporated by reference in
SoftNet's Annual Report on Form 10-K for the year ended September 30, 1998. We
hereby further consent to the incorporation by reference in the prospectus
constituting part of this Registration Statement on Form S-3 of our report on
Intelligent Communications, Inc. Financial Statements dated February 9, 1999,
which is incorporated by reference in SoftNet's Reports on Form 8-K/A filed with
the SEC on February 26, 1999 and March 12, 1999. We also consent to the
reference to us under the heading "Experts" in such prospectus and Form 8-K/A.
/s/PRICEWATERHOUSECOOPERS LLP
September 2, 1999
San Jose, California
