SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
[X] Filed by the registrant
[ ] Filed by a party other than the registrant Check the appropriate
box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
SoftNet Systems, Inc.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transactions applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials:
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[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[LOGO]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 16, 1999
TO THE STOCKHOLDERS OF SOFTNET SYSTEMS, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
SoftNet Systems, Inc., a New York corporation (the "Company"), will be held on
March 16, 1999, at 10:00 a.m. local time, at the Company's corporate offices
located at 650 Townsend Street, San Francisco, California 94103, for the
following purposes, as more fully described in the Proxy Statement accompanying
this Notice:
1. To approve the Company's reincorporation in Delaware;
2. To increase the number of authorized shares of capital stock;
3. To approve the adoption of the Company's 1998 Stock Incentive Plan
under which 2,850,668 shares of common stock have been reserved for
issuance;
4. To authorize and approve the issuance of the common stock underlying
the Company's Convertible Preferred Stock and Warrants to purchase
common stock, which in the aggregate would represent 20% or more of the
outstanding shares of common stock;
5. To approve the sale of the Company's non-Internet related subsidiaries;
6. To elect directors;
7. To appoint PricewaterhouseCoopers LLP as independent auditors of the
Company for the fiscal year ending September 30, 1999; and
8. To conduct such other business as may properly come before the meeting.
Only stockholders of record at the close of business on February 5,
1999 are entitled to notice of and to vote at this Annual Meeting. The stock
transfer books will not be closed between the record date and the date of the
meeting. A list of stockholders entitled to vote at this Annual Meeting will be
available for inspection at the executive offices of the Company.
All stockholders are cordially invited to attend the meeting in person.
Whether or not you plan to attend, please sign and return the enclosed proxy as
promptly as possible in the envelope enclosed for your convenience. Should you
receive more than one proxy because your shares are registered in different
names and addresses, each proxy should be signed and returned to assure that all
your shares will be voted. You may revoke your proxy at any time prior to this
Annual Meeting. If you attend this Annual Meeting and vote by ballot, your proxy
will be revoked automatically and only your vote at the meeting will be counted.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN, DATE AND
MAIL THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED WHICH REQUIRES NO POSTAGE FOR
MAILING IN THE UNITED STATES. A PROMPT RESPONSE IS HELPFUL, AND YOUR COOPERATION
WILL BE APPRECIATED.
BY ORDER OF THE BOARD OF DIRECTORS
Steven M. Harris
Vice President and Secretary
______________, 1999
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SOFTNET SYSTEMS, INC.
650 Townsend Street
San Francisco, California 94103
PROXY STATEMENT
FOR THE 1999 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 16, 1999
General
The enclosed proxy ("Proxy") is solicited on behalf of the Board of
Directors (the "Board of Directors" or the "Board") of SoftNet Systems, Inc., a
New York corporation (the "Company"), for use at the 1999 Annual Meeting of
Stockholders (the "Annual Meeting"). The Annual Meeting will be held at 10:00
a.m. on March 16, 1999 at the Company's corporate offices located at 650
Townsend Street, San Francisco, California 94103. These proxy solicitation
materials were mailed on or about ______________, 1999 to all stockholders
entitled to vote at the Annual Meeting.
Voting
The specific proposals to be considered and acted upon at the Annual
Meeting are summarized in the accompanying Notice and are described in more
detail in this Proxy Statement. On February 5, 1999, the record date for
determination of stockholders entitled to notice of and to vote at the Annual
Meeting (the "Record Date"), ___________ shares of the Company's common stock,
$.01 par value ("common stock"), were issued and outstanding. Each stockholder
is entitled to one vote for each share of common stock held by such stockholder
on February 5, 1999.
A majority of the outstanding shares entitled to vote at the Annual
Meeting and represented in person or by proxy will constitute a quorum. Each
share has one vote on all other matters to be voted upon at the Annual Meeting.
If choices are not specified on the proxy, the shares will be voted for the
proposal described herein. Under New York law, abstentions and broker
"non-votes" will be counted towards determining the presence of a quorum. With
respect to all proposals, abstentions and broker "non-votes" will have the
effect of a negative vote. A broker "non-vote" occurs when a nominee holding
shares for a beneficial owner does not vote for a particular proposal because
the nominee does not have discretionary voting power with respect to that item
and has not received instructions from the beneficial owner. Unvoted shares are
termed "non-votes" when a nominee holding shares for beneficial owners may not
have received instructions from the beneficial owner and may not have exercised
discretionary voting power on certain matters, but with respect to other matters
may have voted pursuant to discretionary authority or instructions from the
beneficial owners.
The following outlines the vote required to approve each proposal set
forth in this Proxy:
o Proposal One, reincorporation in Delaware, requires approval by
at least two-thirds of the Company's outstanding common stock.
o Proposal Two, increase of the authorized stock of the Company,
requires approval by at least a majority of all outstanding
shares entitled to vote at the Annual Meeting.
o Proposal Three, adoption of the Company's 1998 Stock Incentive
Plan, requires approval by at least a majority of the shares of
common stock present in person or by proxy at the Annual
Meeting.
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o Proposal Four, authorization and approval of the issuance of the
Company's common stock underlying its Convertible Preferred
Stock and Warrants, requires approval by at least a majority of
the shares of common stock present in person or by proxy at the
Annual Meeting.
o Proposal Five, to approve the sale of the Company's non-Internet
related businesses, requires approval by at least two-thirds of
the Company's outstanding common stock.
o Proposal Six, to elect directors, requires approval by at least
a majority of the shares of common stock present in person or by
proxy at the Annual Meeting.
o Proposal Seven, to appoint PricewaterhouseCoopers LLP as
independent auditors of the Company for the fiscal year ending
September 30, 1999, shares of common stock present in person or
by proxy at the Annual Meeting.
As of the Record Date, the current Directors and officers of the
Company have the right to vote___ shares, representing _____% of the outstanding
common stock, and have advised the Company that their present intent is to vote
in favor of each proposal and all persons nominated as directors.
The Board of Directors recommends a vote FOR each proposal.
Revocability of Proxies
You may revoke or change your Proxy at any time before the Annual
Meeting by filing with the Secretary of the Company at the Company's principal
executive offices, a notice of revocation or another signed proxy with a later
date. You may also revoke your proxy by attending the Annual Meeting and voting
in person.
Solicitation
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing and mailing of this Proxy Statement, the proxy
and any additional soliciting materials furnished to stockholders. Copies of
solicitation materials will be furnished to brokerage houses, fiduciaries, and
custodians holding shares in their names that are beneficially owned by others
so that they may forward this solicitation material to such beneficial owners.
In addition, the Company may reimburse such persons for their costs in
forwarding the solicitation materials to such beneficial owners. The original
solicitation of proxies by mail may be supplemented by a solicitation by
telephone, telegram, or other means by directors, officers or employees. Except
as described above, the Company does not presently intend to solicit proxies
other than by mail.
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RISK FACTORS
The Company faces certain risks in operating its business, and the
Company's securityholders face certain risks in holding the Company's
securities. Please see the Company's Annual Report on Form 10-K for the year
ended September 30, 1998, which is being delivered with this Proxy Statement and
is incorporated by reference herein.
MATTERS TO BE CONSIDERED AT ANNUAL MEETING
PROPOSAL ONE
REINCORPORATION IN DELAWARE
General
On October 6, 1998, the Board of Directors adopted a plan, subject to
approval by the stockholders, to reincorporate the Company under the laws of the
State of Delaware (the "Reincorporation"). The Company was incorporated under
the laws of the State of New York in 1956 under the name Tensor Electric
Development Co. Inc. The Board of Directors believes Delaware corporate law will
better serve the stockholders' interests and provide the Company with advantages
not available under New York corporate law. Therefore, the Board of Directors
recommends the stockholders approve the form of Merger Agreement that appears as
Appendix A at the end of this Proxy Statement (the "Merger Agreement") to effect
a transaction commonly called a "reincorporation."
The Company will continue to be called "SoftNet Systems, Inc." after
the reincorporation. To explain the proposal, however, this Proxy Statement will
call the Company that exists today as a New York corporation either "the
Company" or "SoftNet-NY," while "SoftNet-DE" will refer to the new Delaware
corporation that will initially be organized as a wholly-owned subsidiary of
SoftNet-NY. If the holders of at least two-thirds of all outstanding shares of
the common stock approve the Merger Agreement, SoftNet-NY will be merged into
SoftNet-DE. The effective date will be when the necessary documents have been
filed in both New York and Delaware. SoftNet-DE will be the surviving
corporation, and the charter and Bylaws of the new corporation will be
substantially the same as those of SoftNet-NY today, except as otherwise
discussed below.
Reasons for the Change
The Company has not maintained its principal office in New York for
some time. It is anticipated that SoftNet-DE will have its principal corporate
offices at SoftNet-NY's address in California, and will appoint a registered
agent to represent it in Delaware. SoftNet-NY's current address is 650 Townsend
Street, San Francisco, California 94103. The Company will move into the new
space when it is available, which is anticipated to be in the first calendar
quarter of 1999. Reincorporation in Delaware will not change the business plan,
management, assets, liabilities, net worth, capitalization or employee benefit
plans of the Company. Each outstanding share of SoftNet-NY's common stock and
preferred stock (hereinafter referred to as the "common stock" and "Preferred
Stock," respectively) will automatically become one share of the common stock or
preferred stock, respectively, of SoftNet-DE. Furthermore, each stock option,
warrant or convertible security that would be, or later becomes, exercisable
for, or convertible into, shares of the common stock will automatically be, or
later become, exercisable for, or convertible into, the same number of shares of
the common stock of SoftNet-DE on the same terms and conditions.
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For many years, Delaware has encouraged incorporation in that state by
adopting modern, comprehensive and flexible corporate laws, and it periodically
updates and revises them to meet changing business needs. The Delaware General
Corporation Law (the "DGCL") is considered a sophisticated statute, highly
conducive to business. That is why many corporations choose Delaware initially
as their place of incorporation, and why many others have reincorporated in
Delaware by means of transactions like the one now proposed. Because of
Delaware's policy of encouraging incorporation and its preeminence as the most
popular state of incorporation for major corporations, the courts of Delaware
have developed considerable expertise in dealing with corporate issues. As a
result, Delaware's case law interpreting its corporate laws is more developed
than that of any other state. This gives Delaware corporate law an extra measure
of predictability that is useful and often crucial in our precedent-based
judicial system.
For the board of directors and the management of a Delaware
corporation, these features of Delaware law allow greater certainty in managing
the corporation. The state's court system also provides for relatively prompt
resolution of most corporate disputes. For example, Delaware has a specialized
Court of Chancery that hears cases involving corporate law. The Court of
Chancery has no jurisdiction over most other kinds of cases, and therefore its
dockets are not as backlogged as many other states. In addition, the Supreme
Court of Delaware hears and decides important corporate appeals rapidly.
The Board of Directors considered the predictability and flexibility of
Delaware law and the efficiency of its judicial process when it approved the
present proposal. The Board of Directors also recognized the possibility that
choosing to be governed by the corporate law of Delaware, as so many other
corporations have done, may further enhance the reputation of the Company.
Authorized Shares of Capital Stock
After the Reincorporation, and depending on stockholder approval of
proposal two herein, the authorized capital stock of SoftNet-DE will consist of
100,000,000 shares of common stock, par value $.01 per share and 4,000,000
shares of preferred stock, par value $.10 per share (see the section "Changes in
Authorized Capital Stock" under this proposal one for additional discussion).
SoftNet-DE will not issue any shares of stock in connection with the
Reincorporation, other than the shares into which the outstanding shares of
SoftNet-NY will convert. In the event the stockholders do not approve proposal
two, the authorized shares of common stock of SoftNet-DE will be 25,000,000.
Conversion of Shares
As soon as the Reincorporation becomes effective, SoftNet-DE will issue
a press release announcing that the transaction has occurred. At the same time,
the holders of the old shares of SoftNet-NY will become holders of the new
shares of SoftNet-DE. Shares of SoftNet-NY will automatically convert into
shares of SoftNet-DE, on these terms:
o The conversion will be on a one-for-one basis.
o Each share of the common stock of SoftNet-NY which is
outstanding at the effective date will become one share of the
new common stock, par value $.01 per share, of SoftNet-DE.
o Each share of the Preferred Stock of SoftNet-NY which is
outstanding at the effective date will become one share of the
new preferred stock, par value $.10 per share, of SoftNet-DE.
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o Each share of the common stock and Preferred Stock held in the
treasury of SoftNet-NY will become a share held in the treasury
of SoftNet-DE.
THIS MEANS THAT, BEGINNING ON THE EFFECTIVE DATE, EACH SOFTNET-NY STOCK
CERTIFICATE WHICH WAS OUTSTANDING JUST BEFORE THE REINCORPORATION WILL
AUTOMATICALLY REPRESENT THE SAME NUMBER OF SOFTNET-DE SHARES. THEREFORE,
STOCKHOLDERS OF SOFTNET-NY NEED NOT EXCHANGE THEIR STOCK CERTIFICATES FOR NEW
SOFTNET-DE STOCK CERTIFICATES. LIKEWISE, STOCKHOLDERS SHOULD NOT DESTROY THEIR
OLD CERTIFICATES AND SHOULD NOT SEND THEIR OLD CERTIFICATES TO THE CORPORATION,
EITHER BEFORE OR AFTER THE EFFECTIVE DATE OF REINCORPORATION.
Trading of the Stock
After the Reincorporation, those who were formerly stockholders of
SoftNet-NY may continue to make sales or transfers using their SoftNet-NY stock
certificates. SoftNet-DE will issue new certificates representing shares of
SoftNet-DE common stock for transfers occurring after the effective date of the
Reincorporation. On request, SoftNet-DE will issue new certificates to anyone
who holds SoftNet-NY stock certificates. Any request for new certificates will
be subject to normal stock transfer requirements including proper endorsement,
signature guarantee, if required, and payment of applicable taxes.
Stockholders whose shares of SoftNet-NY were freely tradable before the
Reincorporation will own shares of SoftNet-DE that are freely tradable after the
Reincorporation. Similarly, any Stockholders holding securities with transfer
restrictions before the Reincorporation will hold shares of SoftNet-DE which
have the same transfer restrictions after the Reincorporation. For purposes of
computing the holding period under Rule 144 of the Securities Act of 1933, as
amended, those who hold SoftNet-DE stock certificates will be deemed to have
acquired their shares on the date they originally acquired their shares in
SoftNet-NY.
After the Reincorporation, SoftNet-DE will continue to be a publicly
held company, with its common stock tradable on the American Stock Exchange
("AMEX"), or tradable over the Nasdaq Stock Market ("NASDAQ"). SoftNet-DE will
also file with the Securities and Exchange Commission (the "Commission") and
provide to its stockholders the same types of information that SoftNet-NY has
previously filed and provided.
Certain Federal Income Tax Consequences
The following is a brief summary of the principal federal income tax
consequences of the Reincorporation under current law to holders of the common
stock and Preferred Stock. This summary is for general information only. It does
not address potential legislative changes that may affect these consequences,
and it does not address any state, local or foreign tax consequences of
reincorporation. The Company has not obtained, and does not intend to obtain, a
ruling from the Internal Revenue Service to the effect that the Reincorporation
is nontaxable.
Neither the Company nor its stockholders will recognize any gain or
loss by reason of the Reincorporation. The tax basis of the shares of SoftNet-DE
common stock and preferred stock received by a stockholder of SoftNet-NY through
the Reincorporation will be the same as the tax basis of SoftNet-NY common stock
and Preferred Stock prior to Reincorporation. A stockholder of SoftNet-NY who
holds the stock as a capital asset should include the period he or she has held
the common stock and Preferred Stock in determining the holding period for his
or her SoftNet-DE shares.
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STOCKHOLDERS SHOULD CONSULT THEIR PERSONAL TAX ADVISERS TO DISCUSS
THEIR OWN TAX SITUATIONS AND ANY POTENTIAL CHANGES IN FEDERAL, STATE AND LOCAL
LAWS AND OTHER APPLICABLE TAX MATTERS RELATING TO THE REINCORPORATION.
Abandonment
The Board of Directors will have the right to abandon the Merger
Agreement and take no further action towards reincorporating the Company in
Delaware at any time before the Reincorporation becomes effective, even after
stockholder approval, if for any reason the Board of Directors determines that
it is not advisable to proceed with the Reincorporation, including considering
the number of shares for which appraisal rights have been exercised and the cost
to the Company thereof.
Comparison of New York and Delaware Corporate Laws
If this proposal one is approved by the holders of at least two-thirds
of the Company's outstanding common stock, and if the Company reincorporates in
Delaware as described above, then the stockholders of the Company will become
stockholders of the new Delaware corporation, SoftNet-DE. There are differences
between the Business Corporation Law of New York (the "NYBCL") and the DGCL that
will affect the rights of stockholders in certain respects. Some of these
differences define the particular provisions a corporation may choose to put
into its certificate of incorporation, commonly called the "charter," and other
differences may not affect the Company in a material way.
The following is a summary of the material differences between the
rights of shareholders under the NYBCL and the DGCL. This summary reflects
certain amendments to the NYBCL that became effective on June 15, 1998.
Amendment of Charter
Both the NYBCL and the DGCL allow a board of directors to recommend a
charter amendment for approval by stockholders, and a majority of the shares
entitled to vote at a stockholders' meeting are normally enough to approve that
amendment. Both bodies of law require that a majority of the holders of any
particular class of stock must approve the amendment if it would have an adverse
effect on the holders of that class. In addition, both bodies of law allow a
corporation to require a vote larger than a majority on special types of issues.
Amendment of Bylaws
The Bylaws of SoftNet-NY provide, as permitted by the NYBCL, that the
Board of Directors may amend, adopt or repeal the Company's Bylaws, subject to
the rights of stockholders to alter, amend, or repeal those Bylaws made by the
Board of Directors except that the Board of Directors shall have no power to
alter, amend or repeal a Bylaw adopted by the stockholders. Under the DGCL,
however, the board of directors may amend, adopt or repeal Bylaws only if
permitted by the charter. Additionally, both the NYBCL and the DGCL allow
stockholders to further amend or repeal Bylaws adopted or amended by the board
of directors. The charter of SoftNet-DE will specifically permit amendment of
the Bylaws by the Board of Directors.
Special Meetings of Stockholders
Under both the NYBCL and the DGCL, the board of directors or anyone
authorized in the charter or Bylaws may call a special meeting of stockholders.
Currently the Bylaws of SoftNet-NY
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allow the Chairman of the Board of Directors, the President or the Board of
Directors to call a special meeting. The Bylaws further provide that upon
written request to the Company by stockholders who hold not less than 66-2/3% of
the outstanding shares of capital stock of the Company entitled to vote for the
election of directors, the Company shall call a special meeting. The provision
in the Bylaws of SoftNet-DE will be comparable, except that only 15% of the
outstanding shares of the common stock of the Company entitled to vote for the
election of directors will be required to call a special meeting.
Corporate Action without Stockholders' Meeting
The NYBCL and DGCL differ concerning corporate action by written
consent and without a stockholders meeting. Under the NYBCL, the corporation's
charter may permit the holders of at least the minimum number of votes required
to authorize such an action to take the action. Otherwise, the consent must be
unanimous. The DGCL, on the other hand, permits stockholders to take action by
the written consent of at least the minimum number of votes required to act at a
stockholders meeting, unless the charter forbids it.
Inspection of Stockholders List
The NYBCL requires five days' written notice from a stockholder of
record to inspect the list of record stockholders for any purpose reasonably
related to the person's interest as a stockholder. Under the DGCL, any
stockholder may inspect the stockholders list for any purpose reasonably related
to the person's interest as a stockholder. In addition, for at least ten days
prior to each stockholders meeting, a Delaware corporation must make available
for examination a list of stockholders entitled to vote at the meeting.
Vote Required for Certain Transactions
Until February 1998, the NYBCL required the holders of two-thirds of
the outstanding stock of a New York corporation to approve certain mergers,
consolidations or sales of all or substantially all the corporation's assets
that may occur outside the ordinary course of business. Since February 1998,
however, a New York corporation may provide in its charter that the holders of a
majority of the outstanding stock may approve such transactions. The Company has
not adopted such a charter provision. Under the DGCL, holders of a majority of
the outstanding stock entitled to vote on such transactions have the power to
approve a merger, consolidation or sale of all or substantially all the assets
without a special provision in the charter, unless the charter provides
otherwise. Furthermore, in the case of a merger under the DGCL, stockholders of
the surviving corporation do not have to approve the merger at all, unless the
charter provides otherwise, if these three conditions are met:
o No amendment of the surviving corporation's charter is made by
the merger agreement; and
o Each share of the surviving corporation's stock outstanding or in
the treasury immediately prior to the effective date of the
merger is to be an identical outstanding or treasury share of the
surviving corporation after the effective date; and
o Either no shares of common stock of the surviving corporation and
no shares, securities or obligations convertible into such stock
are to be issued or delivered under the plan of merger, or the
authorized unissued shares or the treasury shares of common stock
of the surviving corporation to be issued or delivered under the
plan of merger plus those initially issuable upon conversion of
any other shares, securities or obligations to be issued or
delivered under such plan do not exceed 20% of the
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shares of common stock of such constituent corporation
outstanding immediately prior to the effective date of the
merger.
Special vote requirements may apply to certain business combinations
with interested stockholders. See the discussion below under the heading
"Business Combinations with Interested Stockholders."
Classification of Directors
Both the NYBCL and the DGCL permit "classified" boards of directors,
which means the directors have staggered terms that do not all expire at the
same time. The NYBCL permits as many as four classes, the DGCL permits as many
as three. SoftNet-NY currently has one class of directors, and the same will be
true for SoftNet-DE.
Number of Directors
Under the NYBCL, the number of directors may be one or more, and any
number may be fixed by the Bylaws or by the action of the stockholders or of the
board of directors under the specific provisions of the Bylaws adopted by the
stockholders, and if not so fixed the number of directors shall be one. The
number of directors may be increased or decreased by amendment of the Bylaws or
by action of the stockholders or of the board of directors under the specific
provisions of a Bylaw adopted by the stockholders, subject to certain
limitations. Under the DGCL, a corporation may have as few as one director and
there is no statutory upper limit on the number of directors. The specific
number may be fixed in the Bylaws or the charter, but if fixed in the charter,
may be changed only by amendment of the charter. If the charter is silent as to
the number of directors, the board of directors may fix or change the authorized
number of directors pursuant to a provision of the Bylaws. The charter of
SoftNet-NY provides that the Board of Directors shall determine the size of the
Board of Directors; provided, however, that the Board of Directors size may not
be less than five members. Currently, there are seven members of the Board of
Directors, and the Board of Directors has amended the Company's Bylaws to
provide for six directors as of the date of the Annual Meeting. While the Board
of Directors has no current plans to otherwise change the number of directors,
it may decide to do so in the future.
Removal of Directors
Under the NYBCL, directors may be removed by the stockholders for
cause, or by either the stockholders or the directors if the charter so
provides. Furthermore, if the charter or Bylaws so provide, directors may be
removed without cause by a vote of the stockholders. The Company's Bylaws
provide that a director may not be removed prior to the expiration of his term
except for cause by a vote of the stockholders. Directors under the DGCL would
generally be subject to removal with or without cause by a majority of the
stockholders, unless the charter provides otherwise. The Bylaws of SoftNet-DE
will allow for removal of directors for reasons other than cause as provided for
in the DGCL.
Limitation of Directors' Liability
Both states permit the limitation of a director's personal liabiity
while acting in his or her official capacity. Under the NYBCL, a director is not
liable to the corporation or to its stockholders for monetary damages if the
director has acted in good faith and with the same degree of care that an
ordinarily prudent person would exercise in similar circumstances. The DGCL, on
the other hand, requires a charter provision in order to limit a director's
liability for breach of his or her fiduciary duty to the corporation. The
Company's current charter limits liability of directors for any breach of duty
to the
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extent permitted by the Section 402(b) of the NYBCL, and the charter of
SoftNet-DE will likewise limit such liability to the fullest extent permitted by
the DGCL.
In some cases, directors may be liable despite these limitations. Under
the NYBCL, for example, a director is not immune from liability if he or she
violates applicable statutes which expressly make directors liable. The DGCL
forbids any limitation of liability if the director breached his or her duty of
loyalty to the corporation or its stockholders, or if he or she failed to act in
good faith, received an improper personal benefit from the corporation, or
authorized a dividend or stock repurchase that was forbidden by the DGCL.
Indemnification of Directors and Officers, and Insurance
With some variations, both the NYBCL and the DGCL allow a corporation
to "indemnify," that is, to make whole, any person who is or was a director,
officer, employee or agent of the corporation if that person is held liable for
something he or she did or failed to do in an official capacity. Besides
covering court judgments, out-of-court settlements, fines and penalties, both
laws also allow the corporation to advance certain reasonable expenses the
person will incur or to reimburse the person's expenses after he or she incurs
them, even if liability is not actually proven. The right to indemnification
under both laws does not normally exclude other rights of recovery the
indemnified person may have.
Additionally, both the NYBCL and the DGCL permit a corporation to
purchase insurance for its directors, officers, employees and agents against
some or all of the costs of such indemnification or against liabilities arising
from actions and omissions of the insured person, even though the corporation
may not have power to indemnify the person against such liabilities. The NYBCL,
however, restricts the kinds of claims that may be made under insurance
purchased by the corporation against these liabilities. For example, there would
be no insurance coverage if the person to be indemnified was guilty of
deliberate dishonesty and that dishonesty was material to the event that
produced the claim, or if the person gained some financial profit or other
advantage that he or she was not entitled to.
However, neither the NYBCL nor the DGCL permits indemnification of a
director, officer, employee or agent if a court finds the person liable to the
corporation itself, unless the court determines otherwise. Furthermore, if the
corporation sues the person because of some act or omission, the corporation
does not need to indemnify the person unless a court determines the person was
not liable. Furthermore, the DGCL generally requires that the person to be
indemnified must have acted in good faith and in a manner he or she reasonably
believed was consistent with the best interests of the corporation.
If this proposal one is approved by the Company's Stockholders, the
indemnification provisions of the NYBCL, and not the DGCL, will apply to acts
and omissions that occurred before the effective date of the Reincorporation.
Loans and Guarantees of Obligations for Directors
Under the NYBCL, the holders of a majority of the shares entitled to
vote, excluding any shares of the director who is the proposed borrower, are
required to approve any loans to, or guarantees of obligations of, a director.
Under the DGCL, a board of directors may authorize loans or guarantees of
indebtedness to employees and officers, including any employee or officer who is
a director.
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Issuance of Rights and Options to Directors, Officers and Employees
Under the NYBCL, the issuance of any stock rights or stock options, as
well as plans to issue rights or options, to directors, officers or employees
must be approved by a majority of votes cast at a stockholders meeting. The DGCL
does not require stockholder approval of such transactions.
Consideration for Shares
Under the NYBCL, stock certificates cannot be issued until full payment
has been made, except for shares purchased under a stock option plan permitting
installment payments. Under the DGCL, however, a corporation can receive cash,
services, personal or real property, leases of real property or any combination
of these as payment in full or in part for the shares. A purchaser of shares
under the DGCL may pay an amount equal to or greater than the par value of such
shares if the corporation receives a binding obligation of the purchaser to pay
the balance of the purchase price.
Dividends and Redemption of Stock
Subject to its charter provisions, a corporation may generally pay
dividends, redeem shares of its stock or make other distributions to
stockholders if the corporation is solvent and would not become insolvent
because of the dividend, redemption or distribution. The assets applied to such
a distribution may not be greater than the corporation's "surplus." The NYBCL
defines surplus as the excess of net assets over stated capital, and allows the
board to adjust stated capital. The DGCL defines surplus as the excess of net
assets over capital, and allows the board to adjust capital (for shares with par
value, the capital need only equal the aggregate par value of such shares). If
there is no surplus, the DGCL allows the corporation to apply net profits from
the current or preceding fiscal year, or both, unless the corporation's net
assets are less than the capital represented by issued and outstanding stock
which has a preference on any distribution of assets.
Both the NYBCL and the DGCL permit redemptions only when the
corporation has outstanding shares of at least one class of voting stock which
is not subject to the redemption.
Appraisal Rights
Generally, "appraisal rights" entitle dissenting stockholders to
receive the fair value of their shares in the merger or consolidation of a
corporation or in the sale of all or substantially all its assets. The NYBCL
also extends appraisal rights to an exchange of a corporation's shares.
The NYBCL provides that dissenting stockholders have no appraisal
rights if their shares are listed on a national securities exchange. If shares
are not listed on an exchange, appraisal rights under the NYBCL allow any
stockholder of a New York corporation, with various exceptions, to receive fair
value for his or her shares in such transactions. Regardless of listing on an
exchange, appraisal rights are available under the NYBCL in a merger between a
parent corporation and its subsidiary where only one of them is a New York
corporation, or in a merger between a parent and subsidiary where both are New
York corporations and the parent owns at least 90% of the subsidiary. Also,
appraisal rights are available to stockholders who are not allowed to vote on a
merger or consolidation and whose shares will be canceled or exchanged for cash
or other value other than shares of the surviving corporation or another
corporation. When appraisal rights are available, the stockholder may have to
request the appraisal and follow other required procedures. See the discussion
of appraisal rights under the section heading "Rights of Dissenting
Stockholders."
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Similarly, under the DGCL, appraisal rights are not available to a
stockholder if the corporation's shares are listed on a national securities
exchange or held by more than 2,000 stockholders of record, or if the
corporation will be the surviving corporation in a merger which does not require
the approval of the surviving corporation's stockholders. However, regardless of
listing on an exchange, a dissenting stockholder in a merger or consolidation
has appraisal rights under the DGCL if the transaction requires him or her to
exchange shares for anything of value other than one or more of the following:
o Shares of stock of the surviving corporation or of a new
corporation which results from the merger or consolidation.
o Shares of another corporation which will be listed on a national
securities exchange or held by more than 2,000 stockholders of
record after the merger or consolidation occurs.
o Cash instead of fractional shares of the surviving corporation or
another corporation.
Business Combinations with Interested Stockholders
Provisions in both laws may help to prevent or delay changes of
corporate control. In particular, both the NYBCL and the DGCL restrict or
prohibit an interested stockholder from entering into certain types of business
combinations unless the board of directors approves the transaction in advance.
Under the NYBCL, an interested stockholder is generally prohibited from
entering into certain types of business combinations with a New York corporation
for a period of five years after becoming an interested stockholder, unless the
board of directors approved either the business combination or the acquisition
of stock by the interested stockholder before the interested stockholder
acquired his or her shares. An "interested stockholder" under the NYBCL is
generally a beneficial owner of at least 20% of the corporation's outstanding
voting stock. "Business combinations" under the NYBCL include mergers and
consolidations between corporations or with an interested stockholder; sales,
leases, mortgages or other dispositions to an interested stockholder of assets
with an aggregate market value which either (1) equals 10% or more of the
corporation's consolidated assets or outstanding stock, or (2) represents 10% or
more of the consolidated earning power or net income of the corporation; issues
and transfers of stock with an aggregate market value of at least 5% in relation
to the outstanding stock of the corporation; liquidation or dissolution of the
corporation proposed by or in connection with an interested stockholder;
reclassification or recapitalization of stock that would increase the
proportionate stock ownership of an interested stockholder; and the receipt by
an interested stockholder of benefit from loans, guarantees, pledges or other
financial assistance or tax benefits provided by the corporation.
After the five-year period referred to in the NYBCL, the law allows
such business combinations if either the board of directors or a majority of the
outstanding voting stock not owned by the interested stockholder have approved
the business combination or the purchase of stock by the interested stockholder
before the interested stockholder acquired his or her shares. Business
combinations are also permitted when certain statutory "fair price,"
requirements are met.
Section 203 of the DGCL generally prohibits an interested stockholder
from entering into certain types of business combinations with a Delaware
corporation for three years after becoming an interested stockholder. An
"interested stockholder" under the DGCL is any person other than the corporation
and its majority-owned subsidiaries who owns at least 15% of the outstanding
voting stock,
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or who owned at least 15% within the preceding three years, and this definition
includes affiliates of the corporation. The prohibited combinations include:
o Mergers or consolidations.
o Sales, leases, exchanges or other dispositions of 10% or more of
(1) the aggregate market value of all assets of the corporation
or (2) the aggregate market value of all the outstanding stock of
the corporation.
o Issuances or transfers by the corporation of its stock that would
increase the proportionate share of stock owned by the interested
stockholder.
o Receipt by the interested stockholder of the benefit of loans,
advances, guarantees, pledges or other financial benefits
provided by the corporation.
o Any other transaction, with certain exceptions, that increases
the proportionate share of the stock owned by the interested
stockholder.
A Delaware corporation may choose not to be subject to Section 203. The
Company has chosen, however, to accept the protections of Section 203, and
therefore the charter of SoftNet-DE will not waive those protections.
Nevertheless, Section 203 will not apply in the following cases:
o If, before the stockholder became an interested stockholder, the
board of directors approved the business combination or the
transaction that resulted in the stockholder becoming an
interested stockholder.
o If, after the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, subject to
technical calculation rules.
o If, on or after the time the interested stockholder became an
interested stockholder, the board of directors approved the
business combination, and at least two-thirds of the outstanding
voting stock which is not owned by the interested stockholder
also ratified the business combination at a stockholders,
meeting.
Material Changes in the SoftNet-DE Charter and Bylaws from the SoftNet-NY
Charter and Bylaws
The SoftNet-DE charter and Bylaws will be in effect and will govern the
rights of stockholders in the event this proposal one is approved and the merger
of SoftNet-NY into SoftNet-DE takes place. The SoftNet-DE charter is
substantially similar to the SoftNet-NY charter. Except for the provisions
relating to indemnification and limitation of liability, authorized stock,
stockholders' ability to present proposals at stockholder meetings and nominate
directors, stockholders' ability to call special meetings, cumulative voting,
and the ability to remove directors, the differences between the two are
primarily as a result of differences between the NYBCL and the DGCL as discussed
above. Set forth below is a summary of the material changes in the SoftNet-DE
charter and Bylaws from the current SoftNet-NY charter and Bylaws. The Bylaws of
SoftNet-DE and SoftNet-NY are substantially similar except that the Bylaws of
SoftNet-DE reflect the DGCL and the provisions of the SoftNet-DE charter, as
well as certain administrative differences described below. Copies of the
charter and Bylaws of SoftNet-NY are available for inspection at the principal
office of SoftNet-NY and copies will be sent to stockholders upon request.
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Indemnification and Limitation of Liability
The SoftNet-DE charter and Bylaws provide for indemnification of
directors and officers (including provisions authorizing the advancement of
expenses incurred in connection with certain applicable proceedings) to the
fullest extent permitted by the DGCL.
Provisions relating to indemnification of directors and officers of
SoftNet-NY are included in SoftNet-NY's Bylaws rather than in the SoftNet-NY
charter. Such provisions provide for indemnification of directors and officers
in certain situations.
The SoftNet-DE Bylaws expressly authorize the Company to purchase and
maintain directors and officers liability insurance to insure against
liabilities or losses incurred in such capacities whether or not the corporation
would have the power to indemnify the individual under the DGCL. There are
similar provisions in the SoftNet-NY Bylaws.
Furthermore, the SoftNet-DE charter provides that a director of the
corporation shall not be liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director to the fullest
extent permitted by Delaware Law. This provision in the SoftNet-DE charter is
intended to afford directors additional protection and limit their potential
liability from suits alleging a breach of the duty of care by a director. As a
result of the inclusion of such a provision, stockholders may be unable to
recover monetary damages against directors for actions taken by them that
constitute negligence or that are otherwise in violation of their duty of care,
although it may be possible to obtain injunctive or other equitable relief with
respect to such actions. If equitable remedies are found not to be available to
stockholders in any particular situation, stockholders may not have an effective
remedy against a director in connection with such conduct.
In general, the purpose of the changes in the SoftNet-DE charter is to
provide indemnification and exculpation provisions that are customary in modern
charter documents of Delaware corporations (particularly in charter documents of
major, public corporations that have incorporated in Delaware).
Changes in Authorized Capital Stock
The SoftNet-NY charter authorizes the Company to issue Twenty-Five
Million (25,000,000) common shares, having a par value of $0.01 per share, and
Four Million (4,000,000) preferred shares, having a par value of $0.10 per
share.
The SoftNet-DE charter authorizes SoftNet-DE to issue One Hundred
Million (100,000,000) common shares, having a par value of $0.01 per share, and
Four Million (4,000,000) preferred shares, having a par value of $0.10 per
share.
Paragraph Third of the SoftNet-NY charter now provides that the Company
has the authority to issue two classes of stock, consisting of 25,000,000 shares
of common stock and 4,000,000 shares of Preferred Stock. Subject to approval of
proposal two by the stockholders, the SoftNet-DE charter will authorize
100,000,000 shares of common stock and 4,000,000 shares of preferred stock, with
no change in the voting powers, qualifications, rights and privileges of such
shares. If proposal two is not approved by the stockholders, SoftNet-DE's
charter will authorize 25,000,000 shares of common stock and 4,000,000 shares of
Preferred Stock. All classes of preferred stock authorized in the SoftNet-DE
charter will continue to be equal to each other with respect to voting rights,
liquidation rights and dividend rights. The increase in the number of shares of
authorized common stock will give the Company better flexibility to engage in
certain transactions. See proposal two.
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Stockholder Proposals and Nominating Directors
The SoftNet-NY Bylaws require that, to be effective, stockholders
provide to the Company written nominations of directors at least 45 days in
advance of the annual meeting of stockholders, or other meeting where the
election of directors is scheduled to occur, and is silent as to stockholder
presentation of proposals to be considered at annual or special meetings of
stockholders. The SoftNet-DE charter requires stockholders to provide to the
Company written nominations of directors and proposals to be considered at
meetings of shareholders at least 60 days in advance of the proposed record date
of such meeting.
Stockholder Ability to call Special Meetings
The SoftNet-NY Bylaws permit the Chairman of the Board of Directors,
the President or the Board of Directors to call special meetings of
shareholders. In addition, the SoftNet-NY Bylaws require the Secretary to call a
special meeting of shareholders upon a written request setting forth the purpose
of such meeting of not less than 66 2/3% of the outstanding shares of the
Company entitled to vote for the election of directors. The SoftNet-DE Bylaws
will contain similar provisions, except that the Secretary will be required to
call a special meeting of shareholders upon written request of not less than 15%
of the outstanding shares of common stock. Such request must be made to the
Board of Directors at least 60 days prior to the proposed record date of such
special meeting.
Cumulative Voting
The SoftNet-NY charter provides for cumulative voting in the election
of directors. Cumulative voting allows a stockholder to give one candidate a
number of votes equal to the number of directors to be elected multiplied by the
number of shares of common stock held by such shareholder, or may distribute
such votes among as many candidates as the shareholder chooses. In this way, a
shareholder with a sufficient minority stake can elect a director. The
SoftNet-DE charter does not provide for cumulative voting.
Ability to Remove Directors
The SoftNet-NY charter permits removal of directors only for cause. The
SoftNet-DE charter will not contain such a provision, and shareholders will be
able to remove directors for reasons other than cause.
Other Changes to Reflect Technical Differences Between Delaware Law and New
York Law
In addition to the changes described above, certain technical changes
have been made in the SoftNet-DE charter and Bylaws from the SoftNet-NY charter
and Bylaws to reflect differences between the DGCL and the NYBCL. Such technical
changes include: designation of a registered office and registered agent in the
State of Delaware; changes in the minimum and maximum number of days applicable
for giving notice of meetings and for setting record dates; and changing
references in the Bylaws to place or to applicable law from New York to
Delaware.
Rights of Dissenting Stockholders
Section 910 of the NYBCL sets forth the rights of stockholders of the
Company who object to the Merger. Any stockholder of the Company who does not
vote in favor of this proposal one or who duly revokes his or her vote in favor
of the transaction may, if the Merger is consummated, have the
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right to seek to obtain payment in cash of the fair value of his shares by
strictly complying with the requirements of Section 623 of the New York NYBCL
("Section 623").
The dissenting stockholder must file with the Company before the taking
of the vote on this proposal one a written objection including statement of
election to dissent, such stockholder's name and residence address, the number
and classes of shares of stock as to which dissent is made (which number may not
be less than all of the shares as to which such stockholder has a right to
dissent) and a demand for payment of the fair value of such shares if the Merger
is consummated. Any such written objection should be addressed to: SoftNet
Systems Inc., 650 Townsend Street, San Francisco, California 94103. Attention:
Steven M. Harris, Secretary.
Within ten (10) days after the vote of stockholders authorizing this
proposal one, the Company must give written notice of such authorization to each
such dissenting stockholder. Within twenty (20) days after the giving of such
notice, any stockholder to whom the Company failed to give notice of the Annual
Meeting who elects to dissent from the Merger must file with the Company a
written notice of such election, stating such stockholder's name and residence
address, the number and classes of shares of stock as to which dissent is made
(which number may not be less than all of the shares as to which such
stockholder has a right to dissent) and a demand for payment of the fair value
of such shares if the Merger is consummated.
At the time of filing the notice of election to dissent or within one
month thereafter, dissenting stockholders must submit certificates representing
the applicable shares to the Company or its transfer agent, ChaseMellon
Shareholder Services for notation thereon of the election to dissent, after
which such certificates will be returned to the stockholder. Any stockholder who
fails to submit his or her share certificates for such notation shall, at the
option of the Company exercised by written notice to the stockholder within
forty-five (45) days from the date of filing of the notice of election to
dissent, lose such stockholder's appraisal rights unless a court, for good cause
shown, shall otherwise direct.
Within fifteen (15) days after the expiration of the period within
which stockholders may file their notices of election to dissent, or within
fifteen (15) days after consummation of the Merger, whichever is later (but not
later than ninety days after the stockholders, vote authorizing the Merger), the
Company must make a written offer (which, if the Merger has not been
consummated, may be conditioned upon such consummation) to each stockholder who
has filed such notice of election to pay for the shares at a specified price
which the Company considers to be their fair value. If the Company and the
dissenting stockholder are unable to agree as to such value, Section 623
provides for judicial determination of fair value. In the event of such a
disagreement, a proceeding shall be commenced by the Company in the Supreme
Court of the State of New York, County of New York, or by the dissenting
stockholder if the Company fails to commence the proceeding within the time
period required by Section 623 of the NYBCL. The Company intends to commence
such a proceeding in the event of such a disagreement.
A negative vote on this proposal one does not constitute a "written
objection" filed by an objecting stockholder. Failure by a stockholder to vote
against this proposal one will not, however, constitute a waiver of rights under
Section 623 provided that a written objection has been properly filed and such
stockholder has not voted in favor of this proposal one.
A copy of Section 623 is attached in full as Appendix B. Each
stockholder considering whether to exercise dissenter's rights should review
Appendix B carefully and consult such stockholder's advisors for advice
regarding the dissenter's rights.
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Because this proposal one does not involve any change in the nature of
the Company's business, but only involves technical corporate matters such as
the Reincorporation, the Merger and the charter amendments described herein,
management hopes that no stockholder will exercise a dissenter's right. Under
the Merger Agreement, the Board of Directors may abandon the Merger, even after
stockholder approval, if for any reason the Board of Directors determines that
it is inadvisable to proceed with the Merger, including considering the number
of shares for which appraisal rights have been exercised and the cost to the
Company hereof.
Vote Required for Approval of this Proposal One
Approval of this proposal one will require the affirmative vote of at
least two-thirds of the outstanding shares of SoftNet-NY common stock entitled
to vote thereon at the Annual Meeting. As of the Record Date, the current
Directors and officers of the Company have the right to vote ___________ shares,
representing ____% of the outstanding common stock, and have advised the Company
that their present intent is to vote in favor of the proposal to reincorporate
in Delaware. Proxies solicited by the Board of Directors will be voted FOR this
proposal one, unless a shareholder specifies otherwise.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS DEEMS PROPOSAL ONE TO BE IN THE BEST INTERESTS
OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" APPROVAL
THEREOF. UNLESS AUTHORITY TO DO SO IS WITHHELD, THE PERSON(S) NAMED IN EACH
PROXY WILL VOTE THE SHARES REPRESENTED THEREBY "FOR" THE APPROVAL OF THE MERGER
AGREEMENT TO EFFECT THE REINCORPORATION IN DELAWARE.
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PROPOSAL TWO
APPROVAL OF AN INCREASE OF
THE AUTHORIZED CAPITAL SHARES
The current authorized capital stock of the Company consists of
25,000,000 shares of common stock, $.01 par value, of which ___________ shares
of common stock were issued and outstanding as of the Record Date. The Board of
Directors, on October 6, 1998, adopted a resolution to increase the authorized
number of shares of common stock from 25,000,000 to 100,000,000. The proposed
increase would change the Company's capitalization and requires approval of the
stockholders.
Holders of common stock are entitled to one vote per share on all
matters submitted to a vote of stockholders of the Company and to ratably
receive dividends, if any, as may be declared from time to time by the Board of
Directors from funds legally available therefor. Upon liquidation, dissolution
or winding up of the Company, holders of common stock are entitled to share
ratably in any assets available for distribution to stockholders after payment
of all obligations of the Company.
If the proposed amendment is approved, all or any part of the
authorized but unissued shares of common stock may thereafter be issued without
further approval from the stockholders, except as may be required by law or the
policies of any stock exchange or stock market on which the shares of stock of
the Company may be listed or quoted, for such purposes and on such terms as the
Board of Directors may determine. Holders of the capital stock of the Company do
not have any preemptive rights to subscribe for the purchase of any shares of
common stock, which means that current stockholders do not have a prior right to
purchase any new issue of common stock in order to maintain their proportionate
ownership.
The proposed amendment will not affect the rights of existing holders
of common stock except to the extent that further issuances of common stock will
reduce each existing stockholder's proportionate ownership.
The Board of Directors has determined that it would be appropriate for
the Company to increase the number of its authorized shares of common stock in
order to have additional shares available for possible future acquisition or
financing transactions and other issuances. The Board of Directors believes that
the complexity of customary financing, employment and acquisition transactions
requires that the Directors be able to respond promptly and effectively to
opportunities that involve the issuance of shares of common stock. For example,
if this proposal two is approved, the Company will have the flexibility to
authorize stock splits and stock dividends and to enter into joint ventures and
corporate financings involving the issuance of shares of common stock. The
Company has no present agreements, understandings or arrangements regarding
transactions expected to require issuance of the additional shares of common
stock that would be authorized by the proposed amendment. However, the industry
in which the Company is operating is changing rapidly, and the Company is
continuously evaluating potential strategic relationships.
The flexibility of the Board of Directors to issue additional shares of
common stock could enhance the Board of Directors' ability to negotiate on
behalf of stockholders in a takeover situation. Although it is not the purpose
of the proposed amendment, the authorized but unissued shares of common stock
also could be used by the Board of Directors to discourage, delay or make more
difficult a change in control of the Company. For example, such shares could be
privately placed with purchasers who might align themselves with the Board of
Directors in opposing a hostile takeover bid. The issuance of additional shares
of common stock might serve to dilute the stock ownership of persons seeking to
obtain
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control and thereby increase the cost of acquiring a given percentage of the
outstanding shares. The Board of Directors is not aware of any pending or
proposed effort to acquire control of the Company.
If this proposal two (Approval to Increase the Authorized Capital
Shares) is adopted by the Company's stockholders, it will become effective on
either of (i) the date the merger contemplated by proposal one herein
(Reincorporation of the Company in Delaware) is effected if proposal one is
approved by the Company's stockholders, or (ii) on the date a certificate of
amendment is filed to amend SoftNet-NY's Certificate of Incorporation in New
York, if proposal one is not approved by the Company's stockholders.
Approval of this proposal two requires the affirmative vote of the
holders of at least a majority of the shares of the common stock present in
person or by proxy at the Annual Meeting.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS DEEMS PROPOSAL TWO TO BE IN THE BEST INTERESTS
OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" APPROVAL
THEREOF. UNLESS AUTHORITY TO DO SO IS WITHHELD, THE PERSON(S) NAMED IN EACH
PROXY WILL VOTE THE SHARES REPRESENTED THEREBY "FOR" THE APPROVAL OF THE
INCREASE OF THE AUTHORIZED CAPITAL SHARES.
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PROPOSAL THREE
APPROVAL OF ADOPTION OF THE 1998
STOCK INCENTIVE PLAN
The Company's stockholders are being asked to approve the adoption of
the Company's new 1998 Stock Incentive Plan (the "1998 Plan") under which
2,850,668 shares of the Company's common stock have been reserved for issuance.
The Board of Directors adopted the 1998 Plan on October 8, 1998 (the "Effective
Date"), subject to stockholder approval. The 1998 Plan is intended to serve as a
comprehensive equity incentive program for the Company's officers, employees,
and non-employee Board members that will encourage such individuals to remain in
the Company's service and more closely align their interests with those of the
stockholders.
Upon stockholder approval of this proposal, all outstanding options
under the Company's 1995 Long Term Incentive Plan (the "1995 Plan") will be
incorporated into the 1998 Plan, and no further option grants or stock issuances
will be made under the 1995 Plan. The incorporated options will continue to be
governed by their existing terms, unless the Stock Option Committee as
administrator of the 1998 Plan elects to extend one or more features of the 1998
Plan to those options.
The following is a summary of the principal features of the 1998 Plan.
Any stockholder of the Company who wishes to obtain a copy of the actual plan
document may do so upon written request to the Company at 650 Townsend Street,
San Francisco, California 94103, Attn: Mr. Steven M. Harris, Secretary.
Equity Incentive Programs
The 1998 Plan consists of five (5) separate equity incentive programs:
(i) the Discretionary Option Grant Program, (ii) the Stock Issuance Program,
(iii) the Salary Investment Option Grant Program, (iv) the Automatic Option
Grant Program and (v) the Director Fee Option Grant Program. The principal
features of each program are described below. The Stock Option Committee will
have the exclusive authority to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to option grants and stock issuances to the
Company's executive officers and non-employee Board members. Both the Stock
Option Committee and the full Board will each have separate but concurrent
authority to make option grants and stock issuances under those programs to all
other eligible individuals. The Stock Option Committee will also have complete
discretion to select the individuals who are to participate in the Salary
Investment Option Grant Program, but all grants made to the selected individuals
will be governed by the express terms of that program.
The term Plan Administrator, as used in this summary, will mean either
the Stock Option Committee or the Board, to the extent each such entity is
acting within the scope of its administrative jurisdiction under the 1998 Plan.
However, neither the Stock Option Committee nor the Board will exercise any
administrative discretion under the Automatic Option Grant or Director Fee
Option Grant Program for the non-employee Board members. All grants under those
latter programs will be made in strict compliance with the express provisions of
each such program.
Share Reserve
A total of 2,850,668 shares of common stock have been authorized for
issuance over the term of the 1998 Plan. Such share reserve consists of (i) the
number of shares that remain available for issuance under the 1995 Plan
(including shares subject to outstanding options) and (ii) an additional
increase of approximately 1,500,000 shares. In addition, the number of shares of
common stock reserved
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for issuance under the 1998 Plan will automatically be increased on the first
trading day of each calendar year, beginning in calendar year 2000, by an amount
equal to four percent (4%) of the total number of shares of common stock
outstanding on the last trading day of the preceding calendar year, but in no
event will any such annual increase exceed 2,000,000 shares, subject to
adjustment for subsequent stock splits, stock dividends and similar
transactions.
No participant in the 1998 Plan may receive option grants, separately
exercisable stock appreciation rights or direct stock issuances for more than
500,000 shares of common stock in the aggregate per calendar year, subject to
adjustment for subsequent stock splits, stock dividends and similar
transactions. Stockholder approval of this proposal will also constitute
approval of the 500,000-share limitation for purposes of Internal Revenue Code
Section 162(m).
The shares of common stock issuable under the 1998 Plan may be drawn
from shares of the Company's authorized but unissued common stock or from shares
of common stock reacquired by the Company, including shares repurchased on the
open market.
Shares subject to any outstanding options under the 1998 Plan
(including options incorporated from the predecessor 1995 Plan) which expire or
otherwise terminate prior to exercise will be available for subsequent issuance.
Unvested shares issued under the 1998 Plan and subsequently repurchased by the
Company pursuant to its repurchase rights under the 1998 Plan will also be
available for subsequent issuance.
Eligibility
Employees, non-employee Board members and independent consultants in
the service of the Company or its parent and subsidiaries (whether now existing
or subsequently established) will be eligible to participate in the
Discretionary Option Grant and Stock Issuance Programs. The Company's executive
officers and other highly paid employees will also be eligible to participate in
the Salary Investment Option Grant Program, and non-employee members of the
Board will also be eligible to participate in the Automatic Option Grant and
Director Fee Option Grant Programs.
As of December 31, 1998, five executive officers, five non-employee
Board members and approximately 250 other employees and consultants were
eligible to participate in the Discretionary Option Grant and Stock Issuance
Programs. The five executive officers and approximately 250 other individuals
were eligible to participate in the Salary Investment Option Grant Program, and
the five non-employee Board members were also eligible to participate in the
Automatic Option Grant and Director Fee Option Grant Programs.
Valuation
The fair market value per share of common stock on any relevant date
under the 1998 Plan is currently deemed to be equal to the closing selling price
per share on that date on AMEX. However, the Company has filed an application
with NASDAQ to trade the common stock over NASDAQ. Upon the commencement of
trading over NASDAQ, the fair market value per share of common stock on any
relevant date under the 1998 Plan will be deemed equal to the closing price per
share on that date on NASDAQ. On December 31, 1998 the closing selling price per
share on AMEX was $17.38.
20
<PAGE>
Discretionary Option Grant Program
The options granted under the Discretionary Option Grant Program may be
either incentive stock options under the federal tax laws or non-statutory
options. Each granted option will have an exercise price per share not less than
one hundred percent (100%) of the fair market value per share of common stock on
the option grant date, and no granted option will have a term in excess of ten
(10) years. The shares subject to each option will generally vest in one or more
installments over a specified period of service measured from the grant date.
Upon cessation of service, the optionee will have a limited period of
time in which to exercise any outstanding option to the extent exercisable for
vested shares. The Plan Administrator will have complete discretion to extend
the period following the optionee's cessation of service during which his or her
outstanding options may be exercised and/or to accelerate the exercisability or
vesting of such options in whole or in part. Such discretion may be exercised at
any time while the options remain outstanding, whether before or after the
optionee's actual cessation of service.
The Plan Administrator is authorized to issue two types of stock
appreciation rights in connection with option grants made under the
Discretionary Option Grant Program:
Tandem stock appreciation rights which provide the holders with the
right to surrender their options for an appreciation distribution from the
Company equal in amount to the excess of (a) the fair market value of the
vested shares of common stock subject to the surrendered option over (b)
the aggregate exercise price payable for such shares. Such appreciation
distribution may, at the discretion of the Plan Administrator, be made in
cash or in shares of common stock.
Limited stock appreciation rights which may be granted to officers of
the Company as part of their option grants. Any option with such a limited
stock appreciation right may (whether or not the option is at the time
exercisable for vested shares) be surrendered to the Company upon the
successful completion of a hostile tender offer for more than fifty percent
(50%) of the Company's outstanding voting securities. In return for the
surrendered option, the officer will be entitled to a cash distribution
from the Company in an amount per surrendered option share equal to the
excess of (a) the tender offer price paid per share over (b) the exercise
price payable per share under such option.
The Plan Administrator will have the authority to effect the
cancellation of outstanding options under the Discretionary Option Grant Program
which have exercise prices in excess of the then current market price of common
stock and to issue replacement options with an exercise price based on the
market price of common stock at the time of the new grant.
Salary Investment Option Grant Program
The Plan Administrator will have complete discretion in implementing
the Salary Investment Option Grant Program for one or more calendar years and in
selecting the executive officers and other eligible individuals who are to
participate in the program for those years. As a condition to such
participation, each selected individual must, prior to the start of the calendar
year of participation, file with the Plan Administrator an irrevocable
authorization directing the Company to reduce his or her base salary for the
upcoming calendar year by a specified dollar amount not less than $10,000 nor
more than $50,000 and apply that amount to the acquisition of a special option
grant under the program.
21
<PAGE>
If such election is approved by the Plan Administrator, the individual
will automatically be granted, on the first trading day in January of the
calendar year for which that salary reduction is to be in effect, a
non-statutory option to purchase that number of shares of common stock
determined by dividing the amount of the authorized salary reduction by
two-thirds of the fair market value per share of common stock on the grant date.
The option will be exercisable at a price per share equal to one-third of the
fair market value of the option shares on the grant date. As a result, the total
spread on the option shares at the time of grant (the fair market value of the
option shares on the grant date less the aggregate exercise price payable for
those shares) will be equal to the salary reduction amount. The option will
become exercisable in a series of twelve (12) equal monthly installments over
the calendar year for which the salary investment is to be in effect and will
become exercisable in full on an accelerated basis upon certain changes in the
ownership or control of the Company. Each option will remain exercisable for any
vested shares subject to the option until the earlier of (i) the expiration of
the ten (10)-year option term or (ii) the end of the three (3)-year period
measured from the date of the optionee's cessation of service.
Stock Issuance Program
Shares may be issued under the Stock Issuance Program for such valid
consideration under the Delaware General Corporation Law as the Plan
Administrator deems appropriate, provided the value of such consideration is not
less than the fair market value of the issued shares on the date of issuance.
Shares may also be issued solely as a bonus for past services.
The shares issued as a bonus for past services will be fully vested
upon issuance. All other shares issued under the program will be subject to a
vesting schedule tied to the performance of service or the attainment of
performance goals. The Plan Administrator will have the sole and exclusive
authority, exercisable upon a participant's termination of service, to vest any
or all unvested shares of common stock at the time held by that participant, to
the extent the Plan Administrator determines that such vesting provides an
appropriate severance benefit under the circumstances.
Automatic Option Grant Program
Each individual who is first elected or appointed as a non-employee
Board member at any time on or after the Effective Date will automatically be
granted, on the date of such initial election or appointment, a non-statutory
option to purchase 20,000 shares of common stock, provided that individual has
not previously been in the employ of the Company (or any parent or subsidiary).
In addition, each such individual will automatically be granted one or more
additional non-statutory options for 20,000 shares of common stock, with the
first such additional 20,000-share grant to be made at the Annual Stockholders
Meeting which is held in the third calendar year after the calendar year in
which he or she received the initial 20,000-share grant, and any such additional
20,000-share grants to be made at every third Annual Stockholders Meeting held
thereafter. However, such additional 20,000-share option grants will only be
made to each non-employee Board member who is to continue to serve as such after
the Annual Meeting at which the additional 20,000-share option grant is to be
made.
Each individual who is serving as a non-employee Board member as of the
Effective Date will automatically be granted a non-statutory option for 20,000
shares of common stock at the Annual Stockholders Meeting held in 2001 and,
thereafter, will automatically be granted an additional 20,000-share option at
each third Annual Stockholders Meeting held after the Annual Stockholders
Meeting held in 2001. However, any such 20,000-share automatic option grants
will only be made to each non-employee Board member who is to continue to serve
as such following the Annual Meeting at which such option grant is to be made.
22
<PAGE>
There will be no limit on the number of such additional 20,000-share
option grants any one non-employee Board member may receive over his or her
period of Board service, and non-employee Board members who have previously been
in the employ of the Company (or any parent or subsidiary) or who have otherwise
received a stock option grant from the Company prior to the Effective Date will
be eligible to receive one or more such additional 20,000-share option grants
over their period of continued Board service.
Each option under the Automatic Option Grant Program will have an
exercise price per share equal to 100% of the fair market value per share of
common stock on the option grant date and a maximum term of ten years measured
from the grant date. The option will be immediately exercisable for all the
option shares, but any purchased shares will be subject to repurchase by the
Company, at the exercise price paid per share, upon the optionee's cessation of
Board service prior to vesting in those shares. The shares subject to each
automatic option grant will vest (and the Company's repurchase rights will
lapse) in six (6) equal semi-annual installments upon the optionee's completion
of each six (6) months of Board service over the thirty-six (36)-month period
measured from the option grant date.
The shares subject to each outstanding automatic option grant will
immediately vest should the optionee die or become permanently disabled while a
Board member or should any of the following events occur while the optionee
continues in Board service: (i) an acquisition of the Company by merger or asset
sale or (ii) the successful completion of a hostile tender offer for more than
fifty percent (50%) of the outstanding voting securities or a change in the
majority of the Board occasioned by one or more contested elections for Board
membership. Each automatic option grant held by an optionee upon his or her
termination of Board service will remain exercisable, for any or all of the
option shares in which the optionee is vested at the time of such termination,
for up to a twelve (12)-month period following such termination date.
Each option granted under the program will have a limited stock
appreciation right which will allow the optionee to surrender that option to the
Company upon the successful completion of a hostile tender offer for more than
fifty percent (50%) of the Company's outstanding voting securities. In return
for the surrendered option, the optionee will be entitled to a cash distribution
from the Company in an amount per surrendered option share equal to the excess
of (a) the tender offer price paid per share over (b) the exercise price payable
per share under such option. Stockholder approval of this proposal will also
constitute pre-approval of the grant of each such limited stock appreciation
right and the subsequent exercise of that right in accordance with the foregoing
provisions.
Director Fee Option Grant Program
For each calendar year that the Director Fee Option Grant Program is in
effect, as determined by the Plan Administrator, each non-employee Board member
may elect to apply all or a portion of his or her annual retainer fee otherwise
payable in cash that year (currently $1,000 for directors and $2,500 for the
Chairman) to the acquisition of a special option grant under the Director Fee
Option Grant Program. The election must be made prior to the start of the
calendar year for which such election will be in effect, and the grant will
automatically be made on the first trading day in January following the filing
of such election. The option will have an exercise price per share equal to
one-third of the fair market value of the option shares on the grant date, and
the number of option shares will be determined by dividing the dollar amount of
the retainer fee subject to the election by two-thirds of the fair market value
per share of common stock on the option grant date. As a result, the total
spread on the option (the fair market value of the option shares on the grant
date less the aggregate exercise price payable for those shares) will be equal
to the portion of the retainer fee subject to the non-employee Board member's
election. Stockholder approval of this proposal will also constitute approval of
each option grant made
23
<PAGE>
pursuant to the provisions of the Director Fee Option Grant Program and the
subsequent exercise of that option in accordance with the terms of such program.
Each option granted under the program will become exercisable for the
option shares in a series of twelve (12) successive equal monthly installments
upon the optionee's completion of each month of Board service during the
calendar year of the option grant. In the event the optionee ceases Board
service for any reason (other than death or permanent disability), the option
will immediately terminate with respect to any option shares for which the
option is not otherwise at that time exercisable. Should the optionee's service
as a Board member ceases by reason of death or permanent disability, then the
option will immediately become exercisable for all the shares of common stock
subject to the option. Each option may be exercised, for any or all of the
shares for which that option is at the time exercisable, until the earlier of
(i) the expiration of the ten (10)-year option term or (ii) the end of the three
(3)-year period measured from the date of the optionee's cessation of Board
service.
Each option granted under the program will have a limited stock
appreciation right which will allow the optionee to surrender that option to the
Company upon the successful completion of a hostile tender offer for more than
fifty percent (50%) of the Company's outstanding voting securities. In return
for the surrendered option, the optionee will be entitled to a cash distribution
from the Company in an amount per surrendered option share equal to the excess
of (a) the tender offer price paid per share over (b) the exercise price payable
per share under such option. Stockholder approval of this proposal will also
constitute pre-approval of the grant of each such limited stock appreciation
right and the subsequent exercise of that right in accordance with the foregoing
provisions.
Stock Awards
The table below shows, as to Company's Chief Executive Officer ("CEO"),
the three most highly compensated executive officers of the Company other than
the CEO (with base salary and bonus for the past fiscal year in excess of
$100,000), and the other individuals and groups indicated, the number of shares
of common stock subject to options granted under the 1998 Plan and the
predecessor 1995 Plan between the date of the adoption of the 1995 Plan,
September 15, 1995, and December 31, 1998, together with the weighted average
exercise price payable per share. The Company has not made any direct stock
issuances or granted any SARs to date under either the 1998 Plan or the 1995
Plan.
<TABLE>
OPTION TRANSACTIONS
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES UNDERLYING EXERCISE PRICE PER
NAME AND POSITION OPTIONS GRANTED (#) SHARE ($)
----------------- ------------------- ---------
<S> <C> <C>
Dr. Lawrence B. Brilliant....................... 455,000 $ 7.55
President and Chief Executive Officer
Garrett J. Girvan............................... 200,000 7.89
Chief Operating Officer
Steven M. Harris................................. 100,000 7.38
Vice President and Secretary
24
<PAGE>
WEIGHTED AVERAGE
NUMBER OF SHARES UNDERLYING EXERCISE PRICE PER
NAME AND POSITION OPTIONS GRANTED (#) SHARE ($)
----------------- ------------------- ---------
Ian B. Aaron.................................... 320,000 6.74
Vice President, SoftNet Systems, Inc.
and President, ISP Channel, Inc.
All current executive officers as a group (five). 1,255,000 7.81
All current non-employee directors as a group
(five)........................................... 265,000 8.76
All employees, including current officers who are not
executive officers, as a group................... 1,042,567 7.09
</TABLE>
As of December 31, 1998, 1,305,067 shares of common stock were subject
to outstanding options under the 1995 Plan, 45,601 shares remained available for
future option grant and 152,540 shares have been issued in connection with
option exercises. As of December 31, 1998, 2,562,567 shares of common stock were
subject to outstanding options under the 1998 Plan (including those shares
rolled into the 1998 Plan from the 1995 Plan), and no shares had been issued
under the 1998 Plan.
The Company also maintains the Employee Stock Option Plan (the
"Employee Option Plan") under which 40,000 shares of common stock have been
reserved for issuance to employees of the Company's wholly owned subsidiary,
Micrographic Technology Corporation ("MTC"). As of December 31, 1998, options
covering 19,358 shares of common stock were outstanding under the Employee
Option Plan, no shares remained available for future option grant, and 3,208
shares have been issued under the Employee Option Plan pursuant to option
exercises.
New Plan Benefits
The following table lists, as of December 31, 1998, the number of
shares subject to options granted to the CEO, the three most highly compensated
executive officers of the Company other than the CEO (with base salary and bonus
for the last fiscal year in excess of $100,000) and the other groups indicated
which will not become exercisable unless the stockholders approve this proposal.
Such options were initially granted under the 1995 Plan but are to be
incorporated into the 1998 Plan upon stockholder approval of this proposal. In
the event that the stockholders do not approve the adoption of the 1998 Plan,
the following options will terminate without ever becoming exercisable for the
option shares.
25
<PAGE>
<TABLE>
1998 STOCK INCENTIVE PLAN
<CAPTION>
NUMBER OF WEIGHTED AVERAGE EXERCISE
NAME AND POSITION OPTION SHARES (#) PRICE ($)
----------------- ----------------- ---------
<S> <C> <C>
Dr. Lawrence B. Brilliant....................... 255,000 $ 7.38
President and Chief Executive Officer
Garrett J. Girvan................................ 125,000 7.38
Chief Operating Officer
Steven M. Harris............................. 100,000 7.38
Vice President and Secretary
Ian B. Aaron..................................... 98,500 7.38
Vice President, SoftNet Systems, Inc.
and President, ISP Channel, Inc.
All current executive officers as a group (five). 758,500 8.12
All current non-employee directors as a
group (five)..................................... 10,000 7.38
All employees, including current officers who are not
executive officers, as a group................... 489,000 7.38
</TABLE>
Each such option granted under the 1995 Plan has an exercise prices per
share equal to the fair market value of the common stock on the grant date and
no option has a term in excess of ten years measured from the grant date. The
option generally becomes exercisable in a series of installments over the
optionee's period of service with the Company. Upon an acquisition of the
Company pursuant to a merger or asset sale, the option will, at the discretion
of the Stock Option Committee, either be assumed by any successor entity, with
or without accelerated vesting of the option shares, or terminate upon the
acquisition following a thirty (30)-day period during which the option will be
exercisable in full on an accelerated basis.
General Provisions
Acceleration
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program will
automatically accelerate in full, unless assumed by the successor corporation or
replaced with a cash incentive program which preserves the spread existing on
the unvested option shares (the excess of the fair market value of those shares
over the option exercise price payable for such shares) and provides for
subsequent payout in accordance with the same vesting schedule in effect for the
option. In addition, all unvested shares outstanding under the Discretionary
Option Grant and Stock Issuance Programs will immediately vest, except to the
extent the Company's repurchase rights with respect to those shares are to be
assigned to the successor corporation. The Plan Administrator will have complete
discretion to grant one or more options under the Discretionary Option Grant
Program which will become fully exercisable for all the option shares in the
event those options are assumed in the acquisition and the optionee's service
with the Company or the acquiring entity terminates
26
<PAGE>
within a designated period following such acquisition. The vesting of
outstanding shares under the Stock Issuance Program may also be structured to
accelerate upon similar terms and conditions.
The Plan Administrator will also have the authority to grant options
which will immediately vest upon an acquisition of the Company, whether or not
those options are assumed by the successor corporation. The Plan Administrator
is also authorized under the Discretionary Option Grant and Stock Issuance
Programs to grant options and to structure repurchase rights so that the shares
subject to those options or repurchase rights will immediately vest in
connection with a change in control of the Company (whether by successful tender
offer for more than fifty percent (50%) of the outstanding voting stock or a
change in the majority of the Board by reason of one or more contested elections
for Board membership), with such vesting to occur either at the time of such
change in control or upon the subsequent termination of the individual's service
within a designated period (not to exceed eighteen months) following such change
in control.
Each option outstanding under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will also
automatically accelerate in the event the Company should be acquired or other
change in control of the Company occur.
The outstanding options under the 1995 Plan which are to be
incorporated into the 1998 Plan will, at the discretion of the Stock Option
Committee, either be assumed by the successor entity in any acquisition of the
Company, with or without accelerated vesting of the option shares, or terminate
upon the acquisition following a thirty (30)-day period during which the option
will be exercisable in full on an accelerated basis. In addition, the Plan
Administrator will have the discretion to extend one or more of the vesting
acceleration provisions of the 1998 Plan to those options.
The acceleration of vesting in the event of a change in the ownership
or control of the Company may be seen as an anti-takeover provision and may have
the effect of discouraging a merger proposal, a takeover attempt or other
efforts to gain control of the Company.
Financial Assistance
The Plan Administrator may institute a loan program to assist one or
more participants in financing the exercise of outstanding options or the
purchase of shares under the 1998 Plan. The Plan Administrator will determine
the terms of any such assistance. However, the maximum amount of financing
provided any participant may not exceed the cash consideration payable for the
issued shares plus all applicable taxes incurred in connection with the
acquisition of the shares.
Changes in Capitalization
In the event any change is made to the outstanding shares of common
stock by reason of any recapitalization, stock dividend, stock split,
combination of shares, exchange of shares or other change in corporate structure
effected without the Company's receipt of consideration, appropriate adjustments
will be made to (i) the maximum number and/or class of securities issuable under
the 1998 Plan, (ii) the number and/or class of securities for which any one
person may be granted stock options, separately exercisable stock appreciation
rights and direct stock issuances under the 1998 Plan per calendar year, (iii)
the maximum number and/or class of securities which may be issued under the 1998
Plan, (iv) the number and/or class of securities for which grants are
subsequently to be made under the Automatic Option Grant Program to new and
continuing non-employee Board members and (v) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option in order to prevent the dilution or enlargement of benefits thereunder.
27
<PAGE>
Amendment and Termination
The Board may amend or modify the 1998 Plan in any or all respects
whatsoever subject to any required stockholder approval. The Board may terminate
the 1998 Plan at any time, and the 1998 Plan will in all events terminate on
October 8, 2008.
Federal Income Tax Consequences
Option Grants
Options granted under the 1998 Plan may be either incentive stock
options which satisfy the requirements of Section 422 of the Internal Revenue
Code or non-statutory options which are not intended to meet such requirements.
The Federal income tax treatment for the two types of options differs as
follows:
Incentive Options. No taxable income is recognized by the optionee at
the time of the option grant, and no taxable income is generally recognized at
the time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise disposed
of. For Federal tax purposes, dispositions are divided into two categories: (i)
qualifying and (ii) disqualifying. A qualifying disposition occurs if the sale
or other disposition is made after the optionee has held the shares for more
than two (2) years after the option grant date and more than one (1) year after
the exercise date. If either of these two holding periods is not satisfied, then
a disqualifying disposition will result.
If the optionee makes a disqualifying disposition of the purchased
shares, then the Company will be entitled to an income tax deduction, for the
taxable year in which such disposition occurs, equal to the excess of (i) the
fair market value of such shares on the option exercise date over (ii) the
exercise price paid for the shares. In no other instance will the Company be
allowed a deduction with respect to the optionee's disposition of the purchased
shares.
Non-Statutory Options. No taxable income is recognized by an optionee
upon the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.
If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Company in the event of the optionee's
termination of service prior to vesting in those shares, then the optionee will
not recognize any taxable income at the time of exercise but will have to report
as ordinary income, as and when the Company's repurchase right lapses, an amount
equal to the excess of (i) the fair market value of the shares on the date the
repurchase right lapses over (ii) the exercise price paid for the shares. The
optionee may, however, elect under Section 83(b) of the Internal Revenue Code to
include as ordinary income in the year of exercise of the option an amount equal
to the excess of (i) the fair market value of the purchased shares on the
exercise date over (ii) the exercise price paid for such shares. If the Section
83(b) election is made, the optionee will not recognize any additional income as
and when the repurchase right lapses.
The Company will be entitled to an income tax deduction equal to the
amount of ordinary income recognized by the optionee with respect to the
exercised non-statutory option. The deduction will in general be allowed for the
taxable year of the Company in which such ordinary income is recognized by the
optionee.
28
<PAGE>
Stock Appreciation Rights
No taxable income is recognized upon receipt of an SAR. The holder will
recognize ordinary income, in the year in which the SAR is exercised, in an
amount equal to the excess of the fair market value of the underlying shares of
common stock on the exercise date over the base price in effect for the
exercised right, and the holder will be required to satisfy the tax withholding
requirements applicable to such income.
The Company will be entitled to an income tax deduction equal to the
amount of ordinary income recognized by the holder in connection with the
exercise of an SAR. The deduction will be allowed for the taxable year in which
such ordinary income is recognized.
Direct Stock Issuances
The tax principles applicable to direct stock issuances under the 1998
Plan will be substantially the same as those summarized above for the exercise
of non-statutory option grants.
Deductibility of Executive Compensation
The Company anticipates that any compensation deemed paid by it in
connection with disqualifying dispositions of incentive stock option shares or
exercises of non-statutory options will qualify as performance-based
compensation for purposes of Code Section 162(m) and will not have to be taken
into account for purposes of the $1 million limitation per covered individual on
the deductibility of the compensation paid to certain executive officers of the
Company. Accordingly, all compensation deemed paid with respect to those options
will remain deductible by the Company without limitation under Code Section
162(m).
Accounting Treatment
Under current accounting principles, neither the grant nor the exercise
of options granted under the 1998 Plan with exercise prices equal to the fair
market value of the option shares on the grant date will result in any charge to
the Company's reported earnings. However, the Company must disclose, in
footnotes and pro-forma statements to the Company's financial statements, the
impact those options would have upon the Company's reported earnings were the
value of those options at the time of grant treated as a compensation expense.
In addition, the number of outstanding options under the 1998 Plan may be a
factor in determining the Company's earnings per share on a fully-diluted basis.
Should one or more optionees be granted SARs which have no conditions
upon exercisability other than an employment requirement, then such rights will
result in compensation expense to the Company's earnings over the period such
rights remain outstanding.
Vote Required
The affirmative vote of at least a majority of the shares of common
stock present in person or by proxy at the Annual Meeting is required for
approval of the adoption of the 1998 Plan. If such approval is obtained, then
all outstanding options under the 1995 Plan will be incorporated into the 1998
Plan, and the 1995 Plan will terminate. Should such stockholder approval not be
obtained, then any stock options granted under the 1998 Plan will terminate
without ever becoming exercisable for the shares of common stock subject to
those options, and no further option grants will be made under the 1998 Plan. In
addition, the option grants made under the 1995 Plan which are contingent upon
their incorporation into the 1998 Plan with its increased share reserve will
also terminate prior to their becoming exercisable
29
<PAGE>
for any of the option shares. However, the 1995 Plan will remain in effect as
last approved by the stockholders, and option grants and direct stock issuances
may continue to be made under that Plan until the available share reserve has
been issued.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS DEEMS PROPOSAL THREE TO BE IN THE BEST INTERESTS
OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" APPROVAL OF SUCH
PROPOSAL. UNLESS AUTHORITY TO DO SO IS WITHHELD, THE PERSON(S) NAMED IN EACH
PROXY WILL VOTE THE SHARES REPRESENTED THEREBY "FOR" THE APPROVAL OF THE
ADOPTION OF THE SOFTNET SYSTEMS, INC. 1998 STOCK INCENTIVE PLAN.
30
<PAGE>
PROPOSAL FOUR
AUTHORIZATION AND APPROVAL OF THE ISSUANCE OF THE COMMON STOCK UNDERLYING
CONVERTIBLE PREFERRED STOCK AND WARRANTS TO PURCHASE COMMON STOCK, THAT IN THE
AGGREGATE WOULD REPRESENT 20% OR MORE OF THE OUTSTANDING SHARES OF COMMON STOCK
OF THE COMPANY, WHICH APPROVAL IS NECESSARY IN ORDER TO MEET THE CONTINUED
LISTING REQUIREMENTS FOR THE COMMON STOCK ON THE AMERICAN STOCK EXCHANGE
The following contains a summary of the material information relating
to certain transactions involving the Company's preferred stock. Copies of the
Securities Purchase Agreements, Certificate of Incorporation of the Company
setting forth the rights and privileges of the preferred stock, and the form of
warrant for each series of preferred stock are being filed with the SEC as
exhibits to this Proxy Statement.
General
Since December 31, 1997, the Company has issued three series of its
five percent convertible preferred stock denominated Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible
Preferred Stock. In addition, the Company has agreed to issue, pursuant to a
mutually binding stock purchase agreement, a fourth series of its five percent
convertible preferred stock denominated Series D Convertible Preferred Stock. In
connection with the issuance of the five percent convertible preferred stock,
the Company has also issued (or, in the case of the Series D Preferred Stock,
agreed to issue) warrants to purchase its common stock.
Each series of the five percent convertible preferred stock has similar
rights and privileges, and each share of the five percent convertible preferred
stock has a face amount of $1,000. The five percent convertible preferred stock
is convertible into the number of shares of common stock determined by dividing
the face amount of the five percent convertible preferred stock being converted
by the applicable conversion price.
On December 31, 1997, the Company issued to RGC International
Investors, LDC, 5,000 shares of its Series A Preferred Stock and warrants to
purchase 150,000 shares of common stock at an exercise price of $7.95 per share
for an aggregate purchase price of $5,000,000. As of the Record Date, there were
no shares of Series A Preferred Stock outstanding.
On May 29, 1998, the Company issued to RGC International Investors and
Shoreline Associates I, LLC, 9,000 and 1,000 shares, respectively, of its Series
B Preferred Stock and warrants to purchase 180,000 and 20,000 shares,
respectively, of common stock, for an aggregate purchase price of $10,000,000.
The warrants issued in connection with the Series B Preferred Stock have an
exercise price of $13.75 per share. As of the Record Date, RGC International
Investors and Shoreline Associates I, LLC owned 9,112.50 and 1,012.50 shares,
respectively, of Series B Preferred Stock as a result of payment of additional
shares of Series B Preferred Stock as dividends, which was all of the Series B
Preferred Stock outstanding as of such date. Sean Doherty, a director of the
Company, is an owner of Shoreline Associates I, LLC.
On August 31, 1998, the Company issued to RGC International Investors
7,500 shares of its Series C Preferred Stock and warrants to purchase 93,750
shares of common stock at an exercise price of $9.375 per share for an aggregate
purchase price of $7,500,000. As of the Record Date, RGC International Investors
owned 7,531.25 shares of Series C Preferred Stock as a result of payment of
31
<PAGE>
additional shares of Series C Preferred Stock as dividends, which was all of the
Series C Preferred Stock outstanding as of such date.
Also on August 31, 1998, the Company entered into a stock purchase
agreement whereby the Company agreed, subject to certain conditions, including
the stockholder approval being solicited hereby, to issue to RGC International
Investors 7,500 shares of its Series D Preferred Stock and warrants to purchase
93,750 shares of common stock for an aggregate purchase price of $7,500,000. The
warrants issued in connection with the Series D Preferred Stock will be
exercisable at 125% of average closing bid price of the common stock on the five
days prior to the date the Series D Preferred Stock is issued.
Messrs. Wayne Bloch, Gary Kaminsky and Steve Katznelson control RGC
International Investors through their ownership and management of RGC General
Partner Corp. RGC General Partner Corp. is the general partner of Rose Glen
Capital Management, L.P., which is the investment manager of RGC International
Investors. Messrs. Bloch, Kaminsky and Katznelson each disclaim beneficial
ownership of our common stock owned by RGC International Investors.
The following table sets forth for each holder of the five percent
convertible preferred stock, and for all holders of the five percent convertible
preferred stock as a group, the number of shares of the Company's common stock
underlying the five percent convertible preferred stock and warrants issued in
connection with the five percent convertible preferred stock held by such
holder, and the percentage of the Company's outstanding common stock that each
represents as of December 31, 1998. Percentage ownership is based upon 8,631,087
shares of common stock outstanding on December 31, 1998.
The shares of Common Stock underlying the Series A Preferred Stock
represent the number of shares of Common Stock actually issued upon conversion
of the Series A Preferred Stock. The shares of Common Stock underlying the
Series B Preferred Stock and Series C Preferred Stock are based on the
conversion prices in effect as of December 31, 1998, which are $13.20 and $9.00,
respectively. The shares underlying the Series D Preferred Stock is based on the
conversion price that would be in effect if the Series D Preferred Stock was
issued on December 31, 1998, which is $________. See "Five percent convertible
preferred stock--Conversion Prices; Risk Factors--Issuance of Common Stock
Pursuant to Existing Obligations Will Result in Dilution to the Common
Stockholders."
The table may not present the beneficial ownership of the holders of
the preferred stock in accordance with Rule 13d-3 under the Exchange Act because
of the floating conversion price feature of the five percent convertible
preferred stock and certain limitations on conversion and ownership contained in
our Certificate of Incorporation. Please see "Five Percent Convertible Preferred
Stock--Limitations on Conversion" for a more detailed discussion of these
limitations.
32
<PAGE>
<TABLE>
<CAPTION>
Shares of common Shares of common Shares of common Shares of common
stock issued upon stock Underlying stock Underlying stock Underlying Shares of
conversion of Series B Series C Series D common stock
Series A Preferred Preferred Preferred Underlying Total Shares
Preferred Stock Stock Stock Stock Warrants Common Stock
--------------- ----- ----- ----- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
# % # % # % # % # %
RGC International
Investors, LDC 712,964 690,340 7.4 836,805 8.8 423,750 4.7 2,314,259(1) 21.9
Shoreline
Associates I, LLC 0 0 76,704 * 0 0 0 0 20,000 * 96,704 1.1
Preferred
Stockholders
as a Group 712,964 767,044 8.2 836,805 8.8 443,750 4.9 2,410,945 22.6
<FN>
- --------------------
* Less than 1%
(1) In addition to the common stock issuable upon conversion or exercise of the
Series B Preferred Stock, Series C Preferred Stock and warrants, includes
363,364 shares of common stock.
</FN>
</TABLE>
33
<PAGE>
In the event all such shares of five percent convertible preferred
stock were so converted, and taking into account the 712,964 shares of common
stock already issued upon conversion of the Series A Preferred Stock, the common
stock issuable under the five percent convertible preferred stock and warrants
issued in connection with the five percent convertible stock would equal [47.0]%
of the 6,974,967 shares of common stock outstanding on the date the Series A
Preferred Stock was issued, December 31, 1997.
Certain Considerations and Risks
While the Board of Directors is of the opinion that the five percent
convertible preferred stock transactions, and the resulting issuance of common
stock upon conversion or exercise, as applicable, of the five percent
convertible preferred stock and 5% Preferred Warrants, are fair to, and are
advisable and in the best interests of the Company and its stockholders,
stockholders should consider the following possible factors, as well as the
other information contained in this proxy statement, in evaluating this proposal
four. In particular, please review the risk factors contained in the Company's
Annual Report on Form 10-K, which is being delivered with this Proxy Statement
and is incorporated herein by reference.
o The conversion of the five percent convertible preferred stock
and exercise of the warrants will result in substantial dilution
to current shareholders.
o The conversion of the five percent convertible preferred stock
and exercise of the warrants may depress the market price of the
common stock by increasing the amount of shares of common stock
held publicly.
o The current aggregate liquidation preference of the five percent
convertible preferred stock, without giving effect to any accrued
but unpaid dividends, is $17,656,250 million ($25,5156,250 taking
into account the Series D transaction). In the event of the
liquidation, dissolution or winding up of the Company, these
amounts would be paid on a priority over the holders of common
stock and will reduce the amounts, if any, which would otherwise
be payable to the holders of common stock.
AMEX and NASDAQ Voting Requirements
The common stock is listed on the American Stock Exchange, the market
rules of which require stockholder approval if the Company issues common stock
or securities exercisable for 20% or more of the Company's outstanding shares of
common stock or voting power at a price that is below the greater of book value
or market value per share. The Company intends to list its common stock on
NASDAQ, which has a similar rule.
Currently, and at the time of their consummation, none of the series of
five percent convertible preferred stock, individually, would result in the
issuance of 20% or more of the common stock. However, the floating conversion
price mechanism contained in each series of the five percent convertible
preferred stock could result in 20% or more of the common stock being issued on
the conversion of any series of the five percent convertible preferred stock. It
is likely that the holders of the five percent convertible preferred stock would
convert their shares only if the conversion price were lower than the market
price. In addition, the conversion of the five percent convertible preferred
stock, in the aggregate, would exceed 20% of the common stock. To comply with
the rules of the American Stock Exchange, the terms of each series of five
percent convertible preferred stock prohibit conversions
34
<PAGE>
resulting in more than 19.99% of the common stock being issued, unless
stockholder approval is obtained.
Therefore, the stockholders must vote in favor of this proposal four in
order for the holders of the five percent convertible preferred stock to be able
to convert their shares of Preferred Stock without restriction.
The laws of the State of New York do not require stockholder approval
of the issuance of the five percent convertible preferred stock, the 5%
Preferred Warrants, or the common stock underlying such securities.
Reason for the Transactions and Use of Proceeds
Proceeds from the sale of the five percent convertible preferred stock
and warrants are being used to fund the expenditures incurred in the continuing
expansion of ISP Channel, Inc., particularly the ISP Channel service, and for
general corporate purposes. Such expenditures include procuring the equipment
necessary to deliver Internet services to subscribers, hiring additional
personnel and sales and marketing efforts.
The Five Percent Convertible Preferred Stock
The Series A Preferred Stock has been converted into 712,964 shares of
common stock and is no longer outstanding. As such, the description below does
not include the Series A Preferred Stock.
Dividends.
The holders of the five percent convertible preferred stock are
entitled to receive dividends at a rate of 5% per annum, payable quarterly. The
Company may pay this dividend in cash or additional shares of the applicable
series of five percent convertible preferred stock. Unpaid dividends are
cumulative. Any accrued and unpaid dividends are payable only in the event of a
liquidation, dissolution or winding up of the Company. In addition, the holders
of the Series B Preferred Stock are entitled to receive dividends of 10% per
annum in the event they are unable to convert their Series B Preferred Stock
because such conversions would result in greater than 19.99% of the common stock
being issued upon conversion of the Series B, unless stockholder approval is
obtained authorizing such conversions.
The Company has issued 100.78 shares of Series A Preferred Stock, 125
shares of Series B Preferred Stock and 31.25 shares of Series C Preferred Stock
as dividends.
Limitations on Conversion
The Company's Certificate of Incorporation defines the rights and
privileges of the five percent convertible preferred stock. These rights and
privileges follow the five percent convertible preferred stock if it is
transferred, but do not affect common stock issued upon conversion. Certain
provisions of the Certificate of Incorporation are discussed below.
The Series A Preferred Stock has been converted in full, and there are
no shares outstanding.
35
<PAGE>
A holder of the Series B Preferred Stock cannot convert its Series B
Preferred Stock in the event such conversion would result in its beneficially
owning more than 4.99% of the Company's common stock, but they may waive this
prohibition by providing the Company with a notice of election to convert at
least 61 days prior to such conversion. Similarly, a holder of the Series C
Preferred Stock or Series D Preferred Stock cannot convert its Series C
Preferred Stock or Series D Preferred Stock in the event such conversion would
result in beneficially owning more than 4.99% of the Company's common stock.
However, the Series C Preferred Stock does not include a waiver provision such
as that included in the terms of the Series B Preferred Stock. Notwithstanding
this limitation, the holders of the preferred stock cannot convert into an
aggregate of more than 19.99% of the Company's common stock without the approval
of the Company's common stock shareholders, which is being sought by this
proposal four, or the approval of the American Stock Exchange. In addition, even
if such shareholder approval is obtained, the Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock each cannot convert into more than
2,000,000 shares of common stock without our consent. In the event the 2,000,000
share cap for the Series C Preferred Stock or the Series D Preferred Stock is
reached, the Company must either honor conversion requests over the 2,000,000
share cap or redeem the remaining Series C Preferred Stock at its stated value
of $1,000 plus accrued and unpaid dividends.
The 2,000,000 share cap provides common shareholders protection against
dilution upon conversion of the five percent convertible preferred stock. In the
event the company obtains shareholder approval for issuance of more than 19.99%
of its common stock upon conversion of the five percent convertible preferred
stock, the 4.99% restriction does not protect common shareholders from dilution
to the extent the preferred shareholders convert and sell shares to keep at or
under these relevant limits, and the 2,000,000 share cap would not provide
protection against dilution in the event the company decides to continue to
honor conversions of the Series C Preferred Stock or Series D Preferred Stock
after the 2,000,000 share cap is reached.
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
the five percent convertible preferred stock 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 five percent convertible
preferred stock 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.
The following table sets forth the number of shares of common stock
issuable upon conversion of 10,125 shares of Series B Preferred Stock and
7,531.5 shares of Series C Preferred Stock, which is all of the outstanding
preferred stock, and ______ shares of Series D Preferred Stock and percentage
ownership that each represents assuming:
o the Series D Preferred Stock was issued on December 31, 1999;
o the floating conversion price feature of the five percent
convertible preferred stock was in effect;
o the maximum conversion prices of the five percent convertible
preferred stock was not adjusted as provided in our certificate
of incorporation; and
o the market price of the common stock is 25%, 50%, 75% and 100% of
the market price of the common stock on December 31, 1998, which
was $17.38 per share.
The Series B Preferred Stock cannot convert into more than 2,000,000
shares of our common stock. In the event that more than 2,000,000 shares of
common stock would be required to fully
36
<PAGE>
convert the Series C Preferred Stock, we must either honor conversion requests
over the 2,000,000 share limit or redeem the remaining Series C Preferred Stock
for cash, at its stated value of $1,000 per share plus accrued but unpaid
dividends.
<TABLE>
<CAPTION>
- --------------- ------------------------ ------------------------- ------------------------ -------------------------
Percent of
Market Series B Preferred Series D Preferred
Price Stock Series C Preferred Stock Stock Total
=============== ================ ======= ================== ====== ================ ======= ================ =========
Shares Shares Shares Shares
Underlying % Underlying % Underlying % Underlying %
---------- ----------- ---------- ----------
- --------------- ---------------- ------- ------------------ ------ ---------------- ------- ---------------- --------
<S> <C> <C>
25% 2,000,000 1,752,963
- --------------- ---------------- ------- ------------------ ------ ---------------- ------- ---------------- --------
50% 1,179,696 877,490
- --------------- ---------------- ------- ------------------ ------ ---------------- ------- ---------------- --------
75% 786,162 847,265
- --------------- ---------------- ------- ------------------ ------ ---------------- ------- ---------------- --------
100% 776,633 847,265
- --------------- ---------------- ------- ------------------ ------ ---------------- ------- ---------------- --------
</TABLE>
The Company issued 712,964 shares of common stock to RGC International
Investors upon conversion of the Series A Preferred Stock. Assuming RGC
International Investors converted in accordance with the above table, then it
would own the following amount and percentages of the common stock based on
8,631,087 shares of common stock outstanding as of December 31, 1998:
- ------------------- --------------------------------- --------------------------
Percent of Market
Price Number of Shares of Common Stock Percentage of Common Stock
- ------------------- --------------------------------- --------------------------
25%
- ------------------- --------------------------------- --------------------------
50%
- ------------------- --------------------------------- --------------------------
75%
- ------------------- --------------------------------- --------------------------
100%
- ------------------- --------------------------------- --------------------------
Conversion Prices
The stated value of each series of outstanding preferred stock is
$1,000 per share. The actual number of shares of common stock that the Company
will issue upon conversion of the Series B Preferred Stock and Series C
Preferred Stock is indeterminable as of the date of this proxy statement and is
subject to adjustment. The number of shares underlying the Series B Preferred
Stock and Series C Preferred Stock would increase if the conversion price
decreased. The actual number of shares of common stock issuable upon conversion
of each series of Preferred Stock will be determined by the following formula:
(The aggregate stated value of the shares of preferred stock thus being
converted at $1,000 per share)
divided by
(The applicable conversion price of the series of the preferred stock
being converted).
37
<PAGE>
Prior to February 28, 1999, the conversion price of the Series B
Preferred Stock is equal to $13.20 per share. Thereafter, the conversion price
of the Series B Preferred Stock is equal to the lower of $13.20 per share and
the lowest five day average closing price of the common stock during the 20 day
trading period immediately prior to such conversion. The maximum conversion
price of the Series B Preferred Stock would increase to $14.30 in the event the
average closing bid prices of the common stock over the 20 consecutive trading
days immediately prior to February 28, 1999 is greater than $14.30. The
conversion price is subject to adjustment as set forth in the Certificate of
Incorporation.
Prior to May 31, 1999, the conversion price of the Series C Preferred
Stock is equal to $9.00 per share. Thereafter, the conversion price of the
Series C Preferred Stock is equal to the lower of $9.00 per share and the lowest
five day average closing price of the common stock during the 30-day trading
period immediately prior to such conversion. The maximum conversion price of the
Series C Preferred Stock would increase to $9.75 in the event the average
closing bid prices of the common stock over the 20 consecutive trading days
immediately prior to May 29, 1999 is greater than $9.75. The conversion price is
subject to adjustment as set forth in the Certificate of Incorporation.
Prior to the nine month anniversary of the issuance of the Series D
Preferred Stock, the Series D Conversion Price will be the Initial Series D
Conversion Price. After such anniversary, the Series D Conversion Price will be
the lower of the Initial Series D Conversion Price (subject to an escalation
provision pending certain market conditions around such anniversary) and a five
day average market price within a 30-day trading period prior to conversion. The
conversion price is subject to adjustment as set forth in the Certificate of
Incorporation.
Voting Rights.
Holders of the five percent convertible preferred stock do not have
voting rights, except for certain protective provisions relating to changes in
the rights of holders of the five percent convertible preferred stock or
otherwise required by law. Consent of a majority in interest of each effected
series of the five percent convertible preferred stock is required prior to (i)
changing the rights or privileges of such series; (ii) creating any new class or
series of stock with preferences above or on par with those of such series;
(iii) increasing the authorized number of such series; (iv) any act which would
result in a negative tax consequence to the holders of such series pursuant to
Section 305 of the Internal Revenue Code.
In addition, a majority vote of the holders of the Series B Preferred
Stock, Series C Preferred Stock, or Series D Preferred Stock, to the extent such
series is effected, is required to alter or change the rights, preferences or
privileges of any capital stock of the Company so as to effect adversely such
series. A majority vote by each of the Series C Preferred Stock and the Series D
Preferred Stock is required to change the par value of the common stock.
Priority.
Each series of the five percent convertible preferred stock is pari
passu with each other series of five percent convertible preferred stock, and
ranks senior to the common stock as to dividends, distributions and distribution
of assets upon liquidation, dissolution or winding up of the Company.
Liquidation.
In the event of any liquidation, dissolution or winding up of the
Company, holders of the five percent convertible preferred stock will be
entitled to be paid out of the assets of the Company legally available for
distribution to its stockholders, an amount equal to the liquidation value per
share of the five percent convertible preferred stock, but only after and
subject to the payment in full of all amounts
38
<PAGE>
required to be distributed to the holders of any other capital stock of the
Company ranking in liquidations senior to such five percent convertible
preferred stock, but before any payment will be made to the holders of the
common stock. Certain mergers or consolidations of the Company into or with
another corporation or the sale of all or substantially all of the assets of the
Company may be deemed to be a liquidation of the Company triggering the rights
of the holders of the five percent convertible preferred stock.
Redemption.
Each series of the five percent convertible preferred stock is subject
to redemption upon certain circumstances, including the Company's (i) failure to
convert the five percent convertible preferred stock when required and in the
proper manner, (ii) lapse of effectiveness of the registration statement
covering the common stock underlying the five percent convertible preferred
stock, and (iii) suspension of the common stock from trading on AMEX or New York
Stock Exchange or NASDAQ. In addition, the Series B Preferred Stock is subject
to redemption in the event the Company breaches the registration rights
agreement pursuant to which the common stock underlying the Series B Preferred
Stock was registered with the Commission; and the Series C (and Series D if
issued) is subject to redemption in the event the Company breaches the stock
purchase agreement pursuant to which the Series C Preferred Stock was issued or
the registration rights agreement pursuant to which the common stock underlying
the Series C Preferred Stock was registered with the Commission.
The Company will have the right to redeem the Series B Preferred Stock
on the earlier of an underwritten public offering of at least $10,000,000 or
November 29, 1999 at a price equal to the greater of 120% of its face value plus
any accrued unpaid dividends or the market price of the common stock multiplied
by the number of shares of common stock into which the Series B Preferred Stock
can be converted. The Company will have the right to redeem the Series C
Preferred Stock on or after the earlier of (i) an underwritten public offering
or a Rule 144A offering in the amount of at least $10,000,000, or (ii) February
29, 2000, at a price equal to 110% of its face value if such redemption is made
prior to September 1, 1999 and 120% of the face value thereafter. Once issued,
the Company will have the right to redeem the Series D Preferred Stock on or
after the earlier of (i) an underwritten public offering or a Rule 144A offering
in the amount of at least $10,000,000, or (ii) the eighteen-month anniversary of
the date of its issuance at a price equal to 110% of its face value if such
redemption is made in the first 12 months that the Series D Preferred Stock is
outstanding and 120% of the face value thereafter.
Maturity.
The Company, in its sole discretion, must either redeem or convert the
5% Preferred Stock on the three year anniversaries of issuance (the "Maturity
Date"). The Company's ability to convert the 5% Preferred Stock on the Maturity
Date is subject to (i) shareholder approval in the event such conversion
(aggregated with all previous conversions of 5% Preferred Stock) would result in
the issuance of more than 19.99% of the outstanding common stock as of December
31, 1997, and (ii) the shares of common stock issuable upon such conversion
being authorized, registered and eligible for trading over AMEX or NASDAQ. In
the event shareholder approval is not obtained, or the common stock issuable
upon such conversion is not authorized, registered and eligible for trading over
AMEX or NASDAQ, then the Company must redeem the 5% Preferred Stock in cash. The
Maturity Date of the Series B Preferred Stock is May 29, 2001. The Maturity Date
of the Series C Preferred Stock is August 31, 2001.
The Warrants
The warrants issued in connection with each series of the five percent
convertible preferred stock have a term of four years, contain certain
anti-dilution provisions and permit cashless
39
<PAGE>
exercise. The warrants issued in connection with the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock are currently exercisable.
The Company can call the warrants issued in connection with the Series B
Preferred Stock and Series C Preferred Stock any time after the first year
anniversary of their issuance, but only in the event the market price of the
common stock over the twenty days prior to such call is 150% of the exercise
price of the warrants being called. The warrants issued in connection with the
Series B Preferred Stock have an exercise price of $7.95 per share and expire on
December 31, 2001. The warrants issued in connection with the Series C Preferred
Stock have an exercise price of $13.75 per share and expire on May 28, 2002. The
warrants issued in connection with the Series C Preferred Stock have an exercise
price of $9.375 per share and expire on August 31, 2002. The exercise price of
the warrants to be issued in connection with the Series D Preferred Stock will
be 125% of the market price of the common stock on the date of issuance, and
will expire four years after such issuance.
Absence of Appraisal Rights
Under New York and Delaware law, objecting stockholders will have no
appraisal, dissenters' or similar rights (i.e., the right to seek a judicial
determination of the "fair value" of the common stock and to compel the Company
to purchase their common stock for cash in that amount) with respect to matters
presented at the Annual Meeting or otherwise with respect to the five percent
convertible preferred stock transactions, nor will the Company voluntarily
accord such rights to stockholders.
Therefore, approval by the requisite number of shares of the matters
presented at the Annual Meeting will bind all stockholders and objecting
stockholders will be able to liquidate their common stock only by selling it in
the market.
Consequences if this Proposal Four is not Approved
If stockholder approval is not obtained for this proposal four, the
Company will be required to make cash payments to holders of the five percent
convertible preferred stock once such holders have converted into 19.99% of the
common stock. Cash payments would be equal to the number of shares of common
stock that could not be issued because of such restriction multiplied by the
average market price of the common stock on the five days prior to the date of
attempted conversion. In addition, the Company would not be able to complete the
Series D Preferred Stock financing, in which the Company would raise $7,500,000.
The following table sets forth the amount of such cash payment
assuming:
o the market price of such common stock is 25%, 50%, 75%, 100%, 125%,
150% and 175% of the market price of the common stock on December 31,
1998, which was $17.38 per share;
o the floating rate mechanism of the Series B Preferred Stock and Series
C Preferred Stock was in effect;
o the maximum conversion price of the Series B Preferred Stock and Series
C Preferred Stock was not increased; and
o the conversion price was equal to the market price at the time of
conversion in the event the market price was less than the maximum
conversion price.
The actual cash payments may be significantly greater than those listed
if the market price of our common stock increases above $30.42. In addition, the
floating conversion price feature is based on the average market prices of the
common stock for a number of trading days immediately prior
40
<PAGE>
to conversion. Therefore, cash payments may also be significantly greater than
those listed if the market price of our common stock at the time of attempted
conversion was not equal to the conversion price.
<TABLE>
The actual cash payments may be significantly greater than those listed
in the event the market price of our common stock increases above $30.42.
<CAPTION>
Cash Payment for Attempted Conversions
--------------------------------------
Percentage of
--------------
Market Price Series B Preferred Stock Series C Preferred Stock Total Cash Payments
------------ ------------------------ ------------------------ -------------------
<S> <C> <C> <C>
25% ($4.35) $ 5,736,206 $7,625,390 $13,361,596
50% ($8.69) 4,330,786 7,625,390 11,956,176
75% ($13.04) 10,251,560 2,163,775 12,415,335
100% ($17.38) 13,497,887 2,883,927 16,381,814
125% ($21.73) 16,876,242 3,605,738 20,481,980
150% ($26.07) 20,246,831 4,325,890 24,572,721
175% ($30.42) 23,625,186 6,047,702 28,672,888
</TABLE>
Such cash payments and inability to complete the Series D Preferred
Stock Financing will adversely effect the Company's financial condition and
ability to implement its business plan for ISP Channel, Inc. In addition, the
Company will be required to raise funds elsewhere, which could be difficult in
the event stockholder approval is not obtained. If the Company does not receive
stockholder approval, there can be no assurance that the Company would be able
to obtain adequate sources of additional capital. "Risk Factors Possible Cash
Payments to Holders of Preferred Stock."
Vote Required
The affirmative vote on this proposal four by the holders of a majority
of shares of common stock present in person or by proxy at the Annual Meeting is
required to approve the issuance of the common stock underlying the five percent
convertible preferred stock and 5% Preferred Warrants, which in the aggregate
would represent 20% or more of the outstanding shares of common stock, which
approval is necessary to meet the continued listing requirements for the common
stock on the American Stock Exchange. Such approval would permit the holders of
such preferred stock to convert their preferred stock into common stock without
the 19.99% limitation. For purposes of calculating votes cast, abstentions are
included as votes cast while broker non-votes are not included as votes cast.
Recommendations of Board of Directors
The Board of Directors has reviewed and considered the terms and
conditions of the five percent convertible preferred stock transactions and
believes that such transactions, and the resulting issuance of common stock upon
conversion or exercise, as applicable, of the five percent convertible preferred
stock and 5% Preferred Warrants, are fair to, and are advisable and in the best
interests of, the Company and its stockholders. The Board of Directors has
unanimously approved the five percent
41
<PAGE>
convertible preferred stock transactions, and the issuance of the common stock
pursuant to their conversion or exercise, as applicable, and unanimously
recommends that the stockholders vote FOR approval of this proposal four. The
Company's directors and executive officers (who hold common stock representing
approximately ____% of the common stock as of the Record Date) have indicated
that they intend to vote all shares of voting stock over which they exercise
voting power as of the close of business on the Record Date in favor of approval
of this proposal four. The Board of Directors, in recommending stockholder
approval of this proposal four, considered a number of factors, including (a)
the substantial increase in the working capital of the Company that has resulted
from such transactions and the prospect that, as a result of the increase in
working capital resulting from such transactions, the Company will be able to
expand its operations, improve its access to capital markets and, if
appropriate, make certain strategic acquisitions, (b) the terms of the
transactions pursuant to which the five percent convertible preferred stock was
issued, and (c) the alternatives to the five percent convertible preferred stock
transactions, including alternative public or private financing.
THE BOARD OF DIRECTORS BELIEVES THAT THE FIVE PERCENT CONVERTIBLE
PREFERRED STOCK TRANSACTIONS, AND THE RESULTING ISSUANCE OF COMMON STOCK UPON
CONVERSION OR EXERCISE, AS APPLICABLE, OF THE FIVE PERCENT CONVERTIBLE PREFERRED
STOCK AND WARRANTS, ARE FAIR TO, AND ARE ADVISABLE AND IN THE BEST INTERESTS OF,
THE COMPANY AND ITS STOCKHOLDERS AND HAS UNANIMOUSLY APPROVED THE FIVE PERCENT
CONVERTIBLE PREFERRED STOCK TRANSACTIONS AND UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR APPROVAL OF PROPOSAL FOUR.
42
<PAGE>
PROPOSAL FIVE
SALE OF THE COMPANY'S WHOLLY-OWNED SUBSIDIARIES,
KCI AND MTC
The Company has made a strategic decision to focus on its Internet
related businesses. As such, it has decided to sell its two non-Internet related
subsidiaries, Kansas Communications, Inc. ("KCI") and Micrographic Technology
Corporation ("MTC").
The Company has entered into formal negotiations with separate buyers
for each of KCI and MTC. The Company announced that it was seeking buyers for
KCI in April 1998 and has been accounting for it as a discontinued operation
since July 27, 1998. KCI entered into a non-binding letter of intent with a
potential buyer, Convergent Communications Services, Inc. ("Convergent
Communications") on November 9, 1998 (the "Convergent LOI"). The Company
executed a term sheet with Global Information Distribution GmbH ("GID") on
November 5, 1998 (the "GID Term Sheet").
The Company, KCI and MTC are currently negotiating with Convergent
Communications and GID to execute definitive agreements regarding the sales,
which may not come to fruition. However, the Company intends to sell both KCI
and MTC, whether on the terms stated in the Convergent LOI and GID Term Sheet or
otherwise, and a Yes vote on this Proposal Five will authorize the Company to
dispose of both businesses on whatever terms and to whatever parties the Board
of Director deems appropriate. Because KCI and MTC, together, constitute a
substantial majority of the historic assets and revenues of the Company, the
sale of both KCI and MTC requires shareholder approval. The Company reserves the
right to sell either one without shareholder approval, and a "no" vote does not
prohibit the Company from selling KCI and MTC at such time as they no longer
constitute a substantial majority of the Company's assets and revenues.
The Company
The following is a brief description of the Company. A comprehensive
description of the Company can be found in the Company's Annual Report on Form
10-K, which is being delivered with this Proxy Statement and is incorporated by
reference herein.
SoftNet Systems, Inc.
The Company's current principal executive office is located at 650
Townsend Street, San Francisco, California 94103, (415) 365-2500. To reduce its
future rent costs per square foot, the Company has signed a lease at 650
Townsend Street, San Francisco, California, and it intends to move its principal
executive offices and ISP Channel, Inc. to this location in the first quarter of
1999.
ISP Channel, Inc.
ISP Channel, Inc. provides residential and business subscribers access
to the Internet over the existing cable television infrastructure at speeds up
to 100 times faster than 28.8 kilobits per second dial-up access. ISP Channel's
core products and services include high-speed Internet Access, broadband
Internet access for residential, small office/home office and commercial
customers, World Wide Web ("Web") site development, Web hosting and collocation,
on-line commerce applications, virtual private networks, IP telephony, video
conferencing and other collaborative multimedia applications using the Company's
servers, and local content, including planned on-line communities, Remote Local
Area Networks and dial-up Internet access.
43
<PAGE>
Intelligent Communications, Inc.
The Company has signed an agreement to acquire Intelligent
Communications, Inc. ("Intellicom"), the former Xerox Skyway Network. The
consummation of the acquisition is subject to approval from the Federal
Communications Commission. Intellicom offers Internet services including
Internet access via two way satellite which uses a proprietary VSAT (Very Small
Aperture Terminal) technology and hardware manufactured by Intellicom. In
conjunction with its two way VSAT Internet connectivity, Intellicom also
provides a caching service designed to ease Internet congestion and speed the
performance of delivering web traffic by up to 60%.
Kansas Communications, Inc.
KCI provides communication solutions through the design,
implementation, maintenance and integration of voice, data and video
communication equipment and service. KCI operates throughout the Midwestern
United States with offices in Kansas City and the greater metropolitan area,
Columbia, Missouri, Wichita, Kansas and Milwaukee, Wisconsin. The Company's
telecommunications product offerings include third party manufactured telephone
systems and call processing systems (including call centers, voice messaging,
interactive voice response ("IVR") and computer telephone integration ("CTI")).
Additionally, the Company develops software for IVR and CTI applications, sells
local and long distance network services, provides maintenance services for
existing customers and provides cabling and data communications. KCI markets its
products and services primarily to customers with 25 or more telephones located
in the Midwest.
KCI generates revenue primarily through the sale of third party vendor
products through new installations of systems to either existing or new
customers and the provisions of customers with "moves, adds, changes," service
and maintenance to their existing systems. KCI purchases all of the equipment
and software that it markets and installs from third party vendors. The majority
of the products sold by the division are purchased from Fujitsu Business
Communication Systems, Inc. and Executone Information Systems. Other parts and
components necessary for installation and service are purchased from a variety
of sources and, the Company believes, are readily available from alternative
sources.
Micrographic Technology Corporation
MTC designs, develops, and manufactures sophisticated, automated
electronic document management and film-based imaging solutions for customers
with large-scale, complex, document-intensive requirements. MTC's hardware and
software products are based on an industry standard client-server architecture,
providing flexibility to connect to a wide variety of information systems and
produce output to various storage media, including optical disk, magnetic disk
and tape, CD-ROM, and microfilm and microfiche, spanning the entire document
lifecycle. MTC manufactures a family of Computer Output to Microfilm ("COM")
production systems, from which it has historically derived the majority of its
revenues. MTC's proprietary software captures information from a variety of
sources, then intelligently indexes and directs the data for storage,
distribution and retrieval. MTC expects that its business will increasingly be
focused on the distribution and retrieval of electronically captured information
over a variety of communications media, such as the Internet, LANs and wide area
networks ("WANs"). To this end, MTC is pursuing a strategy of partnering with
providers of features or elements that enhance MTC's electronic data
distribution solutions.
44
<PAGE>
Proposed Sales Transactions
The Company has decided to sell KCI and MTC to focus on its Internet
related businesses. While the Company has entered into the Convergent LOI and
GID Term Sheet, these transactions may not be consummated. In the event either
of the transactions is not consummated, the Company will continue to seek to
divest itself of KCI and MTC. There can be no assurance that in such instance,
the Company will be able to find another buyer or that it will be able to sell
KCI or MTC on terms similar to the transactions described herein. By voting for
this proposal five, shareholders are consenting to the sale of KCI and MTC on
any terms and to any parties deemed advisable by the Board of Directors of the
Company.
The terms of each proposed sale are the result of arms-length
negotiations between the Company and each respective purchaser.
Background
Kansas Communications Inc.
In April 1998, the Company announced that it was seeking a buyer for
KCI.
In July 1998, the Board of Directors of the Company formally adopted a
resolution to account for KCI as a discontinued operation, and restated its
financial statements accordingly.
In July 1998, the Company approached Convergent Communications through
a broker. From August through October 1998, the Company and Convergent
Communications met and discussed the possible acquisition of KCI by Convergent
Communications.
On October 6, 1998, the Board of Directors of the Company authorized
the officers to enter into a letter of intent with Convergent Communications
upon the fulfillment of certain conditions.
On November 9, 1998 the Company and Convergent Communications signed a
non-binding letter of intent for the sale of KCI to Convergent Communications,
the terms of which were ratified by the Board of Directors on November 13, 1998.
Micrographic Technology Corporation
In October 1998, the Company approached GID with a proposal to sell MTC
to GID. During October 1998 and November 1998, the Company and GID met and
discussed the possible acquisition of MTC by GID.
On October 6, 1998, the Board of Directors of the Company authorized
the officers to enter into a letter of intent with GID upon the fulfillment of
certain conditions.
On November 5, 1998, the Company and GID signed a term sheet for the
sale of MTC to GID, which was ratified by the Board of Directors of the Company
on November 13, 1998.
Terms of the Convergent LOI
The Company has agreed to sell KCI to Convergent Communications for an
aggregate purchase price of up to $6,600,000. The purchase price is to be paid
as follows:
45
<PAGE>
1. Convergent Communications paid the Company $100,000 in cash upon
execution of the letter of intent;
2. Convergent Communications would pay the Company $500,000 in cash on
the Closing of the purchase and sale of the Assets, as would be defined in the
Purchase Agreement;
3. Convergent Communications would obtain a financing facility in the
amount of $2,900,000 of which the proceeds thereof would be paid to the Company
on the Closing Date;
4. On the Closing Date, Convergent Communications would issue to the
Company 60,000 shares of Convergent Communications' parent company, Convergent
Communications, Inc., a Colorado corporation ("Parent"), no par value common
stock ("Convergent Stock"), with an agreed value of $600,000 ($10.00 per share);
5. On the Closing Date, Convergent Communications would issue the
Company a promissory note ("Purchaser Note") in the amount of $1,000,000. The
Purchaser Note would be payable on the date which is twelve (12) months
following the Closing Date and would bear simple interest at the rate of eight
percent (8%) per annum;
6. On the Closing Date, Convergent Communications would issue the
Company a promissory note ("Contingent Note") in an amount up to a maximum of
$1,500,000. The Contingent Note would be payable on the date which is twelve
(12) months following the Closing Date, would bear simple interest at the rate
of eight percent (8%) per annum and would be subject to reduction in the event
KCI's net working capital and assets are less than $2,200,000 on the Closing
Date. The Company would have the option to accelerate payment of the Contingent
Note upon thirty (30) days written notice to Convergent Communications in the
event that Parent completes an equity or debt financing with net proceeds in
excess of $25,000,000.
Terms of the GID Term Sheet
The Company has agreed to sell MTC to GID for an aggregate purchase
price of $5,125,000. The purchase price is to be paid as follows:
1. GID paid the Company $100,000 as a non-refundable deposit upon
acceptance of the GID Term Sheet;
2. GID shall pay to the Company at the Closing US$5,025,000 in readily
available funds.
Description of Convergent Communications Services, Inc.
Convergent Communications is a wholly owned subsidiary of Convergent
Communications, Inc. ("Parent"). Its principal executive offices are located at
67 Inverness Drive East, Suite 110, Englewood, Colorado 80112, (303) 749-3000.
Its Internet Website address is www.converg.com.
Convergent Communications, an Enterprise Network Carrier, delivers
comprehensive, single-source communications solutions that capitalize on today's
converging voice, data and multimedia technologies. Convergent Communication's
business strategy is centered on an interdisciplinary communications skill set,
a commitment to customer care, and the ability to own and manage all elements of
Convergent Communications' client's communications network with maximum quality
and reliability. As a provider of telephone and data networking systems,
Convergent Communications' offerings include:
46
<PAGE>
o Local and Wide Area Data Networking
o Data Products and Systems
o Data Transport Services
o Network Management
o Internet & Intranet Services o Telephone Systems
o Long-distance and Local Telephone Services
o Video Conferencing
o Enterprise Network Services
Enterprise Network Services ("ENS"), Convergent Communications'
flagship service offering, begins with integrated data and voice networking
within its customers' premises, where Convergent Communications owns and is
responsible for the ongoing integrity and management of that communication
network. This unique approach also includes responsibility for the aggregation
and management of our customers' communications connectivity to the rest of the
world. In short, ENS allows customers to focus on core business competencies
instead of the underlying technology supporting those competencies.
Company's Reason for the Sales
The Company considered many factors in deciding to sell KCI and MTC.
The primary reasons for selling the two divisions are:
1. Additional Funds for the Company to Fuel the Growth of ISP Channel,
Inc. The Company expects to incur substantial losses and experience substantial
negative cash flows as it expands ISP Channel, Inc. The Company has sustained
substantial losses over the last five fiscal years. For the fiscal year ended
September 30, 1998, the Company had a net loss of $17.3 million and an
accumulated stockholders' deficit of approximately $6.2 million.
The sale price of KCI is approximately $6.6 million. The sale price of
MTC is approximately $5.125 million. The proceeds from the sale of KCI and MTC
will be used to partially fund the continued expansion of the Internet Services.
2. Limited Growth Potential of MTC. MTC faces increased competition
from emerging technologies that are perceived to offer advantages over the
traditional methods of managing records and documents that MTC currently uses.
The Board of Directors believes that the current product and services offerings
of MTC have limited growth potential. While the Board of Directors believes that
MTC can adapt and thrive in this increasingly competitive environment, the Board
of Directors has decided to focus on the growth possibilities of ISP Channel,
Inc.
3. Management Focus. ISP Channel, Inc. is a growing company in a very
competitive and growing industry. As such, implementation of the Company's
business plan for ISP Channel, Inc. will require substantial attention from the
Board of Directors and substantially all of the management of the Company.
47
<PAGE>
Possible Disadvantages of Selling KCI and MTC
Although management of the Company recommends approval of the sale,
management recognizes that there may be certain uncertainties or other
disadvantages associated with a sale of KCI and MTC. In addition to the risk
factors beginning on page ___ of the accompanying Annual Report on Form 10-K,
management also considered the following uncertainties and disadvantages:
1. Limited Operating History of ISP Channel, Inc. The Company's current
strategy for growth is to focus on substantially expanding the business of ISP
Channel, Inc., which was acquired in June 1996. The Company has very limited
operating history and experience in the Internet services business, and the
successful expansion of the Company's ISP Channel, Inc. will require strategies
and operations that are different from those historically employed by the
Company. There can be no assurance that the Company will be able to develop or
maintain strategies and business operations that are necessary to increase the
revenues of the Company's ISP Channel, Inc. sufficiently to enable it to achieve
positive cash flow and profitability.
2. Failure to Consummate Sale of Divisions. If the Company is unable to
consummate a sale of KCI or MTC on terms it believes are satisfactory, it will
not obtain the proceeds anticipated from such sales, which will correspondingly
diminish the capital available to the Company to implement its business plan for
the Internet Service Division. In the absence of such a sale, management's
attention could be substantially diverted to operate or otherwise dispose of
these subsidiaries. If a sale of KCI or MTC is delayed, their value could be
diminished. Moreover, KCI and MTC could incur losses and operate on a cash flow
negative basis in the future.
3. Disposal of the Source of Substantially All of the Company's
Revenues. To date, virtually all of the Company's revenues have been derived
from KCI and MTC. The sale of either, or both, of these divisions would have an
adverse short-term effect on the Company's financial condition, including cash
flow from operations.
Potential Effects of the Sales Upon the Stockholders
The Company intends to sell both KCI and MTC for cash or cash
equivalents. The Company intends to use the proceeds therefrom to implement its
business plan for ISP Channel, Inc. The Company does not plan to make any
distribution to shareholders as a result of the sale of KCI. The shareholders of
the Company will continue to hold the same common stock of the Company without
change.
Effect of Sales of MTC and KCI
And Intellicom Acquisition
For a discussion of the anticipated financial effect of the proposed
acquisition of Intellicom and the proposed sales of MTC and KCI, please refer to
the Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth in the Company's Annual Report on Form 10-K for the year
ended September 30, 1998, which is being delivered with this Proxy Statement and
is incorporated by reference herein.
48
<PAGE>
Accounting and Tax Treatment of the Sales
Accounting Treatment of the Sales
[The Company does not expect to sustain a loss on the sale of KCI and
MTC.] Additionally, the Company has treated KCI as a discontinued operation
since July 27, 1998. The sales [will each be treated as a sale of assets for
financial reporting purposes], each to be reflected in the financial statements
of the Company in the quarter it is consummated.
Federal Income Tax Consequences of the Sales
[The sale of KCI and the sale of MTC will be reported as a sale of
assets] for federal income tax purposes in the fiscal year ending September 30,
1999. However, the federal income tax effect of the sale transaction cannot be
estimated at this time.
Federal and State Regulatory Requirements
At this time, the Company is not required to obtain the approval of any
state or federal regulatory agencies in order to consummate the sale of KCI or
MTC. However, there can be no assurances that the Company will not be required
to obtain such approvals in the future; nor, if such approvals are necessary,
that the Company will be able to obtain such approvals.
Principal Accountants
PricewaterhouseCoopers LLP, independent auditors for the Company for
the fiscal year ending September 30, 1998, is (i) expected to be present at the
Shareholders' Meeting, (ii) will have the opportunity to make a statement if
they so desire, and (iii) are expected to be available to answer appropriate
questions.
VOTE REQUIRED
The affirmative vote of at least two-thirds of the Company's
outstanding common stock is required to approve this proposal five. Such
approval will authorize the Board to sell KCI and MTC on the terms described
herein or on such other terms and to such other parties as the Board of
Directors of SoftNet deems advisable. In the event this proposal five is not
approved, the Company reserves the right to sell either KCI or MTC without
shareholder approval as well as the right to sell both MTC and KCI at such time
that MTC and KCI do not represent a substantial majority of the assets and
revenues of the Company.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS DEEMS PROPOSAL FIVE TO BE IN THE BEST INTERESTS
OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" APPROVAL
THEREOF. UNLESS AUTHORITY TO DO SO IS WITHHELD, THE PERSON(S) NAMED IN EACH
PROXY WILL VOTE THE SHARES REPRESENTED THEREBY "FOR" THE APPROVAL TO SELL KCI
AND MTC.
49
<PAGE>
PROPOSAL SIX
ELECTION OF DIRECTORS
At the Annual Meeting, six directors are to be elected to hold office
until the next annual meeting of shareholders or until their successors are
elected and qualified. The Board of Directors of the Company currently consists
of seven members, but it has voted to amend the Company's Bylaws to provide for
six directors as of the date of the Annual Meeting.
It is intended that the proxies (except proxies marked to the contrary)
will be voted for the nominees listed below, all of whom are members of the
present Board of Directors. It is expected that the nominees will serve, but if
any nominee declines or is unable to serve for any unforeseen cause, the proxies
will be voted to fill any vacancy so arising in accordance with the
discretionary authority of the persons named in the proxies. Under the Bylaws of
the Company, persons must be nominated at least forty-five days prior to the
meeting; accordingly, no additional persons may be nominated at the Annual
Meeting.
Nominees
The following table set forth certain information concerning the
nominees, all of whom are members of the present Board of Directors:
Name of Nominee Age Position
--------------- --- --------
Ronald I. Simon.............. 60 Chairman of the Board
Dr. Lawrence B. Brilliant.... 54 Vice Chairman of the Board, President
and Chief Executive Officer
Ian B. Aaron................. 38 Director, Vice President, President of
ISP Channel, Inc.
Edward A. Bennett............ 52 Director
Sean P. Doherty.............. 41 Director
Robert C. Harris, Jr......... 52 Director
Ronald I. Simon has served as a member of SoftNet's Board of Directors
since September 1995 and Chairman of the Board since August 1997. Mr. Simon has
served as Vice President and Chief Financial Officer of Western Water Company, a
developer and marketer of water supplies, since May 1997. Mr. Simon has also
served as Director of Westcorp Investments, a wholly-owned subsidiary of
Westcorp, Inc., a holding company for Western Financial Bank and as Director of
Citadel Corporation, a real estate investment company, since 1995. In addition,
Mr. Simon served as Chairman of Sonant Corporation, an interactive voice
response equipment company, from 1993 to 1997.
Dr. Lawrence B. Brilliant has served as a member of SoftNet's Board of
Directors since January 1998 and has served as Vice Chairman of the Board,
President and Chief Executive Officer of SoftNet since April 1998. Prior to
joining SoftNet, Dr. Brilliant served as President and Chief Executive Officer
of Brilliant Color Cards, a telephone debit/calling card company, from 1989 to
1998. Dr. Brilliant is a founder of MultiVox Communications, a switched
telephone reseller. Dr. Brilliant is also a founder of the International
Telecard Association and has served as Director and Chairman Emeritus since
1992. Dr. Brilliant was also a founder of The Well in 1984 when he was CEO of
Network Technologies, Inc.
50
<PAGE>
Dr. Brilliant has also been a professor at the University of Michigan and has
served as a medical officer with the United Nations.
Ian B. Aaron has served as a member of SoftNet's Board of Directors
since October 1994. In addition, Mr. Aaron has served as President of ISP
Channel since June 1996 and as Vice President of SoftNet since December 1997.
Prior to joining SoftNet, Mr. Aaron served as President of Communicate Direct,
Inc., a telecommunications company, from 1988 to October 1994 and as Director of
Marketing, Sales and Product Development at GTE Business Communications.
Edward A. Bennett has served as a member of SoftNet's Board of
Directors since January 1998. Mr. Bennett has served as President and Chief
Executive Officer of Bennett Media Collaborative, a new
media/Internet/technology consulting company, since June 1997, Director and Vice
Chairman of methodfive LLC, an Internet services company, since June 1997 as
Director of Spinner Networks, an Internet music service, since December 1997,
and as Director of MY-CD, an Internet-based custom CD marketing company, since
May 1998. Mr. Bennett also served as President and Chief Executive Officer of
Prodigy Ventures, an Internet/technology investment firm from June 1996 to June
1997 and as President and Chief Executive Officer of Prodigy Services
Corporation, an Internet services company from 1995 to June 1996. Furthermore,
Mr. Bennett served as President and Chief Executive Officer of VH-1 Network, a
television programming company, from 1989 to 1994.
Sean P. Doherty has served as a member of SoftNet's Board of Directors
since May 1998. Mr. Doherty is currently an owner and Managing Partner of
Shoreline Associates I, LLC ("Shoreline Associates"), a private Silicon Valley
investment firm. Shoreline Associates invests in management buyouts, special
equity and venture capital for companies in the telecommunications and
broadcasting industries. Shoreline Associates is unaffiliated with Shoreline
Pacific Institutional Finance, the entity that arranged the five percent
convertible preferred stock offerings. From 1995 to 1997, Mr. Doherty was a
co-founder of @Home, serving as @Home's Chief Operating Officer and later as the
President of @Home's business-to-business services division, @Work. Mr. Doherty
was previously the founder and Chief Executive Officer of TEAM Software, a
developer of workgroup applications for the Internet and corporate networks. Mr.
Doherty has also served as President of TradeNet, Inc., an on-line transaction
network for commodities traders.
Robert C. Harris, Jr. has served as a member of SoftNet's Board of
Directors since May 1998. Mr. Harris has served as a Senior Managing Director
and Head of Investment Banking in the San Francisco office of Bear, Stearns &
Co. Inc. since November 1997. Mr. Harris also serves as Director of MDSI Mobile
Data Solutions, Inc., N2K, Inc., and Xoom.com. Prior to joining Bear Stearns,
Mr. Harris was a co-founder and a Managing Director of Unterberg Harris, a
registered broker-dealer and investment advisory firm. From 1984 to 1989, Mr.
Harris was a General Partner, Managing Director, and Director of Alex. Brown &
Sons.
Board Meetings and Committees
The Board of Directors held 15 meetings and took action by written
consent eight times during the fiscal year ended September 30, 1998. Each
director attended at least 75% of the meetings of the Board of Directors and the
Committees on which he served.
The Board of Directors has three standing committees: the Audit
Committee, the Compensation/Stock Option Committee and an Executive Committee.
There is no nominating committee or committee performing the functions of such
committee.
51
<PAGE>
The Audit Committee, currently consisting of Messrs. Simon, Hamm and
Bennett, had one meeting in fiscal 1998, which was attended by all of the then
directors of the Committee. The Audit Committee meets with the Company's
financial management and its independent accountants and reviews internal
control conditions, audit plans and results, and financial reporting procedures.
The Compensation/Stock Option Committee, currently consisting of
Messrs. Simon, Harris and Doherty, held informal meetings in fiscal 1998. The
Compensation/Stock Option Committee review and approves the Company's
compensation arrangements for key employees and administers the Company's 1995
Long Term Incentive Plan and, if proposal three is approved, the 1998 Stock
Incentive Plan.
The Executive Committee, currently consisting of Dr. Brilliant and Mr.
Simon, held informal meetings in fiscal 1998. The Executive Committee has all
the authority of the Board, except with respect to items requiring shareholder
approval or submission, the filling of Board or Committee vacancies, fixing
director compensation, amending or adopting Bylaws or amending or appealing
Board resolutions that are not amenable or repealable.
Director Compensation
Members of the Board who are not employees of the Company or of a
subsidiary of the Company are each paid a monthly retainer fee of $1,000 in
connection with their attendance and participation at Board meetings. Mr. Simon
is paid an additional $1,500 per month for his services as Chairman of the
Board. In addition, Board members are reimbursed for certain reasonable expenses
incurred in attending Board or committee meetings. Upon joining the Board, each
non-employee Board member also receives a purchase option grant for shares of
common stock under the 1998 Plan.
Dr. Brilliant and Mr. Aaron each receive compensation for their
services as executive officers of the Company. A description of these
compensation arrangements are set forth under "Executive Compensation - Certain
Agreements."
In addition, subject to approval of proposal three, existing
non-employee directors will each receive options to purchase 20,000 shares of
common stock at the Annual Stockholders Meeting held 2001 and additional options
to purchase 20,000 shares of common stock at each third Annual Stockholders
Meeting thereafter if such person continues to be a director. See "Proposal
Three--Automatic Option Grant Program."
A description of other transactions between directors and the Company
is set forth below in "Certain Relationships and Related Transactions."
Voting
The Company's charter provides for cumulative voting in the election of
directors. Cumulative voting allows a stockholder to give one candidate a number
of votes equal to the number of directors to be elected multiplied by the number
of shares of common stock held by such shareholder, or may distribute such votes
among as many candidates as the shareholder chooses. In this way, a shareholder
with a sufficient minority stake can elect a director. Election of the named
nominees requires approval by at least a majority of the shares of common stock
present in person or by proxy at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR"
THE ELECTION OF THE NAMED NOMINEES.
52
<PAGE>
BENEFICIAL SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
<TABLE>
The following table sets forth certain information known to the Company
regarding beneficial ownership of the common stock as of December 31, 1998 by
(i) each person known by the Company to be the beneficial owner of more than
five percent of the outstanding shares of the common stock, (ii) each current
director of the Company, (iii) the Chief Executive Officer and each of the other
executive officers of the Company and (iv) all executive officers and directors
of the Company as a group. All shares are subject to the named person's sole
voting and investment power except where otherwise indicated.
<CAPTION>
- ------------------- -------------------------------------------- -------------------------- --------------------------
Number of Shares Percentage of
of Common Stock Outstanding Shares
Name of Beneficial Owner Beneficially Owned Beneficially Owned
(1) (1)(2)
- ------------------- -------------------------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
Executive Ronald I. Simon (3) 8,500 *
Officers and Lawrence B. Brilliant (4) 67,500 *
Directors: Garrett J. Girvan 10,000 *
Douglas S. Sinclair --- ---
Steven M. Harris 4,000 *
Ian B. Aaron (5) 297,262 3.4%
Edward A. Bennett (6) 73,500 *
Sean P. Doherty (7) 40,000 *
John G. Hamm (8) 46,930 *
Robert C. Harris, Jr. --- ---
--------------- ---------------
As a Group (ten): 547,693 5.9%
- ------------------- -------------------------------------------- -------------------------- --------------------------
5% Owners: White Rock Capital, Inc. (9) 869,300 10.1%
R. C. W. Mauran (10) 704,128 7.8%
RGC International Investors, LDC (11) 2,314,259 21.9%
------------- ---- -----
Subtotal: 3,887,687 35.3%
- ------------------- -------------------------------------------- -------------------------- --------------------------
<FN>
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, except with respect to RGC (see
footnote 11 below). Shares of common stock which are issued and
outstanding are deemed to be beneficially owned by any person who has
or shares voting or investment power with respect to such shares.
Shares of common stock which are issuable upon exercise of options or
warrants are deemed to be issued and outstanding and beneficially owned
by any person who has or shares voting or investment power over such
shares only if the options or warrants in question are exercisable
within 60 days of December 31, 1998 (after giving effect to any
acceleration provisions which are triggered solely by the Merger) and,
in any event, solely for purposes of calculating that person's
percentage ownership of SoftNet's common stock (and not for purposes of
calculating the percentage ownership of any other person).
(2) The number of shares of common stock deemed outstanding and used in the
denominator for determining percentage ownership for each person equals
(i) 8,631,087 shares of common stock outstanding as of December 31,
1998 plus (ii) such number of shares of common stock as are issuable
pursuant to options, warrants or Preferred Stock held by that person
(and excluding options held by other persons) which may be exercised
within 60 days of December 31, 1998.
(3) Includes 2,500 shares issuable pursuant to options exercisable within
60 days of December 31, 1998.
(4) Includes 57,500 shares issuable pursuant to options exercisable within
60 days of December 31, 1998.
(5) Includes 150,833 shares issuable pursuant to options exercisable within
60 days of December 31, 1998.
(6) Includes 57,500 shares issuable pursuant to options exercisable within
60 days of December 31, 1998.
(7) Includes 20,000 shares issuable upon exercise of warrants held in the
name of Shoreline Associates I, LLC, of which Mr. Doherty is an owner,
which are exercisable within 60 days of December 31, 1998.
53
<PAGE>
(8) Consists of 44,430 shares held jointly with Mr. Hamm's wife and
includes 2,500 shares issuable pursuant to options exercisable within
60 days of December 31, 1998.
(9) Consists of shares of common stock (i) held for the accounts of certain
institutional clients of White Rock Capital Management, L.P., (ii) held
by White Rock Capital Partners, L.P. and (iii) held by White Rock
Capital Management, L.P.
(10) Includes 179,640 shares issuable upon conversion of 9% Convertible
Subordinated Debentures, 175,000 shares issuable upon conversion of 5%
Convertible Subordinated Debentures and 81,481 shares issuable upon
conversion of 6% Convertible Subordinated Secured Debentures issued by
Micrographic Technology Corporation. Shares listed reflect shares held
by Eurocredit Investments, Ltd., a Maltese company that is wholly-owned
by Mr. Mauran.
(11) As of December 31, 1998, RGC held (i) 363,364 shares of common stock,
(ii) 423,750 shares of common stock issuable upon exercise of warrants,
(iii) 690,340 shares of common stock issuable upon conversion of the
Series B Preferred Stock at the conversion price in effect as of
December 31, 1998, which is $13.20 per share, and (iv) 836,805 shares
of common stock issuable upon conversion of the Series C Preferred
Stock at the conversion price in effect as of December 31, 1998, which
is $9.00 per share. The actual number of shares of common stock
issuable upon conversion of the Preferred Stock is indeterminable and
is subject to adjustment based on various factors, including the
floating rate conversion price mechanism contained in the terms of the
Preferred Stock. However, the Series B Preferred Stock and Series C
Preferred Stock each cannot convert into more than 2,000,000 shares of
common stock.
The number of shares into which RGC can convert and the manner of such
conversion is limited by SoftNet's Certificate of Incorporation. A
holder of the Series B Preferred Stock cannot convert its Series B
Preferred Stock in the event such conversion would result in its
beneficially owning more than 4.99% of the common stock (not including
shares underlying the Series B Preferred Stock or the Series B
Warrants), but they may waive this prohibition by providing us a notice
of election to convert at least 61 days prior to such conversion.
Similarly, a holder of the Series C Preferred Stock cannot convert its
Series C Preferred Stock in the event such conversion would result in
beneficial ownership of more than 4.99% of the common stock (not
including shares underlying the Series C Preferred Stock or the Series
C Warrants). Notwithstanding this limitation, the holders of the
Preferred Stock cannot convert into an aggregate of more than 19.99% of
the common stock without the approval of the common stock shareholders,
which is being sought by proposal four.
Accordingly, the number of shares of common stock and percentage
ownership set forth for RGC may exceed the number of shares of common
stock it beneficially own as of the date of this Proxy Statement In
that regard, the table may not adequately represent the beneficial
ownership of RGC.
</FN>
</TABLE>
54
<PAGE>
EXECUTIVE COMPENSATION
Executive Officers
The executive officers and certain other key employees of the
Company are listed below:
Name Age Positions
---- --- ---------
Dr. Lawrence B. Brilliant.. 54 Vice Chairman of the Board, President
and Chief Executive Officer
Garrett J. Girvan.......... 53 Chief Operating Officer
Douglas S. Sinclair........ 44 Chief Financial Officer
Steven M. Harris........... 44 Vice President, External Affairs,
Secretary, and General Counsel
Ian B. Aaron............... 38 Vice President, President of ISP
Channel, Inc. and Director
Kevin Gavin................ 40 Senior Vice President, Marketing of ISP
Channel, Inc.
Daniel B. Donnelly......... 36 Senior Vice President, Affiliate Sales
of ISP Channel, Inc.
Dr. Brilliant's and Mr. Aaron's backgrounds are summarized under
"Election of Directors - Nominees" above.
Garrett J. Girvan has served as SoftNet's Chief Operating Officer since
April 1998 and also served as SoftNet's Chief Financial Officer from April 1998
to November 1998. Prior to joining SoftNet, Mr. Girvan held various positions at
Viacom Cable over a 13-year period, including Chief Financial Officer and Chief
Operating Officer. While at Viacom, Mr. Girvan was involved in the development
of Viacom's broadband services.
Douglas S. Sinclair has served as SoftNet's Chief Financial Officer
since November 1998. Prior to joining SoftNet, Mr. Sinclair served as Chief
Financial Officer of Silicon Valley Networks, Inc., a provider of test
management software to telecommunications and networking companies, from April
1998 to November 1998, Chief Financial Officer of International Wireless
Communications, Inc., an international cellular business operator, from 1995 to
April 1998, Chief Financial Officer of Pittencrieff Communications Inc. (PCI),
then a leading provider of trunked radio services in the southwest United
States, from 1993 to 1995 and Chief Financial Officer of Pittencrieff plc., an
oil and gas company based in the United Kingdom, from 1990 to 1993. Mr. Sinclair
took both Pittencrieff plc and PCI public during his tenures as Chief Financial
Officer. International Wireless Communications, Inc. filed for protection under
the bankruptcy laws of the United States in September 1998.
Steven M. Harris has served as Vice President, Secretary and General
Counsel to SoftNet since August 1998. Prior to joining SoftNet, Mr. Harris
worked at Pacific Telesis Group, most recently as Vice President-of Broadband
Services, where he was responsible for external affairs and policy planning for
video services and broadband networks. Previously, he was Executive Director of
Regulatory Planning and Policy for Pacific Bell with responsibility for federal
and state regulatory policies relating to competition, corporate structure,
interconnection, privacy and new technologies. He began with Pacific Telesis
Group in 1983 as Executive Director of Regulatory Relations, in Washington, D.C.
Mr. Harris was Commissioner's Assistant and Special Assistant to the General
Counsel at the Federal Communications Commission and was previously in private
practice.
Kevin Gavin has served as SoftNet's Senior Vice President, Marketing
since November 1998. Prior to joining SoftNet, he served as Regional Vice
President of Teligent, Inc. From November 1991 to January 1996, he was Vice
President of Marketing and Product Development at Nextel
55
<PAGE>
Communications. From 1981 to 1991, Mr. Gavin held various marketing and sales
positions at Warner Cable Communications, Inc., American Cablesystems, Inc., and
McCaw Cellular Communications, Inc.
Daniel B. Donnelly has served as SoftNet's Senior Vice President,
Affiliate Sales since August 1998. Prior to joining SoftNet, Mr. Donnelly was
Vice President at StarSight Telecast, Inc. From July 1994 to August 1998, he
held various sales and marketing positions at Showtime Networks, Inc.
Summary of Cash and Certain Other Compensation
<TABLE>
The following table sets forth information for the last three
fiscal years concerning compensation paid or accrued by the Company to (i) the
current and former Chief Executive Officer of the Company and (ii) the three
other most highly compensated executive officers of the Company whose total
annual salary and incentive compensation for fiscal year 1998 exceeded $100,000
(collectively, the "Named Officers").
<CAPTION>
Long-Term
Compensation
Awards
Annual Compensation ------------
------------------- Securities
Other Annual Underlying
Name and Principal Position Year Salary($) Bonus($) Compensation Options
- --------------------------- ---- --------- -------- ------------ -------
<S> <C> <C> <C> <C> <C>
Dr. Lawrence B. Brilliant (1) 1998 $128,396 -- -- 200,000
President and Chief Executive Officer 1997 -- -- -- --
1996 -- -- -- --
Garrett J. Girvan (2) 1998 $89,623 -- -- 75,000
Chief Operating Officer and Chief 1997 -- -- -- --
Financial Officer 1996 -- -- -- --
Steven M. Harris (3) 1998 $22,212 -- -- --
Vice President, Secretary and General 1997 --
Counsel 1996 --
Ian B. Aaron 1998 $202,889 -- -- 174,500
Vice President, President of ISP Channel, 1997 $156,000 -- -- 16,000
Inc. 1996 $189,000 -- -- 31,000
A.J.R. Oosthuizen (4) 1998 $245,820 -- -- 52,400
Former President and Chief Executive 1997 $200,000 -- -- 75,000
Officer 1996 $200,000 $80,000 -- 31,000
<FN>
(1) Dr. Brilliant joined the Company as Chief Executive Officer on April 6,
1998. Prior to that he served on the Board of Directors. His annual salary
for fiscal 1998 was $250,000.
(2) Mr. Girvan joined the Company on April 6, 1998. His annual salary for
fiscal 1998 was $200,000.
(3) Mr. Harris joined the Company on August 17, 1998. His annual salary for
fiscal 1998 was $175,000.
(4) Mr. Oosthuizen resigned as a director and from all executive positions with
the Company effective April 6, 1998. On April 6, 1998, pursuant to the
terms of a separation and release agreement (the "Separation Agreement"),
Mr. Oosthuizen resigned as a director and his employment with the Company
terminated. Pursuant to this Separation Agreement, Mr. Oosthuizen became a
consultant to the Company at a monthly salary of $20,000. This consultancy
arrangement is terminable at will by either the Company or Mr. Oosthuizen
at any time after September 15, 1998.
</FN>
</TABLE>
56
<PAGE>
Stock Option Information
<TABLE>
Option Grants in Fiscal 1998. The following table sets forth
information with respect to stock options granted by the Company to the Named
Officers during Fiscal 1998. No stock appreciation rights were granted in Fiscal
1998.
<CAPTION>
Individual Grants Potential
----------------- ---------
Realizable
----------
Value at Assumed
----------------
Annual Rates of
---------------
Stock Price
-----------
Number of Appreciation for
Securities Percent of Total Exercise ----------------
Underlying Options granted or Base Option Term(5)
Options to employees in Price Expiration --------------
Name Granted(#)(1) fiscal year(2) ($/Sh)(3) Date(4) 5%($) 10%($)
--------------------- ------------- --------------- --------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dr. Lawrence B. Brilliant (6) 7,500 1% 6.88 1/8/08 32,000 82,000
67,500 6% 6.63 3/5/08 281,000 713,000
125,000 11% 8.45 4/7/08 664,000 1,683,000
Garrett J. Girvan (7)........ 75,000 7% 8.75 4/6/08 413,000 1,046,000
Steven M. Harris............. - - - - - -
Ian B. Aaron................. 174,500 16% 6.88 1/8/08 755,000 1,913,000
A.J.R. Oosthuizen (8)........ 52,400 5% 6.88 1/8/08 227,000 575,000
<FN>
(1) Options granted under the 1995 Long-Term Incentive Plan generally become
exercisable at a rate of one-third of the shares of common stock underlying
to the option at the end of each year until fully vested or the employee
leaves the Company. Options granted under the 1998 Stock Incentive Plan
generally become exercisable for 25% of the option shares upon completion
of one (1) year of service measured from the grant date and for the balance
of the option shares in a series of 36 successive equal monthly
installments over the three (3) year period of service thereafter.
(2) The Company granted options to employees to purchase 1,070,200 shares of
common stock during Fiscal 1998. In addition, options to purchase 73,333
shares were granted to non-employee consultants during fiscal 1998.
(3) The exercise price may be paid in (a) cash, (b) shares of common stock held
for the requisite period to avoid a charge to the Company's earnings for
financial reporting purposes, (c) through a same-day sale program or (d)
subject to the discretion of the Plan Administrator, by delivery of a
full-recourse, secured promissory note payable to the Company.
(4) The term of the options is typically 10 years.
(5) Potential realizable value is based on the assumption that the price of the
common stock underlying the option appreciates at the annual rate shown,
compounded annually from the date of grant until the end of the option
term. The values are calculated in accordance with rules promulgated by the
SEC and do not reflect the Company's estimate of future stock appreciation.
(6) In Fiscal 1998, Dr. Brilliant received options to purchase 20,000 shares of
common stock pursuant to his nomination to the Board of Directors. Dr.
Brilliant also received an additional option grant of 55,000 shares of
common stock pursuant to a consulting agreement. Subsequently, Dr.
Brilliant was appointed President and Chief Executive Officer of the
Company, pursuant to which he received an additional option grant of
125,000 shares of common stock.
(7) In Fiscal 1998, Mr. Girvan received options to purchase 75,000 shares of
common stock upon his appointment to serve as the Company's Chief Operating
Officer and Chief Financial Officer. Mr. Girvan was replaced as Chief
Financial Officer in November 1998.
(8) Upon his resignation as an officer and director on April 6, 1998, Mr.
Oosthuizen's options were vested in full. In addition, Mr. Oosthuizen
exercised options to purchase 75,000 shares during Fiscal 1998, each with
an exercise price of $4.94.
</FN>
</TABLE>
Aggregated Year-End Option Values. The following table sets
forth certain information concerning the number of options exercised by the
Named Officers during the last fiscal year
57
<PAGE>
<TABLE>
ended September 30, 1998, and the number of shares covered by both exercisable
and unexercisable stock options held by the Named Officers as of September 30,
1998. Also reported are values for "in-the-money" options that represent the
positive spread between the respective exercise prices of outstanding options
and the fair market value of the Company's common stock as of September 30, 1998
($10.125).
<CAPTION>
Number of Securities Value of Unexercised
-------------------- --------------------
Underlying Unexercised Options In-the-Money Options at
------------------------------ -----------------------
at September 30, 1998(#) September 30, 1998($)
------------------------ ---------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Dr. Lawrence B. Brilliant................... 55,000 145,000 193,000 279,000
Garrett J. Girvan........................... - 75,000 - 103,000
Steven M. Harris............................ - - - -
Ian B. Aaron................................ 92,667 128,833 382,000 429,000
A.J.R. Oosthuizen(1)........................ 83,400 - 329,000 -
- --------------------------
<FN>
(1) Upon his resignation as an officer and director on April 6, 1998, Mr.
Oosthuizen's options were vested in full. In addition, Mr. Oosthuizen
exercised options to purchase 75,000 shares during Fiscal 1998, each with
an exercise price of $4.94.
</FN>
</TABLE>
Ten-Year Option Repricings. On November 15, 1996, the
Compensation/Stock Option Committee approved a stock option repricing program to
provide employee option holders additional opportunity and incentive to achieve
business plan goals. All options held by employees on that date were repriced to
$4.94 per share, which was the market price on such date. All other terms of the
options remained the same and, accordingly, there was no change to the vesting
or term of any option.
<TABLE>
The table below presents the required disclosure with respect
to any repricing of options held by any Named Officers during the last ten
completed years.
<CAPTION>
Length of Original
------------------
Number of Securities Market Price of Exercise Price Option Term
-------------------- --------------- -------------- -----------
Underlying Options Stock at Time at Time of Remaining at Date
------------------ ------------- ---------- -----------------
Repriced or of Repricing or Repricing or New Exercise of Repricing or
----------- --------------- ------------ ------------ ---------------
Name Date Amended(#) Amendment($) Amendment($) Price($) Amendment (Years)
- ------------ -------- ---------- ------------ ------------ -------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Ian B. Aaron............ 2/28/96 31,000 $ 8.25 $ 12.75 $ 8.25 9.6
11/15/96 31,000(1) $ 4.94 $ 8.25 $ 4.94 8.9
A.J.R. Oosthuizen....... 2/28/96 31,000 $ 8.25 $ 12.75 $ 8.25 9.6
11/15/96 31,000(1) $ 4.94 $ 8.25 $ 4.94 8.9
- --------------------------
<FN>
(1) Options repriced on February 28, 1996 at the then current market price of
$8.25 and were further repriced on November 15, 1996 at the then current
market price of $4.94.
</FN>
</TABLE>
Employment and Change of Control Agreements
On September 15, 1995, MTC entered into an employment
agreement with Mr. Oosthuizen, a director of the Company, pursuant to which Mr.
Oosthuizen became President of MTC. In July 1997, Mr. Oosthuizen was named Chief
Executive Officer of the Company and was granted an annual salary of $200,000
plus a bonus as determined by the Board of Directors in accordance with the
Company's Incentive Compensation Plan. No bonus was paid to Mr. Oosthuizen with
respect to Fiscal 1997. On October 1, 1997, Mr. Oosthuizen's annual salary was
increased to $240,000. On April 6, 1998, pursuant to the terms of a separation
and release agreement (the "Separation Agreement"), Mr. Oosthuizen resigned as a
director and his employment with the Company terminated. Pursuant to this
Separation Agreement, Mr. Oosthuizen became a consultant to the Company at a
monthly salary of
58
<PAGE>
$20,000. This consultancy arrangement is terminable at will by either the
Company or Mr. Oosthuizen at any time after September 15, 1998.
On April 7, 1998, the Company entered into an employment
agreement with Dr. Lawrence B. Brilliant, a director of the Company, pursuant to
which Dr. Brilliant was appointed Vice Chairman of the Board, President and
Chief Executive Officer of the Company for a term of three years. Under the
terms of this employment agreement, Dr. Brilliant was granted an annual salary
of $250,000 per year plus such bonuses as the Compensation Committee may
establish from time to time. Concurrently with the signing of this employment
agreement, Dr. Brilliant received a Non-Qualified Stock Option to purchase from
the Company a total of 125,000 shares of common stock under the terms of the
Long Term Incentive Plan.
Under the Company's 1998 Stock Incentive Plan, approval of
which is being sought by proposal three, in the event that the Company is
acquired by merger or sale of substantially all of its assets, each outstanding
option or other award under the 1998 Stock Incentive Plan will immediately vest,
except to the extent the Company's obligations under that option or award
assumed by the successor corporation or such successor corporation substitutes
an award with substantially the same economic value.
Under the Company's Amended 1995 Long-Term Incentive Plan (the
"1995 Plan"), upon an acquisition of the Company pursuant to a merger or asset
sale, the option will, at the discretion of the Stock Option Committee, either
be assumed by any successor entity, with or without accelerated vesting of the
option shares, or terminate upon the acquisition following a thirty (30)-day
period during which the option will be exercisable in full on an accelerated
basis.
Under the Company's Employee Stock Option Plan (the "Option
Plan"), in the event the Company is acquired by merger or sale of substantially
all of its assets, each outstanding option will be either be assumed by the
successor corporation or replaced by the successor corporation with an option
with substantially the same economic value.
The Company currently has no other compensatory plan or
arrangement with any of the Named Officers where the amounts paid exceed
$100,000 and which are activated upon resignation, termination or retirement of
any such Named Officer upon a change in control of the Company.
Indemnification of Directors and Limitation of Liability
The Company's Bylaws provide that the Company may indemnify
its directors, officers and other employees and agents to the fullest extent
permitted by law. The Company has also entered into agreements to indemnify its
directors and executive officers, in addition to the indemnification provided
for in the Company's Bylaws. The Company believes that these provisions and
agreements are necessary to attract and retain qualified directors and executive
officers. At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that might result in a claim for such indemnification. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
59
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is responsible for the Company's executive
compensation policies and for annually determining the compensation to be paid
to the executive officers of the Company. During Fiscal 1998, the Board of
Directors assumed all of the responsibilities of the Compensation Committee.
Overview and Philosophy
The executive compensation program of the Company is intended
to provide overall levels of compensation for the executive officers which are
competitive for the industries and the geographic areas within which they
operate, the individual's experience and contribution to long-term success of
the Company. The Board believes that its task of determining fair and
competitive compensation is ultimately judgmental.
The program is composed of base salary, annual incentive
compensation, equity based incentives and other benefits generally available to
all employees. As of September 30, 1998, options on 1,320,125 shares of the
Company's common stock were outstanding and 1,070,200 options were granted to
employees during the fiscal year ended September 30, 1998.
Base Salary
The base salary for each executive is intended primarily to be
competitive with companies in the industries and geographic areas in which the
Company competes. In making annual adjustments to base salary, the Board also
considers the individual's performance over a period of time as well as any
other information which may be available as to the value of the particular
individual's past and prospective future services to the Company. This
information includes comments and performance evaluations by the Company's Chief
Executive Officer and Chief Operating Officer. The Board considers all such
data; it does not prescribe the relative weight to be given to any particular
component.
Annual Incentive Compensation
Annual incentive compensation is ordinarily determined by a
formula which considers the overall operations and financial performance of the
Company and its subsidiaries.
Long-Term Incentives
In general, the Board believes that equity based compensation
should form a part of an executive's total compensation package. Stock options
are granted to executives because they directly relate the executive's earnings
to the stock price appreciation realized by the Company's stockholders over the
option period. Stock options also provide executives the opportunity to acquire
an ownership interest in the Company. The number of shares covered by each
executive's option is determined by factors similar to those considered in
establishing base salary.
Stock Option Repricing Program
On February 28, 1996, the Board of Directors approved a stock
option repricing program to provide employee option holders additional
opportunity and incentive to achieve business plan goals. The exercise prices
for all options held by employees on that date were repriced to $8.25 per share,
which was the market price on that date. All other terms of the options remained
the same and, accordingly, there was no change to the vesting or term of any
option. In addition, on November 15, 1996, the Board of Directors approved an
additional stock option repricing program to further provide employee option
60
<PAGE>
holders with additional opportunity and incentive to achieve business plan
goals. All options held by employees on November 15, 1996 were repriced to $4.94
per share, which was the market price on that date.
Other
Other benefits are generally those available to all other
employees in the Company, or a subsidiary, as appropriate. Together with
perquisites, these benefits did not exceed 10% of any executive's combined
salary and bonus in Fiscal 1998.
Compensation for Chief Executive Officer
The Board applies the same standard in establishing the
compensation of the Company's Chief Executive Officer as are used for other
executives. However, there are procedural differences. The Chief Executive
Officer does not participate in setting the amount and nature of the
compensation. Mr. Oosthuizen did not receive a bonus for Fiscal 1998.
Deduction Limit for Executive Compensation
Section 162(m) of the Internal Revenue Code, enacted in 1993,
generally disallows a tax deduction to publicly held companies for compensation
exceeding $1 million paid to certain of the corporation's executive officers.
The limitation applies only to compensation which is not considered to be
performance-based compensation. Compensation which qualifies as
performance-based compensation will not have to be taken into account for
purposes of this limitation. The non-performance based compensation to be paid
to the Company's executive officers for Fiscal 1998 did not exceed the $1
million limit per officer, nor is it expected that the non-performance based
compensation to be paid to the Company's executive officers for Fiscal 1999 will
exceed that limit. Because it is very unlikely that the compensation payable to
any of the Company's executive officers in the foreseeable future will approach
the $1 million limit, the Board has not taken any action to limit or restructure
the elements of cash compensation payable to the Company's executive officers.
The Board will reconsider this matter should the individual compensation of any
executive officer ever approach the $1 million level.
This report is submitted by the Compensation Committee of the
Board of Directors of the Company, as of the fiscal year ended September 30,
1998.
Sean P. Doherty, Chairman
Ronald I. Simon
Robert C. Harris, Jr.
<PAGE>
PERFORMANCE GRAPH
Set forth below is a comparison of the total stockholder
return on the Company's common stock for the period beginning September 30, 1993
and ending September 30, 1998 with the total stockholder return for the same
period for the AMEX Stock Market Index (a broad equity market index which
includes the stock of companies traded on AMEX) and the AMEX Computer
Programming, Data Processing, & Other Computer Related Services Industrial Index
(an index including companies with primary SIC 7370-7379). The total stockholder
return reflects the annual change in share price, assuming an investment of
$100.00 on September 30, 1993 plus the reinvestment of dividends, if any. No
dividends were paid on the Company's common stock during the period shown. The
return shown is based on the annual percentage change during each fiscal year in
the five year period ended September 30, 1998. The stock price performance shown
below is not necessarily indicative of future stock price performance.
<TABLE>
[The following description data is supplied in accordance with Rule 304(d) of
Regulation S-T]
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
9/30/93 9/30/94 9/29/95 9/29/96 9/30/97 9/30/98
------- ------- ------- ------- ------- -------
SoftNet Systems, Inc. $100.00 $176.27 $368.04 $158.19 $174.33 $261.50
AMEX Stock Market Index 100.00 97.90 119.78 122.76 153.93 132.62
AMEX Computer Industrial Index 100.00 90.50 120.46 131.47 187.05 176.42
</TABLE>
62
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Issuance of 5% Convertible Subordinated Debentures
In fiscal 1998, the Company issued $1,443,750 principal amount
of its 5% Convertible Subordinated Debentures due September 30, 2002 to Mr.
R.C.W. Mauran, a beneficial owner of more than 5% of the Company's common stock,
in exchange for the assignment to the Company of certain equipment leases and
other consideration. The debentures are convertible into common stock of the
Company at $8.25 per share, after December 31, 1998.
Issuance of Preferred Stock
The terms of the five percent convertible preferred stock
limit its holders, such as RGC, from beneficially owning more than 4.99% of the
common stock. Nonetheless, the Company lists the five percent convertible
preferred stock transactions here because RGC has the ability to convert into a
substantial number of shares of common stock in the aggregate.
On December 31, 1997, the Company issued to RGC, 5,000 shares
of its Series A Preferred Stock and warrants to purchase 150,000 shares of
common stock at an exercise price of $7.95 per share (the "Series A Warrants")
for an aggregate purchase price of $5,000,000. As of the Record Date, there were
no shares of Series A Preferred Stock outstanding.
On May 29, 1998, the Company issued to RGC and Shoreline
Associates I, LLC ("Shoreline"), 9,000 and 1,000 shares, respectively, of its
Series B Preferred Stock and warrants to purchase 180,000 and 20,000 shares,
respectively, of common stock (the "Series B Warrants"), for an aggregate
purchase price of $10,000,000. The Series B Warrants have an exercise price of
$13.75 per share. Prior to February 28, 1999, the Conversion Price of the Series
B Preferred Stock (the "Series B Conversion Price") is $13.20. Thereafter, the
Series B Conversion Price will be the lower of $13.20 (subject to an escalation
provision pending certain market conditions around such date) and a five day
average market price within a 20-day trading period prior to conversion, subject
to adjustment upon certain conditions. As of the Record Date, 10,125 shares of
Series B Preferred Stock were outstanding as a result of the payment of
additional shares of Series B Preferred Stock as dividends.
On August 31, 1998, the Company issued to RGC 7,500 shares of
its Series C Preferred Stock and warrants to purchase 93,750 shares of common
stock at an exercise price of $9.375 per share (the "Series C Warrants") for an
aggregate purchase price of $7,500,000. Prior to May 31, 1999, the conversion
price of the Series C Preferred Stock (the "Series C Conversion Price") is
$9.00. Thereafter, the Series C Conversion Price will be the lower of $9.00
(subject to an escalation provision pending certain market conditions around
such date) and a five day average market price within a 30-day trading period
prior to conversion, subject to adjustment upon certain conditions. As of the
Record Date, 7,531.25 shares of Series C Preferred Stock were outstanding as a
result of payment of additional shares of Series C Preferred Stock as dividends.
Sale of Certain CDI Assets
During Fiscal 1997, Communicate Direct, Inc., a wholly-owned
subsidiary of the Company ("CDI"), sold the portion of its operations that
support its Fujitsu maintenance base in the Chicago metropolitan area to a new
company formed by John I. Jellinek, a former president and Chief Executive
Officer and a then director of the Company, and Philip Kenny, a then director of
the Company. The buyers acquired certain assets of CDI in exchange for a
$209,000 promissory note and the
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assumption of trade payables of approximately $750,000. In addition, at the
closing the buyers repaid $438,000 of existing Company bank debt and entered
into a sub-lease of CDI's facility in Buffalo Grove, Illinois. At the closing,
the buyer merged with Telcom Midwest, LLC. and Messrs. Jellinek and Kenny and
two other shareholders of the merged company personally guaranteed obligations
arising out of the promissory note, the sub-lease arrangement and trade
payables. The personal guarantees of the promissory note are several. The
personal guarantees of the sub-lease are limited to $400,000 and are on a joint
and several basis. The personal guarantees of trade payables are on a joint and
several basis but are limited to Messrs. Jellinek and Kenny. Concurrent with
this transaction, Messrs. Jellinek and Kenny resigned from the Company's board.
The transaction was approved by the disinterested members of the Company's
board.
IMNET Software Inc.
In June 1996, the Company acquired the exclusive worldwide
manufacturing rights to IMNET's MegaSAR Microfilm Jukebox (the "IMNET
Agreement") and completed and amended its obligations under a previous agreement
with IMNET. Per the terms of the IMNET Agreement, the Company issued a $2.9
million note for prepaid license fees, software inventory, manufacturing rights,
and certain other payables. Approximately $2.5 million was paid on this note
during the fourth quarter of Fiscal 1996. Subsequently, in Fiscal 1997, the
outstanding $410,000 promissory note was further reduced by $249,000, and a new
promissory note in the face amount of $161,000 was executed. This transaction
was approved by the disinterested members of the Company's board. Following the
transaction, John J. McDonough and John I. Jellinek resigned from the Board of
Directors of IMNET board and James Gordon, a director of IMNET, resigned from
the Company's board.
During the fourth quarter of Fiscal 1996, the Company decided
to integrate the IMNET microfilm retrieval software with another software
developer's product then being distributed by the Company, requiring less IMNET
software than previously assumed. As a result, the Company recorded a one-time
charge of $1.5 million to write off software inventory. Subsequent to the
acquisition of the manufacturing rights from IMNET, technical difficulties
delayed the transfer of technical and manufacturing know-how. In September 1997,
the Company recorded a one-time charge to write off the remaining $1.0 million
in assets associated with the IMNET Agreement. The Company is currently in
negotiations with IMNET to complete the transfer of the technical and
manufacturing know-how.
During Fiscal 1996, the Company sold its entire holdings in
IMNET for net proceeds of $7.7 million. Accordingly, the Company recorded a gain
on the sale of securities of $5.7 million.
Employment Agreement with Mr. Oosthuizen
On September 15, 1995, MTC entered into an employment
agreement with Mr. Oosthuizen, a director of the Company, pursuant to which Mr.
Oosthuizen became President of MTC. In July 1997, Mr. Oosthuizen was named Chief
Executive Officer of the Company and was granted an annual salary of $200,000
plus a bonus as determined by the Board of Directors in accordance with the
Company's Incentive Compensation Plan. No bonus was paid to Mr. Oosthuizen with
respect to Fiscal 1997. On October 1, 1997, Mr. Oosthuizen's annual salary was
increased to $240,000. On April 6, 1998, pursuant to the terms of a separation
and release agreement (the "Separation Agreement"), Mr. Oosthuizen resigned as a
director and his employment with the Company terminated. Pursuant to this
Separation Agreement, Mr. Oosthuizen became a consultant to the Company at a
monthly salary of $20,000. This consultancy arrangement is terminable at will by
either the Company or Mr. Oosthuizen at any time after September 15, 1998.
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Consulting Payments to Mr. Hamm
In Fiscal 1994, the Board voted to compensate Mr. Hamm, a
director of the Company, $150,000, payable in installments, for previously
uncompensated services that he rendered to the Company as a consultant over the
prior ten years. The Company's entire obligation to Mr. Hamm with respect to
this unpaid compensation was satisfied as of January 1998.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Under the securities laws of the United States, the Company's directors,
its executive (and certain other) officers, and any person holding more than ten
percent of the Company's common stock are required to report their ownership of
common stock and any changes in that ownership to the Securities and Exchange
Commission (the "Commission") and any exchange or quotation system on which the
common stock is listed or quoted. Specific due dates for these reports have been
established and the Company is required to report in this proxy statement any
failure to file by these dates. During the fiscal year ended September 30, 1998,
to the knowledge of the Company, all of these filings were satisfied by its
directors and officers. In making this statement, the Company has relied on the
written representations of its directors and officers and copies of the reports
they have filed with the Commission. The Company does not have any ten percent
stockholders.
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PROPOSAL SEVEN
CONFIRMATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has selected PricewaterhouseCoopers LLP to audit the
financial statements of the Company for the year ending September 30, 1999, and
recommends that the stockholders confirm the selection. Confirmation of this
selection requires approval by at least a majority of the shares of common stock
present in person or by proxy at the Annual Meeting. In the event of a negative
vote, the Board will reconsider its selection.
Representatives of PricewaterhouseCoopers LLP are expected to be present at
the Annual Meeting, will have the opportunity to make a statement if they so
desire, and are expected to be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR"
THE CONFIRMATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
STOCKHOLDERS' PROPOSALS
Stockholders are entitled to present proposals for action at a forthcoming
meeting if they comply with the requirements of the proxy rules promulgated by
the Securities and Exchange Commission. Proposals of stockholders of the Company
intended to be presented for consideration at the Company's 2000 Annual Meeting
of Stockholders must be received by the Company no later than October 1, 1999,
in order that they may be included in the proxy statement and form of proxy
related to that meeting.
The attached proxy card grants the proxy holders discretionary authority to
vote on any matter raised at the Annual Meeting. If a stockholder intends to
submit a proposal at the 2000 Annual Meeting, which is not eligible for
inclusion in the proxy statement and form of proxy relating to that meeting, the
stockholder must do so no later than December 15, 1999. If such stockholder
fails to comply with the foregoing notice provision, the proxy holders will be
allowed to use their discretionary voting authority when the proposal is raised
at the 2000 Annual Meeting.
OTHER MATTERS
Management knows of no matters, other than those referred to in this proxy
statement, which will be presented to the Annual Meeting. However, if any other
matters properly come before the Annual Meeting or any adjournment, the persons
named in the accompanying proxy will vote it in accordance with their best
judgment on such matters.
The Company has furnished its financial statements to stockholders in its
1998 Annual Report which accompanies this Proxy Statement. The 1998 Annual
Report contains a complete copy of the Company's Form 10-K for the year ended
September 30, 1998. In addition, the Company will provide, for a fee, on the
request of such stockholder, copies of exhibits to the Form 10-K. Requests for
copies of such exhibits should be directed to Steven M. Harris, Secretary, 650
Townsend Street, San Francisco, California 94103; telephone number (415)
365-2500.
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the
Commission (File No. 1-5270) pursuant to the Exchange Act are incorporated
herein by reference:
1. The Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998.
2. The Company's Current Report on Form 8-K filed with
the Commission on January 26, 1999.
The Company's Current Report on Form 8-K filed on July 28,
1998 includes restated financial statements to reflect the treatment of KCI as a
discontinued operation. Financial statements filed after July 28, 1998, will
continue to reflect the treatment of KCI as a discontinued operation until the
Company no longer operates such division. The Company will provide, without
charge, a copy of any document hereby incorporated by reference to each
stockholder who requests copies of such documents. Requests should be made to
the Company at 650 Townsend Street, San Francisco, California, 94103; ATTN:
Steven M. Harris, Secretary.
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APPENDIX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of ____________, 1999,
pursuant to Section 252 of the Delaware General Corporation Law (the "DGCL") and
Section 907 of the New York Business Corporation Law (the "NYBCL"), between
SoftNet Systems, Inc., a New York corporation having its principal place of
business at 650 Townsend Street, San Francisco, CA 94103 (the "Company"), and
SoftNet Systems, Inc., a Delaware corporation and wholly-owned subsidiary of the
Company, having its principal place of business at 650 Townsend Street, San
Francisco, CA 94103 (the "Surviving Company").
W I T N E S S E T H:
WHEREAS, the Company is a corporation duly organized and
existing under the laws of the State of New York with total authorized capital
stock of Twenty-Nine Million (29,000,000) shares, consisting of Twenty-Five
Million (25,000,000) shares of common stock, $.01 par value per share (the
"Company Common Stock") and Four Million (4,000,000) shares of preferred stock,
$.10 par value per share (the "Company Preferred Stock").
WHEREAS, the Surviving Company is a corporation duly organized
and existing under the laws of the State of Delaware and will have, effective at
the Effective Date (as defined below) total authorized capital stock of One
Hundred Four Million (104,000,000) shares, consisting of One Hundred Million
(100,000,000) shares of common stock, $.01 par value per share (the "Surviving
Company Common Stock"), and Four Million (4,000,000) shares of preferred stock,
$.10 par value per share (the "Surviving Company Preferred Stock").
WHEREAS, the Boards of Directors of the Company and the
Surviving Company have each adopted resolutions approving this Agreement and
Plan of Merger.
NOW THEREFORE, in consideration of the foregoing and the
undertakings herein contained and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
1. Merger. The Company shall be merged into the Surviving
Company pursuant to Section 252 of the DGCL and Section 907 of the NYBCL. The
Surviving Company shall survive the merger herein contemplated and shall
continue to be governed by the laws of the State of Delaware. The separate
corporate existence of the Company shall cease forthwith upon the Effective
Date. The merger of the Company into the Surviving Company shall hereinafter be
referred to as the "Merger."
2. Shareholder Approval. As soon as practicable after the
execution of this Agreement and Plan of Merger, the Company and the Surviving
Company shall, if necessary under the DGCL and NYBCL, submit this Agreement and
Plan of Merger to their respective shareholders for approval.
3. Effective Date. The Merger shall be effective upon the
filing of this Agreement and Plan of Merger with the Secretaries of State of the
States of Delaware and New York, which filings shall be made as soon as
practicable after all required shareholder approvals have been obtained. The
time of such effectiveness shall hereinafter be referred to as the "Effective
Date."
4. Common Stock and Preferred Stock of the Company. On the
Effective Date, by virtue of the Merger and without any action on the part of
the holder thereof, (1) each share of common stock of the Company shall cease to
exist and shall be changed and converted into one fully paid and non-assessable
share of the Surviving Company Common Stock and (2) each share of the Company
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APPENDIX A
Preferred Stock shall cease to exist and shall be changed and converted into one
fully paid and non-assessable share of the Surviving Company Preferred Stock.
5. Stock Certificates. On and after the Effective Date, all of
the outstanding certificates which prior to that time represented shares of
Company Common Stock and Company Preferred Stock shall be deemed for all
purposes to evidence ownership of and to represent the shares of the Surviving
Company Common Stock and Surviving Company Preferred Stock into which the shares
of the Company represented by such certificates have been converted as herein
provided. The registered owner on the books and records of the Surviving Company
or its transfer agent of any such outstanding stock certificate shall, until
such certificate shall have been surrendered for transfer or conversion or
otherwise accounted for to the Surviving Company or its transfer agent, have and
be entitled to exercise any voting and other rights with respect to and to
receive any dividend and other distributions upon the shares of the Surviving
Company evidenced by such outstanding certificate as above provided.
6. Stock Option Plans.
(a) On the Effective Date, if any options or rights
granted under either the Company's 1998 Stock Incentive Plan or the Amended 1995
Long Term Incentive Plan remain outstanding, then the Surviving Company shall
assume the outstanding and unexercised portions of such options and such options
shall be changed and converted into options to purchase common stock of the
Surviving Company, such that an option to purchase one (1) share of common stock
of the Company shall be converted into an option to purchase one (1) share of
common stock of the Surviving Company. No other changes in the terms and
conditions of such options shall occur.
(b) One (1) share of the Surviving Company's Common
Stock shall be reserved for issuance upon the exercise of each option to
purchase one (1) share of the Surviving Company's Common Stock so reserved
immediately prior to the Effective Date.
(c) No "additional benefits" within the meaning of
Section 424(a)(2) of the Internal Revenue Code of 1986 (as amended) shall be
accorded to the optionholders pursuant to the assumption of their Options.
7. Warrants.
(a) On the Effective Date, all outstanding and
unexercised warrants issued by the Company shall be charged and converted into
warrants to purchase common stock of the Surviving Company, such that a warrant
to purchase one (1) share of common stock of the Company shall be converted into
a warrant to purchase one (1) share of common stock of the Surviving Company. No
other changes in the terms and conditions of such warrants shall occur.
(b) One (1) share of the Surviving Company's Common
Stock shall be reserved for issuance upon the exercise of each warrant to
purchase one (1) share of the Surviving Company's Common Stock so reserved
immediately prior to the Effective Date.
8. Subordinated Convertible Debentures. On the Effective Date,
the Surviving Company shall assume all obligations of the Company in connection
with the Company's issuance of 9% Convertible Subordinated Debentures due 2000,
6% Convertible Subordinated Debentures due 2002 and 5% Convertible Subordinated
Debentures due 2002 (the "Debentures"), and the Debentures shall be convertible
into shares of the common stock of the Surviving Company rather than shares of
the common stock of the Company. No other changes in the terms and conditions of
the Debentures shall occur.
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APPENDIX A
9. Cable Affiliate Incentive Plan. On the Effective Date, the
Surviving Company shall assume all obligations of the Company under the
Company's Cable Affiliate Incentive Plan (the "Incentive Plan"). For every share
of the Company's Common Stock reserved for issuance under the Incentive Plan, a
share of the Surviving Company's Common Stock shall similarly be reserved for
issuance under the Incentive Plan.
10. Employee Benefit Plans. On the Effective Date, the
Surviving Company shall assume all obligations of the Company under any and all
employee benefit plans in effect as of such date with respect to which employee
rights or accrued benefits are outstanding as of such date. On the Effective
Date, the Surviving Company shall adopt and continue in effect all such employee
benefit plans upon the same terms and conditions as were in effect immediately
prior to the Merger.
11. Succession. On the Effective Date, the Surviving Company
shall succeed to all of the rights, privileges, debts, liabilities, powers and
property of the Company in the manner of and as more fully set forth in Section
259 of the DGCL. Without limiting the foregoing, upon the Effective Date, all
property, rights, privileges, franchises, patents, trademarks, licenses,
registrations, and other assets of every kind and description of the Company
shall be transferred to, vested in and developed upon the Surviving Company
without further act or deed and all property, rights, and every other interest
of the Company and the Surviving Company shall be as effectively the property of
the Surviving Company as they were of the Company and the Surviving Company,
respectively. All rights of creditors of the Company and all liens upon any
property of the Company shall be preserved unimpaired, and all debts,
liabilities and duties of the Company shall attach to the Surviving Company and
may be enforced against it to the same extent as if said debts, liabilities and
duties had been incurred or contracted by it.
12. Certificate of Incorporation and Bylaws. From and after
the Effective Date, the Certificate of Incorporation and Bylaws of the Surviving
Company shall continue in full force and effect until further amended in
accordance with the provisions thereof and applicable law.
13. Directors and Officers. The members of the Board of
Directors and the officers of the Surviving Company on the Effective Date shall
continue in office until the expiration of their respective terms of office and
until their successors have been elected and qualified.
14. Further Assurances. From time to time, as and when
required by the Surviving Company or by its successors and assigns, there shall
be executed and delivered on behalf of the Company such deeds and other
instruments, and there shall be taken or caused to be taken by it such further
and other action as shall be appropriate or necessary in order to best or
perfect in or to confirm of record or otherwise in the Surviving Company the
title to and possession of all the property, interests, assets, rights,
privileges, immunities, powers, franchises and authority of the Company, and
otherwise to carry out the purposes of this Agreement and Plan of Merger, and
the officers and directors of the Company are fully authorized in the name and
on behalf of the Company or otherwise to take any and all such action and to
execute and deliver any and all such deeds and other instruments.
15. Abandonment. Notwithstanding the approval of this Merger
Agreement by the shareholders of the Company or by the sole stockholder of the
Surviving Company, at any time before the Effective Date, (a) this Merger
Agreement may be terminated and the Merger may be abandoned by the Board of
Directors of either the Company or the Surviving Company or both, including by
reason of a determination, in the sole discretion of either Board of Directors,
that holders of an unacceptable number of shares intend to exercise their
statutory appraisal rights pursuant to Section 623 of the New York Business
Corporation Law, or (b) the consummation of the Merger may be deferred for a
reasonable period of time if, in the opinion of the Boards of Directors of the
Company and the Surviving Company, such action would be in the best interests of
such corporations. In the event of termination of this Merger
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APPENDIX A
Agreement, this Merger Agreement shall become void and of no effect and there
shall be no liability on the part of either corporation or their respective
Board of Directors or stockholders with respect thereto, except that the Company
shall pay all expenses incurred in connection with the Merger or in respect of
this Merger Agreement or relating thereto.
16. Conditions to Merger. The obligation of the corporations
to effect the transactions contemplated hereby is subject to satisfaction of the
following conditions (any or all of which may be waived by either of the
corporations in its sole discretion to the extent permitted by law):
(a) the Merger shall have been approved by the
shareholders of the Company in accordance with applicable provisions of the New
York Business Corporations Law;
(b) The Company, as sole stockholder of the
Surviving Company, shall have approved the Merger in accordance with the
Delaware General Corporation Law; and
(c) any and all consents, permits, authorizations,
approvals, and orders deemed in the sole discretion of the Company to be
material to the consummation of the Merger shall have been obtained.
18. Amendment. This Agreement and Plan of Merger may be
amended by the Boards of Directors of the Company and the Surviving Company at
any time prior to the Effective Date, provided that an amendment made subsequent
to the approval of this Agreement and Plan of Merger by the shareholders of
either the Company or the Surviving Company shall not (1) alter or change the
amount or kind of shares, securities, cash, property and/or rights to be
received in exchange for or on conversion of all or any of the shares of any
class or series thereof of such corporation, (2) alter or change any term of the
Certificate of Incorporation of the Surviving Company to be effected by the
Merger or (3) alter or change any of the terms and conditions of this Agreement
and Plan of Merger if such alteration or change would adversely affect the
holders of any class or series of the stock of such corporation.
19. Governing Law. This Agreement and Plan of Merger and the
legal relations between the parties shall be governed by and construed in
accordance with the laws of the State of Delaware.
20. Counterparts. In order to facilitate the filing and
recording of this Agreement and Plan of Merger, the same may be executed in any
number of counterparts, each of which shall be deemed to be an original.
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APPENDIX A
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement and Plan of Merger to be executed and attested on its behalf by its
officers hereunto duly authorized, as of the date first above written.
SoftNet Systems, Inc.,
a New York corporation
By:_____________________________________
Name:___________________________________
Title:__________________________________
ATTESTED:
By:_____________________________________
Name:___________________________________
Title:__________________________________
SoftNet Systems, Inc.,
a Delaware corporation
By:_____________________________________
Name:___________________________________
Title:__________________________________
ATTESTED:
By:_____________________________________
Name:___________________________________
Title:__________________________________
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<PAGE>
APPENDIX B
SECTION 623 PROCEDURE TO ENFORCE SHAREHOLDER'S RIGHT
TO RECEIVE PAYMENT FOR SHARES.
(a) A shareholder intending to enforce his right under a
section of this chapter to receive payment for his shares if the proposed
corporate action referred to therein is taken shall file with the corporation,
before the meeting of shareholders at which the action is submitted to a vote,
or at such meeting but before the vote, written objection to the action. The
objection shall include a notice of his election to dissent, his name and
residence address, the number and classes of shares as to which he dissents and
a demand for payment of the fair value of his shares if the action is taken.
Such objection is not required from any shareholder to whom the corporation did
not give notice of such meeting in accordance with this chapter or where the
proposed action is authorized by written consent of shareholders without a
meeting.
(b) Within ten days after the shareholders' authorization
date, which term as used in this section means the date on which the
shareholders' vote authorizing such action was taken, or the date on which such
consent without a meeting was obtained from the requisite shareholders, the
corporation shall give written notice of such authorization or consent by
registered mail to each shareholder who filed written objection or from whom
written objection was not required, excepting any shareholder who voted for or
consented in writing to the proposed action and who thereby is deemed to have
elected not to enforce his right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any
shareholder from whom written objection was not required and who elects to
dissent shall file with the corporation a written notice of such election,
stating his name and residence address, the number and classes of shares as to
which he dissents and a demand for payment of the fair value of his shares. Any
shareholder who elects to dissent from a merger under section 905 (Merger of
subsidiary corporation) or paragraph (c) of section 907 (Merger or consolidation
of domestic and foreign corporations) or from a share exchange under paragraph
(g) of section 913 (Share exchanges) shall file a written notice of such
election to dissent within twenty days after the giving to him of a copy of the
plan of merger or exchange or an outline of the material features thereof under
section 905 or 913.
(d) A shareholder may not dissent as to less than all of the
shares, as to which he has a right to dissent, held by him of record, that he
owns beneficially. A nominee or fiduciary may not dissent on behalf of any
beneficial owner as to less than all of the shares of such owner, as to which
such nominee or fiduciary has a right to dissent, held of record by such nominee
or fiduciary.
(e) Upon consummation of the corporate action, the shareholder
shall cease to have any of the rights of a shareholder except the right to be
paid the fair value of his shares and any other rights under this section. A
notice of election may be withdrawn by the shareholder at any time prior to his
acceptance in writing of an offer made by the corporation, as provided in
paragraph (g), but in no case later than sixty days from the date of
consummation of the corporate action except that if the corporation fails to
make a timely offer, as provided in paragraph (g), the time for withdrawing a
notice of election shall be extended until sixty days from the date an offer is
made. Upon expiration of such time, withdrawal of a notice of election shall
require the written consent of the corporation. In order to be effective,
withdrawal of a notice of election must be accompanied by the return to the
corporation of any advance payment made to the shareholder as provided in
paragraph (c,). If a notice of election is withdrawn, or the corporate action is
rescinded, or a court shall determine that the shareholder is not entitled to
receive payment for his shares, or the shareholder shall otherwise lose his
dissenter's rights, he shall not have the right to receive payment for his
shares and he shall be reinstated to all his rights as a shareholder as of the
consummation of the corporate action, including any intervening preemptive
rights and the right to payment of any intervening dividend or other
distribution or, if any such rights have
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APPENDIX B
expired or any such dividend or distribution other than in cash has been
completed in lieu thereof, at the election of the corporation, the fair value
thereof in cash as determined by the board as of the time of such expiration or
completion, but without prejudice otherwise to any corporate proceedings that
may have been taken in the interim.
(f) At the time of filing the notice of election to dissent or
within one month thereafter the shareholder of shares represented by
certificates shall submit the certificates representing his shares to the
corporation, or to its transfer agent, which shall forthwith note conspicuously
thereon that a notice of election has been filed and shall return the
certificates to the shareholder or other person who submitted them on his
behalf. Any shareholder of shares represented by certificates who fails to
submit his certificates for such notation as herein specified shall, at the
option of the corporation exercised by written notice to him within forty-five
days from the date of filing of such notice of election to dissent, lose his
dissenter's rights unless a court, for good cause shown, shall otherwise direct.
Upon transfer of certificate bearing such notation, each new certificate issued
therefor shall bear a similar notation together with the name of the original
dissenting holder of the shares and a transferee shall acquire no rights in the
corporation except those which the original dissenting shareholder had at the
time of the transfer.
(g) Within fifteen days after the expiration of the period
within which shareholder,, may file their notices of election to dissent, or
within fifteen days after the propose( corporate action is consummated.
whichever is later (but in no case later than ninety days from the shareholders'
authorization date), the corporation or, in the case of a merger or
consolidation, the surviving or new corporation, shall make a written offer by
registered mail to each shareholder who has filed such notice of election to pay
for his shares at a specified price which the corporation considers to be their
fair value. Such offer shall be accompanied by a statement setting forth the
aggregate number of shares with respect to which notices of election to dissent
have been received and the aggregate number of holders of such shares. If the
corporate action has been consummated, such offer shall also be accompanied by
(1) advance payment to each such shareholder who has submitted the certificates
representing his shares to the corporation, as provided in paragraph (f), of an
amount equal to eighty percent of the amount of such offer, or (2) as to each
shareholder who has not yet submitted his certificates a statement that advance
payment to him of an amount equal to eighty percent of the amount of such offer
shall be made by the corporation promptly upon submission of his certificates.
If the corporate action has not been consummated at the time of the making of
the offer, such advance payment or statement as to advance payment shall be sent
to each shareholder entitled thereto forthwith upon consummation of the
corporate action. Every advance payment or statement as to advance payment shall
include advice to the shareholder to the effect that acceptance of such payment
does not constitute a waiver of any dissenters' rights. If the corporate action
has not been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements were previously furnished, nor if in
connection with obtaining the shareholders' authorization for or consent to the
proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be paid
for his shares, payment therefor shall be made within sixty days after the
making
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APPENDIX B
of such offer or the consummation of the proposed corporate action, whichever is
later, upon the surrender of the certificates for any such shares represented by
certificates.
(h) The following procedure shall apply if the corporation
fails to make such offer within such period of fifteen days, or if it makes the
offer and any dissenting shareholder or shareholders fail to agree with it
within the period of thirty days thereafter upon the price to be paid for their
shares:
(1) The corporation shall, within twenty days after
the expiration of whichever is applicable of the two periods last mentioned.
institute a special proceeding in the supreme court in the judicial district in
which the office of the corporation is located to determine the rights of
dissenting shareholders and to fix the fair value of their shares. If, in the
case of merger or consolidation, the surviving or new corporation is a foreign
corporation without an office in this state, such proceeding shall be brought in
the county where the office of the domestic corporation, whose shares are to be
valued, was located.
(2) If the corporation fails to institute such
proceeding within such period of twenty days, any dissenting shareholder may
institute such proceeding for the same purpose not later than thirty days after
the expiration of such twenty day period. If such proceeding is not instituted
within such thirty day period, all dissenter's rights shall be lost unless the
Supreme court, for good cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those
who, as provided in paragraph (g), have agreed with the corporation upon the
price to be paid for their shares, shall be made parties to such proceeding,
which shall have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in such proceeding upon each
dissenting shareholder who is a resident of this state in the manner provided by
law for the service of a summons, and upon each nonresident dissenting
shareholder either by registered mail and publication, or in such other manner
as is permitted by law. The jurisdiction of the court shall be plenary and
exclusive.
(4) The court shall determine whether each
dissenting shareholder, as to whom the corporation requests the court to make
such determination, is entitled to receive payment for his shares. If the
corporation does not request any such determination or if the court finds that
any dissenting shareholder is so entitled, it shall proceed to fix the value of
the shares, which, for the purposes of this section, shall be the fair value as
of the close of business on the day prior to the shareholders' authorization
date. In fixing the fair value of the shares, the court shall consider the
nature of the transaction giving rise to the shareholder's right to receive
payment for shares and its effects on the corporation and its shareholders, the
concepts and methods then customary in the relevant securities and financial
markets for determining fair value of shares of a corporation engaging in a
similar transaction under comparable circumstances and all other relevant
factors. The court shall determine the fair value of the shares without a jury
and without referral to an appraiser or referee. Upon application by the
corporation or by any shareholder who is a party to the proceeding, the court
may, in its discretion, permit pretrial disclosure, including, but not limited
to, disclosure of any expert's reports relating to the fair value of the shares
whether or not intended for use at the trial in the proceeding and
notwithstanding subdivision (d) of section 3101 of the civil practice law and
rules.
(5) The final order in the proceeding shall be
entered against the corporation in favor of each dissenting shareholder who is a
party to the proceeding and is entitled thereto for the value of his shares so
determined.
(6) The final order shall include an allowance for
interest at such rate as the court finds to be equitable, from the date the
corporate action was consummated to the date of payment.
B-3
<PAGE>
APPENDIX B
In determining the rate of interest, the court shall consider all relevant
factors, including the rate of interest which the corporation would have had to
pay to borrow money during the pendency of the proceeding. If the court finds
that the refusal of any shareholder to accept the corporate offer of payment for
his shares was arbitrary, vexatious or otherwise not in good faith, no interest
shall be allowed to him.
(7) Each party to such proceeding shall bear its own
costs and expenses, including the fees and expenses of its counsel and of any
experts employed by it. Notwithstanding the foregoing, the court may, in its
discretion, apportion and assess all or any part of the costs, expenses and fees
incurred by the corporation against any or all of the dissenting shareholders
who are parties to the proceeding, including any who have withdrawn their
notices of election as provided in paragraph (e), if the court finds that their
refusal to accept the corporate offer was arbitrary, vexatious or otherwise not
in good faith. The court may, in its discretion, apportion and assess all or any
part of the costs, expenses and fees incurred by any or all of the dissenting
shareholders who are parties to the proceeding against the corporation if the
court finds any of the following: (A) that the fair value of the shares as
determined materially exceeds the amount which the corporation offered to pay;
(B) that no offer or required advance payment was made by the corporation; (C)
that the corporation failed to institute the special proceeding within the
period specified therefor; or (D) that the action of the corporation in
complying with its obligations as provided in this section was arbitrary,
vexatious or otherwise not in good faith. In making any determination as
Provided in clause (A), the court may consider the dollar amount or the
percentage, or both, b which the fair value of the shares as determined exceeds
the corporate offer.
(8) Within sixty days after final determination of
the proceeding, the corporation s pay to each dissenting shareholder the amount
found to be due him, upon surrender of certificate for any such shares
represented by certificates.
(i) Shares acquired by the corporation upon the payment of the
agreed value there or of the amount due under the final order, as provided in
this section, shall become treasury shares or be, cancelled as provided in
section 515 (Reacquired shares), except that, in case of a merger or
consolidation, they may be held and disposed of as the plan of me or
consolidation may otherwise provide.
(j) No payment shall be made to a dissenting shareholder under
this section at a time when the corporation is insolvent or when such payment
would make it insolvent. In such event, the dissenting shareholder shall, at his
option:
(1) Withdraw his notice of election, which shall in
such event be deemed withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the
corporation and, if it is liquidated, subordinated to the rights of creditors of
the corporation, but have rights superior to the non-dissenting shareholders,
and if it is not liquidated, retain his right to be paid for shares, which right
the corporation shall be obliged to satisfy when the restrictions of paragraph
do not apply.
(3) The dissenting shareholder shall exercise such
option under subparagraph (1) or (2) by written notice filed with the
corporation within thirty days after the corporation h given him written notice
that payment for his shares cannot be made because of restrictions of this
paragraph. If the dissenting shareholder fails to exercise such option provided,
the corporation shall exercise the option by written notice given to him within
twenty days after the expiration of such period of thirty days.
B-4
<PAGE>
APPENDIX B
(k) The enforcement by a shareholder of his right to receive
payment for his shares in the manner provided herein shall exclude the
enforcement by such shareholder of an other right to which he might otherwise be
entitled by virtue of share ownership, except as provided in paragraph (e), and
except that this section shall not exclude the right of such shareholder to
bring or maintain an appropriate action to obtain relief on the ground that such
corporate action shall be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section,
any notice to be given by a corporation to a shareholder under this section
shall be given in the manner provided in section 605 (Notice of meetings of
shareholders).
(m) This section shall not apply to foreign corporations
except as provided in subparagraph (e)(2) of section 907 (Merger or
consolidation of domestic and foreign corporations) (Last amended by Ch. 117, L.
'86, eff. 9-1-86.)
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<PAGE>
<TABLE>
SOFTNET SYSTEMS, INC.
PROXY
Annual Meeting of Stockholders, March 16, 1999
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Ronald I. Simon, Dr. Lawrence B. Brilliant and Steven M. Harris, and each of them,
attorneys and proxies of the undersigned, with full power of substitution, and hereby authorizes them to represent the undersigned
at the Annual Meeting of Stockholders (the "Annual Meeting") of SoftNet Systems, Inc. to be held on March 16, 1999 and at any
adjournments thereof, and to vote, as designated below, all of the shares of Common Stock of the Company held of record by the
undersigned on February 5, 1999, which the undersigned is entitled to vote, either on his own behalf or on behalf of any entity or
entities, with the same force and effect as the undersigned might or could do if personally present thereat:
<CAPTION>
<S> <C> <C>
1. FOR ____ AGAINST ____ ABSTAIN ____ To approve the Company's reincorporation in Delaware
2. FOR ____ AGAINST ____ ABSTAIN ____ To increase the number of authorized shares of capital stock
3. FOR ____ AGAINST ____ ABSTAIN ____ To approve the adoption of the Company's 1998 Stock Incentive Plan under which
2,850,668 shares of Common Stock have been reserved for issuance
4. FOR ____ AGAINST ____ ABSTAIN ____ To authorize and approve the issuance of the common stock underlying the Company's
Convertible Preferred Stock and Warrants to purchase common stock, which in the
aggregate would represent 20% or more of the outstanding shares of Common Stock
5. FOR ____ AGAINST ____ ABSTAIN ____ To approve the sale of the Company's non-Internet related subsidiaries
6. FOR ____ AGAINST ____ ABSTAIN ____ To elect directors
7. FOR ____ AGAINST ____ ABSTAIN ____ To appoint PricewaterhouseCoopers LLP as independent auditors of the Company for the
fiscal year ending September 30, 1999
The shares covered by this proxy will be voted in accordance with the undersigned's instruction with respect to
any matter in which a choice is specified. Unless a contrary instruction is indicated, this proxy will be voted in favor of each
proposals, and will be voted at the discretion of the proxy holders on such other matters as may come before the Annual Meeting.
Each of the proxies or their substitutes as shall be present and acting at the Annual Meeting shall have and may
exercise all of the powers of all of said proxies hereunder.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR EACH PROPOSAL.
---
Please print the name(s) appearing on each
certificate over which you have voting authority: ----------------------------------------------
[Print Name on Certificate]
Please sign your name: ------------------------------------- --------------------
[Authorized Signature] [Date of Signature]
</TABLE>
