<PAGE> 1
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 (AMENDMENT NO. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Network Imaging Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(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 transaction 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):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] 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:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
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<PAGE> 2
[NETWORK IMAGING CORPORATION LOGO]
NETWORK IMAGING CORPORATION
500 HUNTMAR PARK DRIVE
HERNDON, VIRGINIA 20170
October 1, 1997
Dear Stockholders:
It is my pleasure to invite you to a Special Meeting of Stockholders of
Network Imaging Corporation to be held on Monday, November 17, 1997 at 9:00
a.m., at the Hidden Creek Club, 1711 Clubhouse Road, Reston, Virginia.
Whether or not you plan to attend, and regardless of the number of shares
you own, it is important that your shares be represented at the Special Meeting.
You are accordingly urged to complete, sign, date and return your proxy promptly
in the enclosed envelope. Your return of a proxy in advance will not affect your
right to vote in person at the Special Meeting.
I hope that you will attend the Special Meeting. The officers and directors
of the Company look forward to seeing you at that time.
Very truly yours,
/s/ JAMES J. LETO
JAMES J. LETO
President and Chief Executive Officer
<PAGE> 3
[NETWORK IMAGING CORPORATION LOGO]
NETWORK IMAGING CORPORATION
500 HUNTMAR PARK DRIVE
HERNDON, VIRGINIA 20170
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
MONDAY, NOVEMBER 17, 1997
------------------------
To our Stockholders:
A Special Meeting of Stockholders (the "Meeting") of Network Imaging
Corporation (the "Company") will be held on Monday, November 17, 1997 at 9:00
a.m. at the Hidden Creek Club, 1711 Clubhouse Road, Reston, Virginia for the
following purposes:
1. To approve the issuance of shares of the Company's Common Stock, $0.0001
par value per share ("Common Stock"), issuable in connection with the
Company's Series K Convertible Preferred Stock ("Series K Stock"), on
exercise of warrants to purchase shares of Common Stock at on exercise
price of $2.40 per share ("Investor Warrants") and on exercise of
warrants to purchase shares of Common Stock at an exercise price of
$1.625 per share ("Agent Warrants") under Nasdaq Rule 4460(i)(1)(D);
2. To approve the issuance of shares of Common Stock issuable in connection
with the Company's 8% Convertible Notes due July 8, 2002 in aggregate
principal amount of $1.8 million ("Convertible Notes") and on exercise
of the warrants to purchase 36,000 shares of Common Stock at an exercise
price of $1.875 per share issued in connection with the Convertible
Notes ("Note Warrants") under Nasdaq Rule 4460(i)(1)(D);
3. To amend the Company's Certificate of Incorporation to increase the
number of authorized shares of Common Stock from 50,000,000 to
100,000,000; and
4. To transact such other business as may properly come before the Meeting
or any adjournment or postponement thereof.
Holders of record of Common Stock at the close of business on September 24,
1997 are entitled to receive notice of and to vote at the Meeting.
You are invited to attend the Meeting. Please carefully read the attached
Proxy Statement for information regarding the matters to be considered and acted
upon at the Meeting. We hope that you will attend the Meeting.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING IN PERSON, YOU ARE
URGED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
RETURN POSTAGE-PAID ENVELOPE. No postage needs to be affixed to the return
envelope if mailed in the United States. If you attend the Meeting, you may
withdraw your proxy and vote in person.
By Order of the Board of Directors
/s/ JULIA A. BOWEN
JULIA A. BOWEN
Vice President, General Counsel and
Assistant Secretary
Herndon, Virginia
October 1, 1997
<PAGE> 4
NETWORK IMAGING CORPORATION
500 HUNTMAR PARK DRIVE
HERNDON, VIRGINIA 20170
------------------------
PROXY STATEMENT
The Proxy Statement and the accompanying Notice of Special Meeting of
Stockholders and Proxy Card are being furnished in connection with the
solicitation by the Board of Directors ("Board") of Network Imaging Corporation
("Company") of proxies to be voted at a Special Meeting of Stockholders
scheduled to be held on Monday, November 17, 1997 at 9:00 a.m. at the Hidden
Creek Club, 1711 Clubhouse Road, Reston, Virginia, and any adjournment or
postponement thereof (the "Meeting"). This Proxy Statement and the enclosed
Proxy Card are being furnished on or about October 1, 1997, to all holders of
record of the Company's Common Stock, $0.0001 par value per share (the "Common
Stock"), as of the close of business on September 24, 1997.
At the Meeting, stockholders will vote on proposals to (1) approve the
issuance of shares of Common Stock issuable in connection with the Company's
Series K Convertible Preferred Stock ("Series K Stock"), on exercise of warrants
to purchase shares of Common Stock at an exercise price of $2.40 per share
("Investor Warrants") and on exercise of warrants to purchase shares of Common
Stock at an exercise price of $1.625 per share ("Agent Warrants") under Nasdaq
Rule 4460(i)(1)(D), (2) approve the issuance of shares of Common Stock issuable
in connection with the Company's 8% Convertible Notes due July 8, 2002 in
aggregate principal amount of $1.8 million ("Convertible Notes") and on exercise
of warrants to purchase 36,000 shares of Common Stock at an exercise price of
$1.875 per share issued in connection with the Convertible Notes ("Note
Warrants") under Nasdaq Rule 4460(i)(1)(D), and (3) amend the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 50,000,000 to 100,000,000.
VOTING SECURITIES AND RECORD DATE
The Board has fixed the close of business on September 24, 1997 as the
record date ("Record Date") for determination of holders of Common Stock
entitled to notice of and to vote at the Meeting. As of the Record Date, there
were 25,865,809 shares of Common Stock issued and outstanding and there were no
other voting securities of the Company outstanding. Each outstanding share of
Common Stock entitles the record holder thereof to one vote. Under Delaware law,
shares represented at the Meeting (either by properly executed proxy or in
person) that reflect abstentions or "broker non-votes" (i.e., shares held by a
broker or nominee that are represented at the Meeting, but with respect to which
such broker or nominee is not empowered to vote on a particular proposal) will
be counted as shares that are present and entitled to vote for purposes of
determining the presence of a quorum. Abstentions as to a Proposal will have the
same effect as votes against the proposal. Broker non-votes, however, will be
treated as unvoted for purposes of determining approval of a proposal (and
therefore will reduce the absolute number -- although not the percentage -- of
votes needed for approval) and will not be counted as votes for or against the
proposals. Under the New York Stock Exchange Rules, brokers will not have
discretionary voting authority to vote on Proposals 1, 2 or 3, and may not vote
for Proposals 1, 2 or 3 without receiving instructions from the beneficial
owners of shares.
VOTING RIGHTS AND SOLICITATION OF PROXIES
Holders of Common Stock of record on the Record Date may vote at the
Meeting in person or by means of the enclosed Proxy Card. You may specify your
voting choices by marking the appropriate boxes on the Proxy Card. The proxy
solicited hereby, if properly signed and returned to the Company and not revoked
prior to or at the Meeting, will be voted in accordance with the instructions
specified thereon. If you properly sign and return your Proxy Card, but do not
specify your choices, your shares will be voted by the proxy holders FOR
Proposals 1, 2 and 3.
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<PAGE> 5
The Board encourages you to complete and return the Proxy Card even if you
expect to attend the Meeting. You may revoke your proxy at any time before it is
voted at the Meeting by giving written notice of revocation to the Secretary of
the Company, by submission of a proxy bearing a later date or by attending the
Meeting and voting in person.
The proxy holders, James J. Leto and Jorge R. Forgues, will vote all shares
of Common Stock represented by Proxy Cards that are properly signed and returned
by stockholders. The Proxy Card also authorizes the proxy holders to vote the
shares represented with respect to any matters not known at the time this Proxy
Statement was printed that may properly be presented for consideration at the
Meeting. YOU MUST RETURN A SIGNED PROXY CARD IF YOU WANT THE PROXY HOLDERS TO
VOTE YOUR SHARES OF COMMON STOCK.
The cost of preparing, assembling and mailing this proxy soliciting
material and Notice of Special Meeting of Stockholders will be paid by the
Company. Following the mailing of proxy solicitation materials, proxies may be
solicited by directors, officers and regular employees of the Company and its
subsidiaries personally, by mail, telephone, telecopier or by personal
solicitation, for which they will receive no additional compensation. In
addition, the Company will reimburse brokers, custodians, nominees and other
persons holding shares of Common Stock for others for their reasonable expenses
in sending proxy materials to the beneficial owners of such shares and in
obtaining their proxies. Brokerage houses and other nominees, fiduciaries, and
custodians nominally holding shares of Common Stock as of the Record Date will
be requested to forward proxy soliciting material to the beneficial owners of
such shares, and will be reimbursed by the Company for their reasonable
expenses. All expenses for soliciting proxies will be paid by the Company. The
Company has retained Georgeson & Company, Inc., Wall Street Plaza, New York, New
York 10005, to aid in the solicitation of proxies, for a fee of $15,000, plus
reasonable out-of-pocket expenses. Proxies may be solicited by personal
interview, mail, and telephone.
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<PAGE> 6
OWNERSHIP OF NETWORK IMAGING CORPORATION STOCK
The following table sets forth certain information, as of September 2,
1997, with respect to the beneficial ownership of shares of Common Stock by (i)
each stockholder known by the Company to be the beneficial owner of more than
five percent (5%) of the outstanding shares of Common Stock; (ii) each director
of the Company; (iii) certain of the Company's executive officers; and (iv) all
executive officers and directors as a group. Except as indicated in the
footnotes to the table, persons named in the table have sole voting and
investment power with respect to all shares of Common Stock that they
respectively own beneficially.
The address of each person who is an executive officer or director of the
Company is 500 Huntmar Park Drive, Herndon, Virginia 20170.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF CLASS
---------------------------------------------------------- --------------------- --------
<S> <C> <C>
Fred E. Kassner(2)........................................ 2,085,597 8.3
Robert P. Bernardi(3)..................................... 1,745,825 7.0
James J. Leto(4).......................................... 126,267 0.5
Robert M. Sterling, Jr.(5)................................ 1,926,825 7.7
Mark T. Wasilko(6)........................................ 43,750 0.2
John F. Burton............................................ 0 *
C. Alan Peyser(7)......................................... 21,500 *
Robert Ripp(8)............................................ 22,088 *
Russell D. Hale(9)........................................ 125,000 0.5
Brian H. Hajost(10)....................................... 14,504 *
Directors and executive officers as a group (9 persons)... 2,147,775 8.5
</TABLE>
- ---------------
* Less than 1% of the outstanding Common Stock.
(1) Under applicable rules of the Securities and Exchange Commission (the
"SEC"), a person is deemed to be the beneficial owner of share of Common
Stock if, among other things, he or she directly or indirectly has or
shares voting power or investment power with respect to such shares. A
person is also considered to beneficially own shares of Common Stock that
he or she does not actually own but has the right to acquire presently or
within the next sixty (60) days, by exercise of stock options or otherwise.
(2) The address of Mr. Kassner is 69 Spring Street, Ramsey, New Jersey 07446.
Of the total shares shown, Mr. Kassner has shared voting and dispositive
power with respect to 1,207,857 shares, including 80,000 shares underlying
a warrant, held by Liberty Travel, Inc. of which Mr. Kassner is an officer,
director, and stockholder. Of the shares reported as being held directly by
Mr. Kassner, 154,000 are issuable upon the exercise of a warrant.
(3) Includes 1,348,325 shares issuable upon exercise of options.
(4) Includes 110,000 shares issuable upon exercise of options.
(5) Includes 1,348,325 shares issuable upon exercise of options and 96,000
shares issuable upon exercise of Redeemable Common Stock Purchase Warrants.
(6) All shares are issuable upon exercise of options.
(7) Includes 12,500 shares issuable upon exercise of options.
(8) Includes 17,088 shares issuable upon exercise of options.
(9) All shares are issuable upon exercise of options.
(10) Includes 12,500 shares issuable upon exercise of options.
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<PAGE> 7
PROPOSAL NUMBER 1 -- APPROVAL TO ELIMINATE
THE RESTRICTION ON THE NUMBER OF COMMON SHARES
ISSUABLE IN CONNECTION WITH THE SERIES K STOCK
AND ON EXERCISE OF THE INVESTOR WARRANTS AND THE AGENT WARRANTS
On July 28, 1997, the Company issued 3,300 units ("Units") consisting of
(1) one share of Series K Stock and (2) warrants to purchase 75 shares of Common
Stock at an exercise price of $2.40 per share. Accordingly, on July 28, 1997,
the Company issued 3,300 shares of Series K Stock and Investor Warrants to
purchase 247,500 shares of Common Stock. As a result of the issuance of 3,300
Units, the Company issued to The Zanett Securities Corporation ("Zanett"), for
its services as placement agent, Agent Warrants to purchase 162,462 shares of
Common Stock at an exercise price of $1.625 per share. The Investor Warrants and
the Agent Warrants expire on July 27, 2002. The rights, preferences and
privileges of the Series K Stock are set forth in a Certificate of Designations,
Preferences and Rights of Series K Convertible Preferred Stock (the "Series K
Certificate"), as filed with the Secretary of State of the State of Delaware.
The Series K Certificate is annexed as Appendix A to this Proxy Statement and
the following summary of the terms of the Series K Stock is qualified in its
entirety by reference to the Series K Certificate. The terms of the Series K
Stock, the Investor Warrants and the Agent Warrants were determined by the
Board.
Pursuant to the terms of the Securities Purchase Agreement dated as of July
28, 1997 ("Securities Purchase Agreement") among the Company and the purchasers
of the Units ("Purchasers"), the Purchasers are required to purchase 3,000
additional Units if the Company achieves certain performance milestones and
satisfies certain other conditions and the Purchasers have the option to
purchase an additional 4,700 Units, at two and possibly three additional
closings. Under the Placement Agency Agreement dated July 2, 1997 between the
Company and Zanett, the Company is obligated to issue additional Agent Warrants
to Zanett to purchase such number of shares of Common Stock as is equal to 8% of
the quotient obtained by dividing the aggregate purchase price of the shares of
Series K Stock and Investor Warrants issued to the Purchasers at such additional
closings divided by the initial exercise price of the Agent Warrants ($1.625 per
share).
The net proceeds of the 3,300 Units ($2.9 million) have been, and the net
proceeds of any additional issuance of Units will be, used for working capital
and general corporate purposes.
Under the Registration Rights Agreement dated as of July 28, 1997 among the
Company, the Purchasers and Zanett ("Registration Rights Agreement"), the
Company has granted each Purchaser and Zanett registration rights, whereby the
Company is obligated to file a registration statement with the Securities and
Exchange Commission ("SEC") as soon as practicable after each closing, but in no
event later than the 60th day following each such closing, registering at least
135% of the shares of Common Stock issuable on conversion of, and as dividends
on, the Series K Stock and on exercise of the Investor Warrants and the Agent
Warrants. This registration statement has been filed with, but has not been
declared effective by, the SEC. Until such time as such registration statements
are declared effective by the SEC, the holders of the Series K Stock ("Holders")
and the holders the Investor Warrants and the Agent Warrants may not transfer
such securities or the Common Stock issuable in connection therewith unless they
comply with an exemption from such registration requirements.
CONVERSION RIGHTS
Each share of Series K Stock is convertible at the option of the Holder
into the number of shares of Common Stock determined by dividing the initial
purchase price of $1,000 by the "Conversion Price," which is the lesser of (a)
the Fixed Conversion Price (which initially is $2.00) and (b) the lowest closing
sale price for the Common Stock on any single trading day during the ten trading
days immediately preceding the conversion multiplied by the "Conversion
Percentage." The "Conversion Percentage" is (a) 105% prior to the 61st day
following July 28, 1997 (the "First Closing Date"), (b) 96% for the period
between the 61st and the 90th day following the First Closing Date, (c) 85% for
the period between the 91st and the 180th day following the First Closing Date,
and (d) 81% for the period after the 180th day following the First Closing Date.
In the event the Company's Common Stock is no longer designated for quotation on
the Nasdaq
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<PAGE> 8
National Market ("Nasdaq") and is designated for quotation on the Nasdaq Small
Cap Market, the Conversion Percentage for each of the periods set forth above is
permanently reduced by 2%.
If (1) a registration statement described above is not declared effective
by the SEC by the 150th day following the date it was required to be filed under
the Registration Rights Agreement ("Registration Deadline"), (2) after the
registration statement is declared effective by the SEC, sales of the shares of
Common Stock registered thereunder cannot be made or (3) the Common Stock is not
listed or included for quotation on Nasdaq, the Nasdaq Small Cap Market, the New
York Stock Exchange ("NYSE") or the American Stock Exchange ("AMEX"), then each
of the Conversion Percentages are permanently reduced. The Conversion
Percentages are permanently reduced by an amount equal to the product of (i) 2%
and (ii) the sum of (a) the number of months (prorated for partial months) after
the Registration Deadline and prior to the date the registration statement is
declared effective by the SEC and (b) the number of months (prorated for partial
months) that sales cannot be made pursuant to an effective registration
statement or the Common Stock is not listed or included for quotation on Nasdaq,
the Nasdaq Small Cap Market, the NYSE or the AMEX. There are certain exceptions
to this provision set forth in the Registration Rights Agreement. In addition,
the aggregate reductions to each of the Conversion Percentages for failure to
have the Common Stock listed on Nasdaq, the Nasdaq Small Cap Market, the NYSE or
AMEX cannot exceed 10%.
The Conversion Price is adjusted if there is a stock split, stock dividend,
combination, reclassification or similar event with respect to the Common Stock,
if certain distributions with respect to shares of Common Stock are made, if
certain purchase rights are distributed and in the event of certain mergers,
certain consolidations, sale or transfer of all or substantially all of the
Company's assets and certain share exchanges.
If a Holder tenders his or her shares of Series K Stock for conversion and
does not receive certificates for all of the shares of Common Stock to which
such Holder is entitled (except in certain specified circumstances), then the
Fixed Conversion Price is thereafter reduced to the lesser of (1) the then Fixed
Conversion Price (prior to the adjustment required by this sentence) and (2) the
lowest Conversion Price in effect during the period beginning on the conversion
date and ending on the date the shares of Common Stock are delivered to the
Holder. If the Company states that it will not deliver freely tradeable shares
of Common Stock on conversion of the Series K Stock (other than in circumstances
permitted by the Registration Rights Agreement), then the Conversion Price is
thereafter reduced to the lowest Conversion Price in effect at any time during
the period beginning on the date of the default occurs and ending on the date
such default is cured. In addition, certain conversion default payments accrue
under Article VI of the Series K Certificate.
Subject to the provisions regarding the Cap Amount (described below) and
provided that all shares of Common Stock issuable on conversion of all
outstanding shares of Series K Stock are authorized and reserved for issuance,
registered for resale under the Securities Act of 1933, as amended, and are
eligible to be traded on the Nasdaq, the NYSE or the AMEX, each share of Series
K Stock outstanding on the fourth anniversary of the First Closing Date is
automatically converted into Common Stock.
The Series K Stock has a liquidation preference of $1,000 per share plus
the accrued "Premium." The Premium is 7% multiplied $1,000 multiplied by a
fraction (1) the numerator is the number of days a share of Series K Stock is
outstanding and (2) the denominator of which is 365. The Premium is payable at
the time of conversion or redemption in cash or shares of Common Stock.
The Series K Certificate provides that in no event shall the total number
of shares of Common Stock issued upon conversion of the Series K Stock exceed
the maximum number of shares of Common Stock that the Company may issue pursuant
to Rule 4460(i) of the Nasdaq or any successor rule ("Cap Amount"). The Cap
Amount is allocated pro rata among the Holders. See "Nasdaq Rule" below.
The exercise price of the Investor Warrants and the Agent Warrants
(collectively, "Warrants") is adjusted in the event the Company issues, grants
or sells any warrants, rights or options (whether or not immediately
exercisable) to purchase Common Stock or securities that are convertible into or
exchangeable for Common Stock at a price per share that is not based on a
percentage of the market price of the Common Stock ("Fixed Price") or that may
be converted into or exchanged for Common Stock at a Fixed Price that is less
than the then exercise price of such Warrants. In such event, the exercise price
of the Warrants is reduced
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<PAGE> 9
to such Fixed Price and the number of shares issuable on exercise of the
Warrants is adjusted so that it equals the number of shares issuable under the
Warrants immediately prior to the adjustment multiplied by the per share
exercise price prior to the adjustment divided by the exercise price after the
adjustment.
In the event of a stock split, stock dividend, recapitalization,
reorganization, reclassification or other subdivision of the Common Stock, the
exercise price of the Warrants and the number of shares of Common Stock issuable
on exercise of the Warrants are proportionately adjusted. The exercise price of
the Warrants and the number of shares issuable on exercise are also adjusted in
the event of certain mergers and consolidations, in the event of any sale or
conveyance of all or substantially all of the Company's assets, in the event of
certain distributions of its assets and in the event the Company distributes
certain purchase rights.
DIVIDENDS
The Series K Stock does not bear dividends and there is no provision for a
sinking fund; accordingly, there are no provisions in the Series K Certificate
restricting repurchase or redemption of the Series K Stock while there is a
dividend or sinking fund arrearage. However, the Premium accrues as noted above.
RANKING
Shares of Series K Stock rank prior to the Common Stock and any class or
series of capital stock created after the creation of the Series K Stock (unless
consent of the Holders is obtained as described below under "Voting Rights") and
ranks pari passu with any class or series created after the creation of the
Series K Stock that specifically states that it ranks pari passu with the Series
K Stock and where the Holders have approved the issuance of such securities as
described below under "Voting Rights." The Series K Stock ranks junior to the
Company's Series A Cumulative Convertible Preferred Stock ("Series A Stock"),
Series F-1, F-2, F-3 and F-4 Convertible Preferred Stock and Series H
Convertible Preferred Stock ("Series H Stock").
VOTING RIGHTS
The Series K Stock generally has no voting rights except as otherwise
provided by the Delaware General Corporation Law. However, the approval of the
holders of a majority of the then outstanding shares of Series K Stock is
required to: (1) alter or change the rights, preferences or privileges of the
Series K Stock, (2) alter or change the rights, preferences or privileges of any
capital stock of the Company so as to adversely affect the Series K Stock, (3)
create any new class or series of capital stock ranking prior to or pari passu
with the Series K Stock, (4) increase the authorized number of shares of Series
K Stock, (5) issue any shares of Series K Stock other than pursuant to the
Securities Purchase Agreement, (6) issue any additional shares of any securities
ranking senior to the Series K Stock or (7) redeem, or declare or pay a cash
dividend or distribution on, any securities junior to the Series K Stock.
In the event the Holders approve a change described in clause (1) above, a
dissenting Holder has the right for a period of 30 days to convert its shares of
Series K Stock pursuant to the terms of the Series K Certificate as they existed
prior to the change.
Except in the event of a required conversion at maturity, no Holder is
entitled to receive shares of Common Stock on conversion of its Series K Stock
to the extent that the sum of (1) the shares of Common Stock owned by such
Holder and its affiliates and (2) the shares of Common Stock issuable on
conversion of the Series K Stock would result in beneficial ownership by such
Holder and its affiliates of more than 4.9% of the outstanding shares of Common
Stock. Beneficial ownership for this purpose is determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended ("1934 Act").
This restriction cannot be amended or deleted unless the holders of a majority
of the Common Stock and each Holder approves such amendment or deletion.
REDEMPTION RIGHTS
In the event the unissued portion of any Holder's Cap Amount is less than
135% of the number of shares of Common Stock then issuable upon conversion of
such Holder's Series K Stock and the Company fails to
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<PAGE> 10
eliminate the prohibitions that have resulted in the existence of the Cap Amount
within 90 days, then each Holder may (1) require (with the consent of the
holders of 50% of the outstanding shares of Series K Stock) the Company to
terminate the listing of the Common Stock on Nasdaq and to cause the Common
Stock to be eligible for trading on the Nasdaq Small Cap Market or on the
over-the-counter electronic bulletin board, at the option of the requesting
Holder, or (2) require the Company to issue Common Stock at a Conversion Price
equal to the average of the closing prices of the Common Stock on the five prior
trading days. In addition, the Holder has the right to require the Company to
redeem for cash at an amount equal to the "Redemption Amount" a portion of the
Holder's Series K Stock such that, after giving effect to such purchase, the
then unissued portion of the Holder's Cap Amount exceeds 135% of the total
number of shares of Common Stock then issuable on conversion of its Series K
Stock. The Redemption Amount per share of Series K Stock equals (1) $1,000 plus
the accrued Premium plus all conversion default payments required under the
Series K Certificate, multiplied by (2) the highest closing price of the Common
Stock during the period beginning on the date of the redemption notice and
ending on the date of redemption, divided by (3) the Conversion Price in effect
on the date of the redemption notice.
A Holder also has the right to require the Company to redeem its Series K
Stock at the Redemption Amount (1) if the Company fails to issue shares of
Common Stock on conversion of the Series K Stock other than in certain specified
circumstances, (2) if the Common Stock is suspended from trading on any of, or
is not listed on at least one of, the NYSE, the AMEX, the Nasdaq or the Nasdaq
Small Cap Market for an aggregate of ten trading days in any nine month period,
(3) the registration statement required to be filed under the Registration
Rights Agreement is not declared effective by the SEC by January 31, 1998 or
cannot be utilized by the Holders for an aggregate of more than 30 days after
June 30, 1998, (4) the Company fails to remove any restrictive legend on shares
of Common Stock issued on conversion of the Series K Stock when required by the
Securities Purchase Agreement or Registration Rights Agreement, (5) the Company
states that it will not issue shares of Common Stock to Holders in accordance
with the terms of the Series K Certificate (other than in circumstances where
other remedies are provided in the Series K Certificate), or (6) the Company
shall (a) sell all or substantially all of its assets, (b) merger or consolidate
with another entity, or (c) have 50% or more of the voting power of its capital
stock owned beneficially by any one person or group within the meaning of
Section 13(d) of the 1934 Act.
In the event the Company fails to pay any Holder its Redemption Amount,
then (1) the Holder is entitled to interest on such amount at the rate of 24%
per annum until such Holder's Series K Stock is redeemed and (2) such Holder has
the right to require the Company to convert the Redemption Amount plus accrued
interest into shares of Common Stock at the lowest Conversion Price in effect
during the period beginning on the date the Holder submitted its redemption
notice and ending on the date of conversion.
The Company has the right to redeem all (but not less than all) of the
outstanding Series K Stock (other than shares that are subject to a notice of
conversion) at any time when it is not in material violation of its obligations
under the Series K Certificate, the Securities Purchase Agreement or the
Registration Rights Agreement at the "Optional Redemption Amount." The Company
can only exercise this right once. The Optional Redemption Amount per share of
Series K Stock is the greater of (1) the sum of the face amount, the accrued
Premium and all conversion default payments accrued through the date of
redemption and (2) (a) the sum of $1,000, the accrued Premium and all conversion
default payments required under the Series K Certificate, multiplied by (b) the
volume weighted average sales price of the Common Stock on the trading day
immediately preceding the optional redemption notice, divided by (c) the
Conversion Price in effect on the date of the optional redemption notice. In the
event the Company fails to pay any Holder its Optional Redemption Amount, then
(1) the Holder is entitled to interest on such amount at the rate of 24% per
annum until the later of the date such Holder's Series K Stock was to be
redeemed or until the Company notifies the Holder that it will not redeem such
Holder's Series K Stock and (2) such Holder has the right to require the Company
to convert such Holder's Series K Stock into shares of Common Stock at the
lowest Conversion Price in effect during the period beginning on the date the
Company elected to redeem such shares and ending on the 20th trading date
following the date such Series K Stock was to be redeemed.
7
<PAGE> 11
NASDAQ RULE
Rule 4460 of Nasdaq, which is applicable to the Company because the
Company's shares of Common Stock are presently included for quotation on the
Nasdaq National Market sets forth the corporate governance standards for such
securities. Section (i) of Rule 4460 provides:
(1) Each NNM [Nasdaq National Market] issuer shall require shareholder
approval of a plan or arrangement under subparagraph (A) below or, prior to
the issuance of designated securities under subparagraph (B), (C) or (D)
below:
. . . (D) in connection with a transaction other than a public
offering involving:
(i) the sale or issuance by the issuer of common stock (or
securities convertible into or exercisable for common stock) at a price
less than the greater of book or market value which together with sales
by officers, directors or substantial shareholders of the company equals
20% or more of common stock or 20% or more of the voting power
outstanding before the issuance; or
(ii) the sale or issuance by the company of common stock (or
securities convertible into or exercisable for common stock) equal to
20% or more of the common stock or 20% or more of the voting power
outstanding before the issuance for less than the greater of book or
market value of the stock.
(2) Exceptions may be made upon application to the Association when:
(A) the delay in securing stockholder approval would seriously
jeopardize the financial viability of the enterprise; and
(B) reliance by the company on this exception is expressly approved
by the Audit Committee of the Board or a comparable body.
A company relying on this exception must mail to all shareholders not
later than ten days before issuance of the securities a letter alerting
them to its omission to seek the shareholder approval that would otherwise
be required and indicating that the Audit Committee of the Board or a
comparable body has expressly approved the exception.
Nasdaq Rule 4460(i)(1) provides that the limit set forth in subparagraph
(D) does not apply if a company's stockholders approve the issuance of the
securities subject to the rule. In the event stockholder approval is not
obtained, the Company will be required to redeem the excess shares of Series K
Stock as described above.
STOCKHOLDER APPROVAL
The Board desires to be able to issue shares of Common Stock in connection
with the Series K Stock and on exercise of the Investor Warrants and the Agent
Warrants (including, without limitation, shares of Common Stock issuable on
conversion of and as Premium on Series K Stock and on exercise of Investor
Warrants and Agent Warrants that have not been issued as of the date of this
Proxy Statement) without regard to the 20% limits of Nasdaq Rule 4460(i)(1)(D).
The Board believes it would be in the best interests of the Company if the
Company could issue such shares of Common Stock to the Holders rather than being
required to redeem the Series K Stock at the required redemption price. See
"Redemption Rights" above. The Board believes this provision could result in a
forced redemption at a time when the Company might not have, and could not
raise, the cash necessary to redeem the shares of Series K Stock. The Board
desires to have the ability to retain cash for the use of the Company for other
purposes. In addition, the Board believes it is in the best interests of the
Company to receive this approval so that it can issue additional Units as
required by the terms of the Securities Purchase Agreement and so that it
retains the ability to obtain additional financing for the Company when
necessary and upon such terms as the Board determines to be advisable. The
actual number of shares issuable upon conversion of and as Premium on the Series
K Stock and on exercise of the Investor Warrants and the Agent Warrants cannot
be determined until the conversion or exercise takes place.
8
<PAGE> 12
To date, only 3,300 shares of Series K Stock have been issued. However,
under the Securities Purchase Agreement, the Company is obligated to issue an
additional 7,700 shares of Series K Stock in certain circumstances. As of
September 2, 1997, the Conversion Price was $1.60 per share and the 3,300 shares
of Series K Stock (including the Premium accrued through such date) were
convertible into 1,664,240 shares of Common Stock. If such additional 7,700
shares of Series K Stock had been outstanding on September 2, 1997, such shares
of Series K Stock (including the Premium accrued through such date) would have
been convertible into 5,514,240 shares of Common Stock at a Conversion Price of
$1.60 per share. If stockholder approval is not obtained (and assuming a
Conversion Price of $1.60 per share), the Company would be required to redeem
1,400,000 shares of Common Stock at a redemption price with a discount equal to
four to 19% of the current market price if 11,000 shares of Series K Stock were
outstanding.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the Common Stock
present or represented and entitled to vote at the Meeting is required to
approve the proposal to eliminate the restriction on the number of shares of
Common Stock issuable in connection with the Series K Stock and on exercise the
Investor Warrants and the Agent Warrants. An abstention from voting by a
stockholder present in person or represented by proxy at the Meeting has the
same effect as a vote against the matter.
THE BOARD RECOMMENDS A VOTE FOR THE APPROVAL TO ELIMINATE THE RESTRICTION
ON THE NUMBER OF SHARES ISSUABLE IN CONNECTION WITH THE SERIES K STOCK AND ON
EXERCISE OF THE INVESTOR WARRANTS AND THE AGENT WARRANTS.
PROPOSAL NUMBER 2 -- APPROVAL TO ELIMINATE
THE RESTRICTION ON THE NUMBER OF SHARES OF COMMON STOCK
ISSUABLE IN CONNECTION WITH THE CONVERTIBLE NOTES
AND ON EXERCISE OF THE NOTE WARRANTS
On July 9, 1997, the Company issued the Convertible Notes and the Note
Warrants. The net proceeds of the Convertible Notes ($1.8 million) have been
used for working capital and general corporate purposes. The Note Warrants
expire on July 8, 2000. The terms of the Convertible Notes and the Note Warrants
were determined by the Board.
Interest on the Convertible Notes are payable at a rate of 8% per annum,
compounded semi-annually. The Company has the option of paying interest in cash
or Common Stock at the redemption or conversion price described below under
"Conversion Rights."
The holders of the Convertible Notes have a security interest in accounts
receivable, inventory, the intellectual property of the 1VIEW Software and on
the stock of the Company's subsidiary, Dorotech, S.A. The payment of principal,
premium, if any, and interest on the Convertible Notes is subordinated to the
senior indebtedness of the Company held by Fred E. Kassner who has granted a
line of credit to the Company. As of August 31, 1997, the amount of outstanding
indebtedness (including accrued and unpaid interest) owed by the Company to Mr.
Kassner under this line of credit was $5,036,000.
Pursuant to the terms of the Convertible Notes, the Company was obligated
to file a registration statement with the SEC by the end of September 1997 to
register the Common Stock issuable on conversion of the Convertible Notes.
While the Company does not believe that it is necessary for the
stockholders to approve this proposal to eliminate the restriction on the number
of shares of Common Stock issuable upon conversion or redemption of the
Convertible Notes and on exercise of the Note Warrants, the Company, in an
abundance of caution, has elected to seek to approval of the stockholders.
9
<PAGE> 13
CONVERSION RIGHTS
The Convertible Notes are convertible into shares of Common Stock 45 days
beginning after issue, that forty-fifth day was August 23, 1997, at a conversion
price of $1.875 per share.
The Convertible Notes may not be redeemed prior to October 30, 1997. On or
after October 30, 1997, the holders have the right to redeem the Convertible
Notes at face value plus accrued interest on one business days' notice to the
Company in cash or shares of Common Stock, at the Company's election. On or
after October 30, 1997, the Company has the right to redeem the Convertible
Notes at face value plus accrued interest on 30 days' notice to the holders in
cash or share of Common Stock, at the holders' election. If shares of Common
Stock are used, Common Stock is issued at a rate of 90% of the previous 5
trading days average closing bid price on Nasdaq.
Under no circumstances may more than 5,035,400 shares of Common Stock be
issued upon on conversion of or otherwise in connection with the Series K Stock,
on conversion or redemption of the Convertible Notes and on exercise of the
Investor Warrants, the Agent Warrants and the Note Warrants unless the Company's
stockholders vote to increase that number or Nasdaq waives the provisions of
Rule 4460(i)(1)(D).
NASDAQ RULE
Rule 4460 of Nasdaq, which is applicable to the Company because the
Company's shares of Common Stock are presently included for quotation on the
Nasdaq National Market, sets forth the corporate governance standards for such
securities. In the event that the Company is not listed on the Nasdaq National
Market, Rule 4460 would still be applicable to the Company if its Common Stock
is traded on the Nasdaq Small Cap. See "Nasdaq Rule" under Proposal 1.
STOCKHOLDER APPROVAL
The Board desires to such be able to issue shares of Common Stock in
connection with the Convertible Notes and on exercise of the Note Warrants
without regard to the 20% limits of Nasdaq Rule 4460(i)(1)(D). The Board
believes it is in the best interests of the Company to receive this approval so
that it retains the ability to obtain additional financing for the Company when
necessary and upon such terms as the Board determines to be advisable. The
actual number of shares issuable upon conversion or redemption of the
Convertible Notes cannot be determined until the conversion or redemption takes
place.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the Common Stock
present or represented and entitled to vote at the Meeting is required to
approve the proposal to eliminate the restriction on the number of shares of
Common Stock issuable upon conversion or redemption of the Convertible Notes and
on exercise of the Note Warrants. An abstention from voting by a stockholder
present in person or represented by proxy at the Meeting has the same effect as
a vote against the matter.
THE BOARD RECOMMENDS A VOTE FOR THE APPROVAL TO ELIMINATE THE RESTRICTION
ON THE NUMBER OF SHARES OF COMMON STOCK ISSUABLE IN CONNECTION WITH THE
CONVERTIBLE NOTES AND ON EXERCISE OF THE NOTE WARRANTS.
PROPOSAL NUMBER 3 -- AMENDMENT TO CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
The Board has recommended, by a unanimous vote of those Directors present
at a meeting held August 28, 1997, subject to stockholder approval, that Article
Fourth of the Certificate of Incorporation of the Company be amended to increase
the number of authorized shares of Common Stock from 50,000,000 shares to
100,000,000 shares, in order to give the Board the ability to issue additional
shares in connection with additional issuances of Units described above under
Proposal 1 and in other circumstances when, and if, the
10
<PAGE> 14
Board should consider that such course of action is advisable. The form of
amendment to the Certificate of Incorporation is annexed as Appendix B to this
Proxy Statement.
As of September 2, 1997, 25,484,827 shares of Common Stock were outstanding
and an additional 7,316,636 shares were reserved for issuance in connection with
the Company's stock option plans, 3,182,123 shares were reserved for issuance in
connection with the Company's Series A Stock, 401,660 shares were reserved for
issuance in connection with the Company's Series H Stock, 960,000 shares were
reserved for issuance in connection with the Convertible Notes, 1,664,240 shares
were reserved for issuance in connection with the outstanding shares of Series K
Stock, 409,962 shares were reserved for issuance in connection with the
outstanding Investor Warrants and the Agent Warrants, 36,000 shares were
reserved for issuance in connection with the Note Warrants and 2,130,218 shares
were reserved for issuance in connection with other outstanding warrants. If the
proposal to increase the authorized Common Stock is adopted, the number of
authorized but unissued and unreserved Common Stock would be increased to
65,000,000.
Although the Board has no present plans, arrangements, understandings or
commitments to issue the additional shares that would be authorized if this
proposal is adopted (other than with respect to the issuance of additional
Units), such shares may be issued from time to time to raise new capital, for
future financing, for stock dividends and stock splits and to achieve other
corporate objectives not foreseeable at this time. Shares of Common Stock may
also be issued in connection with proposed amendments to the terms of the
Certificate of Designations for the Series A Cumulative Convertible Preferred
Stock ("Series A Stock") of the Company ("Series A Certificate"). The Company
intends to propose to the holders of both the Common Stock and the Series A
Cumulative Convertible Preferred Stock ("Series A Stock") that they approve
amendments to the Series A Certificate at a special meeting of stockholders
presently scheduled to be held on November 17, 1997 ("Second Meeting"). If the
amendments to the Series A Certificate are adopted at the Second Meeting (in the
form as is currently being proposed by the Company), (1) Section 8(i) of the
Series A Certificate would be amended to change the rate at which the Company
may exchange shares of Common Stock for shares of Series A Stock for three to
one and (2) provide that dividends on Series A Stock ceased to accrue on April
30, 1997. If the stockholders approve the amendments, each share of Series A
Stock would automatically convert into three shares of Common Stock as of the
close of business on the first business day following the Second Meeting, the
shares of Series A Stock will no longer be outstanding for any purpose and all
rights with respect to such shares shall cease, except for the rights of holders
of Series A Stock to receive shares of Common Stock upon the exchange.
No further authorization by vote of the stockholders will be solicited for
the issuance of the additional shares of Common Stock proposed to be authorized
(other than at the Second Meeting with respect to the amendment to the Series A
Certificate), except as might be required by law, regulatory authorities or
rules of any stock exchange on which the Company's shares may then be listed.
The stockholders do not have any preemptive right to purchase or subscribe for
any part of any new or additional issuance of the Company's securities.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock is required to approve the proposal to amend the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 50,000,000 to 100,000,000.
THE BOARD RECOMMENDS THAT YOU VOTE FOR ADOPTION OF THIS AMENDMENT TO THE
COMPANY'S CERTIFICATE OF INCORPORATION TO INCREASE NUMBER OF AUTHORIZED SHARES
OF COMMON STOCK.
11
<PAGE> 15
CERTAIN INFORMATION REGARDING NETWORK IMAGING CORPORATION
SELECTED FINANCIAL DATA
The following selected financial data for the five years ended December 31,
1996 are derived from the audited consolidated financial statements of Network
Imaging Corporation. The financial data as of and for the six months ended June
30, 1996 and 1997 are derived from the unaudited consolidated financial
statements of Network Imaging Corporation. The unaudited financial statements
include all adjustments, consisting of normal recurring accruals, which Network
Imaging Corporation considers necessary for a fair presentation of the financial
position and results of operations for this period. Operating results for the
six months ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the entire year ending December 31, 1997. The data
should be read in conjunction with the consolidated financial statements,
related notes, and other financial information.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Revenue.......................................................... $ 39,477 $ 69,151 $ 67,028 $ 34,069 $27,961
Costs and expenses:
Costs of revenue................................................... 24,374 42,398 48,189 25,094 21,366
Product Development................................................ 6,500 7,058 4,666 1,315 310
Selling, general and administration................................ 24,956 35,679 36,765 11,886 6,697
Exchange fee and gain on sale of asset, net........................ 619 -- -- -- --
Purchased in-process research and development...................... -- -- 8,821 24,550 --
Settlement with stockholders....................................... -- 1,642 -- -- --
Loss on closure and sale of subsidiaries, net...................... 921 9,274 -- -- --
Restructuring costs................................................ (175) (1,433) 1,654 1,646 --
Capitalized software write-off..................................... -- -- 8,743 286
Loss before interest income and income taxes....................... (17,718) (25,467) (41,810) (30,708) (412)
Interest income (expense), net..................................... 309 224 579 77 (106)
-------- -------- -------- -------- -------
Loss before income taxes........................................... (17,409) (25,243) (41,231) (30,631) (518)
Income tax (benefit) expense....................................... (68) (280) (1,606) 186 (53)
-------- -------- -------- -------- -------
Net loss........................................................... (17,341) (24,963) (39,625) (30,817) (465)
Preferred stock preferences........................................ (3,730) (9,933) (4,496) (604) --
-------- -------- -------- -------- -------
Net loss applicable to common shares............................... $(21,071) $(34,896) $(44,121) $(31,421) $ (465)
======== ======== ======== ======== =======
Net loss per common share.......................................... $ (1.02) $ (2.41) $ (3.56) $ (4.48) $ (0.13)
======== ======== ======== ======== =======
Weighted average shares outstanding................................ 20,682 14,502 12,391 7,015 3,486
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
------- --------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Revenue................................................................................... $18,453 $ 19,671
Costs and expenses:
Costs of revenue............................................................................ 11,972 14,082
Product Development......................................................................... 2,308 3,061
Selling, general and administration......................................................... 10,552 13,847
Exchange fee and gain on sale of asset, net................................................. -- 619
Gain from extinguishment of debt............................................................ (267) --
Restructuring costs......................................................................... -- (175)
Loss before interest income and income taxes................................................ (6,112) (11,763)
Interest income (expense), net.............................................................. (33) (12)
------- --------
Loss before income taxes.................................................................... (6,145) (11,617)
Income tax (benefit) expense................................................................ 55 (12)
------- --------
Net loss.................................................................................... (6,200) (11,605)
Preferred stock preferences................................................................. (1,906) (1,884)
------- --------
Net loss applicable to common shares........................................................ $(8,106) $(13,389)
======= ========
Net loss per common share................................................................... $ (0.33) $ (0.69)
======= ========
Weighted average shares outstanding......................................................... 24,715 20,209
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
JUNE 30, ---------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................... $ 1,845 $ 7,601 $ 9,359 $ 3,989 $39,764 $ 3,385
Working capital.............................................. 4,546 9,893 13,454 17,513 45,859 3,823
Current assets............................................... 19,194 24,709 35,718 46,051 59,516 10,230
Intangible assets, net....................................... 5,969 7,050 9,098 19,874 12,855 2,546
Total assets................................................. 29,439 36,778 49,964 71,871 75,519 13,738
Current liabilities.......................................... 14,648 14,816 22,264 28,538 13,657 6,407
Long term liabilities........................................ 5,524 388 2,037 3,568 3,442 287
Redeemable preferred stock................................... 6,357 9,857 15,478 14,609 15,626 --
Total stockholders equity.................................... $ 2,910 $11,717 $10,195 $25,156 $42,794 $ 7,044
</TABLE>
12
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainty. The Company's
actual results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors" as well as those discussed
elsewhere in this Prospectus.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Revenue. Product revenue includes sales of software licenses and computer
equipment. Product revenue is recognized upon delivery or, for contracts with
significant completion services requiring attainment of customer acceptance,
upon customer acceptance. Service revenue includes software maintenance
contracts, installation and customization. Service revenue is recognized over
the terms of the related contracts as the services are completed or under the
percentage of completion method where appropriate.
Total revenue was $39 million in 1996, $69 million in 1995 and $67 million
in 1994. The decrease in total revenue in 1996 over 1995 of $30 million, or 43%,
resulted from decreases in product revenues of $29.2 million, or 61%, to $18.3
million, and in service revenue of $500,000, or 2%, to $21.1 million. The
increase in total revenue in 1995 over 1994 of $2 million, or 3%, resulted from
increases in service revenue of $4.5 million, or 26% to $21.6 million, offset by
a decrease in product revenue of $2.4 million, or 5% to $47.5 million.
During 1994, the Company committed itself to a plan of restructuring that
was designed to improve operating results by concentrating the Company's
resources on the marketing and continued development of its 1VIEW suite and
PC-based Computer Output to Laser Disk ("COLD") software products. In connection
with its restructuring plan, the Company, during 1995 and 1996, disposed of a
number of operating units (the "Divestitures"), which were not considered
complimentary to the Company's business. The decrease in product revenue in 1996
of $29.2 million was primarily attributable to the Divestitures, which reduced
product revenue by $19.9 million, and a major installation project in 1995 for
$9.3 million, which was not duplicated in 1996.
The decrease in product revenue in 1995 of $2.4 million was primarily
attributable to the Divestitures, which reduced product revenue by $10.6
million, offset by an increase of $8.2 million in 1VIEW and comparable Company
product revenue. The increase in 1VIEW product revenue was attributable to
licenses provided for a major installation project, involving approximately 40
servers and 3,000 clients, in more than 50 districts of a major
telecommunications company. This project accounted for approximately 15 percent
of the Company's revenues in 1995.
The decrease in service revenue in 1996 of $500,000 was attributable to the
Divestitures, which reduced service revenue by $2.9 million, offset by an
increase of $2.4 million in 1VIEW and comparable Company service revenue. The
increase in 1VIEW and comparable Company service revenue was attributable to
increased staffing and management emphasis on the professional services
business. The increase in service revenue in 1995 of $4.5 million was primarily
attributable both to the Company's French subsidiary, Dorotech, S.A.
("Dorotech") and to domestic COLD storage maintenance services.
Profit Margins. Profit margins for product sales improved in 1996 over
1995 as the cost of products sold decreased from 62% to 54% of sales. The
increase in product sales margins was due to the continued increased sales of
the Company's internally developed products and due to the dispositions in 1995
of the Company's CAD/CAM resellers. Profit margins for product sales improved in
1995 over 1994 as the cost of products sold decreased from 74% to 62%. The
significant increase in product sales margins was also due primarily to the
increased sales of the Company's internally developed 1VIEW product suite and
the dispositions of the Company's WildSoft and Hunt Valley divisions and PE
Systems. Microsouth, Tekgraf, IBZ Digital Production and NIC UK subsidiaries
during 1995, which primarily occurred in the second and third quarters.
Profit margins for service sales decreased in 1996 over 1995 as the cost of
products sold increased from 61% to 68% of sales. The decrease in service sales
margins was primarily attributable to the increased staffing in the professional
services business. Profit margins for service sales improved in 1995 as compared
to 1994, as
13
<PAGE> 17
the cost of service sales decreased from 67% to 61%. The increase in service
sales margins was due primarily to customization and maintenance service sales
of the Company's internally developed 1VIEW product suite, an increase in COLD
storage maintenance margins and the Divestitures.
Research and Development. The Company's expenditures on software research
and development activities ("R&D") in 1996 were $8.5 million, of which $2.0
million was capitalized and $6.5 million was expensed. The slight increase in
capitalization between 1996 and 1995 was due to the development of the Company's
next generation mainframe and PC-based COLD products. The Company's expenditures
on software R&D activities in 1995 were $8.7 million, of which $1.7 million was
capitalized and $7.0 million was expensed. The Company's expenditures on
software research and development activities and for the acquisition of software
licenses in 1994 were $11.6 million, of which $7.0 million was capitalized and
$4.6 million was expensed. The 48% increase in product development expense from
$4.6 million in 1994 to $6.8 million in 1995 was primarily attributable to the
general release of the Company's 1VIEW product suite in early 1995, whereas in
1994, the R&D efforts for the 1VIEW product suite were still in the development
stage. The net decrease in total R&D expenditures from $11.6 million in 1994 to
$8.5 million in 1995, or $3.1 million, was primarily attributable to the
Divestitures; a reduced focus on the Company's network attachable storage
products, which resulted in a $770,000 reduction in R&D expenditures; an
increased focus on Dorotech's engineering services, which resulted in a $810,000
reduction in R&D expenditures; a net $200,000 reduction in software license
acquisitions; and, increased domestic engineering services for installation and
maintenance of the Company's 1VIEW product suite.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") were $25.0 million, or 63% of revenue, in 1996,
$35.7 million, or 52% of revenue, in 1995, $36.8 million, or 55% of revenue, in
1994. The decrease in 1996 compared to 1995 of $10.7 million, or 30%, was the
result of the Divestitures, which accounted for a $8.7 million decrease in
addition to a $2.0 million decrease in SG&A expenses resulted from the Company's
continuing 1VIEW, COLD and French operations. The decrease in 1995 compared to
1994 of $900,000, or 2%, is due to the Divestitures, which reduced SG&A expense
an aggregate of $5.0 million, offset by increases in sales and marketing efforts
of $4.1 million.
Exchange Fee and Gain on Sale of Asset, Net. During 1996, the Company paid
a fee of $650,000 plus $80,000 of expenses in connection with the extension of
the redemption date of the Company's Series B Stock and Series C Stock
(collectively, the "Acquisition Preferred Stock"). See "Descriptions of Capital
Stock -- Acquisition of Preferred Stock." During 1996, the Company realized a
$111,000 gain on the disposition of stock distributed to the Company by its
medical insurance provider.
Purchased In-Process R&D. In connection with the acquisition of DCR
("TREEV"), now wholly-owned division of the Company, during 1994, the Company
incurred a charge totaling $8.8 million relating to the expensing of purchased
in-process research and development.
Settlement with Stockholders. Operating expenses in 1995 include a $1.6
million expense related to settlement of obligations with former stockholders of
IBZ and TREEV for $750,000 and $892,000, respectively. The Company entered into
an agreement with the former principle stockholder of IBZ whereby, in exchange
for an aggregate of $750,000, the former principle shareholder of IBZ
relinquished rights to a loan guarantee. During 1995, the Company and four
former stockholders of TREEV, entered into agreements to settle a dispute
arising from the acquisition of DCR in exchange for extensions of employment
agreements and an aggregate of 175,000 additional shares of Common Stock of the
Company, valued at approximately $892,000.
Restructuring Charges and Capitalized Software Write-Offs. At December 31,
1996, the 1994 restructuring plan, whereby excess personnel, duplicate
facilities and products to be discontinued were identified, whereby excess
personnel, duplicate facilities and products to be discontinued were identified
(the "Plan") was complete. Under the Plan, the Company incurred a net change in
estimate of $175,000 in 1996.
During 1995, the Company incurred additional charges under the Plan for
items that exceeded its original estimates totaling $297,000. These additional
charges were offset by $1.4 million reflecting a decrease in estimated charges
for impairment of inventory and maintenance spare parts. During 1995, $322,000
of the
14
<PAGE> 18
1993 restructuring plan costs were reversed after a release was negotiated from
the landlord for vacated property.
The Company incurred a $2.0 million restructuring charge in 1994 when
establishing the Plan. In conjunction with the 1994 restructuring, the Company
also expensed capitalized software of $5.3 million in 1994, which related to
products that were abandoned in favor of the 1VIEW suite. During 1994, $300,000
of costs from the 1993 restructuring plan were adjusted due to changes in
estimate.
Investment and Interest Income. Net investment and interest income was
$309,000 in 1996, $224,000 in 1995 and $579,000 in 1994. The $85,000 increase in
net investment and interest income between 1996 and 1995 was primarily
attributable to the interest earned for the cash received and invested from the
private placement offerings of Common Stock and Series H, I and J Preferred
Stock done during the first three quarters of 1996. The $355,000 decrease in net
investment and interest income between 1995 and 1994 was primarily attributable
to a decrease in cash, cash equivalents and short-term investment balances
during the same period and to increased interest expense from capital leases and
the lines of credit.
Income Taxes. The Company incurred income tax benefits of $68,000,
$280,000 and $1.6 million in 1996, 1995 and 1994, respectively. The $68,000
income tax benefit incurred in 1996 was the result of net operating losses
generated by Dorotech's operations offset by a decrease in Dorotech's net
deferred tax liabilities. The $280,000 income tax benefit incurred in 1995 was
primarily the result of a decrease of net deferred tax liabilities resulting
from the divestiture of IBZ's European operations and other purchase accounting
adjustments. The $1.6 million income tax benefit in 1994 was primarily the
result of income tax credits generated by Dorotech's European operations for R&D
expenditures and net operating losses generated by Dorotech's and IBZ's European
operations.
Net Loss. The Company's net loss was $17.3 million in 1996, $25.0 million
in 1995 and $39.6 million in 1994. The $7.6 million decrease in net loss between
1996 and 1995 was due to the 1995 losses from the Divestitures of $9.3 million,
the $1.6 million settlement with stockholders, and the $10.7 million reduction
in SG&A expenses in 1996. These reductions in expenses were offset by a $11.7
million reduction in gross margin in 1996, the loss on sale of subsidiary in
1996 of $921,000, and the change in estimate of $1.4 million in restructuring
costs in 1995.
The $14.7 million decrease in net loss between 1995 and 1994 was due
primarily to significantly improved margins on product and service sales of $7.8
million, the 1994 expenses incurred for purchased in-process research and
development, of $8.8 million, restructuring charges of $1.7 million and
capitalized software write-offs, of $8.7 million, offset by the 1995 loss on
closure and sales of subsidiaries of $9.3 million, settlement expenses of $1.6
million, and reversals of restructuring costs of $1.4 million.
Excluding the impact of the write-off of purchased in-process R&D and the
write-off of capitalized software, the entities divested in 1995 and 1996
contributed a net loss of approximately $1.1 million in 1996, $4.3 million in
1995 and $14.4 million in 1994.
Net Loss Applicable to Common Shares. Net loss applicable to common shares
includes adjustments for dividends, accretion and redemption amounts related to
the Company's preferred stock. The net loss applicable to common shares was
$21.1 million, or $1.02 per share, in 1996; $34.9 million, or $2.41 per share,
in 1995; $44.1 million, or $3.56 per share, in 1994. The decrease in 1995 over
1994 is attributable to the decrease in net loss described above and the
reduction in accretion to redemption value of the Company's Series B Convertible
Preferred Stock of $417,000 offset by the cost of redemption of Series D
Preferred Stock of $5.9 million.
LIQUIDITY AND CAPITAL RESOURCES FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
As of December 31, 1996, the Company had $7.6 million in cash and cash
equivalents compared to $9.4 million in cash and cash equivalents and $3.0
million in restricted short-term investments, or a total of $12.4 million, at
December 31, 1995. Net working capital decreased to $9.9 million at December 31,
1996 from $13.2 million at December 31, 1995; however, the Company's working
capital ratio improved from 1.6:1 to 1.7:1.
15
<PAGE> 19
At December 31, 1996, the Company had outstanding debt of $2.2 million,
$2.1 million of which is due within one year. This compares with debt of $6.6
million at December 31, 1995, $5.4 million of which was due within one year. The
decrease in debt of $4.4 million primarily arose from net repayments of maturing
obligations. See Notes to the Consolidated Financial Statements.
For 1996, the $1.8 million decrease in cash and cash equivalents resulted
from a $11.9 million use of cash from operating activities, $2.6 million used in
investing activities and the generation of $12.7 million from financing
activities. The $11.9 million use of cash in operating activities arose
primarily from the $17.3 million loss from operations offset by $5.8 million in
depreciation and amortization charges. The $2.6 million to fund investing
activities arose with respect to capitalized software development costs and the
purchase of fixed assets. The $12.7 million in cash provided by financing
activities arose primarily from the $6.0 million proceeds from the issuance of
Common Stock and $10.9 million proceeds from the issuance of Convertible
Preferred Stock, Series H, I and J, offset by the $3.2 million payment of Series
A Stock dividends and net payments in debt and capital leases of $1.2 million.
During the first quarter of 1996, the Company repaid its $2.5 million U.S.
line of credit, which had a termination date of March 31, 1996. At December 31,
1995, $2.5 million of the $3.1 million restricted short-term investments served
as collateral for this line of credit. The Company negotiated a new line of
credit during the fourth quarter of 1996, see Notes to the Consolidated
Financial Statements.
For 1995, the $5.4 million increase in cash and cash equivalents resulted
from a $9 million use of cash from operating activities, the generation of $9.6
million from investing activities, and the generation of $4.7 million from
financing activities. The $9 million use of cash in operating activities arose
primarily from the $25 million net loss offset by $6.3 million in depreciation
and amortization charges and a $9.3 million loss on the sale of subsidiaries.
The $9.6 million raised from investing activities arose primarily from the sale
of short-term investments offset by capitalized software development costs and
purchases of fixed assets. The $4.7 million raised from financing activities
arose primarily from the $28.1 proceeds from the issuance of Preferred Stocks,
Series D, E and G, and the issuance of Common Stock, offset by the $15.6 million
redemption cost for the Series D Preferred Stock, $3.2 million in dividend
payments on the Series A Stock, $2.3 million net payments in debt and capital
lease financings, and $3.1 million purchase of restricted short-term
investments. In 1995, the Company divested seven operating units for which the
Company received $1.2 million in cash.
As a result of stock offerings in 1996, the Company received net proceeds
of approximately $16.9 million, which included offering costs of approximately
$585,000. Under the offerings, the Company issued 1,760,285 shares of Common
Stock and 1,100 shares of Preferred Stock. The net proceeds of the offerings
were used for working capital purposes.
The annual dividend requirements on the Company's preferred stocks are as
follows: Series A Stock -- $3.2 million (payable quarterly) and Series H
Convertible Preferred Stock (the "Series H Stock") is payable at 8% per annum.
Dividends on the Company's Series H Preferred Stock is payable in cash or Common
Stock. (Because the sole holder of all of the outstanding shares of Series F
Convertible Preferred Stock ("Series F Stock") has agreed to sell all of such
shares to the Company for a set price, the Company no longer accrues dividends
on the outstanding shares of Series F Stock).
The adverse results of operations which the Company experienced in 1996
have been declining and are expected to reverse in the first part of 1998. The
Company believes that its existing cash, the proceeds of its private placements
of Convertible Notes, Series K Stock and warrants, and the anticipated cash
flows from 1997 and 1998 operations, should provide sufficient resources to fund
its activities in 1997 and 1998.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Revenues. Total revenues were $18.5 million and $19.7 million for the six
months ended June 30, 1997 and 1996, respectively. The $1.2 million decrease in
revenue was the result of decreases in product revenue of $1.0 million, or 28%,
and a decrease in service revenue of $194,000, or 6%. The decrease in product
revenue was primarily attributable to the disposition in 1996 of Symmetrical
Technologies, Inc. ("STI"), which
16
<PAGE> 20
reduced the Company's revenues by $1.5 million. The decrease in service revenue
of $194,000 was also primarily the result of the disposition of STI, which
contributed $170,000 of the decrease.
Profit Margins. Profit margins for product sales increased 12% for the
first six months of 1997 over the same period in 1996 as cost of products
decreased from 62% to 50% of sales. The increase in product sales margins was
primarily due to the disposition during 1996 of STI. Profit margins for service
sales increased 3% for the six months ended June 30, 1997 as compared to 1996 as
the cost of services decreased from 80% to 77% of sales. The increase in service
sales margins from 20% to 23% was due to the Company's increasing emphasis on
its custom development services.
Sales and Marketing. Sales and marketing expenses were $7.3 million or 39%
of revenue for the six months ended June 30, 1997 compared to $8.3 million, or
42% of revenue in 1996. The decrease of $1.1 million, or 13%, was primarily the
result of the Company's disposition of STI during 1996.
General and Administrative ("G&A"). G&A expenses were $3.3 million, or 18%
of revenue, for the six months ended June 30, 1997 compared to $5.5 million, or
28% of revenue, in 1996. The decrease of $2.2 million, or 40%, was primarily the
result of the Company's efforts in cost reductions in the Company's continuing
operations.
Product Development. The Company's expenditures on software research and
development activities for the six months ended June 30, 1997 were $3.0 million,
of which $0.7 million was capitalized and $2.3 million was expensed. Software
research and development expenditures for the 1996 period were $4.2 million, of
which $1.1 million was capitalized and $3.1 million was expensed. The $1.2
million decrease in research and development expenditures is attributable to the
Company's 1996 plan to consolidate the various 1VIEW product development groups
into a common product development organization operating under a single senior
manager. During 1996, the Company consolidated its COLD product development
groups from three separate locations to one, and vacated the excess office
space. The Company's disposition of STI also resulted in a reduction of $116,000
in research and development expenditures.
Gain on Extinguishment of Debt. The Company's French subsidiary, Dorotech,
realized a $267,000 gain in connection with the partial forgiveness of a grant
made by a French government agency.
Income Taxes. The Company's income tax expense for the six months ended
June 30, 1997 of $55,000 resulted from income generated by the Company's French
operations that could not be offset by operating losses or carryforwards
available in other jurisdictions. The Company had income tax benefit for the six
months ended June 30, 1996 of $12,000, which was primarily the result of taxable
losses generated by Dorotech.
Net Loss. The Company's net loss for the six months ended June 30, 1997
was $6.2 million as compared to a net loss of $11.6 million for the comparable
period of 1996. The net loss decrease of $5.4 million for the first six months
of 1997 as compared to the same period in 1996 is due primarily to the $2.2
million reduction in G&A expenses, $1.1 million reduction in sales and marketing
expenses, $1.1 million reduction in product development expenses, increased
profit margins resulting in $890,000 additional gross margin, and the exchange
fee incurred in 1996.
Net Loss Applicable to Common Stock. The net loss applicable to common
shares includes adjustments for dividends and accretion amounts related to the
Company's Series A and F Preferred stock. The net loss applicable to common
shares was $8.1 million, or ($.33) per share, for the six months ended June 30,
1997 as compared to $13.5 million or ($.69) per share, for the comparable period
of 1996. The decrease is attributable to the decrease in net loss described
above.
LIQUIDITY AND CAPITAL RESOURCES FOR THE SIX MONTHS ENDED JUNE 30, 1997
As of June 30, 1997, the Company had $1.8 million in cash and cash
equivalents, as compared to $7.6 million in cash and cash equivalents at
December 31, 1996. Net working capital was $4.5 million at June 30, 1997 and
$9.9 million at December 31, 1996.
17
<PAGE> 21
During the first six months of 1997, the Company redeemed 1,000,000 shares
of Series F Stock for $3,500,000 by using proceeds from its line of credit. In
addition, the Company drew the remaining $1,500,000 from its domestic line of
credit. See Notes to Consolidated Financial Statement.
Pursuant to the purchase agreement with CDRE, as amended on May 30, 1997,
the Company is obligated to repurchase the remaining 792,186 outstanding shares
of the Company's Series F Stock (all of which are held by CDRE) by January 31,
1998 for an aggregate cash payment of $6,400,000 plus interest in the amount of
$400,000. (Because the sole holder of all of the outstanding shares of Series F
Stock has agreed to sell all of such shares to the Company for a set price, the
Company no longer accrues dividends on the outstanding shares of Series F
Stock.) The Company has granted CDRE a first ranking pledge on all of the
outstanding stock of Dorotech and, if the Company fails to make the payments to
CDRE when due, CDRE is at liberty to sell all of the Dorotech shares owned by
the Company and may withhold all amounts due and payable to CDRE before paying
back excess money, if any, to the Company. The Company cannot repurchase the
outstanding shares of Series F Stock from CDRE unless and until all accrued
dividends on the Series A Stock have been paid. The Company failed to pay its
quarterly dividend on the Series A Stock due in July 1997 of $0.50 per share or
$803,000 in the aggregate.
The Company is endeavoring to sell all of the outstanding stock of Dorotech
to a third party. There can be no assurance that the Company will be able to do
so by January 31, 1998 or at all or on favorable terms.
For the six months ended June 30, 1997, the $5.8 million decrease in cash
and cash equivalents resulted from the use of $3.3 million in cash to fund
operating activities, $1.2 million to fund investing activities and $1.2 million
in cash to fund financing activities.
The $3.3 million in cash used to fund of operating activities arose
primarily with respect to a net loss in operations. The $1.2 million in cash
used to fund investing activities arose with respect to capitalized software
development costs and the purchase of fixed assets. The $1.2 million in cash
used by financing activities arose primarily from the $1.8 million payment of
preferred stock dividends and the principle payments on debt and capital lease
obligations offset by proceeds of $5.0 million from borrowing from the line of
credit.
The adverse results of operations that the Company has experienced is
expected to continue at least for the remainder of 1997. The Company believes
that its existing cash, together with the current proceeds from the Convertible
Notes, current and future proceeds from the sale of Series K Stock and warrants,
and the anticipated cash flows from operations, should provide sufficient
resources to fund its activities through the next twelve months and to maintain
net tangible assets of at least $4.0 million, which is required for continued
inclusion of the Company's securities on Nasdaq National Market. However, there
can be no assurance that the Company will be able to satisfy the conditions
precedent to the issuance of additional shares of Series K Stock and warrants.
Anticipated cash flows from operations are largely dependent upon the Company's
ability to achieve its sales and gross profit objectives for its 1VIEW and other
products. If the Company is unable to meet these objectives, it will consider
alternative sources of liquidity, such as additional offerings of equity
securities. Although the Company believes that it can successfully implement its
operating plan and, if necessary, raise additional capital, there can be no
assurance that implementation of the plan will be successful or that financing,
if sought, will be available.
INDEPENDENT ACCOUNTANTS
The Company engaged Ernst & Young LLP on July 10, 1996 as independent
accountants to examine the consolidated financial statements of the Company for
the year ended December 31, 1996. Ernst & Young LLP replaced Price Waterhouse
LLP. The Company's decision to retain Ernst & Young LLP as the Company's
principal independent accountants and discontinue the engagement of Price
Waterhouse LLP was ratified, confirmed and approved by the Company's Audit
Committee at a meeting held on August 1, 1996.
The Company dismissed Price Waterhouse LLP as its independent accountants
on July 10, 1996. The reports of Price Waterhouse LLP on financial statements
for the fiscal years ended December 31, 1995 and 1994 contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. In connection with its audits
for the fiscal years ended
18
<PAGE> 22
December 31, 1995 and 1994, and through July 10, 1996, there were no
disagreements with Price Waterhouse LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements if not resolved to the satisfaction of Price Waterhouse LLP
would have caused them to make reference thereto in their report on the
financial statements for such years.
During the fiscal years ended December 31, 1995 and 1994 and through July
10, 1996, Price Waterhouse LLP communicated certain internal control matters to
the Company that meet the definition of reportable events (as defined in
Regulation S-K Item 304(a)(1)(iv)). For the fiscal year ended December 31, 1994,
such reportable events involved recommendations that the Company should ensure
compliance with its revenue recognition policies and should further ensure that
significant and/or unusual accounting and reporting issues are addressed and
documented on a timely basis. Price Waterhouse LLP has read the above and is in
agreement with the statements contained therein.
SHAREHOLDER PROPOSALS
The Company anticipates that its 1998 annual meeting of stockholders will
be held in June, 1998. In order to be considered for that meeting, shareholder
proposals must be received by the Company no later than December 26, 1997.
Stockholders should send their proposals to the Company's corporate headquarters
address and must be submitted in accordance with Rule 14a-8 of the 1934 Act on
or before December 26, 1997.
OTHER BUSINESS
The Board does not intend to bring any other matter before the Meeting and
does not know of any other business that others will present for consideration
at the Meeting. Except as the Board may otherwise permit, only the business set
forth and discussed in the Notice of Special Meeting of Stockholders and this
Proxy Statement may be acted on at the Meeting. If any other business does
properly come before the Meeting, the proxy holders will vote on such matters
according to their discretion.
By Order of the Board of Directors
/s/ JULIA A. BOWEN
JULIA A. BOWEN
Vice President, General Counsel
and Assistant Secretary
ALL STOCKHOLDERS ARE URGED TO COMPLETE, SIGN, DATE, AND RETURN THE
ACCOMPANYING PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. THANK YOU FOR
YOUR PROMPT ATTENTION TO THIS MATTER.
19
<PAGE> 23
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Accountants................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995......................... F-4
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and
1994............................................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994............................................................................... F-7
Notes to Consolidated Financial Statements........................................... F-8
Consolidated Balance Sheets at June 30, 1997 (unaudited) and December 31, 1996....... F-22
Consolidated Statements of Operations (unaudited) for the three months ended June 30,
1997 and 1996...................................................................... F-23
Consolidated Statements of Operations (unaudited) for the six months ended June 30,
1997 and 1996...................................................................... F-24
Consolidated Statements of Changes in Stockholders' Equity (unaudited) for the six
months ended June 30, 1997......................................................... F-25
Consolidated Statement of Cash Flows (unaudited) for the six months ended June 30,
1997 and 1996...................................................................... F-26
Notes to Consolidated Financial Statements........................................... F-27
</TABLE>
F-1
<PAGE> 24
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Network Imaging Corporation
We have audited the accompanying consolidated balance sheet of Network
Imaging Corporation (the "Company"), as of December 31, 1996, and the related
consolidated statement of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above present fairly,
in all material respects, the consolidated financial position of Network Imaging
Corporation at December 31, 1996, and the consolidated results of their
operations and their cash flows for the year ended in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG, LLP
February 14, 1997
F-2
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Network Imaging Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all materials respects, the financial position of
Network Imaging Corporation and its subsidiaries at December 31, 1995, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE, LLP
Washington, D.C.
March 29, 1996
F-3
<PAGE> 26
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 7,601 $ 9,359
Short-term investments -- restricted.............................. -- 3,052
Accounts and notes receivable, net................................ 13,243 16,300
Inventories....................................................... 1,503 3,464
Prepaid expenses and other........................................ 2,362 3,543
--------- --------
Total current assets......................................... 24,709 35,718
Fixed assets, net...................................................... 2,887 3,769
Long-term notes receivable, net........................................ 1,979 1,215
Software development costs and purchased technology, net............... 3,813 4,630
Goodwill, net.......................................................... 3,237 4,468
Other assets........................................................... 153 164
--------- --------
Total assets................................................. $ 36,778 $ 49,964
========= ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current debt maturities and obligations under capital leases...... $ 2,063 $ 5,365
Accounts payable.................................................. 3,185 6,201
Accrued compensation and related expenses......................... 1,891 2,638
Deferred revenue.................................................. 3,789 4,408
Other accrued expenses............................................ 3,888 3,652
--------- --------
Total current liabilities.................................... 14,816 22,264
Long-term debt and obligations under capital leases.................... 88 1,264
Deferred income taxes.................................................. 300 773
--------- --------
Total liabilities............................................ 15,204 24,301
Commitments
Redeemable Series F preferred stock, 1,792,186 shares issued and
outstanding.......................................................... 9,857 15,478
Stockholders' equity:
Preferred stock, $.0001 par value, 20,000,000 shares authorized;
1,605,675 and 1,605,228 shares issued and outstanding
Common stock, $.0001 par value, 50,000,000 shares authorized;
22,896,612 and 18,637,226 shares issued and outstanding.......... 2 2
Additional paid-in-capital........................................ 124,429 105,065
Accumulated deficit............................................... (113,098) (95,757)
Translation adjustment............................................ 384 875
--------- --------
Total stockholders' equity................................... 11,717 10,185
--------- --------
Total liabilities and stockholders' equity................... $ 36,778 $ 49,964
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 27
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Products............................................ $ 18,336 $ 47,508 $ 49,867
Services............................................ 21,141 21,643 17,161
---------- ---------- ----------
- - -
39,477 69,151 67,028
---------- ---------- ----------
- - -
Costs and expenses:
Cost of products sold............................... 9,953 29,263 36,757
Cost of services provided........................... 14,421 13,135 11,432
Product development................................. 6,500 7,058 4,666
Selling, general and administrative................. 24,956 35,679 36,765
Exchange fee and gain on sale of asset, net......... 619 -- --
Purchased in-process research and development....... -- -- 8,821
Settlement with stockholders........................ -- 1,642 --
Loss on closure and sale of subsidiaries, net....... 921 9,274 --
Restructuring costs................................. (175) (1,433) 1,654
Capitalized software write-off...................... -- -- 8,743
---------- ---------- ----------
- - -
57,195 94,618 108,838
---------- ---------- ----------
- - -
Loss before investment and interest income and income
taxes.................................................. (17,718) (25,467) (41,810)
Investment and interest income, net................. 309 224 579
---------- ---------- ----------
- - -
Loss before income taxes................................. (17,409) (25,243) (41,231)
Income tax benefit.................................. (68) (280) (1,606)
---------- ---------- ----------
- - -
Net loss................................................. (17,341) (24,963) (39,625)
---------- ---------- ----------
- - -
Preferred stock preferences.............................. (3,730) (9,933) (4,496)
---------- ---------- ----------
- - -
Net loss applicable to common shares..................... $ (21,071) $ (34,896) $ (44,121)
=========== =========== ===========
Net loss per common share................................ $ (1.02) $ (2.41) $ (3.56)
=========== =========== ===========
Weighted average shares outstanding...................... 20,681,694 14,502,399 12,391,225
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 28
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- ------------------ PAID-IN ACCUMULATED TRANSLATION
SHARES AMT. SHARES AMT. CAPITAL DEFICIT ADJUSTMENT TOTAL
--------- ---- ---------- ---- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1993....... 1,400,000 $-- 10,542,105 $1 $ 74,153 $ (31,169) $ (191) $ 42,794
Issuance of preferred stock, net
of offering costs of $673..... 205,025 4,453 4,453
Issuance of common stock, net of
offering costs of $39......... 2,786,070 19,184 19,184
Conversion of preferred stock... 300,000 2,303 2,303
Accretion of preferred stock.... (1,286) (1,286)
Dividends on preferred stock.... (3,210) (3,210)
Translation adjustment.......... 543 543
Net loss........................ (39,625) (39,625)
--------- --- ---------- -- --------- --------- ------ --------
BALANCE DECEMBER 31, 1994....... 1,605,025 -- 13,628,175 1 95,597 (70,794) 352 25,156
Issuance of preferred stock, net
of offering costs of $1,790... 2,174 $-- 19,949 19,949
Conversion of preferred stock... (885) 2,276,237 --
Redemption of preferred stock... (1,086) (15,600) (15,600)
Issuance of common stock, net of
offering costs of $941........ 2,732,814 1 9,198 9,199
Accretion of preferred stock.... (869) (869)
Dividends on preferred stock.... (3,210) (3,210)
Translation adjustment.......... 523 523
Net loss........................ (24,963) (24,963)
--------- --- ---------- -- --------- --------- ------ --------
BALANCE DECEMBER 31, 1995....... 1,605,228 -- 18,637,226 2 105,065 (95,757) 875 10,185
Issuance of common stock, net of
offering costs of $376........ 1,902,487 6,149 6,149
Issuance of preferred stock, net
of offering costs of $209..... 1,100 $-- 10,791 10,791
Issuance of warrants for line of
credit........................ 192 192
Buy-Back adjustment of
Redeemable Series F preferred
stock......................... 5,962 5,962
Conversion of preferred stock... (653) 2,356,899 --
Accretion of preferred stock.... (341) (341)
Dividends on preferred stock.... (3,389) (3,389)
Translation adjustment.......... (491) (491)
Net loss........................ (17,341) (17,341)
--------- --- ---------- -- --------- --------- ------ --------
BALANCE DECEMBER 31, 1996....... 1,605,675 $-- 22,896,612 $2 $ 124,429 $(113,098) $ 384 $ 11,717
========= === ========== == ========= ========= ====== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 29
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................................ $(17,341) $(24,963) $(39,625)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization..................................... 5,793 6,270 6,085
Purchased in-process research and development..................... -- -- 8,821
Restructuring costs............................................... (175) (1,433) 1,654
Loss on closure and sale of subsidiaries.......................... 921 9,274 --
Impairment of spare parts inventory............................... -- 276 --
Capitalized software write-off.................................... -- -- 8,743
Goodwill write-off................................................ -- -- 953
Stock Settlement.................................................. -- 787 --
Realized gain on sale of short-term investments................... (108) (151) --
Unrealized holding loss on short-term investments................. -- -- 437
Changes in assets and liabilities:
Accounts and notes receivable................................... 1,871 (1,350) (1,174)
Inventories..................................................... 313 988 (2,305)
Prepaid expenses and other...................................... 937 (1,681) (694)
Accounts payable................................................ (3,353) (313) 1,433
Accrued compensation and related expenses....................... 54 2,107 (3,540)
Deferred revenues............................................... (449) 1,521 2,651
Deferred income taxes........................................... (246) (331) (1,223)
-------- -------- --------
Net cash used in operating activities................................. (11,783) (8,999) (17,784)
-------- -------- --------
Cash flows from investing activities:
Sale (purchase) of short-term investments........................... 111 12,731 (12,973)
Capitalized software development and license costs.................. (1,979) (1,784) (6,966)
Purchases of fixed assets........................................... (1,068) (1,522) (3,559)
Business divestitures/acquisitions and related costs................ 299 154 (3,640)
-------- -------- --------
Net cash (used in) provided by investing activities................... (2,637) 9,579 (27,138)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net......................... 6,149 8,412 3,057
Proceeds from issuance preferred stock, net......................... 10,791 19,949 4,453
Redemption of Series D preferred stock.............................. -- (15,600) --
Cash dividends paid on Series A preferred stock..................... (3,210) (3,210) (2,830)
Proceeds from borrowings and purchase of short-term investments,
net............................................................... -- (869) 3,537
Proceeds from sale and leaseback of fixed assets.................... 196 226 2,413
Principal payments on capital lease obligations..................... (913) (817) (87)
Principal payments on debt.......................................... (270) (3,382) (1,526)
-------- -------- --------
Net cash provided by financing activities............................. 12,743 4,709 9,017
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents.......... (81) 81 130
Net (decrease) increase in cash and cash equivalents.................. (1,758) 5,370 (35,775)
Cash and cash equivalents at beginning of year........................ 9,359 3,989 39,764
-------- -------- --------
Cash and cash equivalents at end of year.............................. $ 7,601 $ 9,359 $ 3,989
======== ======== ========
Supplemental Cash Flow Information:
Interest paid....................................................... $ 278 $ 712 $ 490
Income taxes paid................................................... $ 209 $ 151 $ 401
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 30
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
Network Imaging Corporation ("Network Imaging" or the "Company") is a
developer and marketer of content and storage management software for
unstructured information. Its flagship product, the 1VIEW(TM) suite, manages the
storage, access and distribution of any multimedia data, such as diagrams,
documents, photographs, voice, and full-motion video. 1VIEW is a solution for
use in distributed, high transaction, high volume mission critical applications
across legacy, client/server and Internet/intranet based environments. The
Company is also a software developer for mainframe and PC based Computer Output
to Laser Disk ("COLD") systems and a developer and marketer of storage
management software systems.
In 1996, the Company's operations were approximately evenly divided between
the United States and Europe. U.S. operations were conducted in or near Herndon,
Virginia (primarily the development of the 1VIEW suite and COLD family of
storage products), Minneapolis, Minnesota and Denver, Colorado. European
operations were conducted near Paris, France (hierarchical storage management
software and related storage products and engineering services).
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of Network
Imaging Corporation and its subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Cash equivalents and short-term investments
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. At December
31, 1995, restricted short-term investments are categorized as "available for
sale" securities whose carrying amount approximates fair value because of the
short-term maturity of the investments.
Revenue recognition
The Company recognizes software revenue in accordance with the AICPA
Statement of Position 91-1, "Software Revenue Recognition". Revenue from
hardware and software sales related to the Company's 1VIEW(TM) and COLD software
products is recognized when the product is delivered to the customer. The
Company accounts for insignificant vendor obligations and post-contract support
at the time of product delivery by accruing such costs at the time of sale.
Revenue from hardware and software contracts with significant completion
services involving technically difficult issues for the attainment of customer
acceptance is recognized upon customer acceptance. Revenue from maintenance
contracts is recognized ratably over the terms of the contracts.
For labor intensive contracts which require significant production or
customization, the Company accounts for such revenue in accordance with AICPA
Statement of Position 81-1, "Accounting for Performance of Construction-type and
Certain Production-type Contracts," using the percentage of completion method.
Losses, if any, are recognized in the period that such losses are determined.
Inventories
Inventories are stated at the lower of cost, determined on the first-in,
first-out method, or market.
Fixed assets
Fixed assets are stated at cost, net of accumulated depreciation.
Depreciation is computed using straight-line and accelerated methods over the
life of the related asset, generally three years. Leasehold improvements
F-8
<PAGE> 31
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNT POLICIES -- (CONTINUED)
are amortized over the shorter of the estimated useful life of the improvements
or the terms of the related lease.
Software development and license costs
The Company capitalizes certain software development costs in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased or Otherwise Marketed," ("SFAS
86"). The Company capitalizes certain acquired software licenses (see Note 5)
which are incorporated into the Company's products. Amortization of software
development and license costs is provided on an individual product basis over
the estimated life of the products of three years beginning when the related
products are available for general release. Costs for research and development
incurred prior to establishing technological feasibility of software products,
or after their commercial release, are expensed in the period incurred. The
Company periodically assesses capitalized software amounts and, when less than
anticipated net realizable value, charges any such excess to expense.
Goodwill
The excess of the purchase price over the fair value of the net
identifiable tangible and intangible assets of businesses acquired is being
amortized on a straight-line basis over seven to ten years. Amortization expense
in 1996, 1995 and 1994 was $1.1 million, $1.3 million and $1.2 million,
respectively. Accumulated amortization as of December 31, 1996 and 1995 was $3.1
million and $1.9 million, respectively. In accordance with Statement of
Financial Accounting Standards No. 121, the Company routinely evaluates
recoverability of goodwill by comparing future undiscounted cash flows to the
recorded carrying value. During 1994, the Company determined that goodwill from
certain acquisitions was impaired and accordingly expensed $953,000.
Product warranty
Warranties for hardware sold by the Company are generally provided by the
manufacturer. The Company provides warranties and service contracts for certain
products and accrues related expenses based on actual claims history.
Income taxes
The Company's income taxes are presented in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under SFAS 109, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax basis of assets and liabilities, using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Foreign currency translation
The functional currency of the Company's foreign operation is the
applicable local currency. Consequently, for the operation outside the United
States, assets and liabilities are translated into United States dollars using
exchange rates in effect at the balance sheet date and revenues and expenses
using the average exchange rate during the period. The gains and losses
resulting from such translations are included as a component of stockholders'
equity. Since the Company's French subsidiary operates only within France,
exposure to foreign exchange risk is limited.
F-9
<PAGE> 32
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNT POLICIES -- (CONTINUED)
Net loss per common share
Net loss applicable to common shares includes adjustments for dividends,
accretion and redemption amounts related to the Company's preferred stock. Net
loss per common share is computed using the weighted average number of common
shares and common share equivalents, unless antidilutive, outstanding during the
year.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock Based Compensation
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), which allows companies which have stock-based compensation arrangements
with employees to adopt a new fair-value basis of accounting for stock options
and other equity instruments, or to continue to apply the existing accounting
rules under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" but with additional disclosure. The Company has adopted the
disclosure provisions of SFAS 123 and therefore, the effect of adopting SFAS 123
did not have impact on its financial position, results of operations or cash
flows as of, or for the year ended, December 31, 1996 (see Note 9).
Reclassifications
Certain reclassifications have been made to the prior year financial
statements in order to conform to the current year presentation.
NOTE 2 -- SHORT-TERM INVESTMENTS
Restricted short-term investments at December 31, 1995 consisted of
certificates of deposit, which served primarily as collateral for the Company's
line of credit that was repaid on March 31, 1996. There was no short-term
investment balance at December 31, 1996.
F-10
<PAGE> 33
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Trade accounts receivable....................................... $ 9,814 $ 11,549
Unbilled receivables............................................ 3,488 3,538
Notes receivable................................................ 2,475 2,808
Employee receivables............................................ 112 614
Other receivables............................................... 188 539
-------- --------
16,077 19,048
Allowance for uncollectible accounts receivable................. (535) (183)
Allowance for uncollectible notes receivable.................... (320) (1,350)
-------- --------
15,222 17,515
Less: Current receivables, net.................................. (13,243) (16,300)
-------- --------
Long-term receivables, net...................................... $ 1,979 $ 1,215
======== ========
</TABLE>
The Company's notes receivable balance of $2.5 million at December 31, 1996
includes $1,950,000 of notes resulting from the divestitures of previously owned
operating units (the "Divestitures") made during 1995 and 1996 (see Note 6) and
$525,000 of notes receivable from former stockholders of a subsidiary acquired
in 1994.
NOTE 4 -- FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Computer and office equipment..................................... $ 4,953 $ 3,911
Furniture and leasehold improvements.............................. 1,131 1,199
Furniture, fixtures and equipment under capital leases............ 2,482 2,559
------- -------
8,566 7,669
Less: Accumulated depreciation.................................... (5,679) (3,900)
------- -------
$ 2,887 $ 3,769
======= =======
</TABLE>
Depreciation and amortization expense related to fixed assets in 1996,
1995, and 1994 totaled $1.7 million, $2.1 million, and $1.7 million,
respectively. Included in depreciation and amortization expense in 1996, 1995,
and 1994 were $580,000, $704,000, and $150,000 of amortization expense related
to capital leases, respectively.
F-11
<PAGE> 34
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- SOFTWARE DEVELOPMENT AND PURCHASED TECHNOLOGY
Capitalized software development and purchased technology consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Internally developed.............................................. $ 8,517 $ 7,064
Purchased technology.............................................. 3,149 2,910
------- -------
11,666 9,974
Less: Accumulated amortization.................................... (7,853) (5,344)
------- -------
$ 3,813 $ 4,630
======= =======
</TABLE>
During 1996, 1995 and 1994, amortization of capitalized software
development and license costs totaled $2.6 million, $2.7 million and $3.0
million, respectively, and was included in cost of products sold. The Company
expensed $3.4 million of purchased technology and $721,000 of capitalized
software in 1995 due to the Divestitures. During 1994, the Company also charged
to expense $8.7 million in capitalized software and purchased technology. The
charge includes $5.3 million resulting from the 1994 restructuring plan related
to products abandoned. The remaining $3.4 million charge, in 1994, relates to
net realizability adjustments.
NOTE 6 -- DIVESTITURES OF BUSINESSES
During 1996 and 1995, the Company engaged in a series of Divestitures
resulting in losses of $921,000 and $9.3 million in 1996 and 1995, respectively.
The Company received as consideration from the dispositions, cash and notes
totaling $1.5 million and $4.3 million in 1996 and 1995, respectively.
The following unaudited pro forma information assumes that the 1996
disposition of the Symmetrical Technologies, Inc. subsidiary occurred January 1,
1996. The unaudited pro forma information is not necessarily indicative of the
results of future operations or the actual results that would have occurred had
the transactions taken place at January 1, 1996 (in thousands, except share
amounts):
<TABLE>
<S> <C>
Revenue........................................... $ 37,812
Net loss.......................................... $(16,251)
Net loss per common share......................... $ (0.97)
</TABLE>
NOTE 7 -- OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accrued restructuring costs (see Note 12)........................... $ -- $ 324
Accrued preferred dividends......................................... 714 527
Accrued income and other taxes...................................... 1,667 1,667
Other............................................................... 1,507 1,134
------ ------
$3,888 $3,652
====== ======
</TABLE>
F-12
<PAGE> 35
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- BORROWING ARRANGEMENTS
Borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Lines of credit........................................... $ -- 3,276
Capital lease obligations bearing interest ranging from
11.7% to 12.7%.......................................... 957 1,702
Term loans from French government agencies, non-interest
bearing, due at various dates through 1997.............. 1,098 1,162
Term notes with financial institutions, bearing interest
ranging from 8.8% to 10%, due at various dates through
1997.................................................... 96 489
------- -------
2,151 6,629
Less: Amounts due in one year............................. (2,063) (5,365)
------- -------
Long-term debt and capital lease obligations.............. $ 88 $ 1,264
======= =======
</TABLE>
At December 31, 1996, the Company maintained lines of credit which provided
for borrowings up to $6.0 million, of which $5.0 million was issued by a
stockholder of the Company and $1.0 million was issued by a French governmental
agency. On December 31, 1996, the Company entered into a restricted $5 million
line of credit agreement with a stockholder (the "Stockholder line of credit")
to finance the buy back of the Series F Preferred Stock. The Stockholder line of
credit bears interest at the prime rate (8.25% at December 31, 1996) plus 2% and
is secured by the domestic accounts receivable of the Company, $6.4 million at
December 31, 1996. In connection with the Stockholder line of credit, which
expires on September 30, 1998, the Company issued warrants for the purchase of
129,000 shares of Common Stock. The fair value of the warrants is $192,000 which
will be amortized over the term of the Stockholder line of credit as additional
interest expense. The Company repaid and terminated its previous line of credit
with a bank on March 31, 1996.
The French Line of Credit is secured by accounts receivable of the
Company's French operations and bears interest at the French interbank monetary
market rate (3.29% at December 31, 1996) plus 3%. The line of credit terminates
May 31, 1997. At December 31, 1996, there were no borrowings outstanding against
the line of credit.
The Company leases certain of its furniture and equipment under capital
lease arrangements. Future minimum lease payments under these capital leases
are: 1997, $925,000; 1998, $88,000; 1999, $10,000 and 2000, $7,000. Of the
$1,030,000 total lease payments, $73,000 represents interest.
NOTE 9 -- STOCKHOLDERS' EQUITY
Common stock
In March 1996, the Company completed a private placement of 934,634 shares
of Common Stock, together with warrants to purchase an additional 64,000 shares
of Common Stock, pursuant to Regulation D under the Securities Act of 1933. Net
proceeds from the offering were $3.0 million. The Company subsequently
registered the Common Stock and Common Stock issuable upon exercise of the
warrants under the Securities Act of 1933.
In March and June 1996, the Company also issued 421,040 and 404,611 shares,
respectively, of Common Stock pursuant to Regulation S under the Securities Act
of 1933. Proceeds from the offerings were $1.7 million and $1.3 million,
respectively.
F-13
<PAGE> 36
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- STOCKHOLDERS' EQUITY -- (CONTINUED)
Series A Preferred Stock
The Series A Cumulative Convertible Preferred Stock ("Series A Preferred")
stockholders are entitled to cumulative dividends at the rate of $2.00 per year,
payable quarterly, and can convert to common stock at a rate of 1.8116 shares of
common for each share of Series A Preferred (an effective conversion price of
$13.80), subject to adjustment in certain circumstances. In 1996, the Company
paid $3.2 million in dividends to the Series A Preferred stockholders. The
Series A Preferred stockholders vote as a class to approve or disapprove any
issuance of any securities senior to or on parity with the Series A Preferred
with respect to dividends or distributions. The Series A Preferred has a
liquidation preference of $25.00 per share, plus accumulated unpaid dividends.
At December 31, 1996, the Series A Preferred was convertible into 2,907,663
shares of Common Stock.
Series E and G Preferred Stock
The three shares of Series E Convertible Preferred Stock outstanding at
December 31, 1995 were converted during 1996 into 10,389 shares of Common Stock.
During 1996, all 200 shares of Series G Convertible Preferred Stock were
converted into 551,546 shares of Common Stock.
Series H and I Preferred Stock
In June 1996, the Company completed two offerings, one pursuant to
Regulation S under the Securities Act of 1933 of 300 shares of Series H
Convertible Preferred Stock and warrants to purchase 80,000 shares of Common
Stock, and the other pursuant to Regulation D under the Securities Act of 1933
of 300 shares of Series I Convertible Preferred Stock, both at $10,000 per share
from which it received net proceeds of $5.9 million. The proceeds have been used
for working capital and general corporate purposes. In connection with the sale
of the Series I Convertible Preferred Stock, the Company agreed to register the
Series I Preferred Stock and the Common Stock issuable upon exercise of the
Series I. At December 31, 1996, 40 shares of Series H Preferred Stock had been
converted into 116,082 shares of Common Stock and all 300 shares of Series I
Preferred Stock had been converted into 1,272,214 shares of Common Stock. At
December 31, 1996, the remaining shares of Series H Preferred Stock were
convertible into 885,956 shares of Common Stock.
The Series H Preferred Stock has a per share liquidation preference,
subordinate to the liquidation preferences of the other series of previously
issued and outstanding Preferred Stocks, of an amount per share equal to the sum
of $10,000 plus 12% per annum simple interest thereon since the date of
issuance. Each share is convertible at the option of the holder into the number
of shares of Common Stock determined by dividing an amount equal to the initial
purchase price of $10,000 by $3.50. Commencing on December 27, 1996, the Company
may redeem the shares at the initial purchase price, if the holder does not
exercise his conversion rights, and the holder may submit the shares for
redemption at that price, in which case the Company may elect to pay the cash
redemption price or issue a number of shares of Common Stock equal to that
price, with the value of the Common Stock being determined by its average
closing bid price for the five trading days immediately preceding the notice of
redemption (the "Average Bid Price"). The Series H Preferred Stock has a
dividend rate of 8% which is payable at the time of conversion or redemption in
cash or shares of Common Stock, as elected by the Company, with the value of the
Common Stock being determined by the Average Bid Price.
The Series I Preferred Stock had a per share liquidation preference,
subordinate to the liquidation preferences of the other series of previously
issued and outstanding Preferred Stocks, of an amount per share equal to the sum
of $10,000 plus an amount equal to accrued but unpaid dividends per share since
the date of issuance. Each share was convertible at the option of the holder
into the number of shares of Common Stock
F-14
<PAGE> 37
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- STOCKHOLDERS' EQUITY -- (CONTINUED)
("Conversion Shares") determined by dividing an amount equal to the initial
purchase price of $10,000 by the lesser of $4.00 and 81% of the average bid
price. The Series I Preferred Stock had a dividend rate of 6% which was paid at
the time of conversion into shares of Common Stock, as elected by the Company.
Series J Preferred Stock
In September 1996, the Company completed an offering pursuant to Regulation
D under the Securities Act of 1933, of 500 shares of Series J Convertible
Preferred Stock at $10,000 per share from which it received net proceeds of $5.0
million. The proceeds have been used for working capital and general corporate
purposes. In connection with the sale of the Series J Convertible Preferred
Stock, the Company agreed to register the Series J Preferred Stock and the
Common Stock issuable upon exercise of the Series J. At December 31, 1996, 110
shares of Series J Preferred Stock had been converted into 406,668 shares of
Common Stock and the remaining shares of Series J Preferred Stock were
convertible into 1,295,372 shares of Common Stock.
The Series J Preferred Stock has a per share liquidation preference,
subordinate to the liquidation preferences of the other series of previously
issued and outstanding Preferred Stocks, of an amount per share equal to the sum
of $10,000 plus an amount equal to accrued but unpaid dividends per share since
the date of issuance. Each share is convertible at the option of the holder into
the number of shares of Common Stock ("Conversion Shares") determined by
dividing an amount equal to the initial purchase price of $10,000 by the lesser
of $3.13 and 81% of the average bid price. The Company may, commencing on
September 30, 1997, require conversion if the Series J Preferred Stock and
underlying Common Stock have been registered under the Securities Act for at
least ten trading days. When the Average Bid Price is less than $3.13, the
Company, subject to the rights of senior securities regarding redemption, may
redeem shares of Series J Preferred Stock submitted for conversion at a price
per share equal to the amount determined by multiplying the number of Conversion
Shares by the Average Bid Price. The Series J Preferred Stock has a dividend
rate of 6% which is payable at the time of conversion or redemption in cash or
shares of Common Stock, as elected by the Company.
Stock purchase warrants
The Company has the following warrants outstanding at December 31, 1996:
<TABLE>
<CAPTION>
WARRANTS
ISSUABLE WARRANTS EXERCISE OUTSTANDING SHARES
ISSUANCE ISSUED PRICE RANGE EXPIRATION DEC. 31, 1996 UPON EXERCISE
- -------------------------- --------- ------------- ------------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Pre-IPO................... 148,993 $1.00 May 1997 33,663 33,663
IPO Units................. 1,595,000 $5.993 May 1997 654,392 850,710
Placement agents.......... 397,472 $5.71-$14.88 May 1997-Oct. 1998 307,472 467,082
Other..................... 350,334 $3.063-$7.00 Jan. 1997-June 2001 275,334 275,334
Series A Preferred........ 140,000 $22.77 December 1998 140,000 253,624
Series D Preferred........ 227,068 $7.57 July 2000 227,068 227,068
Series E Preferred........ 34,400 $7.20 July 2000 34,400 34,400
Private Placement......... 179,400 $3.50-$4.00 Nov.-Dec. 2000 179,400 179,400
Series G Preferred........ 40,000 $3.75 December 2000 40,000 40,000
Series H Preferred........ 80,000 $3.50 June 2001 80,000 80,000
--------- --------- ---------
3,192,667 1,971,729 2,441,281
========= ========= =========
</TABLE>
Stock option plans
During 1994, 1995 and 1996, the Company granted options to buy Common Stock
of the Company under five stock option plans. Certain options qualify as
incentive stock options under the Internal Revenue Code.
F-15
<PAGE> 38
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- STOCKHOLDERS' EQUITY -- (CONTINUED)
The vesting and the terms of any option granted under the plans are determined
by the Board of Directors with the requirement that the term of an incentive
stock option shall not exceed ten years. To date, options granted range from
five- to ten-year terms. The exercise price per share of Common Stock subject to
an incentive stock option will not be less than the fair market value at the
time of grant. The Company has also issued non-qualified plan options. An
aggregate of 9.1 million shares have been authorized for issuance under the
Company's stock option plans.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1995 and 1996,
respectively: average risk-free interest rates of 6.6% and 6.7%; dividend yields
of 0.0%; volatility factors of the expected market price of the Company's common
stock of .63; and a weighted-average expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma loss is $35.6 million and $23.1 million for 1995 and 1996,
respectively, and pro forma loss per share is $2.46 and $1.12 for 1995 and 1996,
respectively. The effect of applying SFAS 123 on the 1995 and 1996 pro forma net
loss is not necessarily representative of the effects on reported net loss and
net loss per share for future years due to, among other things, 1) the vesting
period of the stock options and the 2) fair value of additional stock options in
future years.
The following table summarizes the activity in stock options issued by the
Company:
<TABLE>
<CAPTION>
EXERCISE
---------------------------------
OPTIONS PRICE
---------- -------------------
<S> <C> <C>
Balance, January 1, 1994.................................. 3,183,250 $1.00 - $12.38
Granted.............................................. 2,967,000 3.38 - 12.38
Exercised............................................ (321,658) 1.00 - 7.63
Canceled............................................. (560,792) 1.00 - 12.13
---------
Balance, December 31, 1994................................ 5,267,800 1.00 - 12.38
Granted.............................................. 2,486,250 3.32 - 6.82
Exercised............................................ (89,957) 2.25 - 3.75
Canceled............................................. (1,163,769) 2.25 - 12.38
---------
Balance, December 31, 1995................................ 6,500,324 1.00 - 12.38
Granted.............................................. 1,454,000 2.69 - 4.50
Exercised............................................ (88,869) 1.00 - 3.75
Canceled............................................. (851,619) 1.00 - 6.82
---------
Balance, December 31, 1996................................ 7,013,836 $1.00 - $ 8.75
=========
</TABLE>
At December 31, 1996, options to purchase 3,125,102 shares had vested and
were exercisable at a weighted average exercise price of $3.90 per share and had
a weighted average contractual life of 6.5 years.
F-16
<PAGE> 39
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- REDEEMABLE PREFERRED STOCK
In December 1996, the Company entered into an agreement with the holder of
the Series F Preferred Stock to redeem the shares for an aggregate of $9.9
million or $5.50 per share. The agreement requires the Company to make payments
totaling $6.6 million through June 30, 1997, and an additional $3.6 million on
January 31, 1998. The $3.6 million payment due on January 31, 1998, is subject
to certain acceleration terms that are under the control of the Company. Under
the agreement, the outstanding obligation amount will compound at 8% per annum,
commencing October 1, 1996. The reduction of the Company's Series F redemption
obligation under the terms of the agreement resulted in a $6.0 million increase
in stockholders' equity.
NOTE 11 -- INCOME TAXES
The source of the loss before income taxes was from the following
jurisdictions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
U.S............................................................. $(16,332) $(23,480)
Foreign......................................................... (1,077) (1,763)
-------- --------
$(17,409) $(25,243)
======== ========
</TABLE>
The income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current tax expense (benefit):
U.S. Federal............................................... $ -- $ 51
-------- --------
State and local............................................ -- --
-------- --------
Foreign.................................................... -- --
-------- --------
Deferred tax expense:
Foreign.................................................... (68) (331)
-------- --------
Total income tax................................................ $ (68) $ (280)
======== ========
</TABLE>
F-17
<PAGE> 40
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- INCOME TAXES -- (CONTINUED)
Deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating losses....................................... $ 24,419 $ 12,180
Other...................................................... 1,659 1,997
-------- --------
Gross deferred tax assets............................. $ 26,078 $ 14,177
======== ========
Deferred tax liabilities:
Software development costs................................. (1,372) (1,661)
-------- --------
Gross deferred tax liabilities........................ (1,372) (1,661)
Deferred tax asset valuation allowance.......................... (24,752) (13,032)
-------- --------
$ (46) $ ( 516)
======== ========
Current deferred tax assets (included in prepaid and other
current assets net of valuation allowance).................... $ 254 $ 257
Non-current deferred tax liabilities............................ (300) (773)
-------- --------
$ (46) $ (516)
======== ========
</TABLE>
Income tax expense (benefit) differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
the loss before income taxes as a result of the following differences:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1996 1995
----- -----
(IN THOUSANDS)
<S> <C> <C>
Statutory U.S. tax rate benefit.................................... (34.0)% (34.0)%
State income taxes, net............................................ (4.0) (4.0)
Operating losses and tax credits with no current tax benefit....... 37.5 31.0
Other.............................................................. 0.1 5.9
----- -----
-- --
(0.4)% (1.1)%
===== =====
</TABLE>
As of December 31, 1996, the Company had net operating loss and research
tax credit carryforwards of approximately $53 million and $913,000,
respectively, for U.S. income tax purposes which expire in years through 2010.
The Company experienced changes in ownership during prior years which triggered
certain limitations under Internal Revenue Code Section 382. Accordingly, the
utilization of the net operating loss and research tax credits will be limited
in future years due to the changes in ownership.
Provision has not been made for U.S. or additional foreign taxes on
undistributed earnings of foreign subsidiaries. The earnings have been and will
continue to be reinvested in those subsidiaries. These earnings could become
subject to additional tax if they were remitted as dividends, if they were
loaned to the Company or a U.S. affiliate, or if the Company sold its stock in
the subsidiaries. It is not practicable to estimate the amount of additional tax
that might be payable on the foreign earnings; however, the Company believes
that, due to the operation of the foreign tax credits, any foreign tax credits
would largely eliminate any U.S. tax and offset any foreign tax.
F-18
<PAGE> 41
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- RESTRUCTURING CHARGES AND CAPITALIZED SOFTWARE WRITE-OFFS
At December 31, 1996, the Company's 1994 restructuring plan (the "Plan")
was complete. In accordance with the Plan, 90 employees had been terminated
and/or resigned and the Company's excess leased property was sublet through the
lease termination date. Under the Plan, the Company incurred net changes in
estimate of $175,000 and $1.4 million in 1996 and 1995, respectively and net
restructuring charges of $1.7 million in 1994. In conjunction with the Plan, the
Company also expensed capitalized software of $5.3 million in 1994.
NOTE 13 -- BUSINESS SEGMENTS
The Company sells its products and services through a single industry
segment to a wide variety of customers throughout the United States and Western
Europe. The Company performs ongoing credit evaluations of its customers'
financial condition and generally does not require collateral from its
customers.
The following table sets forth summary information for the years ended
December 31, 1996, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
UNITED WESTERN
STATES EUROPE
-------- -------
<S> <C> <C>
1996:
Revenue..................................................... $ 21,383 $18,094
Net loss.................................................... (16,332) (1,009)
Total assets................................................ 22,718 14,060
1995:
Revenue..................................................... $ 38,367 $30,784
Net loss.................................................... (23,531) (1,432)
Total assets................................................ 30,654 19,310
1994:
Revenue..................................................... $ 37,619 $29,409
Net loss.................................................... (35,360) (4,265)
Total assets................................................ 43,963 27,908
</TABLE>
Revenue in 1996 included sales to the U.S. Government and French Government
totaling $1.1 million and $10.3 million, respectively. Revenue in 1995 included
sales to the U.S. Government and French Government totaling $1.7 million and
$9.6 million, respectively. Revenue in 1994 included sales to the U.S.
Government and French Government totaling $3.3 million and $7.6 million,
respectively.
NOTE 14 -- COMMITMENTS
The Company leases its corporate office, sales offices, assembly facilities
and certain equipment under non-cancelable operating leases certain of which
provide for annual escalations that are amortized over the lease term and pro
rata operating expense reimbursements. Rent expense related to these leases was
$1.6 million, $2.7 million and $2.9 million for the years ended December 31,
1996, 1995, and 1994, respectively.
F-19
<PAGE> 42
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- COMMITMENTS -- (CONTINUED)
Future minimum lease payments under non-cancelable operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------------------------------------------------------
<S> <C>
1997...................................................... $1,328
1998...................................................... 1,076
1999...................................................... 940
2000...................................................... 363
Thereafter................................................ --
------
$3,707
======
</TABLE>
NOTE 15 -- CONTINGENCIES
Department of Justice, Securities and Exchange Commission and Company internal
investigations
During November 1996, the Company received a letter from the Securities and
Exchange Commission advising the Company that it was terminating an
investigation that it had been conducting. In 1994, the Company learned that it
was the subject of investigation by the Commission and the U.S. Attorney's
Office in the Southern District of New York which the Company understood was
focused on certain accounting issues, including questions relating to
capitalization of software and pooling-of-interests accounting treatment for
certain acquisitions, and certain matters related to activities during the years
1992 and 1993. The Company has had no communications with the U.S. Attorney's
Office from the date it received the letter from the SEC.
Other
Dorotech, which was acquired in October 1993, had previously co-guaranteed
the lease payment of ATG Gigadisc SA ("ATG"), a former affiliated company, under
a sale and leaseback of land and buildings ending April 2007. As part of the
December 1996 Series F Preferred Stock redemption agreement (See Note 10), the
holder of the Series F Preferred Stock agreed to use best efforts to obtain a
release from the landlord.
The Company is also subject to other legal proceedings and claims which are
in the ordinary course of business. Management believes that the outcome of such
matters will not have a material impact on the Company's financial position or
its result of operations.
NOTE 16 -- RELATED PARTY TRANSACTIONS
The Company has employment and consulting agreements with individuals who
are current or former members of the Board of Directors and officers of the
Company. The Company has five year agreements with the Chairman of the Board of
Directors and Secretary and with the former Chairman of the Board of Directors
and his consulting firm. The Company also has a five year consulting agreement
with another former Director and his consulting firm. The Company recognized
total compensation expense of approximately $715,000 and $898,000 in 1996 and
1995, respectively, related to these employment and consulting agreements.
During December 1996, the Company and a stockholder entered into a line of
credit agreement. At December 31, 1996, there were no borrowings against the
line of credit (see Note 8).
The Company holds two notes receivable totaling $525,000 from two former
stockholders of a subsidiary acquired in 1994 due and payable December 1998.
Interest accrues at 6.55% per annum.
F-20
<PAGE> 43
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- EMPLOYEE PROFIT SHARING PLANS AND 401K PLAN
The Company has a mandatory and a voluntary profit sharing plan covering
substantially all employees in France. Contributions to the plans are based upon
earnings of the French operations. Plan contributions in 1996 totaled $28,000,
while there were no contributions made to the plans in 1995 and 1994.
The Company also sponsors, in the United States, a 401K plan which covers
all full-time employees. Participants in the plan may make contributions of up
to fifteen percent of pre-tax annual compensation. The Company may make
discretionary matching contributions at the option of the Board of Directors.
The Company made no contributions in 1996, 1995 or 1994.
F-21
<PAGE> 44
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER
JUNE 30, 31,
1997 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 1,845 $ 7,601
Accounts and notes receivable, net............................... 13,482 13,243
Inventories...................................................... 1,602 1,503
Prepaid expenses and other....................................... 2,265 2,362
--------- ---------
Total current assets........................................ 19,194 24,709
Fixed assets, net..................................................... 2,439 2,887
Long-term notes receivable, net....................................... 1,697 1,979
Software development costs and purchased technology, net.............. 3,496 3,813
Goodwill, net......................................................... 2,473 3,237
Other assets.......................................................... 140 153
--------- ---------
Total assets................................................ $ 29,439 $ 36,778
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current debt maturities and obligations under capital leases..... $ 1,243 $ 2,063
Accounts payable................................................. 3,326 3,185
Accrued compensation and related expenses........................ 2,168 1,891
Deferred revenue................................................. 4,329 3,789
Other accrued expenses........................................... 3,582 3,888
--------- ---------
Total current liabilities................................... 14,648 14,816
Long-term debt and obligations under capital leases................... 5,186 88
Deferred income taxes................................................. 338 300
--------- ---------
Total liabilities........................................... 20,172 15,204
Commitments
Redeemable Series F preferred stock, 792,186 and 1,792,186 shares
issued and outstanding.............................................. 6,357 9,857
Stockholders' equity:
Preferred stock, $.0001 par value, 20,000,000 shares authorized;
1,605,125 and 1,605,675 shares issued and outstanding
Common stock, $.0001 par value, 50,000,000 shares authorized;
25,177,743 and 22,896,612 shares issued and outstanding......... 3 2
Additional paid-in-capital....................................... 122,709 124,429
Accumulated deficit.............................................. (119,298) (113,098)
Translation adjustment........................................... (504) 384
--------- ---------
Total stockholders' equity....................................... 2,910 11,717
--------- ---------
Total liabilities and stockholders' equity.................. $ 29,439 $ 36,778
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 45
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenue:
Products........................................................ $ 4,098 $ 3,394
Services........................................................ 5,236 5,735
---------- ----------
9,334 9,129
---------- ----------
Costs and expenses:
Cost of products sold........................................... 2,198 2,367
Cost of services provided....................................... 3,934 4,471
Sales and marketing............................................. 3,640 4,351
General and administrative...................................... 1,689 3,102
Product development............................................. 1,266 1,327
Restructuring costs............................................. -- (19)
---------- ----------
12,727 15,599
---------- ----------
Loss before investment and interest income and income taxes.......... (3,393) (6,470)
Investment and interest income (expense), net................... (64) 87
---------- ----------
Loss before income taxes............................................. (3,457) (6,383)
Income tax (benefit) provision.................................. 61 (114)
---------- ----------
Net loss............................................................. (3,518) (6,269)
---------- ----------
Preferred stock preferences.......................................... (930) (865)
---------- ----------
Net loss applicable to common shares................................. $ (4,448) $ (7,134)
========== ==========
Net loss per common share............................................ $ (0.18) $ (0.35)
========== ==========
Weighted average shares outstanding.................................. 24,963,956 20,208,855
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 46
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenue:
Products........................................................ $ 8,366 $ 9,390
Services........................................................ 10,087 10,281
---------- ----------
18,453 19,671
---------- ----------
Costs and expenses:
Cost of products sold........................................... 4,156 5,807
Cost of services provided....................................... 7,816 8,275
Sales and marketing............................................. 7,252 8,320
General and administrative...................................... 3,300 5,527
Product development............................................. 2,308 3,061
Gain from extinguishment of debt................................ (267) --
Exchange fee and gain on sale of asset, net..................... -- 619
Restructuring costs............................................. -- (175)
---------- ----------
24,565 31,434
---------- ----------
Loss before investment and interest income and income taxes.......... (6,112) (11,763)
Investment and interest income (expense), net................... (33) 146
---------- ----------
Loss before income taxes............................................. (6,145) (11,617)
Income tax (benefit) provision.................................. 55 (12)
---------- ----------
Net loss............................................................. (6,200) (11,605)
---------- ----------
Preferred stock preferences.......................................... (1,906) (1,884)
---------- ----------
Net loss applicable to common shares................................. $ (8,106) $ (13,489)
========== ==========
Net loss per common share............................................ $ (0.33) $ (0.69)
========== ==========
Weighted average shares outstanding.................................. 24,715,116 19,560,045
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 47
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- ------------------ PAID-IN ACCUMULATED TRANSLATION
SHARES AMT. SHARES AMT. CAPITAL DEFICIT ADJUSTMENT TOTAL
--------- ---- ---------- ---- ---------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1996........ 1,605,675 $-- 22,896,612 $2 $124,429 $(113,098) $ 384 $11,717
Issuance of common stock upon
exercise of warrants........... 23,331 23 23
Conversion of preferred stock.... (550) 2,257,800 1 1
Offering costs on issuance of
preferred stock................ (25) (25)
Issuance of warrants and
extension...................... 188 188
Dividends on preferred stock..... (1,906) (1,906)
Translation adjustment........... (888) (888)
Net loss......................... (6,200) (6,200)
--------- --- ---------- -- -------- --------- ------ -------
BALANCE JUNE 30, 1997............ 1,605,125 $-- 25,177,743 $3 $122,709 $(119,298) $ (504) $ 2,910
========= === ========== == ======== ========= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 48
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................................... $(6,200) $(11,605)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 2,550 2,934
Gain on sale of asset.......................................... -- (111)
Restructuring costs............................................ -- (175)
Other non-cash items........................................... 10 --
Changes in assets and liabilities:
Accounts and notes receivable................................ (836) 2,673
Inventories.................................................. (182) 533
Prepaid expenses and other................................... 190 (732)
Accounts payable............................................. 474 (1,523)
Accrued compensation and related expenses.................... 418 (290)
Accrued expenses, other...................................... (212) 2,053
Deferred revenues............................................ 641 (792)
Deferred income taxes........................................ 74 (91)
------- --------
Net cash used in operating activities............................... (3,073) (7,126)
------- --------
Cash flows from investing activities:
Sale of short-term investments.................................... -- 111
Capitalized software development and license costs................ (751) (1,125)
Purchases of fixed assets......................................... (410) (582)
------- --------
Net cash used in investing activities............................... (1,161) (1,596)
------- --------
Cash flows from financing activities:
Proceeds from issuance of common and preferred stocks, net........ (2) 11,902
Cash dividends paid on Series A preferred stock................... (1,605) (1,605)
Cash dividends paid on Series F preferred stock................... (174) --
Payments on Mandatory Redeemable Preferred Stock.................. (3,500) --
Proceeds from borrowings and short-term investments............... 5,000 --
Proceeds from sale and leaseback of fixed assets.................. -- 196
Proceeds from Notes Receivable related to business divestitures... 60 --
Principal payments on capital lease obligations................... (536) (423)
Principal payments on debt........................................ (633) (213)
------- --------
Net cash (used in) provided by financing activities................. (1,390) 9,857
------- --------
Effect of exchange rate changes on cash and cash equivalents........ (132) (81)
Net decrease in cash and cash equivalents........................... (5,756) 1,054
Cash and cash equivalents at beginning of year...................... 7,601 9,359
------- --------
Cash and cash equivalents at June 30................................ $ 1,845 $ 10,413
======= ========
Supplemental Cash Flow Information:
Interest paid..................................................... $ 234 $ 185
Income taxes paid................................................. $ 198 $ 88
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 49
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
1. BASIS OF PRESENTATION
The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q and should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, which include
information and note disclosures not included herein. In the opinion of
management all adjustments, which include only those of a normal recurring
nature, necessary to fairly present the Company's financial position, results of
operations and cash flows have been made to the accompanying financial
statements. The results of operations for the six month period ended June 30,
1997 may not be indicative of the results that may be expected for the year
ending December 31, 1997.
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
2. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact of Statement 128 on the
calculation of the primary and fully diluted earnings per share is not expected
to be material.
3. REDEEMABLE PREFERRED STOCK
During the first quarter of 1997, the Company redeemed 1,000,000 shares of
Series F Preferred Stock for $3,500,000. The Company used proceeds from its line
of credit to finance the Series F Preferred share buy back.
During the second quarter of 1997, the Company was to have redeemed the
remaining 792,186 shares of Series F Preferred Stock for $2,772,651. Under an
amendment to the December 1996 redemption agreement, the $2,772,651 payment is
now due on January 31, 1998, subject to certain acceleration terms related to
the occurrence of certain events that are under the control of the Company.
4. LINE OF CREDIT
During the second quarter of 1997, the Company drew the remaining
$1,500,000 from its $5,000,000 line of credit established to finance the Series
F Preferred share buy back. As part of the additional borrowing, the use of
proceeds restriction was amended to allow its use for general corporate purposes
and the Company entered into an amendment to the security agreement, which
expanded the lender's security interest to include all personal property of the
Company, including without limitation, (1) all personal property of the Company,
(2) all leases, licenses, permits, (3) all 1VIEW software products intellectual
property now owned or hereafter developed by the Company, (4) all inventory, (5)
all accounts, contract rights, chattel papers, instruments, general intangibles,
documents, other obligations, monies, revenues, credits, claims, goodwill and
causes of action. (6) all trade or service names, trademarks, service marks,
logos and all patents, patent applications, copyrights, licensing agreements and
royalty payments, (7) proceeds of the foregoing, and (8) all of the capital
stock of Dorotech, S.A.
5. NASDAQ-NMS MAINTENANCE REQUIREMENTS
At June 30, 1997, the Company had not maintained net tangible assets of at
least $4 million, which is one of the quantitative maintenance criteria for
inclusion of the Company's securities on Nasdaq-NMS. To
F-27
<PAGE> 50
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NASDAQ-NMS MAINTENANCE REQUIREMENTS -- (CONTINUED)
remedy the short-fall and offset any adverse impact, the Company issued, during
July 1997 3,300 shares of Series K Convertible Preferred Stock ("Series K
Stock") and warrants and received net proceeds of $2.9 million. Pursuant to the
terms of the offering, the purchasers are also required to make additional
purchases of shares for $3.0 million upon the Company's achievement of certain
performance milestones and the satisfaction of certain other conditions and an
additional $4.7 million at their option (See Note 6). Although the Company
believes that it can maintain the required net tangible assets of at least $4
million through additional issuances of its Series K Stock or other additional
offerings of equity securities, there can be no assurance that the Company will
complete such offerings or that, if completed, they will be on terms favorable
to the Company or in an amount sufficient to permit the Company to continue to
maintain net tangible assets of at least $4 million.
6. SUBSEQUENT EVENTS
During July 1997, the Company issued, pursuant to a private placement
exemption under the Securities Act of 1933, as amended, 8% Convertible Notes due
July 8, 2002 totaling $1.8 million. The notes are convertible into the Company's
Common Stock beginning 45 days after issue at a conversion price of $1.875 per
share, the price on the issue date.
On or after October 30, 1997, the holders have the right to redeem the
convertible notes plus accrued interest on one business days' notice to the
Company in cash or shares of Common Stock, at the Company's election. On or
after October 30, 1997, the Company has the right to redeem the convertible
notes plus accrued interest on 30 days' notice to the holders in cash or share
of Common Stock, at the holders' election. If shares of Common Stock are used,
Common Stock is issued at a rate of 90% of the previous 5 trading days average
closing bid price. The interest is compounded semi-annually. The warrants issued
to the investors have an exercise price of $1.875 per share and expire on July
8, 2000.
During July 1997, the Company agreed to issue up to 11,000 units ("Units")
consisting of one share of Series K Stock and warrants to acquire 75 shares of
Common Stock at an exercise price of $2.40 per share at the price of $1,000 per
Unit. On July 28, 1997, the Company issued 3,300 Units and received net proceeds
of $2.9 million. The Company also issued warrants to purchase 162,462 shares of
Common Stock at $1.625 per share to the placement agent in the transaction. In
accordance with the terms of the offering, the proceeds will be used for working
capital and general corporate purposes. Pursuant to the terms of the offering,
the purchasers are required to make additional purchases of the units for $3.0
million upon the Company's achievement of certain performance milestones and the
satisfaction of certain other conditions and the remaining $4.7 million is to be
offered to the purchasers and the purchasers, at their option, may elect to make
purchases of the units. In connection with the sale of the units, the Company
agreed to register the Common Stock issuable upon the conversion of the
preferred stock and the execute of the warrants.
The Series K Preferred Stock has a per share liquidation preference,
subject to the liquidation preferences of the Series A Preferred Stock, the
Series F-1, F-2, F-3 and F-4 Preferred and the Series H Preferred Stock of an
amount equal to the sum of $1,000 plus 7% per annum simple interest thereon for
the period since the date of issuance. Each share is convertible at the option
of the holder into the number of shares of Common Stock determined by dividing
an amount equal to the initial purchase price of $1,000 by the lesser of (1)
$2.00 and (2) the lowest closing sale price for the Common Stock for the ten
trading days immediately preceding the conversion multiplied by the "Conversion
Percentage." The "Conversion Percentage" is (a) 105% prior to the 61st day
following July 28, 1997 (the "First Closing Date"), (b) 96% for the period
between the 61st and the 90th day following the First Closing Date, (c) 85% for
the period between the 91st and the 180th day following the First Closing Date,
and (d) 81% for the period after the 180th day following the First Closing Date.
The Series K Stock has a dividend rate of 7% per annum which is payable at the
time of conversion or redemption in cash or shares of Common Stock, as elected
by the Company.
F-28
<PAGE> 51
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SUBSEQUENT EVENTS -- (CONTINUED)
During July 1997, the Company announced that it was suspending the dividend
payment to holders of Series A Cumulative Convertible Preferred Stock ("Series A
Stock"). Holders of Series A Stock did not receive dividends payable for the
three months ended July 31, 1997 in the amount of $0.50 per share or $802,512.50
in the aggregate. In the event the Company fails to pay a required quarterly
dividend, the impact of such failure is that the conversion price is reduced by
$0.50 per share. Further, if the Company fails to pay four quarterly dividends,
the Series A shareholders are entitled to elect one director to the Company's
Board of Directors.
F-29
<PAGE> 52
APPENDIX A
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS
OF
SERIES K CONVERTIBLE PREFERRED STOCK
OF
NETWORK IMAGING CORPORATION
(Pursuant to Section 151 of the
Delaware General Corporation Law)
Network Imaging Corporation, a corporation organized and existing under the
laws of the State of Delaware (the "CORPORATION"), hereby certifies that the
following resolutions were adopted by the Board of Directors of the Corporation
pursuant to authority of the Board of Directors as required by Section 151 of
the Delaware General Corporation Law.
RESOLVED, that pursuant to the authority granted to and vested in the board
of directors of this corporation (the "BOARD OF DIRECTORS" or the "BOARD") in
accordance with the provisions of its Certificate of Incorporation and Bylaws,
each as amended and restated through the date hereof, the Board of Directors
hereby authorizes a series of the Corporation's previously authorized Preferred
Stock, par value $.0001 per share (the "PREFERRED STOCK"), and hereby states the
designation and number of shares, and fixes the relative rights, preferences,
privileges, powers and restrictions thereof as follows:
Series K Convertible Preferred Stock:
I. DESIGNATION AND AMOUNT
The designation of this series, which consists of 11,000 shares of
Preferred Stock, is the Series K Convertible Preferred Stock (the "SERIES K
PREFERRED STOCK") and the face amount shall be One Thousand U.S. Dollars
($1000.00) per share (the "FACE AMOUNT").
II. NO DIVIDENDS
The Series K Preferred Stock will bear no dividends, and the holders of the
Series K Preferred Stock shall not be entitled to receive dividends on the
Series K Preferred Stock.
III. CERTAIN DEFINITIONS
For purposes of this Certificate of Designation, the following terms shall
have the following meanings:
A. "CLOSING PRICE" means, for any security as of any date, the last sale
price of such security on the principal securities exchange or trading market
where such security is listed or traded as reported by Bloomberg Financial
Markets or a comparable reporting service of national reputation selected by the
Corporation and reasonably acceptable to holders of a majority of the then
outstanding shares of Series K Preferred Stock if Bloomberg Financial Markets is
not then reporting Closing Prices of such security (collectively, "BLOOMBERG"),
or if the foregoing does not apply, the last reported sale price of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no sale price is reported for
such security by Bloomberg, the average of the bid prices of any market makers
for such security as reported in the "pink sheets" by the National Quotation
Bureau, Inc. If the Closing Price cannot be calculated for such security on such
date on any of the foregoing bases, the Closing Price of such security on such
date shall be the fair market value as reasonably determined by an investment
banking firm
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<PAGE> 53
selected by the Corporation and reasonably acceptable to holders of a majority
of the then outstanding shares of Series K Preferred Stock, with the costs of
such appraisal to be borne by the Corporation.
B. "CONVERSION DATE" means, for any Optional Conversion, the date specified
in the notice of conversion in the form attached hereto (the "NOTICE OF
CONVERSION"), so long as the copy of the Notice of Conversion is faxed (or
delivered by other means resulting in notice) to the Corporation before
Midnight, New York City time, on the Conversion Date indicated in the Notice of
Conversion. If the Notice of Conversion is not so faxed or otherwise delivered
before such time, then the Conversion Date shall be the date the holder faxes or
otherwise delivers the Notice of Conversion to the Corporation. The Conversion
Date for the Required Conversion at Maturity shall be the Maturity Date (as such
terms are defined in Paragraph D of Article IV).
C. "CONVERSION PERCENTAGE" shall initially have the meaning set forth below
during each of the periods set forth below. In the event, the Corporation's
Common Stock is no longer designated for quotation on the Nasdaq National Market
("NASDAQ") and is designated for quotation on the Nasdaq Small Cap Market, the
Conversion Percentage for each of the periods set forth below shall be
permanently reduced by two percent (2%). The Conversion Percentages also shall
be subject to adjustment as provided herein and as provided in Section 2(c) of
the Registration Rights Agreement (as defined herein):
<TABLE>
<CAPTION>
THEN THE CONVERSION
IF THE CONVERSION DATE IS: PERCENTAGE IS:
- ---------------------------------------- ---------------------------
<S> <C>
Prior to the 61st day following the 105%
First Closing Date
On or after the 61st day following the 96%
First Closing Date and prior to the
91st day following the First Closing
Date
On or after the 91st day following the 85%
First Closing Date and prior to the
181st day following the First Closing
Date
On or after the 181st day following the 81%
First Closing Date
</TABLE>
D. "CONVERSION PRICE" means the lower of the Fixed Conversion Price and the
Variable Conversion Price, each in effect as of such date and subject to
adjustment as provided herein.
E. "FIRST CLOSING DATE" means the date of the first closing under that
certain Securities Purchase Agreement by and among the Corporation and the
purchasers named therein with respect to the initial issuance of the Series K
Preferred Stock (the "SECURITIES PURCHASE AGREEMENT").
F. "FIXED CONVERSION PRICE" means $2.00 and shall be subject to adjustment
as provided herein.
G. "N" means the number of days from, but excluding, the date of original
issuance of such share of Series K Preferred Stock.
H. "PREMIUM" means an amount equal to (.07)X(N/365)X(1,000).
I. "VARIABLE CONVERSION PRICE" means, as of any date of determination, the
amount obtained by multiplying the Conversion Percentage then in effect by the
lowest Closing Price for the Corporation's Common Stock, par value $.0001 per
share ("COMMON STOCK") on any single trading day during the ten (10) consecutive
trading days ending on the trading day immediately preceding such date of
determination (subject to equitable adjustment for any stock splits, stock
dividends, reclassifications or similar events during such ten (10) trading day
period), and shall be subject to adjustment as provided herein.
IV. CONVERSION
A. Conversion at the Option of the Holder. (i) Subject to the limitations
on conversions contained in Paragraph C of this Article IV, each holder of
shares of Series K Preferred Stock may, at any time and from time to time,
convert (an "OPTIONAL CONVERSION") each of its shares of Series K Preferred
Stock into a
A-2
<PAGE> 54
number of fully paid and nonassessable shares of Common Stock determined in
accordance with the following formula if the Corporation timely redeems the
Premium thereon in cash in accordance with subparagraph (ii) below:
1,000
-----------------
CONVERSION PRICE
or in accordance with the following formula if the Corporation does not timely
redeem the Premium thereon in accordance with subparagraph (ii) below:
1,000 + THE PREMIUM
--------------------
CONVERSION PRICE
(ii) (a) The Corporation shall have the right, in its sole discretion, upon
receipt of a Notice of Conversion or in the event of a Required Conversion at
Maturity, to redeem any portion of the Premium subject to such conversion for a
sum of cash equal to the amount of the Premium being so redeemed. All cash
redemption payments hereunder shall be paid in lawful money of the United States
of America at such address for the holder as appears on the record books of the
Corporation (or at such other address as such holder shall hereafter give to the
Corporation by written notice). In the event the Corporation so elects to redeem
all or any portion of the Premium in cash and fails to pay such holder the
applicable redemption amount to which such holder is entitled by depositing a
check in the U.S. Mail to such holder within three (3) business days of receipt
by the Corporation of a notice of Conversion (in the case of a redemption in
connection with an Optional Conversion) or the Maturity Date (in the case of a
redemption in connection with a Required Conversion at Maturity), the
Corporation shall thereafter forfeit its right to redeem such Premium in cash
and such Premium shall thereafter be converted into shares of Common Stock in
accordance with Article IV.A(i).
(b) Each holder of Series K Preferred Stock shall have the right to require
the Corporation to provide advance notice to such holder stating whether the
Corporation will elect to redeem all or any portion of the Premium in cash
pursuant to the Corporation's redemption rights discussed in subparagraph (a) of
this Article IV.A(ii). A holder may exercise such right from time to time by
sending notice (an "ELECTION NOTICE") to the Corporation, by facsimile,
requesting that the Corporation disclose to such holder whether the Corporation
would elect to redeem any portion of the Premium for cash in lieu of issuing
Common Stock therefor if such holder were to exercise its right of conversion
pursuant to this Article IV.A. The Corporation shall, no later than the close of
business on the next business day following receipt of an Election Notice,
disclose to such holder whether the Corporation would elect to redeem any
portion of a Premium in connection with a conversion pursuant to a Notice of
Conversion delivered over the subsequent five (5) business day period. If the
Corporation does not respond to such holder within such one (1) business day
period via facsimile, the Corporation shall, with respect to any conversion
pursuant to a Conversion Notice delivered within the subsequent five (5)
business day period, forfeit its right to redeem such Premium in accordance with
subparagraph (a) of this Article IV.A(ii) and shall be required to convert such
Premium into shares of Common Stock.
B. Mechanics of Conversion. In order to effect an Optional Conversion, a
holder shall: (x) fax (or otherwise deliver) a copy of the fully executed Notice
of Conversion to the Corporation or the transfer agent for the Common Stock and
(y) surrender or cause to be surrendered the original certificates representing
the Series K Preferred Stock being converted (the "PREFERRED STOCK
CERTIFICATES"), duly endorsed, along with a copy of the Notice of Conversion as
soon as practicable thereafter to the Corporation or the transfer agent. Upon
receipt by the Corporation of a facsimile copy of a Notice of Conversion from a
holder, the Corporation shall immediately send, via facsimile, a confirmation to
such holder stating that the Notice of Conversion has been received, the date
upon which the Corporation expects to deliver the Common Stock issuable upon
such conversion and the name and telephone number of a contact person at the
Corporation regarding the conversion. The Corporation shall not be obligated to
issue shares of Common Stock upon a conversion unless either the Preferred Stock
Certificates are delivered to the Corporation or the transfer agent as provided
above, or the holder notifies the Corporation or the transfer agent that such
certificates have been lost, stolen or destroyed (subject to the requirements of
Article XIV.B).
A-3
<PAGE> 55
(i) Delivery of Common Stock Upon Conversion. Upon the surrender of
Preferred Stock Certificates from a holder of Series K Preferred Stock
accompanied by a Notice of Conversion, the Corporation shall, no later than
the second business day following the later of (a) the Conversion Date and
(b) the date of such surrender (or, in the case of lost, stolen or
destroyed certificates, after provision of indemnity pursuant to Article
XIV.B) (the "DELIVERY PERIOD"), issue and deliver to the holder (x) that
number of shares of Common Stock issuable upon conversion of such shares of
Series K Preferred Stock being converted and (y) a certificate representing
the number of shares of Series K Preferred Stock not being converted, if
any. In lieu of delivering physical certificates representing the Common
Stock issuable upon conversion, provided the Borrower's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer program, upon request of the holder and its compliance
with the provisions contained in this paragraph, so long as the
certificates therefor do not bear a legend and the holder thereof is not
obligated to return such certificate for the placement of a legend thereon,
the Corporation shall use its best efforts to cause its transfer agent to
electronically transmit the Common Stock issuable upon conversion to the
holder by crediting the account of holder's Prime Broker with DTC through
its Deposit Withdrawal Agent Commission system.
(ii) Taxes. The Corporation shall pay any and all taxes which may be
imposed upon it with respect to the issuance and delivery of the shares of
Common Stock upon the conversion of the Series K Preferred Stock.
(iii) No Fractional Shares. If any conversion of Series K Preferred
Stock would result in the issuance of a fractional share of Common Stock,
such fractional share shall be disregarded and the number of shares of
Common Stock issuable upon conversion of the Series K Preferred Stock shall
be the next higher whole number of shares.
(iv) Conversion Disputes. In the case of any dispute with respect to
a conversion, the Corporation shall promptly issue such number of shares of
Common Stock as are not disputed in accordance with subparagraph (i) above.
If such dispute involves the calculation of the Conversion Price, the
Corporation shall submit the disputed calculations to its outside
accountant via facsimile within two (2) business days of receipt of the
Notice of Conversion. The accountant shall audit the calculations and
notify the Corporation and the holder of the results no later than two (2)
business days from the date it receives the disputed calculations. The
accountant's calculation shall be deemed conclusive, absent manifest error.
The Corporation shall then issue the appropriate number of shares of Common
Stock in accordance with subparagraph (i) above.
C. Limitations on Conversions. The conversion of shares of Series K
Preferred Stock shall be subject to the following limitations (each of which
limitations shall be applied independently):
(i) Cap Amount. Unless permitted by the applicable rules and
regulations of the principal securities market on which the Common Stock is
listed or traded, in no event shall the total number of shares of Common
Stock issued upon conversion of the Series K Preferred Stock exceed the
maximum number of shares of Common Stock that the Corporation can so issue
pursuant to Rule 4460(i) of the Nasdaq (or any successor rule) (the "CAP
AMOUNT"). The Cap Amount shall be allocated pro-rata to the holders of
Series K Preferred Stock as provided in Article XIV.C. In the event the
Corporation is prohibited from issuing shares of Common Stock as a result
of the operation of this subparagraph (i), the Corporation shall comply
with Article VII.
(ii) No Five Percent Holders. Except in a Required Conversion at
Maturity, in no event shall a holder of shares of Series K Preferred Stock
be entitled to receive shares of Common Stock upon a conversion to the
extent that the sum of (x) the number of shares of Common Stock
beneficially owned by the holder and its affiliates (exclusive of shares
issuable upon conversion of the unconverted portion of the shares of Series
K Preferred Stock or the unexercised or unconverted portion of any other
securities of the Corporation subject to a limitation on conversion or
exercise analogous to the limitations contained herein) and (y) the number
of shares of Common Stock issuable upon the conversion of the shares of
Series K Preferred Stock with respect to which the determination of this
subparagraph is being made, would result in beneficial ownership by the
holder and its affiliates of more than 4.9% of the outstanding
A-4
<PAGE> 56
shares of Common Stock. For purposes of this subparagraph, beneficial
ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13 D-G
thereunder, except as otherwise provided in clause (x) above. The
restriction contained in this subparagraph (ii) shall not be altered,
amended, deleted or changed in any manner whatsoever unless the holders of
a majority of the Common Stock and each holder of Series K Preferred Stock
shall approve such alteration, amendment, deletion or change.
D. Required Conversion at Maturity. Subject to the limitations set forth
in Paragraph C(i) of this Article IV and provided all shares of Common Stock
issuable upon conversion of all outstanding shares of Series K Preferred Stock
are then (i) authorized and reserved for issuance, (ii) registered under the
Securities Act of 1933, as amended (the "SECURITIES ACT") for resale by the
holders of such shares of Series K Preferred Stock and (iii) eligible to be
traded on either the Nasdaq, the New York Stock Exchange or the American Stock
Exchange, each share of Series K Preferred Stock issued and outstanding on the
fourth anniversary of the First Closing Date (the "MATURITY DATE"),
automatically shall be converted into shares of Common Stock on such date in
accordance with the conversion formulas set forth in Paragraph A of this Article
IV (the "REQUIRED CONVERSION AT MATURITY"). If the Required Conversion at
Maturity occurs, the Corporation and the holders of Series K Preferred Stock
shall follow the applicable conversion procedures set forth in Paragraph B of
this Article IV; provided, however, that the holders of Series K Preferred Stock
are not required to deliver a Notice of Conversion to the Corporation or its
transfer agent.
V. RESERVATION OF SHARES OF COMMON STOCK
A. Reserved Amount. Upon the initial issuance of the shares of Series K
Preferred Stock, the Corporation shall reserve 12,500,000 shares of the
authorized but unissued shares of Common Stock for issuance upon conversion of
the Series K Preferred Stock and thereafter the number of authorized but
unissued shares of Common Stock so reserved (the "RESERVED AMOUNT") shall not be
decreased and shall at all times be sufficient to provide for the conversion of
the Series K Preferred Stock outstanding at the then current Conversion Price.
The Reserved Amount shall be allocated to the holders of Series K Preferred
Stock as provided in Article XIV.C.
B. Increases to Reserved Amount. If the Reserved Amount for any three (3)
consecutive trading days (the last of such three (3) trading days being the
"AUTHORIZATION TRIGGER DATE") shall be less than 135% of the number of shares of
Common Stock issuable upon conversion of the Series K Preferred Stock on such
trading days, the Corporation shall immediately notify the holders of Series K
Preferred Stock of such occurrence and shall take immediate action (including,
if necessary, seeking shareholder approval to authorize the issuance of
additional shares of Common Stock) to increase the Reserved Amount to 200% of
the number of shares of Common Stock then issuable upon conversion of the
outstanding Series K Preferred Stock. In the event the Corporation fails to so
increase the Reserved Amount within ninety (90) days after an Authorization
Trigger Date, each holder of Series K Preferred Stock shall thereafter have the
option, exercisable in whole or in part at any time and from time to time by
delivery of a Redemption Notice (as defined in Article VIII.C) to the
Corporation, to require the Corporation to purchase for cash, at an amount per
share equal to the Redemption Amount (as defined in Article VIII.B), a portion
of the holder's Series K Preferred Stock such that, after giving effect to such
purchase, the holder's allocated portion of the Reserved Amount exceeds 135% of
the total number of shares of Common Stock issuable to such holder upon
conversion of its Series K Preferred Stock. If the Corporation fails to redeem
any of such shares within ten (10) business days after its receipt of a
Redemption Notice, then such holder shall be entitled to the remedies provided
in Article VIII.C.
VI. FAILURE TO SATISFY CONVERSIONS
A. Conversion Default Payments. If, at any time, (x) a holder of shares of
Series K Preferred Stock submits a Notice of Conversion and the Corporation
fails for any reason (other than because such issuance would exceed such
holder's allocated portion of the Reserved Amount or Cap Amount, for which
failures the holders shall have the remedies set forth in Articles V and VII) to
deliver, on or prior to the fourth business day following the expiration of the
Delivery Period for such conversion, such number of freely tradeable shares
A-5
<PAGE> 57
of Common Stock to which such holder is entitled upon such conversion, or (y)
the Corporation provides notice to any holder of Series K Preferred Stock at any
time of its intention not to issue freely tradeable shares of Common Stock upon
exercise by any holder of its conversion rights in accordance with the terms of
this Certificate of Designation (other than because such issuance would exceed
such holder's allocated portion of the Reserved Amount or Cap Amount) (each of
(x) and (y) being a "CONVERSION DEFAULT"), then the Corporation shall pay to the
affected holder, in the case of a Conversion Default described in clause (x)
above, and to all holders, in the case of a Conversion Default described in
clause (y) above, payments for the first ten (10) business days following the
expiration of the Delivery Period, in the case of a Conversion Default described
in clause (x), and for the first ten (10) business days following a Conversion
Default described in clause (y), an amount equal to $500 per day.
Notwithstanding the foregoing, in no event shall the Company be deemed to have
committed a Conversion Default at any time prior to the Registration Deadline or
during an Excluded Period (as such terms are defined in the Registration Rights
Agreement (as defined herein)) solely because the shares of Common Stock issued
upon a conversion of Series K Preferred Stock were not freely tradeable. In the
event any Conversion Default continues beyond such ten (10) business day period,
the Corporation shall pay to the holder an additional amount equal to:
(.24) X (D/365) X (the Default Amount)
where:
"D" means the number of days after the expiration of the ten (10) business
day period described above through and including the Default Cure Date;
"DEFAULT AMOUNT" means (i) the total Face Amount of all shares of Series K
Preferred Stock held by such holder plus (ii) the total accrued Premium as of
the first day of the Conversion Default on all shares of Series K Preferred
Stock included in clause (i) of this definition; and
"DEFAULT CURE DATE" means (i) with respect to a Conversion Default
described in clause (x) of its definition, the date the Corporation effects the
conversion of the full number of shares of Series K Preferred Stock and (ii)
with respect to a Conversion Default described in clause (y) of its definition,
the date the Corporation begins to issue freely tradeable Common Stock in
satisfaction of all conversions of Series K Preferred Stock in accordance with
Article IV.A.
The payments to which a holder shall be entitled pursuant to this Paragraph
A are referred to herein as "CONVERSION DEFAULT PAYMENTS." A holder may elect to
receive accrued Conversion Default Payments in cash or to convert all or any
portion of such accrued Conversion Default Payments, at any time, into Common
Stock at the lowest Conversion Price in effect during the period beginning on
the date of the Conversion Default through the Conversion Date for such
conversion. In the event a holder elects to receive any Conversion Default
Payments in cash, it shall so notify the Corporation in writing. Such payment
shall be made in accordance with and be subject to the provisions of Article
XIV.E. In the event a holder elects to convert all or any portion of the
Conversion Default Payments into Common Stock, the holder shall indicate on a
Notice of Conversion such portion of the Conversion Default Payments which such
holder elects to so convert and such conversion shall otherwise be effected in
accordance with the provisions of Article IV.
B. Adjustment to Conversion Price. If a holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Delivery Period with respect to a conversion of
Series K Preferred Stock for any reason (other than because such issuance would
exceed such holder's allocated portion of the Reserved Amount or Cap Amount, for
which failures the holders shall have the remedies set forth in Articles V and
VII), then the Fixed Conversion Price in respect of any shares of Series K
Preferred Stock held by such holder shall thereafter be the lesser of (i) the
Fixed Conversion Price on the Conversion Date specified in the Notice of
Conversion which resulted in the Conversion Default and (ii) the lowest
Conversion Price in effect during the period beginning on, and including, such
Conversion Date through and including the day such shares of Common Stock are
delivered to the holder. If there shall occur a Conversion Default of the type
described in clause (y) of Article VI.A, then the Fixed Conversion Price with
respect to any conversion thereafter shall be the lowest Conversion Price in
effect at any time during the period beginning on, and including, the date of
the occurrence of such Conversion Default through and
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<PAGE> 58
including the Default Cure Date. The Fixed Conversion Price shall thereafter be
subject to further adjustment for any events described in Article XI.
C. Buy-In Cure. Unless the Corporation has notified the applicable holder
in writing prior to the delivery by such holder of a Notice of Conversion that
the Corporation is unable to honor conversions, if (i) the Corporation fails for
any reason to deliver during the Delivery Period shares of Common Stock to a
holder upon a conversion of shares of Series K Preferred Stock and (ii) after
the applicable Delivery Period with respect to such conversion, such holder
purchases (in an open market transaction or otherwise) shares of Common Stock to
make delivery in satisfaction of a sale by such holder of the shares of Common
Stock (the "SOLD SHARES") which such holder anticipated receiving upon such
conversion (a "BUY-IN"), the Corporation shall pay such holder (in addition to
any other remedies available to the holder) the amount by which (x) such
holder's total purchase price (including brokerage commissions, if any) for the
shares of Common Stock so purchased exceeds (y) the net proceeds received by
such holder from the sale of the Sold Shares. For example, if a holder purchases
shares of Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to shares of Common Stock it sold for $10,000, the
Corporation will be required to pay the holder $1,000. A holder shall provide
the Corporation written notification indicating any amounts payable to such
holder pursuant to this Paragraph C. The Corporation shall make any payments
required pursuant to this Paragraph C in accordance with and subject to the
provisions of Article XIV.E.
D. Redemption Right. If the Corporation fails, and such failure continues
uncured for five (5) business days after the Corporation has been notified
thereof in writing by the holder, for any reason (other than because such
issuance would exceed such holder's allocated portion of the Reserved Amount or
Cap Amount, for which failures the holders shall have the remedies set forth in
Articles V and VII) to issue shares of Common Stock within ten (10) business
days after the expiration of the Delivery Period with respect to any conversion
of Series K Preferred Stock, then the holder may elect at any time and from time
to time prior to the Default Cure Date for such Conversion Default, by delivery
of a Redemption Notice (as defined in Article VIII.C) to the Corporation, to
have all or any portion of such holder's outstanding shares of Series K
Preferred Stock purchased by the Corporation for cash, at an amount per share
equal to the Redemption Amount (as defined in Article VIII.B). If the
Corporation fails to redeem any of such shares within five (5) business days
after its receipt of a Redemption Notice, then such holder shall be entitled to
the remedies provided in Article VIII.C.
VII. INABILITY TO CONVERT SHARES OF SERIES K
PREFERRED STOCK DUE TO CAP AMOUNT
A. Obligation to Cure. If at any time the then unissued portion of any
holder's Cap Amount is less than 135% of the number of shares of Common Stock
then issuable upon conversion of such holder's shares of Series K Preferred
Stock (a "TRADING MARKET TRIGGER EVENT"), the Corporation shall immediately
notify the holders of Series K Preferred Stock of such occurrence and shall take
immediate action (including, if necessary, seeking the approval of its
shareholders to authorize the issuance of the full number of shares of Common
Stock which would be issuable upon the conversion of Series K Preferred Stock
but for the Cap Amount) to eliminate any prohibitions under applicable law or
the rules or regulations of any stock exchange, interdealer quotation system or
other self-regulatory organization with jurisdiction over the Corporation or any
of its securities on the Corporation's ability to issue shares of Common Stock
in excess of the Cap Amount. In the event the Corporation fails to eliminate all
such prohibitions within ninety (90) days after the Trading Market Trigger
Event, each holder of Series K Preferred Stock shall thereafter have the option,
exercisable in whole or in part at any time and from time to time by delivery of
a Redemption Notice (as defined in Article VIII.C) to the Corporation, to
require the Corporation to purchase for cash, at an amount per share equal to
the Redemption Amount (as defined in Article VIII.B), a portion of the holder's
Series K Preferred Stock such that, after giving effect to such purchase, the
then unissued portion of such holder's Cap Amount on the date of such Redemption
Notice exceeds 135% of the total number of shares of Common Stock then issuable
to such holder upon conversion of its Series K Preferred Stock. If the
Corporation fails to redeem any of such shares within five (5) business days
after its receipt of a Redemption Notice, then such holder shall be entitled to
the remedies provided in Article VIII.C.
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B. Remedies. If the Corporation fails to eliminate the applicable
prohibitions within the ninety (90) day cure period referred to in Paragraph A
of this Article VII and thereafter the Corporation is prohibited, at any time,
from issuing shares of Common Stock upon conversion of Series K Preferred Stock
to any holder because such issuance would exceed the then unissued portion of
such holder's Cap Amount because of applicable law or the rules or regulations
of any stock exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Corporation or its securities, any
holder who is so prohibited from converting its Series K Preferred Stock may
elect any or both of the following additional remedies:
(i) to require, with the consent of holders of at least fifty percent
(50%) of the outstanding shares of Series K Preferred Stock (including any
shares of Series K Preferred Stock held by the requesting holder), the
Corporation to terminate the listing of its Common Stock on the Nasdaq (or
any other stock exchange, interdealer quotation system or trading market)
and to cause its Common Stock to be eligible for trading on the Nasdaq
SmallCap Market or on the over-the-counter electronic bulletin board, at
the option of the requesting holder; or
(ii) to require the Corporation to issue shares of Common Stock in
accordance with such holder's Notice of Conversion at a conversion price
equal to the average of the Closing Prices of the Common Stock for the five
(5) consecutive trading days (subject to equitable adjustment for any stock
splits, stock dividends, reclassifications or similar events during such
five (5) trading day period) preceding the date of the holder's written
notice to the Corporation of its election to receive shares of Common Stock
pursuant to this subparagraph (ii).
VIII. REDEMPTION DUE TO CERTAIN EVENTS
A. Redemption by Holder. In the event (each of the events described in
clauses (i)-(v) below after expiration of the applicable cure period (if any)
being a "REDEMPTION EVENT"):
(i) the Common Stock (including any of the shares of Common Stock
issuable upon conversion of the Series K Preferred Stock) is suspended from
trading on any of, or is not listed (and authorized) for trading on at
least one of, the New York Stock Exchange, the American Stock Exchange, the
Nasdaq Small Cap Market or Nasdaq for an aggregate of ten (10) trading days
in any nine (9) month period;
(ii) the Registration Statement required to be filed by the
Corporation pursuant to Section 2(a) of the Registration Rights Agreement
entered into in connection with and pursuant to the Securities Purchase
Agreement (the "REGISTRATION RIGHTS AGREEMENT"), has not been declared
effective by January 31, 1998 or such Registration Statement, after being
declared effective, cannot be utilized by the holders of Series K Preferred
Stock for the resale of all of their Registrable Securities (as defined in
the Registration Rights Agreement) for an aggregate of more than thirty
(30) days after June 30, 1998;
(iii) the Corporation fails, and any such failure continues uncured
for five (5) business days after the Corporation has been notified thereof
in writing by the holder, to remove any restrictive legend on any
certificate or any shares of Common Stock issued to the holders of Series K
Preferred Stock upon conversion of the Series K Preferred Stock as and when
required by the Securities Purchase Agreement or the Registration Rights
Agreement;
(iv) the Corporation provides notice to any holder of Series K
Preferred Stock, including by way of public announcement, at any time, of
its intention not to issue shares of Common Stock to any holder of Series K
Preferred Stock upon conversion in accordance with the terms of this
Certificate of Designation (other than due to the circumstances
contemplated by Articles V or VII for which the holders shall have the
remedies set forth in such Articles);
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(v) the Corporation shall:
(a) sell, convey or dispose of all or substantially all of its
assets;
(b) merge, consolidate or engage in any other business combination
with any other entity (other than pursuant to a migratory merger
effected solely for the purpose of changing the jurisdiction of
incorporation of the Corporation); or
(c) have fifty percent (50%) or more of the voting power of its
capital stock owned beneficially by one person, entity or "group" (as
such term is used under Section 13(d) of the Securities Exchange Act
of 1934, as amended);
then, upon the occurrence of any such Redemption Event, each holder of shares of
Series K Preferred Stock shall thereafter have the option, exercisable in whole
or in part at any time and from time to time by delivery of a Redemption Notice
(as defined in Paragraph C below) to the Corporation while such Redemption Event
continues, to require the Corporation to purchase for cash any or all of the
then outstanding shares of Series K Preferred Stock held by such holder for an
amount per share equal to the Redemption Amount (as defined in Paragraph B
below) in effect at the time of the redemption hereunder. For the avoidance of
doubt, the occurrence of any event described in clauses (i), (ii), (iv) or (v)
above shall immediately constitute a Redemption Event and there shall be no cure
period.
B. Definition of Redemption Amount. The "REDEMPTION AMOUNT" with respect
to a share of Series K Preferred Stock means an amount equal to:
V
---- X M
CP
where:
"V" means the face amount thereof plus the accrued Premium thereon and all
Conversion Default Payments (if any) with respect thereto through the date of
redemption;
"CP" means the Conversion Price in effect on the date of the Redemption
Notice; and
"M" means the highest Closing Price of the Corporation's Common Stock
during the period beginning on the date of the Redemption Notice and ending on
the date of the redemption.
C. Redemption Defaults. If the Corporation fails to pay any holder the
Redemption Amount with respect to any share of Series K Preferred Stock within
ten (10) business days of its receipt of a notice requiring such redemption (a
"REDEMPTION NOTICE"), then the holder of Series K Preferred Stock delivering
such Redemption Notice (i) shall be entitled to interest on the Redemption
Amount at a per annum rate equal to the lower of twenty-four percent (24%) and
the highest interest rate permitted by applicable law from the date of the
Redemption Notice until the date of redemption hereunder, and (ii) shall have
the right, at any time and from time to time, to require the Corporation, upon
written notice, to immediately convert (in accordance with the terms of
Paragraph A of Article IV) all or any portion of the Redemption Amount, plus
interest as aforesaid, into shares of Common Stock at the lowest Conversion
Price in effect during the period beginning on the date of the Redemption Notice
and ending on the Conversion Date with respect to the conversion of such
Redemption Amount. In the event the Corporation is not able to redeem all of the
shares of Series K Preferred Stock subject to Redemption Notices, the
Corporation shall redeem shares of Series K Preferred Stock from each holder pro
rata, based on the total number of shares of Series K Preferred Stock included
by such holder in the Redemption Notice relative to the total number of shares
of Series K Preferred Stock in all of the Redemption Notices.
D. Redemption by Corporation.
(i) The Corporation shall have the right, at any time and provided the
Corporation is not in material violation of any of its obligations under
this Certificate of Designation, the Securities Purchase Agreement or the
Registration Rights Agreement, to redeem (an "OPTIONAL REDEMPTION") all
(but not less than all) of the then outstanding Series K Preferred Stock
(other than Series K Preferred Stock
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which is the subject of a Notice of Conversion delivered prior to the
delivery date of the Optional Redemption Notice (as defined in subparagraph
(iii) below)) for a price per share equal to the Optional Redemption Amount
(as defined below) which right shall be exercisable only one time while any
Series K Preferred Stock is outstanding by the Corporation in its sole
discretion by delivery of an Optional Redemption Notice in accordance with
the redemption procedures set forth below. Holders of Series K Preferred
Stock may not convert any shares of Series K Preferred Stock selected for
redemption hereunder into Common Stock at any time or on prior to the
Effective Date of Redemption designated by the Corporation in the Optimal
Redemption Notice pursuant to subparagraph (iii). The "OPTIONAL REDEMPTION
AMOUNT" with respect to each share of Series K Preferred Stock means the
greater of (a) 100% multiplied by the sum of (I) the Face Amount thereof
plus (II) the accrued Premium thereon and all Conversion Default Payments
(if any) with respect thereto through the date of redemption, and (b) the
Benefit of the Bargain (as defined below).
(ii) The "BENEFIT OF THE BARGAIN" with respect to a share of Series K
Preferred Stock means an amount equal to:
V
---- X M
CP
where:
"V" means the face amount thereof plus the accrued Premium thereon and all
Conversion Default Payments (if any) with respect thereto through the date of
redemption;
"CP" means the Conversion Price in effect on the date of the Optional
Redemption Notice; and
"M" means the volume weighted average sales price of the Corporation's
Common Stock on the trading day immediately preceding the date of the Optional
Redemption Notice.
(iii) The Corporation shall effect each redemption under this Section
VIII.D by giving at least five (5) business days but not more than ten (10)
business days prior written notice (the "OPTIONAL REDEMPTION NOTICE") of
the date which such redemption is to become effective (the "EFFECTIVE DATE
OF REDEMPTION"), the shares of Series K Preferred Stock selected for
redemption and the Optional Redemption Amount to (i) the holders of Series
K Preferred Stock selected for redemption at the address and facsimile
number of such holder appearing in the Corporation's register for the
Series K Preferred Stock and (ii) the transfer agent for the Common Stock,
which Optional Redemption Notice shall be deemed to have been delivered on
the business day after the Corporation's fax (with a copy sent by overnight
courier to the holders of Series K Preferred Stock) of such notice to the
holders of Series K Preferred Stock.
(iv) The Optional Redemption Amount shall be paid to the holder of the
Series K Preferred Stock being redeemed within three (3) business days of
the Effective Date of Redemption; provided, however, that the Corporation
shall not be obligated to deliver any portion of the Optional Redemption
Amount until either the certificates evidencing the Series K Preferred
Stock being redeemed are delivered to the office of the Corporation or the
transfer agent, or the holder notifies the Corporation or the transfer
agent that such certificates have been lost, stolen or destroyed and
delivers the documentation in accordance with Article XIV.B hereof.
Notwithstanding anything herein to the contrary, in the event that the
certificates evidencing the Series K Preferred Stock being redeemed are not
delivered to the Corporation or the transfer agent prior to the third
business day following the Effective Date of Redemption, the redemption of
the Series K Preferred Stock pursuant to this Article VIII.D shall still be
deemed effective as of the Effective Date of Redemption and the Optional
Redemption Amount shall be paid to the holder of Series K Preferred Stock
being redeemed within five (5) business days of the date the certificates
evidencing the Series K Preferred Stock being redeemed are actually
delivered to the Corporation or the transfer agent.
(v) If the Corporation fails to pay, when due and owing, any Optional
Redemption Amount, then the holder of Series K Preferred Stock entitled to
receive such Optional Redemption Amount shall have
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the right, at any time and from time to time during the twenty (20) trading
day period following the Effective Date of Redemption (the "Optional
Redemption Amount Conversion Period"), to require the Corporation, upon
written notice, to immediately convert (in accordance with the terms of
paragraph A of Article IV) any or all of the shares of Series K Preferred
Stock which are the subject of such redemption, into shares of Common Stock
at the lowest Conversion Price in effect during the period beginning on the
date the Corporation elected to redeem such shares of Series K Preferred
Stock and ending on expiration of the Optional Redemption Amount Conversion
Period. From and after the expiration of the Optional Redemption Amount
Conversion Period, the holders may convert Series K Preferred Stock at the
Conversion Price then in effect and in accordance with Article IV. In
addition, if the Corporation fails to pay an Optional Redemption Amount
when due and owing, the Corporation shall pay the holder interest on such
Optional Redemption Amount at a per annum rate equal to the lower of
twenty-four percent (24%) and the highest interest rate permitted by
applicable law from the date the Corporation elected to redeem such shares
of Series K Preferred Stock until the later of the Effective Date of
Redemption or the date the Corporation notifies the holder that it will not
redeem the shares the Series K Preferred Stock selected for redemption by
the Corporation. If a holder is entitled to interest pursuant to this
subparagraph (v), the holder will not be entitled to interest under Article
XIV.E for the Corporation's failure to timely pay any Optional Redemption
Amount hereunder.
IX. RANK
All shares of the Series K Preferred Stock shall rank (i) prior to the
Corporation's Common Stock; (ii) prior to any class or series of capital stock
of the Corporation hereafter created (unless, with the consent of the holders of
Series K Preferred Stock obtained in accordance with Article XIII hereof, such
class or series of capital stock specifically, by its terms, ranks senior to or
pari passu with the Series K Preferred Stock) (collectively with the Common
Stock, "JUNIOR SECURITIES"); (iii) pari passu with any class or series of
capital stock of the Corporation hereafter created (with the consent of the
holders of Series K Preferred Stock obtained in accordance with Article XIII
hereof) specifically ranking, by its terms, on parity with the Series K
Preferred Stock (the "PARI PASSU SECURITIES"); (iv) junior to the Corporations
Series A Cumulative Convertible Preferred Stock, par value $.0001 per share, the
Series F-1, F-2, F-3 and F-4 Convertible Preferred Stock, par value $.0001 per
share and the Corporation's Series H Convertible Preferred Stock, par value
$.0001 per share (collectively the "EXISTING PREFERRED STOCK") and (v) junior to
any class or series of capital stock of the Corporation hereafter created (with
the consent of the holders of Series K Preferred Stock obtained in accordance
with Article XIII hereof) specifically ranking, by its terms, senior to the
Series K Preferred Stock (collectively, with the Existing Preferred Stock, the
"SENIOR SECURITIES"), in each case as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary.
X. LIQUIDATION PREFERENCE
A. If the Corporation shall commence a voluntary case under the U.S.
Federal bankruptcy laws or any other applicable bankruptcy, insolvency or
similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Corporation shall be entered by a court having jurisdiction in the premises
in an involuntary case under the U.S. Federal bankruptcy laws or any other
applicable bankruptcy, insolvency or similar law resulting in the appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of sixty (60) consecutive
days and, on account of any such event, the Corporation shall liquidate,
dissolve or wind up, or if the Corporation shall otherwise liquidate, dissolve
or wind up (a "LIQUIDATION EVENT"), no distribution shall be made to the holders
of any shares of capital stock of the Corporation (other than Senior Securities)
upon liquidation, dissolution or winding up unless prior thereto
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the holders of shares of Series K Preferred Stock shall have received the
Liquidation Preference with respect to each share. If, upon the occurrence of a
Liquidation Event, the assets and funds available for distribution among the
holders of the Series K Preferred Stock and holders of Pari Passu Securities
shall be insufficient to permit the payment to such holders of the preferential
amounts payable thereon, then the entire assets and funds of the Corporation
legally available for distribution to the Series K Preferred Stock and the Pari
Passu Securities shall be distributed ratably among such shares in proportion to
the ratio that the Liquidation Preference payable on each such share bears to
the aggregate Liquidation Preference payable on all such shares.
B. The purchase or redemption by the Corporation of stock of any class, in
any manner permitted by law, shall not, for the purposes hereof, be regarded as
a liquidation, dissolution or winding up of the Corporation. Neither the
consolidation or merger of the Corporation with or into any other entity nor the
sale or transfer by the Corporation of less than substantially all of its assets
shall, for the purposes hereof, be deemed to be a liquidation, dissolution or
winding up of the Corporation.
C. The "LIQUIDATION PREFERENCE" with respect to a share of Series K
Preferred Stock means an amount equal to the Face Amount thereof plus the
accrued Premium thereon through the date of final distribution. The Liquidation
Preference with respect to any Pari Passu Securities shall be as set forth in
the Certificate of Designation filed in respect thereof.
XI. ADJUSTMENTS TO THE CONVERSION PRICE
The Conversion Price shall be subject to adjustment from time to time as
follows:
A. Stock Splits, Stock Dividends, Etc. If at any time on or after the
First Closing Date, the number of outstanding shares of Common Stock is
increased by a stock split, stock dividend, combination, reclassification or
other similar event, the Fixed Conversion Price shall be proportionately
reduced, or if the number of outstanding shares of Common Stock is decreased by
a reverse stock split, combination or reclassification of shares, or other
similar event, the Fixed Conversion Price shall be proportionately increased. In
such event, the Corporation shall notify the Corporation's transfer agent of
such change on or before the effective date thereof.
B. Adjustment Due to Merger, Consolidation, Etc. If, at any time after the
First Closing Date, there shall be (i) any reclassification or change of the
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination), (ii) any consolidation or merger of the
Corporation with any other entity (other than a merger in which the Corporation
is the surviving or continuing entity and its capital stock is unchanged), (iii)
any sale or transfer of all or substantially all of the assets of the
Corporation or (iv) any share exchange pursuant to which all of the outstanding
shares of Common Stock are converted into other securities or property (each of
(i) - (iv) above being a "FUNDAMENTAL CHANGE"), then the holders of Series K
Preferred Stock shall thereafter have the right to receive upon conversion, in
lieu of the shares of Common Stock otherwise issuable, such shares of stock,
securities and/or other property as would have been issued or payable in such
Fundamental Change with respect to or in exchange for the number of shares of
Common Stock which would have been issuable upon conversion (without giving
effect to the limitations contained in Article IV.C) had such Fundamental Change
not taken place, and in any such case, appropriate provisions shall be made with
respect to the rights and interests of the holders of the Series K Preferred
Stock to the end that the provisions hereof (including, without limitation,
provisions for adjustment of the Conversion Price and of the number of shares of
Common Stock issuable upon conversion of the Series K Preferred Stock) shall
thereafter be applicable, as nearly as may be practicable in relation to any
shares of stock or securities thereafter deliverable upon the conversion
thereof. The Corporation shall not effect any transaction described in this
Paragraph B unless (i) each holder of Series K Preferred Stock has received
written notice of such transaction at least thirty (30) days prior thereto, but
in no event later than ten (10) days prior to the record date for the
determination of shareholders entitled to vote with respect thereto, and (ii)
the resulting successor or acquiring entity (if not the Corporation) assumes by
written instrument the obligations of this Paragraph B. The above provisions
shall apply regardless of whether or not there would have been a sufficient
number of
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shares of Common Stock authorized and available for issuance upon conversion of
the shares of Series K Preferred Stock outstanding as of the date of such
transaction, and shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges. For purposes of
this Paragraph B, the sale of the capital stock or assets of Dorotech, S.A. as
contemplated by that certain Purchase Agreement dated December 31, 1996 by and
between the Company and CDR Enterprises shall not constitute a sale of all or
substantially all of the Company's assets.
C. Adjustment Due to Distribution. If at any time after the First Closing
Date the Corporation shall declare or make any distribution of its assets (or
rights to acquire its assets) to holders of Common Stock as a partial
liquidating dividend, by way of return of capital or otherwise (including any
dividend or distribution to the Corporation's shareholders in cash or shares (or
rights to acquire shares) of capital stock of a subsidiary (i.e. a spin- off))
(a "DISTRIBUTION"), then the holders of Series K Preferred Stock shall be
entitled, upon any conversion of shares of Series K Preferred Stock after the
date of record for determining shareholders entitled to such Distribution, to
receive the amount of such assets which would have been payable to the holder
with respect to the shares of Common Stock issuable upon such conversion
(without giving effect to the limitations contained in Article IV.C) had such
holder been the holder of such shares of Common Stock on the record date for the
determination of shareholders entitled to such Distribution.
D. Purchase Rights. If at any time after the Closing Date, the Corporation
issues any Convertible Securities or rights to purchase stock, warrants,
securities or other property (the "PURCHASE RIGHTS") pro rata to the record
holders of any class of Common Stock, then the holders of Series K Preferred
Stock will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which such holder could have acquired if
such holder had held the number of shares of Common Stock acquirable upon
complete conversion of the Series K Preferred Stock (without giving effect to
the limitations contained in Article IV.C) immediately before the date on which
a record is taken for the grant, issuance or sale of such Purchase Rights, or,
if no such record is taken, the date as of which the record holders of Common
Stock are to be determined for the grant, issue or sale of such Purchase Rights.
E. Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price pursuant to this Article XI, the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to each holder of Series K Preferred Stock
a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of Series
K Preferred Stock, furnish to such holder a like certificate setting forth (i)
such adjustment or readjustment, (ii) the Conversion Price at the time in effect
and (iii) the number of shares of Common Stock and the amount, if any, of other
securities or property which at the time would be received upon conversion of a
share of Series K Preferred Stock.
XII. VOTING RIGHTS
The holders of the Series K Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Delaware General Corporation Law
(the "BUSINESS CORPORATION LAW"), in this Article XII and in Article XIII below.
Notwithstanding the above, the Corporation shall provide each holder of
Series K Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). If the Corporation takes a record of its shareholders for the
purpose of determining shareholders entitled to (a) receive payment of any
dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or (b) to vote in connection with any proposed sale,
lease or conveyance of all or substantially all of the assets of the
Corporation, or any proposed merger, consolidation, liquidation, dissolution or
winding up of the Corporation, the Corporation shall mail a notice to each
holder, at least twenty (20) days prior to the record date specified therein (or
thirty (30) days prior to the consummation of the transaction or event,
whichever is earlier, but in no event earlier than public announcement of such
proposed transaction), of the date on which any such record is to be taken for
the
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purpose of such vote, dividend, distribution, right or other event, and a brief
statement regarding the amount and character of such vote, dividend,
distribution, right or other event to the extent known at such time.
To the extent that under the Business Corporation Law the vote of the
holders of the Series K Preferred Stock, voting separately as a class or series,
as applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the shares
of the Series K Preferred Stock represented at a duly held meeting at which a
quorum is present or by written consent of a majority of the shares of Series K
Preferred Stock (except as otherwise may be required under the Business
Corporation Law) shall constitute the approval of such action by the class. To
the extent that under the Business Corporation Law holders of the Series K
Preferred Stock are entitled to vote on a matter with holders of Common Stock,
voting together as one class, each share of Series K Preferred Stock shall be
entitled to a number of votes equal to the number of shares of Common Stock into
which it is then convertible (without giving effect to the limitations contained
in Article IV.C) using the record date for the taking of such vote of
shareholders as the date as of which the Conversion Price is calculated.
XIII. PROTECTION PROVISIONS
So long as any shares of Series K Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by the Business Corporation Law) of the holders of at least
a majority of the then outstanding shares of Series K Preferred Stock:
(a) alter or change the rights, preferences or privileges of the
Series K Preferred Stock;
(b) alter or change the rights, preferences or privileges of any
capital stock of the Corporation so as to affect adversely the Series K
Preferred Stock;
(c) create any new class or series of capital stock having a
preference over the Series K Preferred Stock as to distribution of assets
upon liquidation, dissolution or winding up of the Corporation (as
previously defined in Article IX hereof, "SENIOR SECURITIES");
(d) create any new class or series of capital stock ranking pari passu
with the Series K Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously
defined in Article IX hereof, "PARI PASSU SECURITIES");
(e) increase the authorized number of shares of Series K Preferred
Stock;
(f) issue any shares of Series K Preferred Stock other than pursuant
to the Securities Purchase Agreement;
(g) issue any additional shares of Senior Securities; or
(h) redeem, or declare or pay any cash dividend or distribution on,
any Junior Securities.
If holders of at least a majority of the then outstanding shares of Series K
Preferred Stock agree to allow the Corporation to alter or change the rights,
preferences or privileges of the shares of Series K Preferred Stock pursuant to
subsection (a) above, then the Corporation shall deliver notice of such approved
change to the holders of the Series K Preferred Stock that did not agree to such
alteration or change (the "DISSENTING HOLDERS") and the Dissenting Holders shall
have the right, for a period of thirty (30) days, to convert pursuant to the
terms of this Certificate of Designation as they existed prior to such
alteration or change or to continue to hold their shares of Series K Preferred
Stock.
XIV. MISCELLANEOUS
A. Cancellation of Series K Preferred Stock. If any shares of Series K
Preferred Stock are converted pursuant to Article IV, the shares so converted
shall be canceled, shall return to the status of authorized, but unissued
preferred stock of no designated series, and shall not be issuable by the
Corporation as Series K Preferred Stock.
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B. Lost or Stolen Certificates. Upon receipt by the Corporation of (i)
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of
indemnity reasonably satisfactory to the Corporation, or (z) in the case of
mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Corporation shall execute and deliver new Preferred Stock
Certificate(s) of like tenor and date. However, the Corporation shall not be
obligated to reissue such lost or stolen Preferred Stock Certificate(s) if the
holder contemporaneously requests the Corporation to convert such Series K
Preferred Stock.
C. Allocations of Cap Amount and Reserved Amount. The initial Cap Amount
and Reserved Amount shall be allocated pro rata among the holders of Series K
Preferred Stock based on the number of shares of Series K Preferred Stock issued
to each holder. Each increase to the Cap Amount and Reserved Amount shall be
allocated pro rata among the holders of Series K Preferred Stock based on the
number of shares of Series K Preferred Stock held by each holder at the time of
the increase in the Cap Amount or Reserved Amount, as the case may be. In the
event a holder shall sell or otherwise transfer any of such holder's shares of
Series K Preferred Stock, each transferee shall be allocated a pro rata portion
of such transferor's Cap Amount and Reserved Amount. Any portion of the Cap
Amount or Reserved Amount which remains allocated to any person or entity which
does not hold any Series K Preferred Stock shall be allocated to the remaining
holders of shares of Series K Preferred Stock, pro rata based on the number of
shares of Series K Preferred Stock then held by such holders.
D. [Intentionally Omitted]
E. Payment of Cash; Defaults. Whenever the Corporation is required to make
any cash payment to a holder under this Certificate of Designation (as a
Conversion Default Payment, upon redemption or otherwise), such cash payment
shall be made to the holder within five (5) business days after delivery by such
holder of a notice specifying that the holder elects to receive such payment in
cash and the method (e.g., by check, wire transfer) in which such payment should
be made. If such payment is not delivered within such five (5) business day
period, such holder shall thereafter be entitled to interest on the unpaid
amount at a per annum rate equal to the lower of twenty-four percent (24%) and
the highest interest rate permitted by applicable law until such amount is paid
in full to the holder.
F. Status as Stockholder. Upon submission of a Notice of Conversion by a
holder of Series K Preferred Stock, the shares covered thereby shall be deemed
converted into shares of Common Stock and the holder's rights as a holder of
such converted shares of Series K Preferred Stock shall cease and terminate,
excepting only the right to receive certificates for such shares of Common Stock
and to any remedies provided herein or otherwise available at law or in equity
to such holder because of a failure by the Corporation to comply with the terms
of this Certificate of Designation. Notwithstanding the foregoing, if a holder
has not received certificates for all shares of Common Stock prior to the tenth
(10th) business day after the expiration of the Delivery Period with respect to
a conversion of Series K Preferred Stock for any reason, then (unless the holder
otherwise elects to retain its status as a holder of Common Stock) the holder
shall regain the rights of a holder of Series K Preferred Stock with respect to
such unconverted shares of Series K Preferred Stock and the Corporation shall,
as soon as practicable, return such unconverted shares to the holder. In all
cases, the holder shall retain all of its rights and remedies (including,
without limitation, (i) the right to receive Conversion Default Payments
pursuant to Article VI.A to the extent required thereby for such Conversion
Default and any subsequent Conversion Default and (ii) the right to have the
Conversion Price with respect to subsequent conversions determined in accordance
with Article VI.B) for the Corporation's failure to convert Series K Preferred
Stock.
G. Remedies Cumulative. The remedies provided in this Certificate of
Designation shall be cumulative and in addition to all other remedies available
under this Certificate of Designation, at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein
shall limit a holder's right to pursue actual damages for any failure by the
Corporation to comply with the terms of this Certificate of Designation. The
Corporation acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the holders of Series K Preferred Stock and that the
remedy at law for any such breach may be inadequate. The Corporation therefore
agrees, in the event of any such breach or threatened
A-15
<PAGE> 67
breach, the holders of Series K Preferred Stock shall be entitled, in addition
to all other available remedies, to an injunction restraining any breach,
without the necessity of showing economic loss and without any bond or other
security being required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
A-16
<PAGE> 68
IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf
of the Corporation this day of July, 1997.
NETWORK IMAGING CORPORATION
By:
A-17
<PAGE> 69
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series K Preferred Stock)
The undersigned hereby irrevocably elects to convert shares of
Series K Preferred Stock (the "CONVERSION"), represented by stock certificate
Nos(s). ____________ (the "PREFERRED STOCK CERTIFICATES") into shares of common
stock ("COMMON STOCK") of Network Imaging Corporation (the "CORPORATION")
according to the conditions of the Certificate of Designations, Preferences and
Rights of Series K Convertible Preferred Stock (the "CERTIFICATE OF
DESIGNATION"), as of the date written below. If securities are to be issued in
the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. No fee will be charged to the
holder for any conversion, except for transfer taxes, if any. A copy of each
Preferred Stock Certificate is attached hereto (or evidence of loss, theft or
destruction thereof).
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Series K Preferred Stock shall be made pursuant to registration of the Common
Stock under the Securities Act of 1933, as amended (the "ACT"), or pursuant to
an exemption from registration under the Act.
[ ] The undersigned hereby requests that the Corporation electronically transmit
the Common Stock issuable pursuant to this Notice of Conversion to the
account of the undersigned's Prime Broker (which is )
with DTC through its Deposit Withdrawal Agent Commission System.
Date of Conversion:
-------------------
Applicable Conversion Price:
----------
Amount of Conversion Default Payments
to be Converted, if any:
--------------
Number of Shares of Common Stock to be
Issued:
-------------------------------
Signature:
----------------------------
Name:
---------------------------------
Address:
------------------------------
* The Corporation is not required to issue shares of Common Stock until the
original Preferred Stock Certificate(s) (or evidence of loss, theft or
destruction thereof) to be converted are received by the Corporation or its
transfer agent. The Corporation shall issue and deliver shares of Common Stock
to an overnight courier not later than the later of (a) two (2) business days
following receipt of this Notice of Conversion and (b) delivery of the
original Preferred Stock Certificates (or evidence of loss, theft or
destruction thereof) and shall make payments pursuant to the Certificate of
Designation for the failure to make timely delivery.
A-18
<PAGE> 70
APPENDIX B
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
NETWORK IMAGING CORPORATION
NETWORK IMAGING CORPORATION, a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY as follows:
FIRST: The Certificate of Incorporation of the Corporation is hereby
amended by deleting the first paragraph of Article FOURTH of the
Certificate of Incorporation in its entirety and substituting therefor the
following:
FOURTH: The corporation shall be authorized to issue two classes of
stock to be designated respectively "Common" and "Preferred." The
total number of shares of Common Stock that the corporation shall
have authority to issue shall be One Hundred Million (100,000,000),
and the par value of each share of Common Stock shall be one
one-hundredth of one cent ($.0001). The total number of shares of
Preferred Stock that the corporation shall have authority to issue
shall be Twenty Million (20,000,000), and the par value of each
share of Preferred Stock shall be one one-hundredth of one cent
($.0001).
SECOND: The capital of the Corporation will not be reduced under or by
reason of this Amendment to the Certificate of Incorporation of the
Corporation.
THIRD: The amendment to the Certificate of Incorporation of the
Corporation set forth in this Certificate of Amendment has been duly
adopted by the vote of the stockholders of the Corporation in accordance
with Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed and attested by its duly authorized officers as of this
day of , 1997.
NETWORK IMAGING CORPORATION
By:
--------------------------------------
James J. Leto
President
ATTEST:
- ------------------------------------------------------
Julia A. Bowen
Assistant Secretary
B-1
<PAGE> 71
NETWORK IMAGING CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints James J. Leto and Jorge R. Forgues, and
each of them individually, each with full power of substitution, as the lawful
proxies of the undersigned and hereby authorizes them to represent and to vote
as designated on the reverse all shares of common stock, $0.0001 par value per
share ("Common Stock"), of Network Imaging Corporation ("Company") that the
undersigned would be entitled to vote if personally present at the Special
Meeting of Stockholders of the Company ("Special Meeting") to be held on
Monday, November 17, 1997, and at any adjournment or postponement thereof.
The undersigned acknowledges that receipt of the Notice of Special
Meeting of Stockholders and Proxy Statement for the Special Meeting. All other
proxies heretofore given by the undersigned to vote shares of Common Stock are
expressly revoked.
(TO BE SIGNED ON REVERSE SIDE)
<PAGE> 72
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!
SPECIAL MEETING OF STOCKHOLDERS
NETWORK IMAGING CORPORATION
NOVEMBER 17, 1997
Please Detach and Mail in the Envelope Provided
/X/ PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTIONS ARE
GIVEN, THIS PROXY WILL BE VOTED FOR THE MATTERS LISTED ABOVE.
Whether or not you plan to attend the Special Meeting, you are urged
to execute and return this proxy, which may be revoked at any time prior
to its use.
<TABLE>
<S> <C> <C> <C>
FOR AGAINST ABSTAIN
1. Approve the issuance of shares of the Company's / / / / / /
Common Stock issuable in connection with the
Company's Series K Convertible Preferred Stock,
on exercise of warrants to purchase shares of
Common Stock at an exercise price of $2.40 per share and
on exercise of warrants to purchase shares of Common Stock
at an exercise price of $1.825 per share under Nasdaq Rule
4480(i)(1)(D).
FOR AGAINST ABSTAIN
2. Approve the issuance of shares of Common Stock issuable in / / / / / /
connection with the Company's 8% Convertible Notes due
July 8, 2002 in aggregate principal amount of $1.4 million
("Convertible Notes") and an exercise of the warrants to
purchase $8,000 shares of Common Stock at an exercise price
of $1.870 per share issued in connection with the Convertible
Notes under Nasdaq Rule 4480(i)(1)(D).
FOR AGAINST ABSTAIN
3. Amend the Company's Certificate of Incorporation to increase / / / / / /
the number of authorized shares of Common Stock from 50,000,000
to 100,000,000.
4. In their discretion on such other business as may properly come
before the Special Meeting or any adjournment or postponement thereof.
</TABLE>
Signature of Shareholder
--------------------------------
Signature of Additional Shareholder(s) Dated: , 1997
------------------ --------
