December 8, 1997
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
RE: Network Imaging Corporation
Registration Statement of Form S-1
(Registration No. 333-36385)
Gentlemen:
Network Imaging Corporation hereby requests acceleration of the
effective date of the above captioned Registration Statement on Form S-1 to 5:00
p.m., Eastern time, on Tuesday, December 9, 1997, or as soon thereafter as
practicable.
Very truly yours,
NETWORK IMAGING CORPORATION
By: /s/ James J. Leto
----------------------
James J. Leto
<PAGE>
As filed with the Securities and Exchange Commission on December 8, 1997
Registration No. 333-36385
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NETWORK IMAGING CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 7373 54-1590649
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Identification Number)
incorporation or
organization)
500 Huntmar Park Drive
Herndon, Virginia 20170
(703) 478-2260
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Julia A. Bowen, Esq.
Vice President and General Counsel
Network Imaging Corporation
500 Huntmar Park Drive
Herndon, Virginia 20170
(703) 478-2260
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Cary J. Meer, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036
(202) 778-9000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered in this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ------------------------------- -------------- ------------------ ------------------- ------------------
Proposed Maximum Proposed Maximum
Title of Each Class of Amount To Be Offering Price Aggregate Amount of
Securities To Be Registered Registered Per Share(1) Offering Price(1) Registration
Fee(1)
- ------------------------------- -------------- ------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
- ------------------------------- -------------- ------------------ ------------------- ------------------
Common Stock 2,150,000 $1.55 $3,332,500 $1,010(3)
(par value $.0001 per
share)(2)
- ------------------------------- -------------- ------------------ ------------------- ------------------
</TABLE>
(1) Estimated pursuant to Rule 457 for the purpose of calculating the
registration fee only; based upon the average of the high and low sales prices
for the Common Stock on September 18, 1997. Registration fee is calculated
pursuant to Rule 457.
(2) Includes shares of Common Stock issuable on conversion of and as interest on
the Company's Convertible Notes.
(3) Previously paid.
================================================================================
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION, ___________, 1997
2,150,000 SHARES
NETWORK IMAGING CORPORATION
COMMON STOCK
All of the 2,150,000 shares ("Shares" or "Offered Shares") of Common
Stock, $.0001 par value per share ("Common Stock"), that Network Imaging
Corporation ("Network Imaging" or the "Company") is seeking to register and can
be offered hereby will be sold by Wood Gundy in trust for RRSP 550 98866 19 and
Gundyco in trust for RRSP 550 99119 12 (collectively referred to as the "Selling
Stockholders"). The Shares are issuable upon conversion of and as interest on
certain 8% convertible notes ("Convertible Notes") that are due on July 8, 2002
and August 20, 2002. This Prospectus relates to the resale of such shares of
Common Stock by such Selling Stockholders. See "Plan of Distribution" and
"Selling Stockholders." The Company's Common Stock is quoted on the National
Association of Securities Dealers, Inc. Automated Quotation System ("Nasdaq")
National Market. On December 5, 1997, the last reported sale price for the
Common Stock on the Nasdaq National Market was $1 1/4 per share.
None of the proceeds from the sale of the Offered Shares by the Selling
Stockholders will be received by the Company. The Company will pay substantially
all of the expenses with respect to the offering and the sale of the Offered
Shares to the public, including the costs associated with registering the
Offered Shares under the Securities Act of 1933, as amended ("Securities Act")
and preparing and printing this Prospectus. Normal underwriting commissions and
broker fees, however, as well as any applicable transfer taxes, are payable
individually by the Selling Stockholders.
See "Risk Factors" beginning on page 4 for a discussion of certain
factors that should be considered in connection with the purchase of securities
hereunder.
---------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------------------------------
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGIS-
TRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.
---------------------------------------
, 1997
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. The Common Stock offered hereby involves a high
degree of risk. See "Risk Factors." Unless otherwise indicated, all information
in this Prospectus regarding stock ownership and voting power of the Company's
Common Stock is as of November 13, 1997.
THE COMPANY
Network Imaging Corporation ("Network Imaging" or the "Company")
provides software products supporting storage, management and distribution.
These products provide businesses and government organizations with an automated
method of electronically storing, managing and distributing large volumes of
structured data (text) and unstructured data (diagrams, documents, photos, voice
and full-motion video).
The Company is a leader in content and storage management for all
unstructured information. Its flagship product, the 1View suite, manages the
storage, access and distribution of any multimedia (or unstructured) data, such
as diagrams, documents, photographs, voice, and full-motion video. 1View is a
unique 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. 1View, InfoAccess(TM),
Treev+(TM) and the Company logo are trademarks of Network Imaging Corporation.
All other product and brand names are trademarks or registered trademarks of
their respective companies.
The Company's executive offices are located at 500 Huntmar Park Drive,
Herndon, Virginia 20170. The Company's telephone number is (703) 478-2260.
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA Quarter Ended
---------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31,
1995 1995 1995 1995
Net revenue $ 12,791 $ 16,042 $ 20,270 $ 20,048
Costs and expenses:
Costs of revenue 8,103 7,995 12,811 13,555
Product development 1,536 1,448 1,972 2,176
Selling, general and
administration 7,048 7,473 10,777 10,247
Settlement with stockholders -- -- 892 750
Gain (loss) on closure and sale of
subsidiaries, net -- (147) 9,906 (492)
Restructuring costs (396) (946) (286) 195
<PAGE>
STATEMENT OF OPERATIONS DATA Quarter Ended
--------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31,
1995 1995 1995 1995
(Loss) before interest
income and income taxes (3,500) 219 (15,802) (6,383)
Interest income (expense), net 17 318 (167) 55
(Loss) before income taxes (3,483) 537 (15,969) (6,328)
Income tax (benefit) expense (256) 157 72 (253)
Net income (loss) (3,227) 380 (16,041) (6,075)
Preferred stock preferences (6,874) (1,020) (1,020) (1,020)
======== ======== ======== ========
Net loss applicable to
common shares $(10,101) $ (640) $(17,061) $ (7,095)
======== ======== ======== ========
Net loss per common
share $ (0.60) $ (0.05) $ (1.25) $ (0.52)
======== ======== ======== ========
Weighted average shares
outstanding 16,945 13,780 13,628 13,628
STATEMENT OF OPERATIONS DATA Quarter Ended
---------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31,
1996 1996 1996 1996
Net revenue $ 10,428 $ 9,379 $ 9,129 $ 10,542
Costs and expenses:
Costs of revenue 5,594 5,536 6,838 7,244
Product development 1,401 1,410 1,327 1,734
Selling, general and
administration 5,520 5,379 7,453 6,394
Exchange fee and gain
on sale of asset, net -- -- -- 619
Loss on closure and sale of
subsidiaries, net -- 921 -- --
Restructuring costs -- -- (19) (156)
-------- -------- -------- --------
(Loss) before interest income
and income taxes (2,087) (3,867) (6,470) (5,293)
Interest income (expense), net 121 41 87 59
-------- -------- -------- --------
(Loss) before income taxes (1,996) (3,826) (6,383) (5,234)
Income tax (benefit) expense 21 (77) (114) 102
-------- -------- -------- --------
Net (loss) (1,987) (3,749) (6,269) (5,336)
Preferred stock preferences (981) (865) (865) (1,020)
======== ======== ======== ========
Net loss applicable to common
shares $ (2,968) $ (4,614) $ (7,134) $ (6,356)
======== ======== ======== ========
Net loss per common share $ (0.13) $ (0.22) $ (0.35) $ (0.34)
======== ======== ======== ========
Weighted average shares
outstanding 22,470 21,113 20,209 18,911
STATEMENT OF OPERATIONS DATA Quarter Ended,
----------------------------------------
September 30, June 30, Mar. 31,
1997 1997 1997
Net revenue $ 9,944 $ 9,334 $ 9,119
Costs and expenses:
Costs of revenue 6,450 6,132 5,840
Product development 1,142 1,266 1,042
Selling, general and
administration 5,298 5,329 5,223
Gain from extinguishment
of debt -- -- (267)
-------- -------- --------
Loss before interest
income and income taxes (2,946 (3,393) (2,719)
Interest income (expense),
net (130) (64) 31
-------- -------- --------
Loss before income taxes (3,076) (3,457) (2,688)
Income tax (benefit)
expense (142) 61 (6)
-------- -------- --------
Net loss (2,934) (3,518) (2,682)
Preferred stock preferences (1,704) (930) (976)
======== ======== ========
Net loss applicable to
common shares $ (4,638) $ (4,448) $ (3,658)
======== ======== ========
Net loss per common share $ (0.18) $ (0.18) $ (0.15)
======== ======== ========
Weighted average shares
outstanding 25,437 24,964 24,464
CERTAIN FORWARD-LOOKING STATEMENTS
This Prospectus contains or may contain certain forward-looking
statements and information as well as estimates and assumptions made by the
Company's management. When used in this Prospectus, words such as "anticipate,"
"believe," "estimate," "expect," "future," "intend," "plan" and similar
expressions, as they relate to the Company or the Company's management, identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions relating to the Company's operations and results
of operations, shifts in market demand, the timing of product releases, economic
conditions in foreign countries, competitive products and pricing and other
risks and uncertainties including, in addition to any uncertainties specifically
identified in the text surrounding such statements, uncertainties with respect
to changes or developments in social, economic, business, industry, market,
legal and regulatory circumstances and conditions and actions taken or omitted
to be taken by third parties, including the Company's stockholders, customers,
suppliers, business partners, competitors, and legislative, regulatory, judicial
and other governmental authorities and officials. Should one or more of these
risks or uncertainties materialize, or should the underlying estimates or
assumptions prove incorrect, actual results or outcomes may vary significantly
from those anticipated, believed, estimated, expected, intended or planned.
RISK FACTORS
An investment in the Company's securities involves a high degree of
risk. In evaluating the Company and its business, prospective purchasers of the
Shares offered hereby should carefully consider the risk factors set forth
below, as well as the other information included in this Prospectus, prior to
making an investment.
Lack of Profitability
The Company has had net losses in each period of its operations, except
for one quarter, and it had an accumulated deficit at September 30, 1997 of
$122.2 million. Net losses applicable to common shares were $June12.7 million
for the nine months ended September 30, 1997, $21.1 million for the year ended
December 31, 1996, and $34.9 million for the year ended December 31, 1995. The
losses have resulted primarily from non-recurring charges (including in 1994, a
non-recurring charge of $8.8 million for purchased in-process research and
development and a write-off of $8.7 million in capitalized software that related
to products that were abandoned in favor of 1View, and, in 1995, non-recurring
net charges of $9.3 million in connection with the bankruptcy of IBZ Digital
Production AG ("IBZ"), a company that had been purchased by the Company as a
wholly owned subsidiary, and business divestitures) as well as the delay in the
commercial release of the Company's 1View product, the lead time to close sales
and recognize revenues, increasing sales and marketing efforts and costs
associated with product research and development. See "Business."
Continued Adverse Results of Operations Through 1997
The adverse results of operations that the Company has experienced is
expected to continue at least for the remainder of 1997until the first part of
1998. The Company believes that its existing cash, together with the current
proceeds from the convertible notes, a debt offering the Company effected in
July 1997 (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 $6.0 million,
which is required for continued inclusion of the Company's securities on the
Nasdaq National Market. However, there can be no assurance that the Company will
be able to satisfy the conditions precedent to The Company believes that the
combination of existing cash, potential future proceeds from such additional
offerings of equity securities as may be required, and the anticipated cash
flows from operations, should provide sufficient resources to fund its
activities through the next twelve months and to achieve net tangible assets of
at least $6 million as of December 31, 1997, which is required for continued
inclusion of the Company's securities on the Nasdaq National Market. The Company
is also proposing some changes to the terms of its Series A Cumulative
Conevertible Preferred Stock ("Series A Stock"). See "--Amendment to Certificate
of Designations of Series A Stock." The Company has had discussions with
prospective investors with respect to selling additional equity of the Company.
While no formal or contractual commitments have been received to date, the
Company believes that, if required, it could sell such equity for cash prior to
January 1, 1998, and thereby raise sufficient additional equity to achieve such
tangible net asset measure at December 31, 1997; however, there can be no
assurance that such efforts would be successful should they become required.
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.
Continued Listing on the Nasdaq National Market
At June 30, and September 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 the Nasdaq
National Market. To 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
and, on December 8, 1997, issued 3,250 shares of Series L Convertible Preferred
Stock ("Series L Stock") and received net proceeds of $2.99 million.
On August 21, 1997, the Company received a letter from the Nasdaq
National Market indicating that the Company may not have sufficient assets to
continue its listing on the Nasdaq National Market. The Company has responded to
that inquiry and after further correspondence with Nasdaq requested a hearing
before the Nasdaq National Market's Hearing Department to explain its plan for
achievement and maintenance of the minimum net tangible assets requirement.
Following a hearing held on Thursday, October 30, 1997, a Nasdaq Listing
Qualifications Panel determined to granted the Company's request for continued
inclusion in the Nasdaq National Market pursuant to an exception to the Nasdaq
National Market's minimum net tangible asset requirement. 1997.
The Panel found that the Company had presented a reasonable plan for
compliance. Based upon the plan detailed by the Company, the Panel concluded
that the Company could achieve compliance with the continued listed requirements
for the long-term.
On December 2, 1997, the Nasdaq Listing Qualifications Panel granted an
extension to the exception.
In order to fully comply with both the exception and the extension
granted by the Panel, the Company must complete its plan of compliance in
accordance with a timetable set forth by the Panel. The Company must demonstrate
full compliance with the Nasdaq National Market continued listing requirements
by December 31, 1997. The Panel also required that the Company have a minimum of
$6.0 million in net tangible assets to ensure long term compliance with the net
tangible assets requirement. Although the Company would not be required to
maintain this minimum each quarter going forward, the Company would be subject
to the new net tangible assets requirements (requiring a minimum of $5.0 million
in net tangible assets) for the continued inclusion on the Nasdaq National
Market that becomes effective in February 1998. In the event the Company fails
to comply with any of the terms of this exception, the Panel has stated that the
Company's securities will be immediately delisted from the Nasdaq National
Market.
Although the Company believes that it can maintain achieve the required
net tangible assets of at least $6 million through certain proposed changes to
the terms of its Series A Stock (See "--Amendment to Certificate of Designations
of Series A Stock") and 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 achieve and maintain the minimum
tangible net assets of at least $6 millionasset requirements as stipulated by
Nasdaq. If the Company ultimately is unable to achieve the minimum tangible net
asset requirements, the Company's Common Stock, Series A Stock and Public
Warrants would be delisted from the Nasdaq National Market. While the Company
believes that trading of its Common Stock could continue, any inability to trade
on a national exchange could adversely impact the value of the Company's stock.
Under the terms of the Series A Stock, the Company's Series F Convertible
Preferred Stock ("Series F Stock), its existing line of credit and the
Convertible Notes, a delisting of the Company's stock would not affect those
transactionse Company's ability to meet the terms and requirements of those
agreements.
Inadequate Dividend Coverage
The annual dividend requirements on the Company's Series A Stock is
$3.2 million payable quarterly. All quarterly dividends on the Series A
Preferred Stock have been paid through April 1997. The Company suspended payment
on the quarterly dividends on the Series A Stock due in July and October 31,
1997 in the amounts of $0.50 per share or $803,000 in the aggregate for each
period, respectively. Failure to pay any quarterly dividend has resulted in a
reduction in the conversion price and failure to pay a total of four quarterly
dividends will entitle the holders of the Series A Stock to elect one director.
(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
accrues dividends on the outstanding shares of Series F Stock, but is not
obligated to make any payments until January 31, 1998 or upon the occurrence of
certain conditions under the control of the Company). However, the Company may
not redeem the Series F Stock when there are accrued and unpaid dividends on the
Series A By law, dividends may be paid from surplus or net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal year.
The Company may not declare any dividends payable to holders of Common Stock
until all accrued and unpaid cash dividends are paid in full to the holders of
the Series A and F Stocks. There can be no assurance that future surplus or
earnings, if any, will be adequate to pay dividends on the preferred stock. See
"Description of Capital Stock."
European Operations
The Company's European operations are conducted through the Company's
subsidiary Dorotech, S.A. ("Dorotech") and accounted for approximately 46% of
its revenue in 19961997. and approximately 40% of the Company's revenue and 10%
of its net loss during the first nine months of 1997. The Company's business in
European markets is subject to the risks customarily associated with overseas
operations, including fluctuations in foreign currency exchange rates and
controls, tariffs, expropriation, nationalization and other economic, tax and
regulatory policies of foreign governments. Since Dorotech conducts virtually
all of its business in currencies other than the U.S. dollar, foreign currency
fluctuations may affect the Company's asset valuations and net income. The
Company has not used financial instruments with off-balance sheet risk in
managing foreign currency fluctuation risks. The Company's results will also be
affected by any laws affecting its ability to repatriate foreign profits, if
any, and by changes in foreign tax laws and tax rates, as well as changes in
international tax treaties. There can be no assurance that these and similar
factors will not have a negative impact on the Company's operations.
On December 31, 1996, the Company entered into
a purchase agreement with CDR Enterprises ("CDRE") for the sale and purchase of
all of the Series F Stock. Pursuant to the purchase agreement with CDRE, as
amended on May 30, 1997, and December 1, 1997 the Company is obligated to make
to CDRE an aggregate cash payment of $6,400,000 plus interest in the amount of
$190,000. (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 accrues dividends on the outstanding shares of Series F Stock, but is
not obligated to make any payments until January 31, 1998 or upon certain
conditions under the control of the Company. 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. See
"-- Guarantee of ATG Lease Payment" and "Description of Capital Stock -
Acquisition Preferred Stock." See "-- Inadequate Dividend Coverage" and
"Description of Capital Stock -- Series A Cumulative Convertible Preferred
Stock."
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.
Guarantee of ATG Lease Payments
Prior to the acquisition of Dorotech by the Company, Dorotech's parent
(which was merged into Dorotech prior to the acquisition) signed a guarantee of
lease payments by an affiliated company, ATG Gigadisc SA ("ATG"), under a sale
and leaseback of land and buildings by ATG. At December 31, 1995, the remaining
lease payments due by ATG totaled approximately $6.1million, including interest
of approximately $1.8 million. On May 31, 1996, ATG filed for bankruptcy
protection with the Court of Commerce in Toulouse, France, and officials were
appointed by the Court to supervise the operations of ATG. In July 1996, the
lessor notified Dorotech that ATG was in default with respect to one lease
payment, that, as a result, it was filing a claim with one of the officials for
accelerated payment of all remaining amounts due under the lease and that it was
requesting from Dorotech the amount due under the guarantee. The Company is not
itself a party to the guarantee; however, if Dorotech were to become obligated
to fulfill the guarantee, there could be a material adverse effect on the
Company's results of operations and financial condition. On December 31, 1996,
the Company entered into a purchase agreement with CDRE for the sale and
purchase of the Series F Stock. See "--European Operations." As a condition to
entering into that purchase agreement, CDRE agreed it would endeavor to obtain a
release of the lease guarantee. To date, neither the Company nor Dorotech has
received a release of the lease guarantee. If claims were to be made against
Dorotech.
Dorotech believes it has meritorious defenses to, and intends to defend
vigorously against, any action that may be brought against it based on the
guarantee. There can be no assurance, however, that Dorotech would prevail if
such action were brought.
In the event that Dorotech is sold by January 31, 1998, CDRE has agreed
to be responsible for any claims or damages brought by any party in connection
with the ATG lease.
Competition; Rapid Technological Change
The computer industry, including the information access, imaging and
optical disk storage segments, is highly competitive, and is characterized by
rapid and continuous technological change, short product cycles, frequent
product innovations and new product introductions, evolving industry standards,
and changes in customer requirements and preferences. The Company's future
profitability will depend, among other things, on wide-scale market acceptance
of the Company's products, the Company's ability to demonstrate the potential
advantages of its products over other types of similar products and on the
Company's ability to develop in a timely fashion enhancements to existing
products or new products that are responsive to the demands of the marketplace
for information access, imaging and optical disk storage systems. There can be
no assurance that the Company will be able to market successfully its current
products, develop and market enhancements to existing products or introduce new
products. In addition, the Company faces existing competitors that are larger
and more established and have substantially greater resources than the Company.
Because of the rapid expansion of the information access, imaging and optical
disk storage market, the Company will also face competition from new entrants,
possibly including the Company's customers, suppliers or resellers.
Technological advances by any of the Company's current or future competitors
could render obsolete or less competitive the products being offered by the
Company. The Company believes that the principal competitive factors affecting
the market for information access, imaging and optical disk storage products
include effectiveness, scope of product offerings, technical features, ease of
use, reliability, customer service and support, name recognition, distribution
resources and price. Current and potential competitors have established, or may
establish in the future, strategic alliances to increase their ability to
compete for the Company's prospective customers. Accordingly, it is possible
that new competitors or alliances may emerge and rapidly acquire significant
market share. Such competition could have a material adverse effect on the
Company's business, financial condition and results of operations.
Risks of Defects and Development Delays
The Company's development of enhancements to existing products and of
new products is subject to the kinds of problems and delays that are routinely
encountered in the development of software. For example, the Company may
experience schedule overruns in software development triggered by factors such
as insufficient staffing or the unavailability of development-related software,
hardware or technologies. Further, during the development of new software
products, or the enhancement of existing products, the Company's development
schedules may be altered as a result of the discovery of software bugs,
performance problems or changes to the product specification in response to
customer requirements, market developments or Company initiated changes. Changes
in product specifications may delay completion of documentation, packaging or
testing, which may, in turn, affect the release schedule of the product. In
connection with complex software products, the technology market may shift
during the development cycle, requiring the Company either to enhance or change
a product's specifications to meet a customer's changing needs. Any of these
factors may cause a product to enter the market behind schedule, which may
adversely affect market acceptance of the product, or place it at a disadvantage
relative to a competitor's product that has already gained market share or
market acceptance during the delay. The Company does not believe, however, that
it is practicable to quantify the impact that such delays have had or in the
future may have on its operating results. There can be no assurance that the
Company will not experience difficulties that will interrupt the marketing and
distribution of its current products or that the Company will not experience
difficulties in the future that could materially delay or prevent the successful
development of other products.
Dependence on Key Personnel
The Company is substantially dependent on the business and technical
expertise and business relationships of certain key personnel and on its ability
to attract and retain key management and technical employees in the future.
Competition for such employees is intense. The loss of current key employees or
the Company's inability to attract and retain other employees with necessary
business or technical skills in the future would have a material adverse effect
on the Company's business.
Dependence on Suppliers
The Company relies exclusively on outside suppliers for the hardware
components of its products such as scanners, printers, computers and optical
disk drives and jukeboxes. Most parts and components are currently available
from multiple sources at competitive prices. To date, the Company has not
experienced significant delays in obtaining parts and components and, although
there can be no assurance, the Company does not expect to experience such delays
in the future. Lack of availability of certain components could require minor
redesign of the Company's products and result in production delays.
Evolving Distribution Channels
The Company has developed a distribution strategy that involves the
development of strategic alliances with resellers, integrators, and
international distributors to enable the Company to achieve broad market
penetration. The Company's reseller distribution channel is established, and the
Company intends to expand that channel. There can be no assurance, however, that
the Company will be able to continue to attract distributors and resellers that
will be able to market the Company's products effectively and will be qualified
to provide timely and cost-effective customer support and service. The Company
ships products to distributors and resellers on a purchase-order basis, and its
distributors, integrators and resellers may, in some instances, carry competing
product lines. Therefore, there can be no assurance that any distributor,
integrator, or reseller will continue to represent the Company's products. The
inability to recruit, or the loss of, important sales personnel, distributors,
integrators or resellers could materially adversely affect the Company's
business, financial condition and results of operations in the future.
Long Sales Cycle; Seasonality
Sales of the Company's products sometimes involve a significant
commitment of capital by customers, with the attendant delays frequently
associated with large capital expenditures. Prior to such sales, the Company
often permits customers to evaluate products being considered for license,
generally involving a small license fee. In addition, the type of software that
the Company manufactures and sells is of the type that requires businesses to
re-engineer their processes, and completion of this may be arduous. For these
and other reasons, the sales cycle associated with the Company's products is
likely to be lengthy and subject to a number of significant risks over which the
Company has little or no control and, as a result, the Company believes that its
quarterly results are likely to vary significantly in the future. The Company
may be required to ship products shortly after it receives orders and,
consequently, order backlog, if any, at the beginning of any period may
represent only a small portion of that period's expected revenues. As a result,
product revenues in any period will be substantially dependent on orders booked
and shipped in that period. The Company plans its production and inventory
levels based on internal forecasts of customer demand, which is highly
unpredictable and can fluctuate substantially. If revenues fall significantly
below anticipated levels, the Company's financial condition and results of
operations could be materially and adversely affected. In addition, the Company
has experienced significant seasonality in its business, and the Company's
financial condition and results of operations may be affected by such trends in
the future. Such trends may include higher revenues in the third and fourth
quarters of the year and lower revenues in the first and second quarters. The
Company believes that revenues may tend to be higher in the fourth quarter due
to year-end budgetary pressures on the Company's commercial customers.
Intellectual Property Rights; Infringement Claims
The Company regards its software as proprietary and relies principally
on the protection afforded by contractual provisons, trade secret, copyright and
trademark laws and by routinely requiring all of its employees, consultants,
suppliers and others with access to the Company's proprietary information to
enter into non-disclosure agreements that require such persons to maintain the
confidentiality of such information. The Company filed two patent applications
in 1995, one of which was granted in July 1997, and expects to file several more
in the near future covering key components of the 1View suite. Prosecution of
these patent applications, and any other patent applications that the Company
may subsequently determine to file, may require the expenditure of substantial
resources. The issuance of a patent from a patent application may require 24
months or longer. There can be no assurance that the Company's technology will
not become obsolete while the Company's applications for patents are pending.
There also can be no assurance that any pending or future patent application
will be granted, that any future patents will not be challenged, invalidated or
circumvented or that the rights granted thereunder will provide meaningful
competitive advantages to the Company. Further, the Company has not pursued
patent protection outside of the United States for the technology covered by the
Company's existing patent and pending patent applications. The Company currently
intends to pursue patent protection outside of the United States for the
technology covered by such patent applications, although there can be no
assurance that any such protection will be granted or, if granted, that it will
adequately protect the technology covered thereby. In addition, there can be no
assurance that others will not independently develop similar technologies or
duplicate any technology developed by the Company or that its technology will
not infringe upon patents, copyrights or other intellectual property rights
owned by others.
Further, the Company may be subject to additional risk as the Company
enters into transactions in countries where intellectual property laws are not
well developed or are poorly enforced. Legal protections of the Company's rights
may be ineffective in foreign markets and technology developed by the Company
may not be protectable in such foreign jurisdictions in circumstances where
protection is ordinarily available in the United States.
The Company believes that, due to the rapid pace of technological
innovation for the Company's imaging and optical storage products, the Company's
abilityestablished to maintain a position of technology leadership in the
industry is dependent more upon the skills of its development personnel than
upon legal protections afforded its existing or future technology.
As the number of information access, imaging and optical storage
products in the industry increases and the functionality of these products
further overlap, software developers may increasingly become subject to
infringement claims. There can be no assurance that third parties will not
assert infringement claims against the Company in the future with respect to
current or future products. The Company also may desire or be required to obtain
licenses from others in order to develop, produce and market commercially viable
products effectively. Failure to obtain those licenses could have a material
adverse effect on the Company's ability to market its software products. There
can be no assurance that such licenses will be obtainable on commercially
reasonable terms, if at all, that the patents (if any) underlying such licenses
will be valid and enforceable or that the proprietary nature of any unpatented
technology underlying such licenses will remain proprietary.
Any claims or litigation, with or without merit, could be costly and
could result in a diversion of management's attention, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, there can be no assurance that the Company
will have adequate resources to prosecute or defend such claims or litigation,
or that the Company's proprietary rights, including patents, if any, will be
upheld. Adverse determinations in such claims or litigation could also have a
material adverse effect on the Company's business, financial condition and
results of operations.
Fluctuations in Financial Performance
Timing and volume differences in the shipment of the Company's products
and the performance of services under contracts can produce significant
fluctuations in quarter-to-quarter and year-to-year financial performance.
Factors that could affect such timing include, among other things, customer
purchasing patterns, new product transitions, delays in new product
introductions and shortages of system components. Past financial performance
should not be considered to be a reliable indicator of future performance in any
particular fiscal period.
Control of the Company
The executive officers and directors of the Company beneficially own
approximately 6% of the Company's outstanding Common Stock, other officers and
employees of the Company beneficially own at least another 6% of the outstanding
shares and officers and employees may, in the future, acquire substantial
additional amounts of Common Stock upon the exercise of stock options which are
not currently exercisable. Although there are no arrangements requiring the
executive officers and other employees of the Company to vote their Common Stock
collectively, those persons may exert considerable influence over the outcome of
matters requiring stockholder votes, including the election of directors and
proposals to sell, merge or liquidate the Company.
Dividend Policy
The Company has not paid dividends on its Common Stock since its
inception, and it does not anticipate paying cash dividends on its Common Stock
in the foreseeable future. The Company may not declare dividends payable to
holders of Common Stock unless and until all accrued cash dividends through the
most recent past dividend payment date have been paid in full to holders of the
Series A Stock and the Company's Series F Stock. The Company suspended its
quarterly dividend on the Series A Stock due in July and October 31, 1997 in the
amounts of $0.50 per share or $803,000 in the aggregate for each period. By
their terms, the Series K Stock and Series L Stock purchase agreements require
that the Company not use the proceeds of that offering to make quarterly
dividend payments to the holders of Series A Stock. See "--Inadequate Dividend
Coverage," "Dividend and Market Price Information," and "Description of Capital
Stock -- Common Stock."
Shares Eligible for Future Sale; Effect on Market Price of Common Stock and
the Ability of the Company to Raise Additional Capital
As of November 13, 1997, the Company had outstanding 25,959,101 shares
of Common Stock, of which approximately 3.5 million shares were "restricted
securities" as that term is defined under Rule 144 of the Securities Act ("Rule
144"), which were not covered by an effective registration statement under the
Securities Act or eligible for sale pursuant to Rule 144(k). Of those shares,
approximately 1.8 million were otherwise eligible for sale under Rule 144.
As of November 13, 1997, the Company had outstanding options and
warrants that were exercisable for 8,947,487 shares of Common Stock with
exercise prices of the options and warrants ranging from $1.00 to $14.88 per
share (subject to adjustment pursuant to the anti-dilution provisions of the
respective instruments and based upon the closing sale and bid price of the
Company's Common Stock on November 13, 1997). The number of shares of Common
Stock into which the Company's convertible securities convert could increase
significantly depending upon a number of factors, including the market price of
the Company's Common Stock at the time of conversion or redemption of the
convertible securities, the issuance of the Series K Stock, the Series L Stock
and the related warrants, and the adoption of certain amendments to the terms of
Series A Stock. See "Risk Factors -- Amendment to Certificate of Designations of
Series A Stock" and "Description of Capital Stock." The options and warrants
expire at various times through November 11, 2007.
As of November 13, 1997, the Company and had outstanding other
convertible securities (including the the NConvertible Notes, and the Series A
and K Preferred Stock) that were convertible into 7,187,855 shares of Common
Stock (subject to adjustment pursuant to the anti-dilution provisions of the
respective instruments and based upon the closing sale and bid price of the
Company's Common Stock on November 13, 1997). On December 8, 1997, the Company
issued 3,250 shares of Series L Stock. The number of shares of Common Stock into
which the Company's convertible securities convert could increase significantly
depending upon a number of factors, including the market price of the Company's
Common Stock at the time of conversion or redemption of the
instruments).convertible securities and the adoption of certain amendments to
the terms of Series A Stock. However, the Company may not redeem the Series F
Stock when there are accrued and unpaid dividends on the Series A Stock. See
"Risk Factors - Amendment to Certificate of Designation of Series A Stock." (The
Common Stock issuable on conversion of the Series F Stock has not been included
as the holder of the Series F Stock is obligated to sell the Series F Stock to
the Company at a set price. See "Description of Capital Stock -- Acquisition
Preferred Stock). The conversion prices of the convertible securities range from
$1.01 to $12.61 per share. The convertible securities may convert at various
times through 2001August 20, 2002.
Those options, warrants and convertible securities that are not subject
to registration rights may, upon exercise or conversion, be sold pursuant to
Rule 144 or, if applicable, Rule 144(k). In addition, the Company is obligated
to issue additional shares of Series L Stock and warrants that would be
convertible into or exercisable for 3,385,417 shares of Common Stock in certain
circumstances. See "Description of Capital Stock -- Series L Convertible
Preferred Stock."
The Company has registration commitments with respect to 6,569,176
shares ("Registrable Shares") of Common Stock in connection with certain
options, warrants and convertible securities that the Company has issued. (This
amount does not include 3,385,417 shares of Common Stock issuable on conversion
of Series L Stock and warrants that the Company may be obligated to issue to the
Purchasers and Zanett in certain circumstances. See "Description of Capital
Stock -- Series L Convertible Preferred Stock.") The Company has filed
registration statements with the Securities and Exchange Commission ("SEC")
covering in the aggregate 14,994,884 of the Registrable Shares (including the
2,150,000 shares covered by this Registration Statement), which may be offered
from time to time by the stockholders named in such registration statements or
that may be sold by the Company upon exercise or conversion of certain
outstanding warrants, options or convertible securities. In addition, the
Company has filed a registration statement in connection with a proposed
amendment to the Certificate of Designations of the Series A Stock. See
"--Amendment to Certificate of Designations of Series A Stock." In addition, the
Company has registered 9,100,000 shares of Common Stock that may be issued
pursuant to stock option plans. The Company's obligations generally are to
maintain such registration statements for varying periods ranging from nine
months to two years at its expense, except for commissions and legal costs
incurred by selling stockholders.
The Company believes that the existence of convertible securities,
options and warrants, with conversion or exercise prices less than the
prevailing market price of the Common Stock, and the possibility of, as well as
actual, sales of shares of Common Stock under Rule 144, pursuant to registration
statements and otherwise in all likelihood have had and may continue to have an
adverse effect on the market price of the Common Stock and on the Company's
ability to raise future equity capital. In addition, if the Selling Stockholders
or the others, individually or in the aggregate, were to offer a large amount of
Common Stock in the market, the market price of the Common Stock and the
Company's ability to raise additional capital could be adversely affected. See
"Selling Stockholders" and "Plan of Distribution."
Amendment to Certificate of Designations of Series A Stock
Prior to the Company's issuance in July 1997 of shares of Series K
Stock and warrants and the issuance in July and August 1997 the Convertible
Notes and warrants (see "Management's Discussion and Analysis of Financial
Condition and Results of Operatoions - Recent Events" for a description of the
cConvertible nNotes), and the issuance of 3,250 shares of Series L Stock and
warrants on December 8, 1997, the outstanding shares of Series A Stock were
convertible into 1.9826 shares of Common Stock in the aggregate. As a result of
anti-dilution provisions to which the shares of Series A Stock are subject, and
the issuance of shares of Series K Stock, the Series L Stock, the Convertible
Notes and warrants, the holders of Series A Stock will be entitled to receive
additional shares of Common Stock. See "Description of Capital Stock - Series A
Cumulative Convertible Preferred Stock." The number of additional shares of
Common Stock to which the holders of Series A Stock would be entitled to receive
will depend upon the conversion prices of the Series K Stock, the Series L Stock
and the Convertible Notes and the exercise prices of the warrants. The
conversion prices of the Series K Stock, the Series L Stock and the Convertible
Notes are not fixed; they vary based on formulas tied to the market price of the
Common Stock at the time of conversion of the Series K Stock, the Series L Stock
and the redemption or conversion of the Convertible Notes and on the date of
conversion or redemption. See "Description of Capital Stock" and "Management's
Discussions and Analysis of Financial Conditionss and Results of Operations -
Recent Events." The exercise prices of the wwarrants are also subject to
antidilution adjustments. Accordingly, because these conversion and exercise
prices vary, the Company cannot ascertain definitively the number of additional
shares of Common Stock that the holders of Series A Stock may receive as a
result of the Series A Stock's anti-dilution provisions until the shares of
Series A Stock are actually converted. The Company is also obligated to issue
additional shares of Series L Stock in certain circumstances. See "Description
of Capital Stock." Nonetheless, the holders of Series A Stock will be entitled
to receive a significant number of additional shares Common Stock as a result of
such anti-dilution provisions.
The number of shares of Common Stock that each holder of Series A Stock
will receive may be limited, however, as a result of a resolution adopted by the
Board of Directors of the Company that provides for certain amendments to the
Certificate of Designations of Series A Cumulative Convertible Stock ("Series A
Amendment"). If the Series A Amendment is approved, the rate at which holders
may voluntarily convert shares of Series A Stock into Common Stock would be as
follows:
Shares of Common
Stock per one
Share of Series
Average Stock Price (1) A Stock
----------------------------- ------------------
$1.30 or less 7.68
$1.31-$1.50 6.67
$1.51-$1.75 5.71
More than $1.75 5.00
- --------------
(1) The Average Stock Price would be equal to the average closing price per
share of Common Stock on the Nasdaq National Market during the 20
trading days following the date the Series A Amendment is approved.
If the Series A Amendment is approved, the Company may not force
conversion of shares of Series A Stock into Common Stock during 1998. Beginning
January 1, 1999, the Company would be able convert each share of Series A Stock
into shares of Common Stock if the closing price per share of Common Stock is at
least equal to $4.00 per share for 20 consecutive trading days. Beginning
January 1, 2000, the Company would be able convert each share of Series A Stock
into shares of Common Stock if the closing price per share of Common Stock is at
least equal to $3.00 per share for 20 consecutive trading days. Beginning
January 1, 2001, the Company would be able convert each share of Series A Stock
into shares of Common Stock at any time at the Company's option. The number of
shares of Common Stock received on conversion of the Series A Stock would also
be determined based on the Average Stock Price in accordance with the table set
forth above. In the event of a change of control (which would include a
transaction where an third party acquires more than 50% of the outstanding
shares of Common Stock), the holders of Series A Stock would receive no less
than $25 in value, either in cash, securities or a combination of both.
If the Series A Amendment is approved, cash dividends on the Series A
Stock would cease to accrue at their current rate on April 30, 1997. Starting on
the date the Series A Amendment is approved and until the Series A Stock is
converted, the Series A Stock would accrue an annual dividend of $1.75 1.84 per
share, payable quarterly in cash or Common Stock, at the Company's option. If
the dividend is paid in Common Stock, the number of shares of Common Stock
distributed as a dividend will be based on the average closing price per share
of Common Stock during the 10 day period following the Company's release of
earnings for the applicable quarter. If the Series A Amendment is approved, the
liquidation price per share of Series A Stock would be reduced from $25.00 to
$10.0012.00.
The Company currently plans to hold a meeting of stockholders to
approve the Series A Amendment on December 31, 1997 or as soon thereafter as is
reasonably possible. (Approval of the Series A Amendment requires the approval
of a majority of the voting power of all of the outstanding shares of Common
Stock voting separately as a class and a majority of the voting power of all of
the outstanding shares of Series A Stock, Series F Stock, Series K Stock and
Series L Stock, each voting separately as a class.) If the Series A Amendment is
approved, the anti-dilution provisions of the Series A Stock currently in effect
would no longer be in effect. If the Series A Amendment is not approved, the
Company will be required to continue accruing dividends on the outstanding
shares of Series A Stock and will be required to issue a significant number of
shares of Common Stock to the holders of Series A Stock in accordance with the
currently applicable Certificate of Designations. See "Description of Capital
Stock -- Series A Cumulative Convertible Preferred Stock."
Certain Anti-takeover Provisions of Certificate of Incorporation
and Delaware Law
The Company's Board of Directors has the authority to issue up to
20,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights of those
shares, without any further vote or action by the Company's shareholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of preferred stock that has already been
issued and that may be issued in the future. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire a majority of the voting stock of the Company. As
of December 8, 1997, the Company had outstanding 1,605,025 shares of Series A
Stock, 792,186 shares of Series F Stock, 3,300 shares of Series K Stock and
3,250 shares of Series L Stock. The Company may issue additional shares of
Series L Stock. See "Description of Capital Stock."
The Company is subject to Section 203 of the Delaware General Corpora-
tion Law, which places certain restrictions on the ability of Delaware
corporations to engage in business combinations with interested shareholders.
See "Description of Capital Stock."
Impact of Offerings and Acquisitions on Net Operating Loss Carryforwards
As a result of the issuance of the Series A Stock, the issuance of
securities in acquisitions and the sale of shares by certain stockholders, the
utilization of the Company's net operating loss carryforward of approximately
$53 million at December 31, 1996 is subject to the limitations and expiration
periods imposed by Section 382 and other provisions of the Internal Revenue
Code, thereby increasing the probability that all or a portion may expire before
utilization.
USE OF PROCEEDS
There will be no proceeds to the Company from the sale of the Shares by
the Selling Stockholders. Any proceeds of sales of Common Stock received by the
Selling Stockholders will be retained by the Selling Stockholders
DIVIDEND AND MARKET PRICE INFORMATION
The Company's Common Stock is quoted on Nasdaq National Market under
the symbol IMGX. The following table indicates, for each calendar quarter from
January 1, 1995, the high and low sales prices for the Common Stock as reported
by Nasdaq.
PERIOD HIGH LOW
1995 -First Quarter 4 3/4 2 5/8
-Second Quarter 5 7/16 3 1/8
-Third Quarter 7 3/4 4 7/8
-Fourth Quarter 5 1/8 2 13/16
1996 -First Quarter 5 7/8 3 3/4
-Second Quarter 5 5/8 3 7/16
-Third Quarter 5 1/16 3 1/16
-Fourth Quarter 4 5/32 2 11/16
1997 -First Quarter 3 1/2 2 9/16
-Second Quarter 2 29/32 1 11/16
-Third Quarter 2 1/32 1 1/4
-Fourth Quarter 1 3/4 1 1/32
(through December 4, 1997)
On December 4, 1997, the closing sale price for the Common Stock as
reported by Nasdaq was 1 1/4. As of that date, the Company had approximately
385 holders of record of its Common Stock, and based on information supplied
by certain of such holders of record, the Company estimates that as of such
date there were approximately 7,600 beneficial owners of its Common Stock.
The Company has not paid any cash dividends on its Common Stock
since its inception and does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. The Company may not declare
dividends payable to holders of Common Stock unless and until all accrued
cash dividends through the most recent past dividend payment date have been
paid in full to holders of the Series A Stock and the Series F Stock. The
Company suspended payment of the quarterly dividend on the Series A Stock
due in July and October 1997 of $0.50 per share or $803,000 in the aggregate
for each period, respectively. The Company's future earnings, if any, may
not be adequate for the payment of dividends on its outstanding preferred
stocks. In addition, the purchase agreements for the Series K Stock and
Series L Stock each require that the Company not use the proceeds of that
offering to make its quarterly dividend payments to the holders of the
Series A Stock.
At June 30 and September 30, 1997, the Company had not maintained
net tangible assets of at least $4 million, which is one of the quantitative
maintenance criteria for continued inclusion of the Company's securities on
the Nasdaq National Market. See "Risk Factors - Continued Listing on the
Nasdaq National Market."
CAPITALIZATION
The following table sets forth, as of September 30, 1997, the
capitalization of the Company (including loan capital).
September 30, 1997 (unaudited)
(in thousands, except share amounts)
Short-Term Debt:
Bank credit facilities $ 648
Other notes payable 590
----
Total Short-Term Debt 1,238
Long-Term Debt and Obligations
Under Capital Leases 7,318
Mandatorily Redeemable Series F
Preferred Stock, 792,186
shares outstanding 6,357
Mandatorily Redeemable Series K
Preferred Stock, 3,300 shares
outstanding 3,700
Stockholders' Equity:
Preferred stock, par value $.0001
per share, 20,000,000 shares
authorized; 1,605,035 shares
outstanding
Common stock, par value $.0001
per share, 50,000,000 shares
authorized; 25,865,809
shares outstanding 3
Additional paid in capital 121,108
Accumulated deficit (122,233)
Translation adjustment (569)
Stockholders' Deficit (1,691)
------
Total Capitalization $16,922
======
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 nine months
ended 30,September 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 nine months ended September 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 included in
this Prospectus.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA Year ended December 31,
- ---------------------------- -----------------------------------------------------
(in thousands, except per
share amounts) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
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>
STATEMENT OF OPERATIONS DATA: Nine Months Ended September 30,
(in thousands, except per share amounts) --------------------------------
1997 1996
Net revenue $ 28,396 $ 29,049
Costs and expenses:
Costs of revenue 18,421 19,951
Product development 3,451 4,190
Selling, general and administration 15,850 19,174
Exchange fee and gain
on sale of asset, net -- 619
Gain from extinguishment of debt (267) --
Loss on sale of subsidiary -- 921
Restructuring costs -- (175)
(Loss) before interest
income and income taxes (9,059) (15,631)
Investment and interest
income (expense), net (163) (188)
-------- --------
(Loss) before income taxes (9,222) (15,443)
Income tax (benefit) expense (87) (89)
-------- --------
Net(loss) (9,135) (15,354)
Preferred stock preferences (3,610) (2,749)
-------- --------
Net loss applicable
to common shares $(12,745) $(18,103)
======== ========
Net loss per common share $ (0.51) $ (0.90)
======== ========
Weighted average shares
outstanding 24,957 20,081
<TABLE>
<CAPTION>
BALANCE SHEET DATA September 30, Year ended December 31,
- ------------------ -----------------------------------------------------------
(in thousands) 1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 3,782 $ 7,601 $ 9,359 $ 3,989 $39,764 $ 3,385
Working capital 6,246 9,893 13,454 17,513 45,859 3,823
Current assets 21,851 24,709 35,718 46,051 59,516 10,230
Intangible assets, net 5,575 7,050 9,098 19,874 12,855 2,546
Total assets 31,480 36,778 49,964 71,871 75,519 13,738
Current liabilities 15,605 14,816 22,264 28,538 13,657 6,407
Long term liabilities 7,318 388 2,037 3,568 3,442 287
Redeemable preferred stock 10,057 9,857 15,478 14,609 15,626 --
Total stockholders equity $(1,691) $11,717 $10,185 $25,156 $42,794 $ 7,044
</TABLE>
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 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 comparableCOLD
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 sales and service revenue. The increase in
1View sales and 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
Dorotech, the Company's French subsidiary, 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, Inc., Microsouth, Inc., Tekgraf, Inc., IBZ and Network Imaging (UK)
Holders Limited 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 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 and the software 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 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 Dorotech Acquisition Preferred Stock.
See "Descriptions of Capital Stock--Acquisition 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
Technologies, Inc. ("TREEV"), now a 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 that time at approximately $892,000.
Restructuring Charges and Capitalized Software Write-Offs. At December
31, 1996, the 1994 restructuring plan ("1994 Plan"), whereby excess personnel,
duplicate facilities and products to be discontinued were identified was
complete. Under the 1994 Plan, the Company incurred a net change in estimate of
$175,000 in 1996.
During 1995, the Company incurred additional charges under the 1994
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 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 1994 Plan. In conjunction with the 1994 Plan, 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 in 1994, 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.
Domestic and ExporForeignt Sales. For information regarding the
Company's domestic and foreign sales, see Note 13 to the Consolidated Financial
Statements for the years ended December 31, 1994, 1995 and 1996.
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.
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 Note 8 to the Consolidated Financial Statements for the years
ended December 31, 1994, 1995 and 1996.
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 Note 8 to the Consolidated
Financial Statements for the years ended December 31, 1994, 1995 and 1996.
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 $500,000. Under the offerings, the Company issued 1,760,285 shares
of Common Stock and 1,100 shares of Series H, I and J Preferred Stock. The net
proceeds of the offerings were used for working capital purposes.
The annual dividend requirements on the Company's Series A Cumulative
Confertible Preferred Stock ("Series A Stock") is $3.2 million payable
quarterly. All quarterly dividends on the Series A Stock due in July and October
31, 1997 in the amounts of $0.50 per share or $803,000 in the aggregate for each
period. Failure to pay any quarterly dividend has resulted in a reduction in the
conversion price and failure to pay a total of four quarterly dividends will
entitle the holders of the Series A to elect one director. (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 accrues dividends on
the outstanding shares of Series F Stock but is not obligated to make any
payments until January 31, 1998 or upon the occurrence of certain conditions
under the control of the Company.) Bylaw, dividends may be paid from surplus or
net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. There can be no assurance that future surplus or
earnings, if any, will be adequate to pay dividends on the preferred stock. See
"Description of Capital Stock."
Results of Operations for the Nine Months Ended September 30, 1997 and 1996
Revenues. Total revenues were $28.4 million and $29.0 million for the
nine months ended September 30, 1997 and 1996, respectively. The $700,000
decrease in revenue was the result of decreases in productservice revenue of
$700,000, or 5%, offset by an increase in product revenue of $94,000, or 1%. The
decrease in service revenue was tattributable to a decrease of $1.6 million in
the Company's French subsidiary's service revenues, due in part to the weakening
of the U.S. dollar against the French franc and to a temporary slow down in a
major service contract, offset by a $1.1 million increase in domestic service
revenue. The disposition in 1996 of Symmetrical Technologies, Inc. ("STI"),
decrease.also reduced the Company's service revenues by $170,000. The increase
in product revenue of $94,000 was the result of a $2.2 million increase in
comparable Company U.S. revenues offset by a decrease of $640,000 in the
Company's French subsidiary's product revenues and a decrease of $1.5 million
due to the disposition of STI in 1996.
Profit Margins. Profit margins for product sales increased 9% for the
first nine months of 1997 over the same period in 1996 as cost of products
decreased from 59% to 50% of sales. The increase in product sales margins was
due in part to the disposition during 1996 of STI, and an increase in both
domestic and French margins. Profit margins for service sales decreased 2% for
the nine months ended September 30, 1997 as compared to 1996 as the cost of
services increased from 77% to 79% of sales. The decrease in service sales
margins from 23% to 21% was attributable to the Company's French subsidiary.
Sales and Marketing13 Sales and marketing expenses were $10.9 million
or 38% of revenue for the nine months ended September 30, 1997 compared to $11.7
million, or 40% of revenue in 1996. The decrease of $800,000, or 6%, was
primarily the result of the Company's disposition of STI during 1996.
General and Administrative ("G&A")40 G&A expenses were $4.9 million or
17% of revenue for the nine months ended September 30, 1997 compared to $7.5
million, or 26% of revenue, in 1996. The decrease of $2.6 million, or 34%, 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 $0.7nine months ended September 30, 1997 were
$4.5 million, of which $1.1 million was capitalized and $2.33.4 million was
expensed. Software research and development expenditures for the 1996 period
were $4.25.7 million, of which $1.15 million was capitalized and $3.14.2 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 $208,000 in research and development expenditures.
Gain on Extinguishement of Debt. The Company's French subsidiary
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 benefit for the nine months ended
September 30, 1997 and 1996 of $87,000 and $89,000, respectively, resulted from
taxable losses generated by the Company's French operations.
Net Loss. The Company's net loss for the nine months ended September
30, 1997 was $9.1 million as compared to a net loss of $15.3 million for the
comparable period of 1996. The net loss decrease of $6.2 million for the first
nine months of 1997 as compared to the same period in 1996 is due primarily to
the $2.6 million reduction in G&A expenses, $800,000 reduction in sales and
marketing expenses, $700,000 reduction in product development expenses,
increased profit margins resulting in $880,000 additional gross margin, and the
loss on sale of subsidiary and 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 preferred stock. The net loss applicable to common shares was $as12.7
million, or ($.51) per share, for the nine months ended September 30, 1997 as
compared to $18.1 million or ($.90) 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 Nine Months Ended September 30, 1997
As of September 30, 1997, the Company had $3.8 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 $6.2 million at September 30, 1997
and $9.9 million at December 31, 1996.
During the first nine months of 1997, the Company redeemed 1,000,000
shares of Series F proceedsStock for $3.5 million by using proceeds from its
domestic line of credit, and drew the remaining $1,500,000 from its line of
credit. In addition, the Company issued convertible notes and Series K Stock for
which it received net proceeds of $2.0 million and $2.9 million, respectively.
For the nine months ended September 30, 1997, the $3.8 million decrease
in cash and cash equivalents resulted from the use of $5.1 million in cash to
fund operating activities, $1.6 million to fund investing activitiesfund, offset
by $3.1 million in cash generated by financing activities.
The $5.1 million funding of operating activities arose primarily with
respect to a net loss in operations. The $1.6 million to fund investing
activities arose with respect to capitalized software development costs and the
purchase of fixed assets. The $3.1 million in cash provided by financing
activities arose primarily from the proceeds of $5.0 million from borrowing from
the line of credit, $2.0 million from the issuance of convertible notes and $2.9
million from the issuance of Series K Stock, offset by the $1.8 million payment
of preferred stock dividends, $3.5 million payment on the Series F Stock and the
principle payments on debt and capital lease obligations.
The adverse results of operations that the Company has experienced is
expected to continue at least until the first part of 1998. The Company believes
that its existing cash, potential future proceeds from such additional offerings
of equity securities as may be required, 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 $6.0
million, which is required for continued inclusion of the Company's securities
on the Nasdaq National Market. See "Risk Factors - Continued Listing on the
Nasdaq National Market." 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.
Recent Events
On December 31, 1996, the Company entered into a restricted $5 million
line of credit agreement with Fred E. Kassner ("Loan Agreement") to finance the
buy back of the Series F Preferred Stock. The line of credit bears a rate of
interest rate at 2% above a commercial lender's fluctuating prime rate. The line
of credit was initially secured by a lien against all of the domestic accounts
receivable of the Company pursuant to a security agreement with the stockholder
("Security Agreement"). In connection with the line of credit, the Company
issued to the stockholder warrants to purchase 100,000 shares of Common Stock at
an exercise price of $3.06 per share, warrants to purchase 70,000 shares of
Common Stock at an exercise price of $3.06 per share and warrants to purchase
30,000 shares of Common Stock at an exercise price of $2.09 per share
(collectively, the "Kassner Warrants"). In connection with the Kassner Warrants,
the Company granted the stockholder with one demand and two piggyback
registration rights, which will become effective on January 1, 1998.
On June 8, 1997, the Company and the stockholder entered into an
amendment to the Loan Agreement pursuant to which the stockholder permitted the
Company to use the proceeds of the loan for general corporate purposes and
entered into an amendment to the Security Agreement, which expanded the
stockholder's security to cover, including without limitation, (1) all personal
property of the Company, (2) all leases, licenses, permits, (3) all software
products intellectual property now owned or hereafter developed by the Company,
(4) all inventory, (5) all accounts, contract rights, chattel paper,
instruments, general intangibles, documents and other obligations, (6) all trade
or service n 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. Also at
that time, the stockholder agreed to modify and thereby eliminate a provision in
the Loan Agreement that required the Company to achieve and maintain
profitability by the end of the third quarter of 1997.
During July and August 1997, the Company issued to nominees for Mark
Shoom and Charles G. Kucey (collectively referred to as "Noteholders"), pursuant
to a private placement exemption under the Securities Act of 1933, as amended,
8% Convertible Notes due July 8, 2002 and August 20, 2002 totaling $2.0 million
(the "Convertible Notes"). $1.8 million of the Convertible Notes are convertible
into the Company's Common Stock beginning 45 days after issue at a conversion
price of $1.875 per share and $200,000 of the Convertible Notes are converible
with the Company's Common Stock beginning 45 days after issue at a conversion
price of $1.50 per share, which were the prices on the issue dates. The net
proceeds of the Convertible Notes have been used for working capital and general
corporate purposes. The Company also issued warrants to purchase 36,000 shares
and 4,000 shares of Common Stock, in the aggregate, to the Noteholders at
exercise prices of $1.875 and $1.50 per share ("Note Warrants"). The Note
Warrants expire on July 8, 2002 and August 20, 2002.
Interest on the Convertible Notes is payable at 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.
The holders of the Convertible Notes have a security interest in
accounts receivable, inventory, the intellectual property of the 1 View Software
and on the stock of the Company's subsidiary, Dorotech. 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 November 13, 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 million.
Pursuant to the terms of the Convertible Notes, the Company was
obligated to file a registration statement with the SEC to register the Common
Stock issuable on conversion of the Convertible Notes.
Accordingly, the Company filed this registration statement.
On or after October 30 (with respect to $1.8 million of Convertible
Notes), and December 12, 1997 (with respect to $200,000 of Convertible
Notes),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 (with respect to $1.8
million of Convertible Notes), and December 12, 1997, with respect to $200,000,
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.
See "Description of Capital Stock--Series K Convertible Preferred
Stock" and "Description of Capital Stock - Series L Convertible Preferred Stock"
for a description of the securities sold to Capital Ventures International,
Zanett Lombardier, Ltd., Bruno Guazzoni and the Zanett Securities Corporation
("Zanett").
On July 9, 1997, the Company issued to nominees for Mark Shoom and
Charles G. Kucey (collectively referred to as "Noteholders") 8% convertible
notes that are due on July 8, 2002. Pursuant to the terms of the convertible
cotes, the Company was obligated to register the Common Stock issuable in
connection with the convertible cotes by September 12, 1997. The net proceeds of
the convertible notes ($1.8 million) have been used for working capital and
general corporate purposes. The Company also issued warrants to purchase 36,000
shares of Common Stock, in the aggregate, to the Noteholders at an exercise
price of $1.875 per share ("Note Warrants").
The Note Warrants expire on July 8, 2000.
On August 20, 1997, the Company issued to one of the nominees for the
Noteholders additional 8% convertible notes that are due on August 20, 2002.
Pursuant to the terms of these convertible notes, the Company is obligated to
register the Common Stock issuable in connection with the convertible notes by
______________, 1997. The net proceeds of these convertible notes were also used
for working capital and general corporate purposes. The Company also issued
warrants to purchase 4,000 shares of Common Stock to one of the Noteholders at
an exercise price of $1.50 per share. These warrants expire on August 20, 2002.
Interest on the convertible notes is 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.
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. 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 November, 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 million.
Pursuant to the terms of the convertible notes, the Company was
obligated to file a registration statement with the SEC convertible notes45 days
The convertible notes issued in August are convertible into shares of Common
Stock beginning 45 days after issue (October 4, 1997) at a conversion price of
$1.50 per share.
convertible notes issued in JulyThe convertible notes issued in August
may not be redeemed prior to December 12, 1997. in the case of the convertible
notes issued in July, and on or after December 12, 1997, in the case of the
convertible notes issued in August, convertible notes1997 or December 12, as the
case may be, convertible notesSee "Description of Capital Stock - Series K
Convertible Preferred Stock" for a description of the securities sold to the
Purchasers and Zanett.
BUSINESS
Network Imaging Corporation ("Network Imaging" or the "Company") was
incorporated in Delaware in May 1991. The Company provides software products
supporting storage, management and distribution. These products provide
businesses and government organizations with an automated method of
electronically storing, managing and distributing large volumes of structured
data (text) and unstructured data (diagrams, documents, photographs, voice and
full-motion video).
The Company is a leader in content and storage management for all
unstructured information. Its flagship product, the 1View suite, manages the
storage, access and distribution of any multimedia (or unstructured) 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 COLD systems and a developer and marketer of storage management
software systems. 1View, InfoAccess(TM), Treev+(TM) and the Company logo are
trademarks of Network Imaging Corporation.
United States operations are conducted in Herndon, Virginia (primarily
the development, marketing and sales activities of the 1View suite and mainframe
COLD products), Minneapolis, Minnesota and Denver, Colorado (PC COLD products).
European operations are conducted primarily in Paris, France (hierarchical
storage management ("HSM") software and related storage products and engineering
services).
Traditional manual filing, retrieval, and distribution methods are
labor intensive, slow, require bulky file storage, allow only one person to use
a file at a time and often result in misfiled, damaged or lost items. Large
commercial and government organizations must continually process large volumes
of documents stored in hard copy paper files where there is a need for more
efficient movement of information throughout the enterprise. The information may
take the form of documents, database records, graphics, video clips, audio,
computer aided design ("CAD") and engineering drawings, and other such
"information objects" which are distributed throughout a multi-site enterprise.
To address this need for information storage, retrieval, and distribution
management, the Company has developed its principal products: the 1View software
application suite, a family of COLD products, and the Doro-family of products
for HSM applications.
The Company uses advances in object management software to capture and
store "information objects" with more advanced indexing and retrieval features
than those available for paper documents or "structured data." The Company's
information access, object management, and storage management systems have been
designed to support "open systems standards," which permit hardware and software
from different vendors to operate together on a network.
1View
The Company's 1View suite is designed to answer the information access
needs of large organizations. 1View's object enabling suite of software tools
contains flexible and layered application program interfaces ("APIs"), which
allow developers to select the appropriate level of API to suit customer
solution requirements, provide a bridge to "legacy" systems previously used, and
allow for easy customization of software systems in comparison to standard file
structures. 1View is an independent platform.
The 1View suite consists of the following:
1View: Object Manager is an API toolkit that provides a unique solution
for storing, managing, and distributing any type of multimedia document object
in high transaction, high volume, client/server and Internet/intranet
environments. It can manage information that originates from a large variety of
sources, including scanned documents, computer output, word processor or
spreadfile sheets, audio/voice or full motion clips, and photographic images.
1View: Object Manager helps companies seamlessly and efficiently
multimedia-enable existing or new database applications while preserving their
investments in legacy information systems, hardware equipment and personnel
training.
1View: EDM (Engineering Document Management) is a software product with
an application that solves the document management problems unique to
engineering organizations. Target customers include manufacturing, utilities,
transportation and other engineering-based corporations. The product supports a
variety of document types including oversized engineering and architectural
drawings, project plans, specifications and blueprints indexing the documents
according to end-user criteria.
1View: Workflow is a software product with an easy-to-implement suite
of software tools designed to automate complex business processes in
client/server and Web environments. It is a rules-based workflow management
system designed to allow integration and automation of work process management
applications into mainstream business practices. 1View:Workflow provides the
ability to graphically represent and control business processes by linking
together a variety of people and software elements to automate the flow of
documents (objects) throughout an enterprise.
1View: WebMOM (Web Multimedia Object Manager) is a software product
that allows companies to build customer Internet/intranet applications easily
and cost-effectively using the 1View:Object Manager as a back-end storage
repository. It delivers high performance access from Web browsers due to its
caching capabilities, while protecting confidentiality of data by linking to Web
security mechanisms. Upon requests from Web users, it locates the object,
retrieves it, adds a MIME header to it, and finally transfers it back through
the Web server to the Web browser. 1View:WebMOM supports all major Web browsers
and servers, such as Netscape Navigator, Netscape Web Server, MS Internet
Explorer, and MS Internet Information Server.
1View: COLD/ES is a report storage and retrieval system that offers
high volume, high speed mission critical print data handling. It lets the user
maximize the power and extensive resources of the mainframe computer by
off-loading report management operations to a cost-effective dedicated server
and its associated high efficiency data storage subsystem.
Another product is a software product that provides a storage and
retrieval system for scanned images and other documents. It provides a simple
and consistent way to find and view information regardless of the information's
storage location or internal format. In most cases, documents are added to this
system using a batch scanning process. This product is an end-user application
that runs with 1View:Object Manager. 1View:Object Manager handles the physical
management of documents as they are being scanned into the system and after they
have been stored on storage media while This product allows the end-user to
organize documents electronically in a structure that is meaningful to the
end-user and retrieves information rapidly.
Other Products
A significant portion of the Company's product emphasis is on packaged
software solutions. COLD software is an important component of several of these
products. COLD technology is widely accepted as a way to permanently archive and
provide for the retrieval of permanent business reports produced by computers
(computer output). COLD typically replaces printed paper reports and Computer
Output Microfiche (COM or "microfiche") with high capacity optical disks. Once
written permanently to this unalterable media, COLD provides for on-line viewing
of information such as banking and brokerage statements, utility bills, payroll
reports and corporate financial journals and reports. COLD technology provides a
more economical way to store the information as well as a faster method to
retrieve reports. Optical disk is a much less expensive storage medium than
microfiche or paper. By putting reports back on-line utilizing an organization's
standard terminals, workstations, and networks, productivity is increased as
compared to manually handling physical paper and microfiche. The Company is one
of the largest commercial providers of COLD technology.
The TREEV Division of the Company's U.S. operations has developed and
markets PC-based COLD systems used in over 2,000 community banks. TREEV also
markets imaging products to the community bank marketplace including 1View:Unity
a software product repackaged as TREEV Voyager II. TREEV Division provides
"turn-key" hardware and software solutions, maintenance services for its client
systems, consulting, training, and high quality optical supplies.
The Company's French subsidiary, Dorotech, headquartered in Paris,
develops and markets a family of software products designed to manage large
volumes of information and provides professional engineering services.
Dorotech's software products include DoroStore, DoroFile, Doro-JB, Dorokey, and
Dorodoc (the "DoroStore suite"). The DoroStore suite implements advanced data
and storage management solutions for enterprises with complex networks and large
numbers of servers and workstations. The capabilities of the DoroStore suite
include: (1) centralized administration capability to implement uniform data and
storage policies throughout a distributed network, (2) advanced backup and
restore processes to protect and secure data from disasters, and provide users
with a direct link to retrieving their individual files, (3) On-Line Database
Backup/Restore ("ODBR") to manage the backup and recovery of databases, (4)
advanced archiving methods that allow retrieval of files using keywords,
phrases, and date ranges, thereby reducing costly processes involving users and
administrators searching for specific files, (5) hierarchical storage management
for transparently and automatically storing data onto lower cost storage
subsystems, providing virtually limitless network capacity, and (6) full
security protection for all operations. The DoroStore suite provides a single
utility for administering heterogeneous environments in terms of storage space
and data protection across networks on any scale, up to and including the very
largest networks. 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.
Product Development
The Company's plan to consolidate the various 1View product development
groups into a common product development organization was completed in 1996. The
unified team now operates under a single senior manager and is located at the
Company's headquarters in Herndon, Virginia. This consolidation allows the
organization to operate under a common shared strategy, which includes both the
1View product suite's technical vision and software development methodology.
During 1997, the product development group focused on completing product release
plans that are responsive to the market and support the Company's short term
revenue goals.
The strategic direction for the products is to provide a cohesive suite
of 1View products that will deliver innovative, intelligent, multimedia content
management solutions to enable the Company's customers and business partners to
leverage existing applications and exploit emerging business opportunities
across the Internet/intranet. This vision has been accomplished by leveraging
the existing 1View suite of products and adapting them to the Web environment as
well as to database vendor products such as Sybase's OmniConnect. The Company
was an early adopter of the Microsoft's ActiveX technology and will continue to
migrate the existing toolkits and API into components that can be used to
rapidly build new enterprise wide applications and easily integrated into
existing customer applications.
The Company views the product development organization as one of its
key assets and will continue to invest in building the group's infrastructure,
refining the group's software development methodology, and implementing the
1View, COLD and storage management products strategy.
Assembly; Sources of Supply
The Company assembles its products at its facilities in Herndon,
Virginia, Denver, Colorado, and Paris, France. The Company relies exclusively on
outside suppliers for the hardware components of its products such as scanners,
printers, computers and optical disk drives and jukeboxes. Most parts and
components are currently available from multiple sources at competitive prices.
To date, the Company has not experienced significant delays in obtaining parts
and components, and although there can be no assurance, the Company does not
expect to experience such delays in the future.
Warranty and Service
Warranties for hardware sold by the Company are generally provided by
the manufacturer. The Company typically provides for its software products
warranties for ninety days and service contracts for support and maintenance
that usually cover one year periods. The Company recognizes revenue under
service contracts ratably over the contract period.
Competition
Management believes that the Company's 1View product line is an
innovative solution available for enterprise scaleable content and storage
management in the industry today. When companies have a clear need for storing,
managing and distributing multimedia objects such as large drawings,
photographs, documents, video clips, and audio clips that must: (a) scale to
many terabytes, (b) serve thousands of users and (c) work with existing and new
applications, application databases or universal database platforms in
distributed heterogeneous environments, there is no direct competition from
other companies. When only some, but not all, of these requirements must be met,
there is competition from companies such as FileNet Corporation, Wang,
Recognition International, Eastman Kodak and other vendors in the traditional
imaging and document management markets. For smaller scale systems in
centralized environments with low performance requirements, the competitive
issue becomes price or company size and stability.
With increasing recognition by companies such as Sybase, Informix, Sun
Microsystems, and Microsoft of the unique capability of the Network Imaging
product suite, many of those issues have become less important from a
competitive perspective.
There is, however, the potential for competition from the database,
application and storage vendors who in some cases are Network Imaging partners.
The new Universal Server initiatives from Oracle, Informix and IBM all
seem to indicate support to store and manage the same multimedia content in
markets that Network Imaging serves.
Scaleability of content storage requirements, complexity of the
environment (i.e., distributed content base, multiplatform, and multiple
application content access), and cost management of the storage resources
(hierarchical storage environments) are real and significant issues in this
industry. None of the database vendors completely solve these issues and most of
them have recognized that and are working with Network Imaging on large scale
system proposals. Sybase, Inc. has entered into a reseller agreement to remarket
the 1View solution as part of their adaptive server initiative. The Network
Imaging partner marketing program is targeted to address these competitive
issues and make business partners of the apparent competitors.
In the future, the systems management companies such as Computer
Associates and Tivoli are expected to recognize the need for comprehensive
content and storage management for multimedia as a part of their overall systems
management architecture. Their option to cooperate or compete will depend on how
rapidly they want to enter this market. In a market segment (Internet/intranet)
poised for explosive growth, Network Imaging has significant time to market
advantage over their competitors' software technology.
Backlog Orders
As of November 2, 1997, the Company had a backlog of orders for
approximately $1,000,000 for its TREEV Division, whereas on November 2, 1996,
the Company had a backlog of approximately $800,000 for its TREEV Division. The
backlog of orders for 1View and COLD exceed several million dollars. The Company
expects that it will fill approximately 80% of the current backlog within the
current fiscal year.
Marketing and Sales
The Company sells its products directly, through its own sales force,
and indirectly, through value added resellers, system integrators, and
distributors. The Company maintains sales offices in locations in or near New
York, Boston, Washington D.C., Atlanta, Charlotte, Denver, Detroit, Minneapolis,
Los Angeles, San Francisco, Dallas, Seattle and in Europe, near Paris, France.
The Company has active programs to develop marketing partnerships with
vendors of complementary product technologies such as companies who market and
manufacture database, application development, systems management, and
communication and connectivity middleware.
The Company also focuses on vertical market segments that have proven
requirements for the Company's product line. These market segments include
Telecommunications and Utilities, Finance Banking and Insurance, Healthcare,
Manufacturing, and the Public Sector. The Company has developed vertical
business development programs in these segments to identify sales opportunities,
create product awareness, and develop contacts for the Company's indirect sales
channels.
The Company advertises in numerous major industries, vertical market
and news publications. The Company markets diverse products to multiple
industries. It is not dependent on any one customer or business partner for a
major percentage of its business.
Business Dispositions
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 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.
As a result of the Divestitures, the Company recorded losses of
$921,000 and $9.3 million in 1996 and 1995, respectively. The aggregate
consideration received by the Company from the Divestitures was $1.6 million in
cash and $4.3 million in notes receivable, of which $320,000 was reserved as
uncollectible at December 31, 1996.
The Company sold the assets and liabilities of STI subsidiary in
September 1996. During 1995, the Company disposed of the following operations:
Hunt Valley Division (formerly NSI, Inc.), Network Imaging (UK Holdings)
Limited, Microsouth, Inc., Tekgraf, Inc., P E Systems, Inc., WildSoft Division,
and IBZ.
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. See "Risk
Factors--European Operations."
License Agreements and Pricing
The Company's software product revenues consist primarily of fees
generated from license of software products. In consideration of the payment of
license fees, the Company generally grants nonexclusive, nontransferable,
perpetual licenses that are primarily computer site or user specific. License
fee arrangements vary depending upon the type of software product being licensed
and on the number of users or locations in the case of client/server
implementations and on a per CPU basis in the case of mainframe installations.
The United States list price for the Company's 1View products ranges from $5,000
for a single product to several million dollars for the entire suite of the
Company's products.
Customers may generally obtain support services and maintenance for an
annual fee that is approximately 16% of the then-current annual license fee. The
support and maintenance fee is billed monthly or annually and is subject to
changes in software license list prices. Resellers of the Company's software
products are generally required to collect and remit to the Company 8% of the
Company's then-current annual license fees for maintenance and support services.
In such cases, the Company only provides a certain level of support to the
end-user and general maintenance and support, such as initial calls and queries,
are performed by the reseller. The Company also provides pre-installation
assistance, systems administration, training and other product-related services,
generally on a time and materials basis.
Proprietary Rights and Licenses
The Company regards its software as proprietary and relies on a
combination of trade secret, copyright and trademark laws, license agreements,
nondisclosure and other contractual provisions and technical measures to protect
its proprietary rights in its products. The Company distributes its software
products under reseller agreements and software license agreements that
typically grant customers nonexclusive, nontransferable licenses to the
Company's products and have perpetual terms unless terminated for breach. Under
these license agreements, the Company retains the right to market its products.
Use of the licensed software by the end user/customer is usually restricted to
the customer's internal operations on designated computers at specified sites
unless the customer obtains a site license, which restricts that use of the
software to designated users. Use is subject to terms and conditions prohibiting
unauthorized reproduction or transfer of the software. The Company also seeks to
protect the source code of its software as a trade secret and as an unpublished,
copyrighted work. See "Risk Factors--Intellectual Property Rights; Infringement
Claims."
Facilities
The Company's corporate headquarters, including its principal
administrative, product development, product management, technical support, and
sales and marketing operations, are located in 25,600 square feet of office
space in a building in Herndon, Virginia. The Company occupies the space under
leases expiring in the year 2000. The Company also leases an aggregate of 55,000
square feet of space in or near Atlanta, Georgia, Charlotte, North Carolina,
Chicago, Illinois, Dallas, Texas, Denver, Colorado, Los Angeles, California,
Minneapolis, Minnesota, New York New York, San Francisco, California, Seattle,
Washington, and Paris, France. The Company believes that its existing facilities
are suitable and adequate for its present needs and that suitable space will be
available as needed to accommodate any expansion of operations.
Employees
As of November 13, 1997, the Company had 234 full-time employees,
including 78 employees primarily engaged in research and development, 48 in
technical support and services, 76 in sales and marketing, and 32 in operations,
finance and administration.
Legal Proceedings
From time to time, the Company is involved in litigation relating to
claims arising out of its operation in the normal course of business. The
Company is not currently a party to any legal proceedings other than those in
the normal course of business.
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company, and their respec-
tive ages at September 2, 1997 are as follows:
Name Age Position
---- --- --------
James J. Leto (2) 53 President, Chief Executive Officer and
Chairman of the Board
Jorge R. Forgues 42 Senior Vice President of Finance and
Administration, Chief Financial
Officer
John M. Flowers 47 Senior Vice President of Engineering
Brian H. Hajost 41 Senior Vice President of Marketing
Mark T. Wasilko 43 Senior Vice President of Business
Alliances
Robert P. Bernardi (2) 46 Director and Assistant Secretary
John F. Burton (1) 46 Director
C. Alan Peyser 63 Director
Robert Ripp (1)(2) 56 Director
- --------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
James J. Leto became President and Chief Executive Officer and a
Director of the Company in May 1996 and became Chairman of the Board in June
1997. Mr. Leto served as the Chairman and Chief Executive Officer of PRC Inc.,
an information technology company ("PRC"), from January 1993 to February 1996,
and prior thereto in various capacities as an executive officer of that company.
From January 1989 until February 1992, Mr. Leto served as the Vice President and
General Manager of AT&T Federal Systems Computer Division, a division of AT&T
charged with developing a major system integration and computer presence in the
federal marketplace. Mr. Leto first joined AT&T in November 1977. Mr. Leto is a
director of Government Technology Systems, Inc.
Jorge R. Forgues became Chief Financial Officer, Vice President of
Finance and Administration and Treasurer of the Company in April 1996. In
January 1997, Mr. Forgues was promoted to Senior Vice President. From October
1993 through April 1996, he served as the Vice President of Finance &
Administration and Chief Financial Officer of Globalink, Inc., a computer
software developer that offers foreign language translation software. From July
1992 to September 1993, Mr. Forgues served as Director of Accounting at Spirit
Cruises, Inc., and from June 1987 to June 1992 he served as the Vice President
of Finance of Best Programs, Inc., a computer software developer. Mr. Forgues is
a director of On-Site Sourcing Incorporated.
John M. Flowers, Jr. was appointed Senior Vice President of Engineering
Services in April 1996. From 1989 to April 1996, he was with PRC, serving in
various capacities, including Manager of the Center for Imaging Technology,
Chief Architect for Systems Integration Division, Corporate Director of the
Imaging Core Competency Program, and Vice President and Chief Scientist for the
Information Systems Division.
Brian H. Hajost joined the Company in March 1996, was appointed Senior
Vice President of Integrated Products in April 1996 and was appointed Senior
Vice President of Marketing in May 1997. Form 1985 to 1995, Mr. Hajost was with
Servantis Systems, Inc. (formerly Stockholder Systems, Inc.) where he served in
various capacities including Securities Products Group Regional Manager,
Securities Products Group Regional Director Banking Sales, Securities Product
Group Vice President Sales Manager, Imaging Technologies Group Vice President
Sales and Marketing, and Imaging Technologies Group Senior Vice President
Business Unit Manager.
Mark T. Wasilko joined the Company in September 1995, became Senior
Vice President of Marketing for the Company in October 1995 and was appointed
Senior Vice President of Business Alliances in May 1997. From January 1994 to
August 1995, Mr. Wasilko was Vice President of Corporate Marketing for Legent
Corporation ("Legent"), an independent software vendor. Prior thereto, Mr.
Wasilko was Senior Vice President for Corporate Marketing at Computer Associates
International, Inc., an independent software vendor, where he had held a variety
of sales and marketing positions since 1982.
Robert P. Bernardi was a co-founder of the Company and has been a
Director of the Company (and its predecessor) since its inception. He served as
Chairman of the Board of Directors from September 1995 through June 1997. Mr.
Bernardi served as President of the Company from inception to February 1995 and
as Chief Executive Officer from inception to May 1996. From 1988 to 1990, Mr.
Bernardi was an independent consultant in the document imaging and
telecommunications fields. From March 1984 to December 1987, Mr. Bernardi was
Chairman and Chief Executive Officer of Spectrum Digital Corporation, a publicly
held telecommunications equipment manufacturing company ("Spectrum Digital"),
with overall management responsibilities including marketing, sales, engineering
and finance.
John F. Burton was appointed to the Board of Directors in September
1995. Mr. Burton became Managing Director of the Updata Group. a mergers and
acquisitions investment bank, in March 1997. From October 1996 to February 1997,
he served as the President of Burton Technology Partners, a strategic consulting
and investment company. Mr. Burton was President and Chief Executive Officer of
Nat Systems, Inc., a provider of applications development software from August
1995 to September 1996. From January 1995 to August 1995, Mr. Burton was an
independent consultant in the applications software field. From March 1992 to
January 1995, Mr. Burton served as Chief Executive Officer, and from 1989 to
January 1995 as President, Chief Operating Officer and a Director, of Legent.
Mr. Burton is also a Director of Banyan Systems, Inc., MapInfo Corporation and
Netrix Corporation. Mr. Burton was a founding member of the Northern Virginia
Technology Council.
C. Alan Peyser became a Director of the Company in May 1996. Mr. Peyser
was appointed President and Chief Executive Officer of Cable & Wireless, Inc.,
in October 1996. From September 1995 to October 1996, Mr. Peyser served as a
consultant to Cable & Wireless, Inc. He is also currently President of Country
Long Distance Corporation and a member of the Board of Directors of Tridex
Corporation and TCI International, Inc. Mr. Peyser previously served as the
Chief Executive Officer and President of Cable & Wireless, Inc. from 1980
through September 1995.
Robert Ripp has served as a Director since October 1994. Mr. Ripp is
Corporate Vice President and Chief Financial Officer of AMP, Inc., an
electronics manufacturer. Prior to joining AMP in 1994, Mr. Ripp was Vice
President and Treasurer of International Business Machines Corporation, where he
served in various capacities as a finance executive from 1964 to 1994. He is a
member of the board of directors of ACE, Limited.
Director Compensation
At the Board's quarterly meeting on August 28, 1997, the Board voted
and approved the elimination of payment for service to the Board and adopted,
subject to shareholder approval, the Directors Stock Option Plan (the "Director
Stock Option Plan"). Under the Director Stock Option Plan, each director who is
not an executive officer of the Company will receive an option to purchase
30,000 shares of Common Stock vested in 25% each quarter following the date of
grant, so that at upon the first anniversary of the stock option grant, the
option grant will be fully vested. The option price is equal to 100% of fair
market value on the date of the option grant. Messrs. Ripp, Burton, Peyser, and
Bernardi were each granted an option for 30,000 shares of the Company's Common
Stock under that plan effective July 1, 1997 with an exercise price equal to
100% of fair market value of the Common Stock on June 30, 1997.
Prior to that meeting, each director of the Company who was not
currently employed by the Company, received a fee of $1,000 for each meeting of
the Board or committee thereof that he attended in person and $250 for each such
meeting in which he participated by Plantelephone. Mr. Ripp has also been
granted options on 21,675 shares of Common Stock at $3.75 per share, 25,000
shares of Common Stock at $6.82 per share, and 25,000 shares of Common Stock at
$3.82 per share, each with a term of 10 years and each of which is exercisable
on a cumulative basis in four equal installments on each of the first four
anniversaries of the applicable date of grant. Mr. Burton has been granted an
option on 100,000 shares of Common Stock with an exercise price of $3.38 per
share and a term of 10 years. The option vests on May 2, 2002 or, earlier, upon
the Company's entering into a strategic partnership agreement with a major
software company as a result of the assistance of Mr. Burton. Mr. Peyser has
been granted an option on 50,000 shares of Common Stock at $3.69 per share with
a term of 10 years and that is exercisable on a cumulative basis in four equal
installments on each of the first four anniversaries of its date of grant. The
exercise prices of the options granted to directors were set at the fair market
value of the Common Stock at the time of grant.
The Company has entered into a termination of consulting agreement
("Bernardi Termination Agreement") with Robert P. Bernardi, and BCG, Inc.
("BCG") (of which Mr. Bernardi is the sole stockholder) that provides for the
termination, as of October 1, 1997, of the consulting agreement entered into
between the parties as of May 28, 1996. (See "Management - Compensation
Committee Interlocks and Insider Participation.") Under the terms of this
agreement, the Company agreed to pay BCG severance pay at the rate of $18,750
per month for the period beginning on October 1, 1997 and ending on September 1,
1998. The Company also granted to Mr. Bernardi a warrant to purchase 50,000
shares of the Common Stock at $1.50 per share. The warrant has a term of five
years. Furthermore, Mr. Bernardi held, prior to the execution of the Bernardi
Termination Agreement, options to purchase 1,348,325 shares of Common Stock with
exercise prices ranging from $2.60 to $6.82 per share. Under the terms of the
Bernardi Termination Agreement, these options were converted into options to
purchase 755,747 shares of Common Stock at an exercise price of $1.50 per share,
the market price of the Common Stock on September 17, 1997. These options are
not exercisable for a period of twelve months from October 1, 1997. The Company
also agreed to employ Mr. Bernardi as an Assistant Secretary of the Company at
an annual salary of $5,000. Mr. Bernardi will also receive health and dental
insurance through December 31, 2003. The agreement prohibits Mr. Bernardi for
one year from certain associations with any business that competes with the
Company. Mr. Bernardi also has the right to cause the Company to register, at
the Company's expense, shares of Common Stock held by Mr. Bernardi or issuable
on exercise stock options in a registration statement on Form S-3 at any time
prior to the termination of the Bernardi Termination Agreement or within one
year thereafter.
Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 1996, the Company's Compensation
Committee was composed of directors Robert P. Bernardi, the Company's Chief
Executive Officer until June 3, 1996 and currently an employee of the Company
and Robert Ripp, an outside director. As of September 2, 1997, the Compensation
Committee is composed of outside directors Robert P. Bernardi and Robert Ripp
and James J. Leto, the Company's President and Chief Executive Officer.
The Company entered into consulting agreements with BCG, Inc. ("BCG")
(of which Mr. Bernardi is the sole stockholder) that provided for BCG to make
the services of Mr. Bernardi available to the Company. The consulting agreement
was for an initial term ending January 31, 1999 and continued from year to year
thereafter unless terminated by either the Company or Mr. Bernardi. The
agreement with BCG provided for an annual consulting fee of $225,000, subject to
increase upon review by the Board of Directors. The Company also agreed to
employ Mr. Bernardi as Secretary at an annual salary of $5,000. The agreement
provided demand registration rights to Mr. Bernardi with respect to securities
of the Company owned by him or that he may acquire upon exercise of options.
Each registration right terminated on the first anniversary following
termination of the consulting agreement. The agreement prohibits Mr. Bernardi
during the term of the agreement from certain associations with any business
that competes with the Company.
The Company has entered into the Bernardi Termination Agreement with
Robert P. Bernardi, and BCG that provides for the termination, as of October 1,
1997, of the consulting agreement entered into between the parties as of May 28,
1996. In the Bernardi Termination Agreement, the Company agreed to pay BCG gross
severance pay at the rate of $18,750 per month, beginning on October 1, 1997 and
ending on September 1, 1998. Under the terms of this agreement, the Company also
granted to Mr. Bernardi a warrant to purchase 50,000 shares of the Common Stock
at $1.50 per share. The warrant has a term of five years. Furthermore, Mr.
Bernardi held, prior to the execution of the Bernardi Termination Agreement,
options to purchase 1,348,325 shares of Common Stock with exercise prices
ranging from $2.60 to $6.82 per share. Under the terms of the Bernardi
Termination Agreement, these options were converted into options to purchase
755,747 shares of Common Stock at an exercise price of $1.50 per share, the
market price of the Common Stock on September 17, 1997. These options are not
exercisable for a period of twelve months from October 1, 1997.the date of
execution of the Bernardi Termination Agreement. The Company also agreed to
employ Mr. Bernardi as an Assistant Secretary of the Company at an annual salary
of $5,000equal to the net amount sufficient to pay Mr. Bernardi's annual health
and dental insurance premiums through December 31, 2003. Mr. Bernardi will also
receive health and dental insurance through December 31, 2003. The agreement
prohibits Mr. Bernardi for one year from certain associations with any business
that competes with the Company. Mr. Bernardi also has the right to cause the
Company to register, at the Company's expense, shares of Common Stock held by
Mr. Bernardi or issuable on exercise stock options in a registration statement
on Form S-3 at any time prior to the termination of the Bernardi Termination
Agreement or within one year thereafter.
Summary Compensation Table
The Summary Compensation Table below lists the Chief Executive Officer
and the four other most highly compensated executive officers of the Company
(the "Named Executives") as of the end of 1996 and their compensation for
services in 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------
Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Options(#) Compensation ($)
(1)
<S> <C> <C> <C> <C> <C> <C>
Robert P. Bernardi(2)........ 1996 79,306 $ 50,000 0 $ 107,333(3)
Chairman of the Board 1995 182,306 50,000 1,148,325(4)
and Chief Executive Officer 1994 175,000 64,000 625,000(5)
James J. Leto................ 1996 118,974(6) 34,066 262,195
President and Chief 1995
Executive Officer (7) 1994
Russell D. Hale(8)........... 1996 165,000 11,050 0
Senior Vice President, 1995 165,000 43,329 250,000
Federal Sales 1994 28,135(9) 0
Mark T. Wasilko.............. 1996 150,000 13,125 28,049(13)
Senior Vice President, 1995 48,942(10) 57,927
Marketing 1994
Brian H. Hajost.............. 1996 102,000(11) 26,978 60,976 42,697(12)
Senior Vice President, 1995
Integrated Products 1994
- --------------------
</TABLE>
(1) Perquisites and other personal benefits, securities and property is
less than the lesser of $50,000 and 10% of the total annual salary and
bonus for each Named Executive in each year shown.
(2) Mr. Bernardi resigned as the Company's Chief Executive Officer
effective May 29, 1996 and as the Company's Chairman of the Board on
June 3, 1997.
(3) Mr. Bernardi became a consultant to the Company upon his resignation as
the Company's Chief Executive Officer. $102,083 constitutes the
consulting fees paid to Mr. Bernardi in 1996 and $5,250 constitutes the
automobile allowance for Mr. Bernardi. Mr. Bernardi terminated his
consulting agreement with the Company as of October 1, 1997 under the
terms of the Bernardi Termination Agreement.
(4) This number has been adjusted to give effect to the Bernardi Termina-
tion Agreement.
(5) Terminated pursuant to the Company's 1995 Option Repricing Program.
(6) Mr. Leto joined the Company as its Chief Executive Officer in May 1996.
(7) Mr. Leto became Chairman of the Board of the Company on June 3, 1997.
(8) Mr. Hale resigned as an officer of the Company effective April 1, 1997.
(9) Mr. Hale joined the Company as an officer in October 1994.
(10) Mr. Wasilko joined the Company as an officer in September 1995.
(11) Mr. Hajost joined the Company as an officer in March 1996.
(12) The amount shown constitutes temporary housing benefits and moving
expenses paid for Mr. Hajost in 1996.
(13) In August 1997, the Board of Directors approved a plan to reprice the
Company's outstanding stock options ("1997 Repricing Plan"). The 1997
Repricing Plan allowed holders of out-of-the money options, including
executive officers, non-officer employees, and non-director employees,
to receive a new exercise price of $1.50 per option share, the market
price on the date the 1997 Repricing Plan was approved. The 1997
Repricing Plan also allowed executives and officers who held
out-of-the-money options to also receive a new exercise price of $1.50,
but the number of shares covered by these options were reduced pursuant
to the Black-Scholes formula so that there would be approximate
economic equivalence between old and new options. As a result, options
for an aggregate of 561,752 out of a total of 1,635,000 shares of
Common Stock at exercise prices ranging from $6.82 to $1.91 per share
were repriced. The number of shares of Common Stock shown in this table
have been adjusted to reflect the 1997 Repricing Plan.
Option Grants in Last Fiscal Year
No stock options were granted to Messrs. Bernardi or Hale during 1996.
The following table sets forth certain information concerning the grant of
options to the other Named Executives in 1996. The Company has not granted any
stock appreciation rights ("SARs"). The table set forth below does not give
effect to the 1997 Repricing Plan.
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------
Percent of Potential Realizable
Number of Total Value at Assumed
Securities Options Annual Rates of Stock
Underlying Granted to Exercise Price Appreciation
Options Employees in or Base Expiration for Option Term
-----------------------------
Name Granted(#) Fiscal Year Price($/Sh) Date 5% 10%
- ---- ---------- -------------- ----------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
James J. Leto........ 500,000(1) 34% $4.22 5/28/06 $1,327,000 $3,363,000
Mark T. Wasilko..... 50,000(1) 3% $3.82 4/10/06 $ 120,120 $ 305,000
Brian H. Hajost...... 50,000(1) 3% $3.82 4/15/06 $ 120,120 $ 305,000
50,000(1) 3% $3.13 9/22/06 $ 98,500 $ 249,500
- --------------------
</TABLE>
(1) Each of the indicated options was granted pursuant to the Company's
Employee Incentive Stock Option Plan and vests four years from the date
of grant, or, for the options held by Mr. Leto, upon the acquisition of
the Company.
Aggregated Option Exercises in Last Year and Year End Option Values
The following table summarizes the value realized upon exercise of
outstanding stock options and the value of the outstanding options held by the
Chief Executive Officer and the other Named Executives. The table set forth
below does not give effect to the 1997 Repricing Plan.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Year-End(#) at Fiscal-Year-end($)(1)
Shares
Acquired on Value
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Bernardi.. 0 0 680,582 667,743 $230,000 $0
James J. Leto....... 0 0 0 0 500,000 0
Russell M. Hale..... 0 0 125,000 125,000 0 0
Mark T. Wasilko..... 0 0 43,750 131,250 0 0
Brian H. Hajost..... 0 0 0 100,000 0 0
- --------------------
</TABLE>
(1) Computed by multiplying the number of options by the difference between
(i) the per share market value of the Common Stock on December 31, 1996
and (ii) the exercise price per share.
OWNERSHIP OF NETWORK IMAGING CORPORATION STOCK
The following table sets forth certain information, as of November 13,
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) each Named Executive; 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 table does
not include shares of Common Stock that may be issued to the Purchasers because,
except in the event of a required conversion at maturity, no holder of Series K
Stock or Series L Stock is entitled to convert such securities to the extent
that the shares to be received by such holder upon conversion would cause such
holder to beneficially own more than 4.9% or 4.99 %, respectively, of the
outstanding shares of Common Stock.
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 of
Name and Address of Beneficial Owner Beneficially Owned (1) Class
------------------------------------ ---------------------- -----
<S> <C> <C>
Fred E. Kassner(2)................................................. 2,285,297 8.8
Robert P. Bernardi(3).............................................. 447,500 1.5
James J. Leto(4)................................................... 91,816 0.3
Robert M. Sterling, Jr.(5)......................................... 678,500 2.3
Mark T. Wasilko(6)................................................. 21,494 *
John F. Burton..................................................... 50,000(7) *
C. Alan Peyser(8).................................................. 21,500 *
Robert Ripp(9)..................................................... 23,332 *
Brian H. Hajost(10)................................................ 17,248 *
Directors and executive officers as a group (9) persons 714,515 2.6
- --------------------
</TABLE>
* Less than 1% of the outstanding Common Stock.
(1) Under applicable rules of 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, 354,000 are issuable upon the exercise of
warrants.
(3) Includes 755,747 shares issuable upon exercise of options.
(4) Includes 65,549 shares issuable upon exercise of options.
(5) Includes 755,747 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) All shares are issuable upon exercise of options.
(8) Includes 12,500 shares issuable upon exercise of options.
(9) Includes 17,088 shares issuable upon exercise of options.
(10) Includes 15,244 shares issuable upon exercise of options.
CERTAIN TRANSACTIONS
The Company entered into consulting agreements with Mr. Bernardi and
BCG, and with Mr. Sterling and Sterling Capital that provided for BCG and
Sterling Capital Group, Inc. ("Sterling Capital") (of which Mr. Sterling is the
sole stockholder) to make the services of Messrs. Bernardi and Sterling
available to the Company. Each of the consulting agreements was for an initial
term ending January 31, 1999 and continued from year to year thereafter unless
terminated by either the Company or either of Messrs. Bernardi or Sterling. Each
of the agreements with BCG and Sterling Capital provided for an annual
consulting fee of $225,000, subject to increase upon review by the Board of
Directors. The Company also agreed to employ Mr. Bernardi as Secretary or
Assistant Secretary and Mr. Sterling as Assistant Secretary of the Company at an
annual salary of $5,000. The agreements provided demand registration rights to
Messrs. Bernardi and Sterling with respect to securities of the Company owned by
them or that they may acquire upon exercise of options. Each registration right
terminates on the first anniversary following termination of the consulting
agreement. Each of the respective agreements prohibited Messrs. Bernardi and
Sterling during the term of the agreement from certain associations with any
business that competes with the Company.
The Company has entered into termination of consulting agreements with
(i) Robert M. Sterling and Sterling Capital, (ii) John B. Mann and Mann
Enterprises, Inc. ("ME") (of which Mr. Mann is the sole stockholder), and (iii)
Robert P. Bernardi and BCG, each of which provide for the termination of
consulting agreements between the above named parties and the Company effective
October 1, 1997.
The Company has entered into a termination of consulting agreement
("Sterling Termination Agreement") with Robert M. Sterling and Sterling Capital
that provides for the termination, as of October 1, 1997, of the consulting
agreement entered into between the parties as of February 1, 1994. Under the
terms of this agreement, the Company paid Sterling Capital $58,500 on October 1,
1997 and agreed to pay gross severance pay to Sterling Capital at a rate of
$10,000 per month for the period beginning on October 1, 1997 and ending on
December 1, 1998. The Company also agreed to pay Sterling Capital $12,000 on
January 1, 1999. The Company also granted to Mr. Sterling a warrant to purchase
100,000 shares of the Common Stock at $1.50 per share. The warrant has a term of
five years and the underlying shares of Common Stock are subject to piggy-back
registration rights commencing one year after the date of execution of the
Sterling Termination Agreement. Furthermore, Mr. Sterling held, prior to the
execution of the Sterling Termination Agreement, options to purchase 1,348,325
shares of Common Stock with exercise prices ranging from $2.60 to $3.75 per
share. Under the terms of the Sterling Termination Agreement, these options were
converted into options to purchase 755,747 shares of Common Stock at an exercise
price of $1.50 per share, the market price of the Common Stock on September 17,
1997. These options are not exercisable for a period of twelve months from the
date of execution of the Sterling Termination Agreement. The Company also agreed
to employ Mr. Sterling as an Assistant Secretary of the Company at an annual
salary equal to the net amount sufficient to pay Mr. Sterling's annual health
and dental insurance premiums through December 31, 2003. The agreement prohibits
Mr. Sterling through October 13, 1998 from certain associations with any
business that competes with the Company.
The agreement with John B. Mann and ME ("Mann Termination Agreement")
terminates the agreement entered into among them and the Company on March 30,
1994. The Company agreed to pay Mann Inc. $30,000 on October 1, 1997. In
addition, the Company agreed to pay gross severance pay at the rate of $5,000
per month for the period beginning on October 1, 1997 and ending on September 1,
1998. Additionally, the Company agreed to grant to ME a warrant to purchase
66,667 shares of Common Stock for $1.50 per share, which has a term of five
years. The underlying shares of Common Stock are subject to piggyback
registration rights commencing one year after the date of execution of the Mann
Termination Agreement. Furthermore, Mr. Mann held, prior to the execution of the
Mann Termination Agreement, options to purchase 560,340 shares of Common Stock
with exercise prices ranging from $2.60 to $6.82 per share. Under the terms of
the Mann Termination Agreement, these options were converted into options to
purchase 321,170 shares of Common Stock at an exercise price of $1.50 per share,
the market price of the Common Stock on September 17, 1997. These options are
not exercisable for a period of twelve months from the date of execution of the
Mann Termination Agreement. The Company also agreed to employ Mr. Mann as an
Assistant Secretary of the Company at an annual salary equal to the net amount
sufficient to pay Mr. Mann's annual health and dental insurance premiums through
December 31, 2003. The agreement prohibits Mr. Mann through October 17, 1998
from certain associations with any business that competes with the Company.
For a description of the Bernardi Termination Agreement, see
"Management --Compensation Committee Interlocks and Insider Participation." For
a description of the convertible notes, related warrants and the Loan Agreement,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Events." For a description of the Series K Stock, the
Series L Stock and related warrants, see "Description of Capital Stock -- Series
K Convertible Preferred Stock" and "Description of Capital Stock - Series L
Convertible Preferred Stock."
SELLING STOCKOLDERS
The following table sets forth the names of the Selling Stockholders,
the number of shares of Common Stock beneficially owned by each Selling
Stockholder as of December 4, 1997 and the number of Shares that may be offered
for sale pursuant to this offering by each such Selling Stockholder. None of the
Selling Stockholders has held any position, office or other material
relationship with the Company or any of its affiliates within the past three
years other than as a result of his or its ownership of the Convertible Notes
and the other Company securities that it holds. The Shares may be offered from
time to time by the Selling Stockholders named below. However, such Selling
Stockholders are under no obligation to sell all or any portion of such Shares,
nor are the Selling Stockholders obligated to sell any such Shares immediately
pursuant to this Registration Statement. Because the Selling Stockholders may
sell all or part of their Shares, no estimate can be given as to the number of
shares of Common Stock that will be held by any Selling Stockholder upon
termination of any offering made hereby.
<TABLE>
<CAPTION>
Common Stock Beneficially
Owned After Offering(1)
Shares of Common -----------------------------
Name of Selling Stock Beneficially Common Stock Percent of
Stockholder Owned Prior to Offering Offered Hereby Number Outstanding
- ------------------ ----------------------- -------------- ------ ------------
<S> <C> <C> <C> <C>
Mark Shoom and
Mark Shoom as
beneficial owner of
shares held by
Wood Gundy in trust
for RRSP 550 98866 19
and
Wood Gundy in
trust for RRSP 550
98867 18 648,365 (2) (3) 1,053,500 (4) 445,135 1.7%
Charles Kucey and
Charles Kucey as
beneficial owner of
shares held by
Gundyco in
trust for RRSP 550
99119 12 (2)
and
Wood Gundy in trust
for RRSP 55099119
12 664,248 (2) (3) 1,096,500 (4) 472,252 1.8%
- --------------------------
</TABLE>
(1) Assumes the sale of all Shares.
(2) On July 9, 1997 and August 21, 1997, the Company issued to the Selling
Stockholders the Convertible Notes. The Convertible Notes are due on
July 8, 2002 and August 20, 2002, respectively. Mark Shoom is the
beneficial owner of the Convertible Notes issued to Wood Gundy in
aggregate principal amount of $1,000,000 dated July 9, 1997. Charles
Kucey is the beneficial owner of the Convertible Notes issued to
Gundyco in aggregate principal amount of $800,000 dated July 9, 1997
and in aggregate principal amount of $200,000 dated August 21, 1997.
Pursuant to the terms of the Convertible Notes, the Company is
obligated to register the Common Stock issuable upon conversion of each
Convertible Note. Convertible Notes issued in the aggregate principal
amount of $1,000,000 and $800,000 dated as of July 9, 1997 were issued
to Gundyco in trust for RRSP 550 98866 19 (for the benefit of Mark
Shoom) and Gundyco in trust for RRSP 550 99119 12 (for the benefit of
Charles Kucey), respectively, and as of December 4, 1997 are
convertible into (including interest) 568,365 and 446,572 shares of
Common Stock, respectively. Convertible Notes issued in the aggregate
principal amount of $200,000 dated as of August 20, 1997 were issued to
Gundyco in trust for RRSP 550 99119 12 (for the benefit of Charles
Kucey) and as of December 4, 1997 are convertible into (including
interest) 137,676 shares of Common Stock.
The Convertible Notes issued in July in the aggregate principal amount
of $1,800,000 are convertible into shares of Common Stock 45 days
beginning after issue (August 23, 1997) at a conversion price of $1.875
per share. On or after October 30, 1997, the holders have the right to
redeem these Convertible Notes at face value plus accrued interest on
one business day's 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 these Convertible Notes at face value
plus accrued interest on 30 days' notice to the holders in cash or
shares 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 the Nasdaq National Market.
The Convertible Notes issued in August in the aggregate principal
amount of $200,000 are convertible into shares of Common Stock 45 days
beginning after issue (September 4, 1997) at a conversion price of
$1.50 per share. On or after December 12, 1997, the holders have the
right to redeem these 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 December 12,
1997, the Company has the right to redeem these Convertible Notes at
face value plus accrued interest on 30 days' notice to the holders in
cash or shares 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 the Nasdaq
National Market.
(3) Warrants to purchase 20,000 shares of Common Stock dated as of December
20, 1995 were issued to each Wood Gundy in trust for RRSP 550 98867 18
(for the benefit of Mark Shoom) and Wood Gundy in trust for RRSP 550
99119 12 (for the benefit of Charles Kucey). Warrants to purchase
40,000 shares of Common Stock dated June 25, 1996 were issued to each
Mark Shoom and Charles Kucey. Warrants to purchase 20,000 and 16,000
shares of Common Stock dated as of July 9, 1997 were issued to Gundyco
in trust for RRSP 550 98866 19 (for the benefit of Mark Shoom) and
Gundyco in trust for RRSP 550 99119 12 (for the benefit of Charles
Kucey), respectively. A warrant to purchase 4,000 shares of Common
Stock dated as of August 21, 1997 was issued to Gundyco in trust for
RRSP 550 99119 12 (for the benefit of Charles Kucey). The resale of the
shares of Common Stock issuable on exercise of these warrants is not
registered under this Registration Statement.
(4) Represents the pro rata allocation between trustees for the benefit of
each Mark Shoom and Charles Kucey of the 2,150,000 shares of Common
Stock that the Company is registering hereunder issuable pursuant to
the Convertible Notes based on the outstanding principal amount of the
Convertible Notes held by each. The 2,150,000 shares of Common Stock
represent a greater number of shares than the number of shares of
Common Stock into which the Convertible Notes (including interest) are
currently convertible.
PLAN OF DISTRIBUTION
The Shares are being offered on behalf of the Selling Stockholders, and
the Company will not receive any proceeds from this offering. The Shares may be
sold or distributed from time to time by the Selling Stockholders, or by
pledgees, donees or tranferees of, or other successors in interest to, the
Selling Stockholders, directly to one or more purchasers (including pledgees) or
through brokers, dealers or underwriters who may act solely as agents or may
acquire Shares as principals, at market prices prevailing at the time of sale,
at prices related to such prevailing market prices, at negotiated prices, or at
fixed prices, which may be changed. The distribution of the Shares may be
effected in one or more of the following methods: (1) ordinary brokers'
transactions, which may include long or short sales; (2) transactions involving
cross or block trades or otherwise on the Nasdaq National Market or Nasdaq Small
Cap Market; (3) purchases by brokers, dealers or underwriters as principal and
resale by such purchasers for their own accounts pursuant to this Prospectus;
(4) "at the market" to or through market makers or into an existing market for
the Common Stock; (5) in other ways not involving market makers or established
trading markets, including direct sales to purchasers or sales effected through
agents; (6) through transactions in options, swaps or other derivatives (whether
exchange-listed or otherwise), or (7) any combination of the foregoing, or by
any other legally available means. In addition, the Selling Stockholders or
their successors in interest may enter into hedging transactions with
broker-dealers who may engage in short sales of shares of Common Stock in the
course of hedging the positions they assume with the Selling Stockholders. The
Selling Stockholders or their successors in interest may also enter into option
or other transactions with broker-dealers that require the delivery by such
broker-dealers of the Shares, which Shares may be resold thereafter pursuant to
this Prospectus.
Brokers, dealers, underwriters or agents participating in the
distribution of the Shares as agents may receive compensation in the form of
commissions, discounts or concessions from the Selling Stockholders and/or
purchasers of the Shares for whom such broker-dealers may act as agent, or to
whom they may sell as principal, or both (which compensation as to a particular
broker-dealer may be less than or in excess of customary commissions). The
Selling Stockholders and any broker-dealers who act in connection with the sale
of Shares hereunder may be deemed to be "underwriters" within the meaning of the
Securities Act, and any commissions they receive and proceeds of any sale of
Shares may be deemed to be underwriting discounts and commissions under the
Securities Act. Neither the Company nor any Selling Stockholder can presently
estimate the amount of such compensation. The Company knows of no existing
arrangements between any Selling Stockholder and any other shareholder, broker,
dealer, underwriter or agent relating to the sale or distribution of the Shares.
The Company will pay substantially all of the expenses incident to the
registration, offering and sale of the Shares to the public other than
commissions or discounts of underwriters, broker-dealers or agents and the
expenses of counsel to the Selling Stockholders. Such expenses are estimated to
be $80149,000.
DESCRIPTION OF CAPITAL STOCK
The following statements with respect to the Company's securities are
subject to, and qualified in their entirety by reference to, the detailed
provisions of the Company's Certificate of Incorporation and Bylaws and the
resolutions adopted by the Board of Directors of the Company ("Board")
establishing the rights, preferences, privileges and restrictions relating to
Series A Stock, the Series F Stock, the Series K Stock and the Series L Stock as
filed under Delaware law (the "Certificates of Designations").
Authorized Stock
The Company is authorized to issue up to 100,000,000 shares of Common
Stock, $.0001 par value, of which 25,959,101 shares were outstanding at November
13, 1997, and 20,000,000 shares of preferred stock, $.0001 par value (the
"Preferred Stock"), of which 1,605,025 shares of Series A Stock, 792,186 shares
of Series F Stock, and 3,300 shares of Series K Stock were outstanding on that
date. On December 8, 1997, the Company issued 3,250 shares of Series L Stock.
Common Stock
All holders of Common Stock are entitled to one vote per share on any
matter coming before the stockholders for a vote, unless the matter is one upon
which by express provision of law a different vote is required. The Common Stock
does not have cumulative voting rights, which means, in effect, that holders of
more than 50% of the shares can generally elect all the directors.
Each holder of Common Stock is entitled to receive ratably such
dividends on the Common Stock as may be declared by the Board out of funds
legally available therefor and, in the event of the liquidation, dissolution or
winding up of the Company, is entitled to share ratably in all assets of the
Company remaining after payment of liabilities and payment of amounts due to
holders of capital stock senior to the Common Stock. The Board may not declare
dividends payable to holders of Common Stock unless and until all accrued cash
dividends through the most recent past dividend payment date have been paid in
full to holders of the Series A and F Stocks. Holders of Common Stock have no
conversion, preemptive or other rights to subscribe for additional shares, and
there are no redemption rights or sinking fund provisions with respect to the
Common Stock. The outstanding shares of Common Stock are validly issued, fully
paid and nonassessable.
The Company has never paid any dividends on the Common Stock and does
not anticipate paying any such dividends in the foreseeable future.
Preferred Stock
The Certificate of Incorporation authorizes the Board to establish and
designate the classes, series, voting powers, designations, preferences and
relative, participating, optional or other rights, and such qualifications,
limitations and restrictions of the Preferred Stock as the Board, in its sole
discretion, may determine without further vote or action by the stockholders.
The rights, preferences, privileges, and restrictions or qualifications
of different series of Preferred Stock may differ with respect to dividend
rates, amounts payable on liquidation, voting rights, conversion rights,
redemption provisions, sinking fund provisions and other matters. The issuance
of Preferred Stock could decrease the amount of earnings and assets available
for distribution to holders of Common Stock or could adversely affect the rights
and powers, including voting rights, of holders of Common Stock.
The existence of the Preferred Stock, and the power of the Board to set
its terms and issue a series of Preferred Stock at any time without stockholder
approval, could have certain anti-takeover effects. These effects include that
of making the Company a less attractive target for a "hostile" takeover bid or
rendering more difficult or discouraging the making of a merger proposal,
assumption of control through the acquisition of a large block of Common Stock
or removal of incumbent management, even if such actions could be beneficial to
the stockholders of the Company.
Series A Cumulative Convertible Preferred Stock
The issuance of up to 1,750,000 shares of Series A Stock has been
authorized and 1,605,025 shares are outstanding. The Series A Stock has a
liquidation preference of $25.00 per share plus all accrued and unpaid
dividends.
The Series A Stock is convertible into Common Stock at any time prior
to redemption or exchange. As of November 13, 1997, the Series A Stock is
convertible at the rate of 2.06 shares of Common Stock for each share of Series
A Stock (an effective conversion price of $12.11 per share). The conversion rate
and conversion price are adjustable in certain circumstances, which are
described in the Series A Certificate. Some of those circumstances are described
below.
The Series A Stock, upon 30 days written notice after December 7, 1996,
is redeemable by the Company at $25.00 per share, plus accumulated and unpaid
dividends, and exchangeable by the Company for Common Stock having a current
market price of $25.00 per share, provided in each case that the closing sale
price of the Common Stock for at least 20 consecutive trading days ending not
more than 10 trading days prior to the date notice of the call for redemption or
notice of exchange is given is at least $18.00 per share, or after December 7,
1997, at the cash redemption prices (ranging from $26.75 to $25.00) set forth in
the Certificate of Designations, plus accumulated and unpaid dividends. The
Company may not redeem by exchange unless all accumulated and unpaid dividends
have been paid or funds for payment have been set aside.
If the Company sells or issues Common Stock or rights, options,
warrants or convertible securities ("Rights") containing the right to subscribe
for or purchase Common Stock and the sale or issue price of the Common Stock is
less than the lower of the current conversion price or current market price
("Current Price"), the conversion price is adjusted such that the number of
shares of Common Stock receivable upon conversion of the Series A Stock shall be
the number determined by multiplying (1) the number of shares of Common Stock
receivable upon conversion of the Series A Stock immediately prior to such
issuance and (2) a fraction (not to be less than one) with a numerator equal to
the product of the number of shares of Common Stock outstanding after giving
effect to such issuance (assuming that such Rights had been fully exercised or
converted) and the Current Price and a denominator equal to the sum of (a) the
product of the number of shares of Common Stock outstanding immediately before
such issuance and the Current Price and (b) the aggregate consideration received
or deemed received by the Company for the shares of Common Stock to be sold or
purchased upon exercise of the Rights.
Cumulative dividends on the Series A Stock at the rate of $2.00 per
share per annum are payable quarterly, out of funds legally available therefor,
on January 31, April 30, July 31 and October 31 of each year, commencing January
31, 1994. Failure to pay any quarterly dividend will result in a reduction of
$.50 per share in the conversion price. If the Company fails to pay dividends on
the Series A Stock for four quarterly dividend payment periods, holders of
Series A Stock voting separately as a class will be entitled to elect one
director; such voting rights will be terminated as of the next annual meeting of
stockholders following payment of all accrued dividends. In addition, the
Company may not pay dividends on, or redeem, junior securities unless all
accrued and unpaid dividends on the Series A Stock have been paid. The Company
failed to pay the quarterly dividend on July 31, and October 31, 1997.
The affirmative vote of a majority of the outstanding shares of Series
A Stock voting as a single class is necessary to authorize any class of senior
or parity securities unless, at that time the Company has the right to redeem
the Series A Stock and such redemption occurs before the senior or parity
securities are issued.
The Series A Stock is senior to the Series F, K and L Stocks. The
Company is not subject to any mandatory redemption or sinking fund provision
with respect to Series A Stock. The holders of the Series A Stock are not
entitled to preemptive rights to subscribe for or to purchase any shares or
securities of any class which may at any time be issued, sold or offered for
sale by the Company. The purchase agreements for each of the Series K and L
Stock requires that the Company not use the proceeds of that offering to make
the quarterly dividend payments to the holders of Series A Stock. Shares of
Series A Stock redeemed or otherwise reacquired by the Company shall be retired
by the Company and shall be unavailable for subsequent issuance as Series A
Stock.
In addition, the Company has issued to RAS Securities Corp. ("RAS") and
R.A. Schneider ("RA") representatives' warrants to purchase, in aggregate, (i)
up to 140,000 shares of Series A Stock (112,000 to RAS and 28,000 to RA), or
(ii) up to 253,624 shares of Common Stock (202,809 shares to RAS and 50,725
shares to RA), or (iii) any combination of (i) and (ii). These warrants are
exercisable by the holders through December 7, 1998 at an initial exercise price
(subject to adjustment) of $41.25 per shares of Series A Stock and $22.77 per
share of Common Stock. The Company gave to the holders of the warrants piggyback
registration rights expiring December 7, 2000. Under the terms of the warrant
agreement, the shares of Series A Stock underlying this warrant cannot be
redeemed by the Company even if the Company has called all or part of the
outstanding Series A Stock for redemption. Accordingly, the Company is seeking
to obtain the consent of RAS and Schneider to an amendment to the RAS Agreement
that would terminate this provision of the RAS Agreement. There can be no
assurance that RAS and Schneider will consent to such an amendment.
See "Risk Factors" - Amendment to Certificate of Designations of Series
A Stock" for a description of certain proposed changes to the Certificate of
Designations of the Series A Stock.
Acquisition Preferred Stock
In connection with the acquisition of Dorotech, the Company issued
2,092,186 shares of Series B Convertible Preferred Stock ("Series B Stock") to a
corporate stockholder of Dorotech. The Series B Stock was entitled to the same
cash dividends as were paid on the Common Stock, if any, was convertible into
Common Stock commencing six months after it was issued on a share basis (subject
to anti-dilution adjustments), had a liquidation value of $9.00 per share, and
had no voting rights, except those required by law. Four series of Series B
Stock were authorized, and all had substantially the same terms. Each of the
first three series provided that if it had not been transferred by the original
holder to an unaffiliated third party prior to the time it became convertible at
the end of a six-month period following its issuance, it would have been
automatically exchanged for the next series, unless the holder elected otherwise
by prior written notice to the Company. The fourth series provided that
immediately prior to the time it became convertible, it would have been redeemed
by the Company for $9.00 per share, unless the holder had transferred the shares
to an unaffiliated third party or elected not to redeem by prior written notice
to the Company. Any shares of any of the Series B Stock transferred by the
original holder to an unaffiliated third party would thereafter have been
redeemable by the Company for Common Stock at the conversion rate in effect at
the time of redemption. The Series B Stock was junior to the Series A Stock.
The original holder converted 300,000 shares of the Series B Stock into
Common Stock in April 1994. In July 1994, the Company entered into an agreement
with the holder and an affiliate of the holder, which was a prospective
transferee of the Series B Stock and the Common Stock, in which the holder and
the affiliate agreed, among other things, to extend the cash redemption date for
the Preferred Stock from October 1, 1995 to October 1, 1996. In order to
accomplish the extension, the Company agreed to offer to exchange a Series C
Stock for the Series B Stock and the holder of the Series B Stock and its
affiliate agreed to accept the exchange. The provisions of the Series C Stock
and the Series B Stock (collectively, the "Acquisition Preferred Stock") were
the same in all material respects except for the cash redemption date.
In March 1996, the Company and the holder of the Acquisition Preferred
Stock exchanged the Acquisition Preferred Stock for 1,792,186 shares of Series F
Stock and in connection therewith all authorized shares of the Acquisition
Preferred Stock were returned to the status of authorized preferred stock of the
Company of no designated class or series. The Series F Stock is junior to the
Series A Stock and senior to the Series K Stock and the Series L Stock. In
connection with the exchange of the Acquisition Preferred Stock for the Series F
Stock, the Company paid the holder a fee of $650,000 plus expenses and agreed to
obtain the consent of the holder prior to issuing any unsecured long-term debt.
The Company also agreed to extend the holder's registration rights to June 30,
1999, assist the holder with a private placement of the Series F Stock or the
Common Stock into which it is convertible, and extend observer rights to the
holder with respect to regular meetings of the Board.
The Series F Stock has no voting rights, except that the affirmative
vote of a majority of the outstanding shares of Series F Stock voting as a
single class is necessary with respect to the amendment of its terms, the
issuance of senior and parity securities, the redemption of parity and junior
securities and other matters required by law.
The Series F Stock is convertible into Common Stock six months after it
is issued on a share for share basis (subject to antidilution adjustments). Four
series of Series F Stock have been authorized, and all have substantially the
same terms. Each of the first three series provides that, at the end of the six
month period following its issuance, it will be automatically exchanged for the
next series, unless the holder elects otherwise by prior written notice to the
Company. The fourth series provides that it will be redeemed by the Company on
January 2, 1998 for $9 per share plus accrued and unpaid dividends (the
"Redemption Price"), unless the holder elects not to redeem by prior written
notice to the Company.
Beginning October 1, 1996, the Series F Stock is entitled to receive
dividends in an amount equal to the greater of 10% per annum or the annual rate
of any dividend paid on the Company's Common Stock. Dividends accrue daily and
be payable on the last day of June, September, December and March commencing on
December 31, 1996. 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 accrues dividends on the outstanding shares of Series F
Stock, but is not obligated to make any payments until January 31, 1998 or upon
the occurance of certain conditions under the control of the Company. See "Risk
Factors -- European Operations."
In the event of a change in control of the Company, the Series F Stock
becomes convertible at the rate described above and the then holder of the
Series F Stock may elect to redeem at the Redemption Price; provided, however,
that, if the acquiror has a class of securities registered pursuant to Section
12 of the Exchange Act, and has outstanding voting stock held by non-affiliates
with an aggregate market value of at least $100 million and if the Company
agrees to pay the holder in cash the excess, if any, of the Redemption Price
over the transaction consideration, the holder will not be entitled to
redemption and will be deemed to have elected to convert the Series F Stock. A
change in control is deemed to occur if substantially all the assets of the
Company are sold, if the Company is merged or consolidated with another
corporation, if any person acquires 50% or more of the Company's outstanding
voting securities or if during any period of two consecutive years individuals
who at the beginning of such period constitute the Board cease for any reason to
constitute at least a majority thereof, unless the election of each director who
was not a director at the beginning of such period has been approved in advance
by directors representing at least a majority of the directors who were
directors at the beginning of the period or whose election was previously so
approved. For purposes of conversion, a change in control is deemed to occur
when the Company enters into an agreement to merge, consolidate or sell
substantially all its assets or when a tender offer is commenced for 50% or more
of the outstanding voting securities of the Company.
The then holders of the Series F Stock may also redeem some or all of
the Series F Stock if the Company is in arrears with respect to two quarterly
dividend payments or defaults in its agreements relating to Board observer
status, the issuance of long-term debt or the extension of voting rights to the
holders of Series F Stock.
On December 31, 1996, the Company and the holder entered into a
purchase agreement whereby the Company agreed to repurchase all of the
outstanding shares of Series F Stock. See "Risk Factors--European Operations."
That agreement provided for certain payment terms, and in the event that payment
is not made in accordance with those terms, and the default is not cured within
five business days, the holder has the right to realize on its first ranking
pledge on all of the outstanding stock of Dorotech. If the Company has not
effected a sale of Dorotech by January 31, 1998, and the Company is in default
to the holder, the holder is at liberty to sell all of the Dorotech shares owned
by the Company and withhold all amounts due and payable to the holder before
paying back excess money, if any, to the Company.
Series K Convertible Preferred Stock
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 ("Investor Warrants").
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, warrants to purchase
162,462 shares of Common Stock at an exercise price of $1.625 per share ("Agent
Warrants"). The Investor Warrants and the Agent Warrants expire on July 27,
2002. The terms of the Series K Stock, the Investor Warrants and the Agent
Warrants were determined by the Board.
The net proceeds of the 3,300 Units ($2.9 million) have been 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 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, or othewise with respect to, the Series K Stock
and on exercise of or otherwide pursuant to the Investor Warrants and the Agent
Warrants. This registration statement has 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 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%.
Under the requirements of a newly issued SEC staff position, the
carrying value of the Series K Stock was increased by $774,000, or the
corresponding amount allocated to beneficial conversion feature described below.
The Company also recorded a related $774,000 non-cash charge to preferred stock
dividends. In addition, as required under the newly issued SEC staff position,
the Company would record similar non-cash charges to preferred stock dividends
for all future offerings with below market conversion features.
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 tradable 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 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. The Company has obtained
approval from the holders of Common Stock to issue shares of Common Stock in
connection with the Series K Stock, the Investor Warrants and the Agent Warrants
in excess of the amounts permitted by Nasdaq Rule 4460(i)(1)(D).
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 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 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 the Series L Stock and 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 Series A Stock, and Series F-1,
F-2, F-3 and F-4 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 datd July 28, 1997 ("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 Exchange 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 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.
The terms of the Series K Stock provide the Holders with 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 all of which are in the sole
control of the Company, (2) if the Common Stock is suspended from trading on any
of, or is not listed on at least one of, the New York Stock Exchange, the
American Stock Exchange, the Nasdaq National Market or the Nasdaq Small Cap
Market for an aggregate of 10 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 Exchange Act.
The Company and the Holders entered into an agreement on November 30,
1997 wherein the Holders agreed to not exercise a right of redemption under
certain circumstances and subject to certain conditions (the "Agreement").
Specifically, the Holders agreed not to exercise a right of redemption in the
circumstance described above so long as (i) the Company has not, at any time,
decreased the number of shares of Common Stock reserved for issuance with
respect to the Series K Stock ("Reserved Amount") below 12,500,000 shares of
Common Stock; (ii) the Company shall have taken immediate action following the
trigger date to increase the Reserved Amount to 200% of the number of shares of
Common Stock then issuable upon conversion of the outstanding Series K Stock;
and (iii) the Company continues to use its good faith best efforts to increase
the Reserved Amount to 200% of the number of shares of Common Stock then
issuable upon conversion of the outstanding Series K Stock. The parties agreed
that the Company will be deemed to have used "its good faith best efforts" to
increase the Reserved Amount so long as it solicits shareholder approval to
authorize the issuance of additional shares of Common Stock no less than three
times during each 12 month period following the trigger date.
Further, pursuant to that Agreement, the Holders will not exercise a
right of redemption if the Common Stock is suspended from trading on any of, or
is not listed on at least one of, the New York Stock Exchange, the American
Stock Exchange, the Nasdaq National Market or the Nasdaq Small Cap Market for an
aggregate of 10 trading days in any nine month period, and in such circumstance
the Company would be required to pay to the Holders within five (5) business
days of the occurrence of that redemption event, as liquidated damages, an
amount equal to 25% of the aggregate face amount of the shares of Series K Stock
then held by each Holder. The liquidated damages are payable, at the Company's
option, in cash or shares of Common Stock, such stock based upon a price per
share equal to 50% of the lowest closing price of the Common Stock during the 10
consecutive trading day period immediately preceding the date of such redemption
event. Under the Agreement, the Company is obligated to keep reserved 3,000,000
shares of Common Stock to satisfy its obligation with respect to the liquidated
damages. In the event that the number of shares required to be issued by the
Company with respect to the amount of liquidated damages exceeds 3,000,000
shares of Common Stock, and the Company does not have a sufficient number of
shares of Common Stock authorized and available for issuance to satisfy its
obligation with respect to the liquidated damages, the Company shall issue and
deliver to the Holders all 3,000,000 shares of Common Stock so reserved for that
purpose and, upon such issuance, the Holders shall have no right of redemption
upon a Redemption Event as specified in the Certificate of Designation to the
Series K Stock, but shall retain all other remedies to which they may be
entitled at law or in equity, which remedies shall not include the right of
redemption. The Holders also agreed that they would have no right to require the
Company to effect a redemption of their outstanding shares of Preferred Stock if
the registration statement required to be filed by the Company, pursuant to a
registration rights agreement entered into between the parties, has not been
declared effective by January 31, 1998, or such registration statement, after
being declared effective, cannot be utilized by the Holders of the Series K
Preferred Stock for the resale of their registrable securities for an aggregate
of more than 30 days after June 30, 1998; however, upon the occurrence of any
such event and while any of the events continue, the Company agrees to provide
that the permanent reductions to the conversion percentages set forth in the
Registration Rights Agreement shall accrue at the rate of two hundreds (.02) per
week instead of two hundreds (.02) per month. Lastly, the Holders agreed not to
exercise a right of redemption upon an event where the Company has 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 Exchange Act),
so long as the Company has not approved, recommended or otherwise consented to
the transaction which triggered that event.
The Agreement provides that all subsequent holders of the Series K
Stock shall be bound by the terms of the Agreement, and the Holders are
prohibited from transferring any shares of the Series K Stock unless, prior to
the transfer (i) the Company is furnished with written notice of the name and
address of such transferee; (ii) at or before the time the Company receives the
written notice contemplated by clause (i) of this sentence, the transferee
agrees in writing for the benefit of the Company to be bound by all of the
provisions contained in the Agreement following such transfer, (iii) such
transfer shall have been made in accordance with the applicable requirements of
the Securities Purchase Agreement, the Certificate of Designation, the
Securities Act and applicable state securities laws, and (iv) the further
transfer or disposition of such Series K Stock by the transferee (and any
subsequent transferees) is restricted pursuant to the provisions of the
Agreement.
In the event that the Company fails to perform its obligations under
the Agreement, it is then required to pay the Redemption Amount, and if it
should fail to do so, the Company is further obligated to (1) pay 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 preceeding 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.
Series L Convertible Preferred Stock
On December 8, 1997, the Company issued 3,250 units ("Units")
consisting of (1) one share of Series L Stock and (2) warrants to purchase 75
shares of Common Stock at an exercise price of $1.65 per share ("December
Investor Warrants"). Accordingly, on December 8, 1997, the Company issued 3,250
shares of Series L Stock and December Investor Warrants to purchase 243,750
shares of Common Stock. As a result of the issuance of 3,250 Units, the Company
issued to The Zanett Securities Corporation ("Zanett") for its services as
placement agent, warrants to purchase 160,000 shares of Common Stock at an
exercise price of $1.625 per share ("December Agent Warrants"). The December
Investor Warrants and the December Agent Warrants expire on December 7, 2002.
The terms of the Series L Stock, the December Investor Warrants and the December
Agent Warrants were determined by the Board.
Pursuant to the terms of the Securities Purchase Agreement dated as of
December 8, 1997 ("December Securities Purchase Agreement") among the Company
and Capital Ventures International, Zanett Lombardier, Ltd. and Bruno Guazzoni
(the "Purchasers"), the Purchasers may purchase up to an additional 3,000 Units
if the Company satisfies certain other conditions (one of which is that the
Common Stock remain listed on the Nasdaq National Market), at two additional
closings (up to 1,500 Units at each closing). Under the Placement Agency
Agreement dated July 2, 1997 between the Company and Zanett, the Company is
obligated to issue additional December 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 L Stock and
December Investor Warrants issued to the Purchasers at such additional closings
by $1.625. The initial exercise price of the December Agent Warrants is $1.625
per share.
The net proceeds of the 3,250 Units ($2.99 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 December 8, 1997
among the Company, the Purchasers and Zanett ("December 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 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, or otherwise with respect to,
the Series L Stock and on exercise of, or otherwise pursuant to, the December
Investor Warrants and the December Agent Warrants. Until such time as such
registration statements are declared effective by the SEC, the holders of the
Series L Stock ("Holders") and the holders of the December Investor Warrants and
the December 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 L 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 $1.375) 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) 85% prior to the
48th day following December 8, 1997 (the "First Closing Date"), and (b) 81% for
the period on or after the 48th day following the First Closing Date. In the
event the Company'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
above is permanently reduced by 2%. In addition, if the second and third
closings under the December Securities Purchase Agreement do not occur because
the Company failed to obtain stockholder approval of the issuance of the
securities in the second and third closings in accordance with Nasdaq Rule
4460(i), the Conversion Percentage for each period is permanently reduced by
10%.
Under the requirements of a newly issued SEC staff position, the
carrying value of the Series L Stock was increased by $772,000, or the
corresponding amount allocated to beneficial conversion feature described below.
The Company also recorded a related $772,000 non-cash charge to preferred stock
dividends. In addition, as required under the newly issued SEC staff position,
the Company would record similar non-cash charges to preferred stock dividends
for all future offerings with below market conversion features.
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 December Registration Rights Agreement (the 90th day in the case
of a registration statement on Form S-3) ("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 December 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%. In addition, if any required registration
statement has not been declared effective on or before the 60th day following
the applicable Registration Deadline, or if, after the registration statement is
declared effective, it cannot be utilized for more than 30 days after the
earlier of the date the Company first becomes eligible to use Form S-3 or June
30, 1998, each of the Conversion Percentages applicable during such time are
permanently reduced by 2% per week rather than 2% per month.
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 L 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 tradable shares of
Common Stock on conversion of the Series L Stock (other than in circumstances
permitted by the December 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 L Certificate.
Subject to the provisions regarding the Cap Amount and provided that
all shares of Common Stock issuable on conversion of all outstanding shares of
Series L 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 L Stock outstanding on
the fourth anniversary of the First Closing Date is automatically converted into
Common Stock.
The Series L 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 L 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 L Certificate provides that in no event shall the total
number of shares of Common Stock issued upon conversion of the Series L 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. The Company will seek
approval from the holders of Common Stock to issue shares of Common Stock in
connection with the Series L Stock, the December Investor Warrants and the
December Agent Warrants in excess of the amounts permitted by Nasdaq Rule
4460(i)(1)(D).
The exercise price of the December Investor Warrants and the December
Agent Warrants (collectively, "December 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 December Warrants. In
such event, the exercise price of the December Warrants is reduced to such Fixed
Price and the number of shares issuable on exercise of the December Warrants is
adjusted so that it equals the number of shares issuable under the December
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 stock split, stock dividend, recapitalization,
reorganization, reclassification or other subdivision of the Common Stock, the
exercise price of the December Warrants and the number of shares of Common Stock
issuable on exercise of the December Warrants are proportionately adjusted. The
exercise price of the December 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 L Stock does not bear dividends and there is no
provision for a sinking fund; accordingly, there are no provisions in the Series
L Certificate restricting repurchase or redemption of the Series L Stock while
there is a dividend or sinking fund arrearage. However, the Premium accrues as
noted above.
Ranking. Shares of Series L Stock rank prior to the Common Stock and
any class or series of capital stock created after the creation of the Series L
Stock (unless consent of the Holders is obtained as described below under
"Voting Rights") and ranks pari passu with the Series K Stock and any class or
series created after the creation of the Series L Stock that specifically states
that it ranks pari passu with the Series L Stock and where the Holders have
approved the issuance of such securities as described below under "Voting
Rights." The Series L Stock ranks junior to the Series A Stock, and Series F-1,
F-2, F-3 and F-4 Stock.
Voting Rights. The Series L 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 L
Stock is required to: (1) alter or change the rights, preferences or privileges
of the Series L Stock, (2) alter or change the rights, preferences or privileges
of any capital stock of the Company so as to adversely affect the Series L
Stock, (3) create any new class or series of capital stock ranking prior to or
pari passu with the Series L Stock, (4) increase the authorized number of shares
of Series L Stock, (5) issue any shares of Series L Stock other than pursuant to
the December Securities Purchase Agreement, (6) issue any additional shares of
any securities ranking senior to the Series L Stock or (7) redeem, or declare or
pay a cash dividend or distribution on, any securities junior to the Series L
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 L Stock pursuant to the terms of the Series L 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 L 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 L Stock would result in beneficial ownership by such
Holder and its affiliates of more than 4.99% of the outstanding shares of Common
Stock. Beneficial ownership for this purpose is determined in accordance with
Section 13(d) of the Exchange 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 L Stock and the Company fails
to 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 L 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, subject to the provisions discussed in the next
paragraph, 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 L
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 L Stock. The Redemption Amount
per share of Series L Stock equals (1) $1,000 plus the accrued Premium plus all
conversion default payments required under the Series L 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.
However, the Holders may not exercise a right of redemption in the
circumstance described above so long as (i) the Company has not, at any time,
decreased the number of shares of Common Stock reserved for issuance with
respect to the Series L Stock ("Reserved Amount") below 12,500,000 shares of
Common Stock; (ii) the Company shall have taken immediate action following the
trigger date to increase the Reserved Amount to 200% of the number of shares of
Common Stock then issuable upon conversion of the outstanding Series L Stock;
and (iii) the Company continues to use its good faith best efforts to increase
the Reserved Amount to 200% of the number of shares of Common Stock then
issuable upon conversion of the outstanding Series L Stock. The Company will be
deemed to have used "its good faith best efforts" to increase the Reserved
Amount so long as it solicits shareholder approval to authorize the issuance of
additional shares of Common Stock no less than three times during each 12 month
period following the trigger date.
The terms of the Series L Stock provide the Holders with the right to
require the Company to redeem its Series L Stock at the Redemption Amount (1) if
the Company fails to issue shares of Common Stock on conversion of the Series L
Stock other than in certain specified circumstances all of which are in the sole
control of the Company, (2) the Company fails to remove any restrictive legend
on shares of Common Stock issued on conversion of the Series L Stock when
required by the December Securities Purchase Agreement or the December
Registration Rights Agreement, (3) the Company states that it will not issue
shares of Common Stock to Holders in accordance with the terms of the Series L
Certificate (other than in circumstances where other remedies are provided in
the Series L Certificate), or (4) the Company shall (a) sell all or
substantially all of its assets, (b) merger or consolidate with another entity,
or (c) have approved, recommended or otherwise consented to any transaction or
series of transactions which results in 50% or more of the voting power of its
capital stock being owned beneficially by any one person or group within the
meaning of Section 13(d) of the Exchange Act.
The Holders do not have a right of redemption if the Common Stock is
suspended from trading on any of, or is not listed on at least one of, the New
York Stock Exchange, the American Stock Exchange, the Nasdaq National Market or
the Nasdaq Small Cap Market for an aggregate of 10 trading days in any nine
month period, and in such circumstance the Company is required to pay to the
Holders within five (5) business days of the occurrence of that redemption
event, as liquidated damages, an amount equal to 25% of the aggregate face
amount of the shares of Series L Stock then held by each Holder. The liquidated
damages are payable, at the Company's option, in cash or shares of Common Stock,
such stock based upon a price per share equal to 50% of the lowest closing price
of the Common Stock during the 10 consecutive trading day period immediately
preceding the date of such redemption event. The Company is obligated to keep
reserved 3,000,000 shares of Common Stock to satisfy its obligation with respect
to the liquidated damages. In the event that the number of shares required to be
issued by the Company with respect to the amount of liquidated damages exceeds
3,000,000 shares of Common Stock, and the Company does not have a sufficient
number of shares of Common Stock authorized and available for issuance to
satisfy its obligation with respect to the liquidated damages, the Company shall
issue and deliver to the Holders all 3,000,000 shares of Common Stock so
reserved for that purpose and, upon such issuance, the Holders shall have no
right of redemption, but shall retain all other remedies to which they may be
entitled at law or in equity, which remedies shall not include the right of
redemption.
In the event that the Company is required to pay the Redemption Amount,
and if it should fail to do so, the Company is further obligated to (1) pay
interest on such amount at the rate of 24% per annum until such Holder's Series
L 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 L 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 L Certificate, the December Securities Purchase Agreement or
the December Registration Rights Agreement at the "Optional Redemption Amount."
The Company can only exercise this right once. The Optional Redemption Amount
per share of Series L 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 L Certificate, multiplied
by (b) the volume weighted average sales price of the Common Stock on the
trading day immediately preceeding 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 L Stock was to
be redeemed or until the Company notifies the Holder that it will not redeem
such Holder's Series L Stock and (2) such Holder has the right to require the
Company to convert such Holder's Series L 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 L Stock was to be redeemed.
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 ("Investor
Warrants"). 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, warrants
to purchase 162,462 shares of Common Stock at an exercise price of $1.625 per
share ("Agent Warrants"). The Investor Warrants and the Agent Warrants expire on
July 27, 2002. 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, the Purchasers are required to purchase 3,000 additional Units if
the Company achieves certain performance milestones and satisfies certain other
conditions (one of which is that the Common Stock remain listed on the Nasdaq
National Market) and the Purchasers have the option to purchase an additional
4,700 Units, at two 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 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 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%.
Under the requirements of a newly issued SEC staff position, the
carrying value of the Series K Stock was increased by $774,000, or the
corresponding amount allocated to beneficial conversion feature described below.
The Company also recorded a related $774,000 non-cash charge to preferred stock
dividends. In addition, as required under the newly issued SEC staff position,
the Company would record similar non-cash charges to preferred stock dividends
for all future offerings with below market conversion features.
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 tradable 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 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. The Company is seeking
approval from the holders of Common Stock to issue shares of Common Stock in
connection with the Series K Stock and the Warrants in excess of the amounts
permitted by Nasdaq Rule 4460(i)(1)(D).
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 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 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 Series A Stock, and Series F-1, F-2, F-3 and F-4 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 Exchange 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 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. The parties entered into an agreement
whereby the Holder agreed not to exercise a right of redemption in such
circumstance so long as (i) the Company has not, at any time, decreased the
Reserve Amount below 12,500,000 shares of Common Stock; (ii) the Company shall
have taken immediate action following the trigger date to increase the Reserved
Amount to 200% of the number of shares of Common Stock then issuable upon
conversion of the outstanding Preferred Stock; and (iii) the Company continues
to use its good faith best efforts to increase the Reserved Amount to 200% of
the number of shares of Common Stock then issuable upon conversion of the
outstanding Preferred Stock. The parties agreed that the Company will be deemed
to have used "its good faith best efforts" to increase the Reserved Amount so
long as it solicits shareholder approval to authorize the issuance of additional
shares of Common Stock no less than three (3) times during each 12 month period
following the trigger date.
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) 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, (3) 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,
(4) 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
(5) 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 Exchange Act. The holders agreed not to
excerise a right of redemption if the Common Stock is suspended from trading on
any of, or is not listed on at least one of, the New York Stock Exchange, the
American Stock Exchange, the Nasdaq National Market or the Nasdaq Small Cap
Market for an aggregate of 10 trading days in any nine month period, and in such
circumstance the stockholders would be entitled to receive within five (5)
business days of the occurrence of a redemption event, as liquidated damages an
amount equal to 25% of the aggregate face amount of the shares of Series K Stock
then held by each stockholder. The liquidated damages are payable, at the
Company's option, in cash or shares of Common Stock, such stock based upon a
price per share equal to 50% of the lowest closing price of the Common Stock
during the 10 consecutive trading day period immediately preceding the date of
such redemption event. Additionally, the Company has agreed to keep reserved
3,000,000 shares of Common Stock to satisfy its obligation with respect to the
liquidated damages. In the event that the number of shares required to be issued
by the Company with respect to the amount of liquidated damages exceeds
3,000,000 shares of Common Stock, and the Company does not have a sufficient
number of shares of Common Stock authorized and available for issuance to
satisfy its obligation with respect to the liquidated damages, the Company shall
issue and deliver to the stockholders all 3,000,000 shares of Common Stock so
reserved for that purpose and, upon such issuance, the stockholders shall have
no right of redemption upon a Redemption Event as specified in the Certificate
of Designation to the Series K Stock, but shall retain all other remedies to
which they may be entitled at law or in equity which remedies shall not include
the right of redemption. The stockholders also agreed not to exercise a right of
redemption if the registration statement required to be filed by the Company,
pursuant to a registration rights agreement entered into between the parties,
has not been declared effective by January 31, 1998, or such registration
statement, after being declared effective, cannot be utilized by the holders of
the Series K Preferred Stock for the resale of their securities for an aggregate
of more than 30 days after June 30, 1998, however, in any such events and while
any of such events continues, the Company agrees to provide that the permanent
reductions to the conversion percentages set forth in the registration rights
agreement shall accrue at the rate of two hundreds (.02) per week instead of two
hundreds (.02) per month. The stockholders further agreed not to exercise a
right of redemption upon an event where the Company has 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), so long as the Company has not approved, recommended or
otherwise consented to the transaction which triggered that event. . The parties
have agreed that all subsequent holders of the Series K Stock shall be bound by
the terms of the amendment, and the parties shall be responsible for
communicating the terms of the amendment to any such subsequent holders.
In the event the Company fails to perform its obligations under the
agreements between the parties and fail 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 preceeding 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.
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 ("Investor Warrants").
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")Zanett, for its services as placement agent, warrants to
purchase 162,462 shares of Common Stock at an exercise price of $1.625 per share
("Agent Warrants"). The Investor Warrants and the Agent Warrants expire on July
27, 2002. 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")Purchasers, the Purchasers are required to
purchase 3,000 additional Units if the Company achieves certain performance
milestones and satisfies certain other conditions (one of which is that the
Common Stock remain listed on the Nasdaq National Market), and the Purchasers
have the option to purchase an additional 4,700 Units by February 15, 1998, at
two 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 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 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%.
Under the requirements of a newly issued SEC staff position, the
carrying value of the Series K Stock was increased by $774,000, or the
corresponding amount allocated to beneficial conversion feature described below.
The Company also recorded a related $774,000 non-cash charge to preferred stock
dividends. In addition, as required under the newly issued SEC staff position,
the Company would record similar non-cash charges to preferred stock dividends
for all future offerings with below market conversion features.
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 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. The Company has obtained
approval from the holders of Common Stock to issue shares of Common Stock in
connection with the Series K Stock and the Warrants in excess of the amounts
permitted by Nasdaq Rule 4460(i)(1)(D).
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 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 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 Series A Stock, and the Series F-1, F-2, F-3 and F-4 Stock. and
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 Exchange 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 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. The parties entered into an agreement
whereby the Holder could not effect a redemption in such circumstance so long
and (i) the Company has not, at any time, decreased the Reserved Amount below
12,500,000 shares of Common Stock; (ii) the Company shall have taken immediate
action following the trigger date to increase the reserved amount to 200% of the
number of shares of Common Stock then issuable upon conversions of outstanding
Preferred Stock; and (iii) the Company continues to use its good faith best
efforts to increase the Reserved Amount to 200% of the number of shares of
Common Stock then issuable upon conversion of the outstanding Preferred Stock.
23451934Exchange Act. The parties entered into an agreement whereby 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, the Holders will be
entitled to receive liquidation damages in an amount equal to 25% of the
aggregate Face Amount of the shares of Preferred Stock held by each Holder. The
liquidation damages are payable, at the Company's option, in cash or shares of
Common Stock , such shares at a price equal to 50% of the then-current market
value. Limitation of Liability
Pursuant to the Company's Certificate of Incorporation and under
Delaware law, directors of the Company are not liable for monetary damages for
breach of their fiduciary duty as directors except (i) for a breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions by the director not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for a willful or negligent
declaration of an unlawful dividend, stock purchase or redemption or (iv) for
transactions from which the director derived an improper personal benefit.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock and Series A
Stock is American Stock Transfer & Trust Company, 40 Wall Street, New York, New
York 10005.
Anti-takeover Effects of Provisions of the Certificate of Incorporation
and Delaware Law
The following provisions of the Company's Certificate of Incorporation
and Bylaws could discourage potential acquisition proposals and could delay or
prevent a change in control of the Company. Such provisions also may have the
effect of preventing changes in the management of the Company. See "Risk Factors
- -Certain Anti-takeover Provisions of Certificate of Incorporation and Delaware
Law."
Preferred Stock. The Company's Certificate of Incorporation authorizes
20,000,000 shares of Preferred Stock with a par value of $0.0001. The Board of
Directors is authorized to provide for the issuance of the shares of Preferred
Stock in series, and by filing a certificate pursuant to the applicable law of
the State of Delaware, to establish from time to time the number of shares to be
included in each such series, and to fix the designations, powers, preferences
and rights of the shares of each such series and the qualifications, limitations
or restrictions thereof. In the event of a proposed merger, tender offer or
other attempt to gain control of the Company of which management does not
approve, it might be possible for the Board of Directors to authorize the
issuance of a series of preferred stock with rights and preferences that could
impede the completion of such a transaction. See "Risk Factors - Certain
Anti-takeover Provisions of Certificate of Incorporation and Delaware Law."
Delaware Anti-Takeover Statute. The Company is subject to Section 203
of the Delaware General Corporation Law, which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any business combination with
any interested shareholder for a period of three years following the date that
such shareholder became an interested shareholder, unless: (1) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction that resulted in the shareholder becoming an
interested shareholder; (2) upon consummation of the transaction that resulted
in the shareholder becoming an interested shareholder, the interested
shareholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (i) by persons
who are directors and also officers and (ii) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer,
or (3) on or subsequent to such date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
shareholders, and not by written consent, by the affirmative vote of at least 66
2/3% of the outstanding voting stock that is not owned by the interested
shareholder.
Section 203 defines business combination when used in reference to a
corporation and any interested shareholder to include: (i) any merger or
consolidation of the corporation with the interested shareholder or with any
other corporation if the merger or consolidation is caused by the interested
shareholder and, as a result of the transaction, Section 203(a) does not apply
to the surviving corporation; (ii) any sale, lease, exchange, mortgage,
transfer, pledge or other disposition involving the interested shareholder of
10% or more of the assets of the corporation; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested shareholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation owned
by the interested shareholder; or (v) any receipt by the interested shareholder
of the benefit of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation. In general, Section 203 defines
an interested shareholder as any entity or person beneficially owns, or within
three years did own, 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
INDEPENDENT ACCOUNTANTS
The Board, upon the recommendation of the Audit Committee, appointed
Ernst & Young LLP, independent accountants, as auditors of the Company to
examine and report to stockholders on the consolidated financial statements of
the Company and it subsidiaries for the year ended on December 31, 1996 and for
the year ending December 31, 1997. Ernst & Young LLP currently serves as the
Company's 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 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.
LEGAL MATTERS
The legality of shares of Common Stock offered hereby will be passed
upon for the Company by Kirkpatrick & Lockhart LLP, Washington, D.C.
EXPERTS
The consolidated financial statements of Network Imaging Corporation at
December 31, 1996 and for the year then ended, appearing in the Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such reports given the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of Network Imaging Corporation at
December 31, 1995 and for each of the two years in the period ended December 31,
1995 included in this Prospectus have been so included in reliance on the report
of Price Waterhouse LLP, independent accountantsa, given on the authority of
saids firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or any other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. Further information with respect to the Company and the
Common Stock offered hereby is included or incorporated by reference in the
Registration Statement and exhibits.
Network Imaging is subject to the informational reporting requirements
of the Exchange Act, and in accordance therewith files reports, proxy statements
and other information with the SEC. Such reports, proxy statements and other
information can be inspected and copied at the public reference rooms of the
SEC, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and copies of
such materials can be obtained by mail from the Public Reference Section of the
SEC, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed
rates. In addition, copies of such materials are available for inspection and
reproduction at the public reference facilities of the SEC at its New York
regional office, 7 World Trade Center, New York, New York 10048 and at its
Chicago regional office, Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. The SEC also maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
The Company's Common Stock, Series A Stock, and Public Warrants are listed on
the Nasdaq National Market. Reports, proxy statements and other information
concerning the Company can also be inspected at Nasdaq, 1735 K Street, N.W.,
Washington, D.C. 20036.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
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 September 30, 1997 (unaudited) and
December 31, 1995 F-24
Consolidated Statements of Operations (unaudited) for the three
months ended September 30, 1997 and 1996 F-25
Consolidated Statements of Operations (unaudited) for the nine
months ended Septmber 30, 1997 and 1996 F-26
Consolidated Statements of Changes in Stockholders' Equity
(unaudited) for the nine months ended September 30, 1997 F-27
Consolidated Statement of Cash Flows (unaudited) for the nine
months ended September 30, 1997 and 1996 F-28
Notes to Consolidated Financial Statements F-29
F-1
<PAGE>
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 out 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>
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 prove a reasonable
basis for the opinion expressed above.
/S/ Price Waterhouse, LLP
Washington, D.C.
March 29, 1996
F-3
<PAGE>
<TABLE>
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<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>
<TABLE>
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
(In thousands, except share and per share amounts)
<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>
<TABLE>
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)
<CAPTION>
Additional
Preferred Stock Common Stock paid-in Accumulated
Shares Amt. Shares Amt. capital Deficit
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1993 1,400,000 $ -- 10,542,105 $ 1 $ 74,153 $ (31,169)
Issuance of preferred stock,
net of offering costs
of $673 205,025 4,453
Issuance of common stock,
net of offering costs of $39 2,786,070 19,184
Conversion of preferred stock 300,000 2,303
Accretion of preferred stock (1,286)
Dividends on preferred stock (3,210)
Translation adjustment
Net loss (39,625)
----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 1994 1,605,025 -- 13,628,175 1 95,597 (70,794)
Issuance of preferred stock,
net of offering costs of $1,790 2,174 $ -- 19,949
Conversion of preferred stock (885) 2,276,237
Redemption of preferred stock (1,086) (15,600)
Issuance of common stock, net
of offering costs of $941 2,732,814 1 9,198
Accretion of preferred stock (869)
Dividends on preferred stock (3,210)
Translation adjustment
Net loss (24,963)
----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 1995 1,605,228 -- 18,637,226 2 105,065 (95,757)
Issuance of common stock, net
of offering costs of $376 1,902,487 6,149
Issuance of preferred stock,
net of offering costs
of $209 1,100 $ -- 10,791
Issuance of warrants for
line of credit 192
Buy-Back adjustment of
Redeemable Series F
preferred stock 5,962
Conversion of preferred stock (653) 2,356,899
Accretion of preferred stock (341)
Dividends on preferred stock (3,389)
Translation adjustment
Net loss (17,341)
----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 1996 1,605,675 $ -- 22,896,612 $ 2 $ 124,429 $ (113,098)
=========== =========== =========== =========== =========== ===========
Translation
Adjustment Total
---------- ---------
<S> <C> <C>
Balance December 31, 1993 $ (191) $ 42,794
Issuance of preferred stock,
net of offering costs
of $673 4,453
Issuance of common stock,
net of offering costs of $39 19,184
Conversion of preferred stock 2,303
Accretion of preferred stock (1,286)
Dividends on preferred stock (3,210)
Translation adjustment 543 543
Net loss (39,625)
-------- --------
Balance December 31, 1994 352 25,156
Issuance of preferred stock,
net of offering costs of $1,790 19,949
Conversion of preferred stock --
Redemption of preferred stock (15,600)
Issuance of common stock, net
of offering costs of $941 9,199
Accretion of preferred stock (869)
Dividends on preferred stock (3,210)
Translation adjustment 523 523
Net loss (24,963)
-------- --------
Balance December 31, 1995 875 10,185
Issuance of common stock, net
of offering costs of $376 6,149
Issuance of preferred stock,
net of offering costs
of $209 10,791
Issuance of warrants for
line of credit 192
Buy-Back adjustment of
Redeemable Series F
preferred stock 5,962
Conversion of preferred stock --
Accretion of preferred stock (341)
Dividends on preferred stock (3,389)
Translation adjustment (491) (491)
Net loss (17,341)
-------- --------
Balance December 31, 1996 $ 384 $ 11,717
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
<TABLE>
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(In thousands)
<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>
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 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.
F-8
<PAGE>
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 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.
F-9
<PAGE>
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 almost entirely within France, exposure to
foreign exchange risk is limited.
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).
F-10
<PAGE>
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.
NOTE 3 - RECEIVABLES
Receivables consist of the following:
December 31,
1996 1995
(in thousands)
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
======== ========
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:
F-11
December 31,
1996 1995
(in thousands)
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
======= =======
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.
NOTE 5 - SOFTWARE DEVELOPMENT AND PURCHASED TECHNOLOGY
Capitalized software development and purchased technology consists of the
following:
December 31,
1996 1995
(in thousands)
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
======== ========
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.
F-12
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):
Revenue $ 37,812
Net loss $(16,251)
Net loss per common share $ (0.97)
NOTE 7 - OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following:
December 31,
1996 1995
(in thousands)
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
====== ======
NOTE 8 - BORROWING ARRANGEMENTS
Borrowings consist of the following:
December 31,
1996 1995
(in thousands)
Lines of credit $ -- $ 3,276
Capital lease obligations
bearing interest ranging from
11.7% to 12.7% 957 1,702
F-13
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
======= =======
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
200,000 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.
F-14
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.
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 share
per year, payable quarterly, and could initially convert to common stock at a
rate of 1.8116 shares of common for each share of Series A Preferred (an
effective initial 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.
F-15
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 ("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
F-16
an amount equal to the initial purchase price of $10,000 plus accrued but unpaid
dividends per share since the date of issuance by the lesser of $3.25 and 81% of
the average closing bid price per share of the Common Stock for the five (5)
trading days immediately preceding the notice of conversion ("Conversion 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
Conversion Average Bid Price is less than $3.25, 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
Conversion 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 Warrants Exercise Outstanding Shares Issuable
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 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 27,068 227,068
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. 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.
F-17
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:
Exercise
Options Price
---------- ---------------
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
==========
F-18
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.
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:
Year Ended December 31,
1996 1995
(in thousands)
U.S. $(16,332) $(23,480)
Foreign (1,077) (1,763)
-------- --------
$(17,409) $(25,243)
======== ========
The income tax expense (benefit) consists of the following:
Year Ended December 31,
1996 1995
(in thousands)
Current tax expense (benefit):
U.S. Federal $ -- $ 51
----- -----
State and local -- --
----- -----
Foreign -- --
----- -----
Deferred tax expense:
Foreign (68) (331)
----- -----
Total income tax $ (68) $(280)
===== =====
F-19
Deferred tax assets and liabilities are comprised of the following:
December 31,
1996 1995
(in thousands)
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)
======== ========
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:
Year Ended December 31,
1996 1995
(in thousands)
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%)
==== ====
As of December 31, 1996, the Company had net operating loss and research tax
credit carry forwards 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
F-20
to the Company or a U.S. affiliate, or if the Company sold its stock in the sub-
sidiaries. 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.
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 charges 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):
United Western
States Europe
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
F-21
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.
Future minimum lease payments under non-cancelable operating leases are as
follows (in thousands):
Year Ending
December 31,
1997 $1,328
1998 1,076
1999 940
2000 363
Thereafter --
-------
$3,707
=======
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.
F-22
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.
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-23
<PAGE>
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma at
December 31, September 30, September 30,
1996 1997 1997
----------- ----------- -----------
(Unaudited) (Unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 7,601 $ 3,782 $ 3,782
Accounts and notes receivable, net 13,243 14,451 14,451
Inventories 1,503 1,404 1,404
Prepaid expenses and other 2,362 2,214 2,214
--------- --------- ---------
Total current assets 24,709 21,851 21,851
Fixed assets, net 2,887 2,096 2,096
Long-term notes receivable, net 1,979 1,648 1,648
Software development costs and purchased technology, net 3,813 3,347 3,347
Goodwill, net 3,237 2,228 2,228
Other assets 153 310 310
--------- --------- ---------
Total assets $ 36,778 $ 31,480 $ 31,480
========= ========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current debt maturities and obligations under capital leases $ 2,063 $ 1,238 $ 1,238
Accounts payable 3,185 3,890 3,890
Accrued compensation and related expenses 1,891 1,983 1,983
Deferred revenue 3,789 3,599 3,599
Other accrued expenses 3,888 4,895 4,895
--------- --------- ---------
Total current liabilities 14,816 15,605 15,605
Long-term debt and obligations under capital leases 88 7,318 7,318
Deferred income taxes 300 191 191
--------- --------- ---------
Total liabilities 15,204 23,114 23,114
Commitments
Redeemable Series F preferred stock, 1,792,186 and 792,186 shares
issued and outstanding at December 31, 1997 and September 30, 1997
and 792,186 shares issued and outstanding on a pro forma basis at
September 30, 1997 9,857 6,357 6,357
Redeemable Series K preferred stock, no and 3,300 shares issued and
outstanding at December 31, 1996 and September 30, 1997 and no
shares issued and outstanding on a pro froma basis at September 30, 1997 -- 3,700 --
Stockholders' equity:
Preferred stock, $.0001 par value, 20,000,000 shares authorized;
1,605,675 and 1,605,035 shares issued and outstanding at
December 31, 1996 and September 30, 1997 and 1,608,335 shares
issued and outstanding on a proforma basis at September 30, 1997
Common stock, $.0001 par value, 50,000,000 shares authorized;
22,896,612 and 25,865,809 shares issued and outstanding at
December 31, 1996 and September 30, 1997 and
25,865,809 shares issued and outstanding on a pro forma basis
at September 30, 1997 2 3 3
Additional paid-in-capital 124,429 121,108 124,808
Accumulated deficit (113,098) (122,233) (122,233)
Translation adjustment 384 (569) (569)
--------- --------- ---------
Total stockholders' equity (deficit) 11,717 (1,691) 2,009
--------- --------- ---------
Total liabilities and stockholders' equity $ 36,778 $ 31,480 $ 31,480
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended September 30,
1997 1996
----------- -----------
Revenue:
Products $ 5,225 $ 4,107
Services 4,719 5,272
----------- -----------
9,944 9,379
----------- -----------
Costs and expenses:
Cost of products sold 2,585 2,169
Cost of services provided 3,865 3,700
Sales and marketing 3,649 3,332
General and administrative 1,649 1,995
Product development 1,142 1,129
Loss on sale of subsidiary -- 921
----------- -----------
12,890 13,246
----------- -----------
Loss before investment and
interest income and income taxes (2,946) (3,867)
Investment and interest income
(expense), net (130) 41
----------- -----------
Loss before income taxes (3,076) (3,826)
Income tax benefit (142) (77)
----------- -----------
Net loss (2,934) (3,749)
----------- -----------
Preferred stock preferences
Accrued dividends (930) (865)
Imputed dividends (774) --
----------- -----------
Net loss applicable to
common shares $ (4,638) $ (4,614)
=========== ===========
Net loss per common share $ (0.18) $ (0.22)
=========== ===========
Weighted average shares outstanding 25,436,748 21,112,811
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Nine Months Ended September 30,
1997 1996
------------ ------------
Revenue:
Products $ 13,591 $ 13,497
Services 14,805 15,552
------------ ------------
28,396 29,049
------------ ------------
Costs and expenses:
Cost of products sold 6,740 7,976
Cost of services provided 11,681 11,975
Sales and marketing 10,901 11,652
General and administrative 4,949 7,522
Product development 3,451 4,190
Gain from extinguishment of debt (267) --
Loss on sale of subsidiary -- 921
Exchange fee and gain on
sale of asset, net -- 619
Restructuring costs -- (175)
------------ ------------
37,455 44,680
------------ ------------
Loss before investment and
interest income and income taxes (9,059) (15,631)
Investment and interest income
(expense), net (163) 188
------------ ------------
Loss before income taxes (9,222) (15,443)
Income tax benefit (87) (89)
------------ ------------
Net loss (9,135) (15,354)
------------ ------------
Preferred stock preferences
Accrued dividends (2,836) (2,749)
Imputed dividends (774) --
------------ ------------
Net loss applicable to
common shares $ (12,745) $ (18,103)
============ ============
Net loss per common share $ (0.51) $ (0.90)
============ ============
Weighted average shares outstanding 24,957,354 20,081,412
============ ============
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the nine months ended September 30, 1997
(In thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock paid-in Accumulated
Shares Amt. Shares Amt. capital Deficit
----------------------- -------------------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996 1,605,675 $ -- 22,896,612 $ 2 $ 124,429 ($ 113,098)
Issuance of common stock
upon exercise of warrants 23,331 23
Conversion of preferred
stock (640) 2,926,818 1
Offering costs on issuance
of preferred stock (25)
Issuance of common stock 19,048 27
Issuance of warrants and
extension 264
Accrued dividends on preferred
stock (2,836)
Imputed dividends on preferred
stock (774)
Translation adjustment
Net loss (9,135)
------------------------ -------------------------- ---------- ----------
Balance September 30, 1997 1,605,035 $ -- 25,865,809 $ 3 $ 121,108 $ (122,233)
======================== ========================== ========== ==========
</TABLE>
Translation
Adjustment Total
------------ -------------
Balance December 31, 1996 $ 384 $ 11,717
Issuance of common stock
upon exercise of warrants 23
Conversion of preferred
stock 1
Offering costs on issuance
of preferred stock (25)
Issuance of common stock 27
Issuance of warrants and
extension 264
Accrued dividends on preferred
stock (2,836)
Imputed dividends on preferred
stock (774)
Translation adjustment (953) (953)
Net loss (9,135)
-------- --------
Balance September 30, 1997 $ (569) $ (1,691)
======== ========
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
1997 1996
---------- ----------
(In thousands)
Cash flows from operating activities:
Net loss $ (9,135) $(15,354)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 3,752 4,465
Gain on sale of asset -- (111)
Restructuring costs -- (175)
Loss on sale of subsidiary -- 921
Other non-cash items 15 --
Changes in assets and
liabilities:
Accounts and notes receivable (1,837) 3,147
Inventories (6) 358
Prepaid expenses and other 145 (1,103)
Accounts payable 1,698 (1,421)
Accrued compensation and
related expenses 242 (494)
Accrued expenses, other 161 (1,656)
Deferred revenues (81) 1,707
Deferred income taxes (71) (235)
-------- --------
Net cash used in operating activities (5,117) (9,951)
-------- --------
Cash flows from investing activities:
Sale of short-term investments -- 111
Capitalized software development
and license costs (1,059) (1,513)
Purchases of fixed assets (557) (748)
Net cash provided in business
divestiture -- (401)
-------- --------
Net cash used in investing activities (1,616) (2,551)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common
and preferred stocks, net (2) 16,937
Proceeds from issuance of Series
K preferred stock, net 2,926 --
Cash dividends paid on Series A
preferred stock (1,605) (2,408)
Cash dividends paid on Series F
preferred stock (174) --
Payments on Mandatory Redeemable
Preferred Stock (3,500) --
Proceeds from borrowings 5,000 --
Proceeds from issuance of
long-term debt 2,000
Proceeds from sale and leaseback
of fixed assets -- 196
Proceeds from Notes Receivable
related to business divestitures 60 --
Principal payments on capital
lease obligations (800) (667)
Principal payments on debt (843) (271)
-------- --------
Net cash provided by financing
activities 3,062 13,787
-------- --------
Effect of exchange rate changes on
cash and cash equivalents (148) (77)
Net decrease in cash and cash
equivalents (3,819) 1,208
Cash and cash equivalents at
beginning of year 7,601 9,359
-------- --------
Cash and cash equivalents at September 30, $ 3,782 $ 10,567
======== ========
Supplemental Cash Flow Information:
Interest paid $ 478 $ 231
Income taxes paid $ 261 $ 170
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
NETWORK IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 this Prospectus 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
nine month period ended September 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.
The Company intends to adopt Statement of Financial Accounting Standards No.131,
Disclosure about Segments of an Enterprise and Related Information (SFAS No.
131), in fiscal year 1998. SFAS No. 131 changes the way companies report segment
information and requires segments to be determined based on how management
measures performance and makes decisions about allocating resources. The
adoption of SFAS No. 131 is not expected to materially impact the Company's
financial position or results of operations.
3. REDEEMABLE PREFERRED STOCK
During the first quarter of 1997, the Company redeemed 1,000,000 shares of
Series F Preferred Stock for $3.5 million. The Company used proceeds from its
line of credit to finance the Series F Preferred share buy back.
F-29
During the second quarter of 1997, the Company was to have redeemed the
remaining 792,186 shares of Series F Preferred Stock for $2.8 million. Under an
amendment to the December 1996 redemption agreement, the $2.8 million 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 $1.5 million
from its $5.0 million 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 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, and September 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 National Market. To
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 of Series K Stock and warrants 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 7).
On August 21, 1997, the Company received a letter from the Nasdaq National
Market indicating that the Company may not have sufficient assets to continue
its listing on the Nasdaq National Market. The Company has responded to that
inquiry and after further correspondence with Nasdaq requested a hearing before
the Nasdaq National Market's Hearing Department to explain its plan for
achievement and maintenance of the minimum net tangible assets requirement.
Following a hearing held on Thursday, October 30, 1997, a Nasdaq Listing
Qualifications Panel determined to grant the Company's request for continued
inclusion in the Nasdaq National Market pursuant to an exception to the Nasdaq
National Market's minimum net tangible asset requirement.
F-30
The Panel found that the Company had presented a reasonable plan for compliance.
Based upon the plan detailed by the Company, the Panel concluded that the
Company could achieve compliance with the continued listed requirements for the
long-term.
In order to fully comply with the exception granted by the Panel, the Company
must complete its plan of compliance in accordance with a timetable set forth by
the Panel. The Company must demonstrate full compliance with the Nasdaq National
Market continued listing requirements by December 31, 1997. The Panel also
required that the Company have a minimum of $6.0 million in net tangible assets
to ensure long term compliance with the net tangible assets requirement.
Although the Company believes that it can maintain the required net tangible
assets of at least $6 million through additional issuances of its Series K Stock
and warrants 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 $6
million.
6. CONVERTIBLE NOTES
During July and August 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 and August 20, 2002 totaling $2.0 million. The notes are
convertible into the Company's Common Stock beginning 45 days after issue at a
conversion price of $1.875 and $1.50 per share, the prices on the issue dates.
On or after October 30, and December 12, 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, and December 12, 1997, the Company has the right to redeem
the convertible notes plus accrued interest on 30 days' notice tothe 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 and $1.50 per share and expire on July 8, and August 20, 2000,
respectively.
7. CONVERTIBLE PREFERRED STOCK OFFERINGS
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 "Offering"). The Company also issued warrants to purchase
162,462 shares of Common Stock at $1.625 per share to the placement
F-31
agent in the transaction. Under the requirements of a newly issued SEC staff
position, the carrying value of the Series K Stock was increased by $774,000, or
the corresponding amount allocated to beneficial conversion feature described
below. The Company also recorded a related $774,000 non-cash charge to preferred
stock dividends. 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. The
remaining $4.7 million is to be offered to the purchasers and the purchasers, at
their election, 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 execution 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.
8. PREFERRED STOCK DIVIDENDS
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 or October 31, 1997 in the amounts of $0.50 per
share or $802,512.50 in the aggregate, respectively.
F-32
9. STOCK OPTION REPRICING
In August 1997, the Board of Directors approved a plan to reprice the Company's
outstanding stock options. The plan allowed holders of out-of-the-money options,
excluding executives, officers, and directors, to receive a new exercise price
of $1.50 per option share, the market price on the date the plan was approved.
The plan allowed executives and officers of out-of-the-money options to also
receive a new exercise price of $1.50, but the number of shares of Common Stock
covered by these options were reduced pursuant to the Black-Scholes formula so
that there would be approximate economic equivalence between old and new
options. As a result, options for an aggregate of 561,752 out of a total of
1,635,000 shares of Common Stock at exercise prices ranging from $6.82 to $1.91
per share were repriced.
10. RESTATEMENT
In connection with the Company's issuance of Series K Preferred Stock on July
28, 1997, ("the Offering"), the Company has restated its Consolidated Financial
Statements for the quarter ended September 30, 1997 to reflect the Offering as
temporary equity (See Note 7). The Offering was reclassified from shareholders'
equity to temporary equity due to conditions of redemption, pursuant to the
terms of the Certificate of Designation for the Series K Stock, that were not
solely within control of the Company. As a result of this change, the Company's
total stockholders' equity at September 30, 1997 decreased from $2.0 million to
negative ($1.7) million. Subsequent to September 30, 1997, the Company received
from the Series K Stockholders an amendment to the redemption provisions
whereby, all conditions of redemption are now solely within control of the
Company (See Note 11).
11. SUBSEQUENT EVENT AND PRO FORMA BALANCE SHEET
On November 30, 1997, the Company and the Series K Preferred Stockholders agreed
to amend certain redemption provisions of the Certificate of Designation to the
Series K Stock that were not solely within the control of the Company. The
stockholders agreed not to exercise any right of redemption if the stockholder's
Cap Amount exceeds 135% of the total number of shares of Common Stock then
issuable on conversion of its Series K Stock. The stockholders agreed to forgo
their right to exercise such rights so long as (i) the Company has not, at any
time, decreased the reserved amount of shares below 12,500,000 shares of Common
Stock; (ii) the Company shall have taken immediate action following the trigger
date to increase the reserved amount to 200% of the number of shares of Common
Stock then issuable upon conversion of the outstanding Preferred Stock; and
(iii) the Company continues to use its good faith best efforts to increase the
reserved amount to 200% of the number of shares of Common Stock then issuable
upon conversion of the outstanding Preferred Stock. The parties agreed that the
Company will be deemed to have used "its good faith best efforts" to increase
the Reserved Amount so long as it solicits shareholder approval to authorize the
issuance of additional shares of Common Stock no less than three (3) times
during each 12 month period following the trigger date. Furhter, the
stockholders agreed not to exercise any right of redemption if the Common Stock
is suspended from trading on any of, or is not listed on at least one of, the
New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market
or the Nasdaq Small Cap Market for an aggregate of 10 trading days in any nine
month period, and in such circumstance the stockholders would be entitled to
receive within five (5) business days of the occurrence of a redemption event,
as liquidated damages an amount equal to 25% of the aggregate face amount of the
shares of Series K Stock then held by each stockholder. The liquidated damages
are payable, at the Company's option, in cash or shares of Common Stock, such
stock based upon a price per share equal to 50% of the lowest closing price of
the Common Stock during the 10 consecutive trading day period immediately
preceding the date of such redemption event. Additionally, the Company has
agreed to keep reserved 3,000,000 shares of Common Stock to satisfy its
obligation with respect to the liquidated damages. In the event that the number
of shares required to be issued by the Company with respect to the amount of
liquidated damages exceeds 3,000,000 shares of Common Stock, and the Company
does not have a sufficient number of shares of Common Stock authorized and
available for issuance to satisfy its obligation with respect to the liquidated
damages, the Company shall issue and deliver to the stockholders all 3,000,000
shares of Common Stock so reserved for that purpose and, upon such issuance, the
stockholders shall have no right of redemption upon a Redemption Event as
specified in the Certificate of Designation to the Series K Stock, but shall
retain all other remedies to which they may be entitled at law or in equity
which remedies shall not include the right of redemption. The stockholders also
agreed not to exercise a right of redemption if the registration statement
required to be filed by the Company, pursuant to a registration rights agreement
entered into between the parties, has not been declared effective by January 31,
1998, or such registration statement, after being declared effective, cannot be
utilized by the holders of the Series K Preferred Stock for the resale of their
securities for an aggregate of more than 30 days after June 30, 1998, however,
in any such events and while any of such events continues, the Company agrees to
provide that the permanent reductions to the conversion percentages set forth in
the registration rights agreement shall accrue at the rate of two hundreds (.02)
per week instead of two hundreds (.02) per month. The stockholders further
agreed not to exercise a right of redemption upon an event where the Company has
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), so long as the Company has not
approved, recommended or otherwise consented to the transaction which triggered
that event. The parties have agreed that all subsequent holders of the Series K
Stock shall be bound by the terms of the amendment, and the parties shall be
responsible for communicating the terms of the amendment to any such subsequent
holders. As a result, the Series K Preferred Stock classified as temporary
equity at September 30, 1997 will be included within shareholders' equity at
December 31, 1997. The pro forma balance sheet at September 30, 1997 reflects
the Series K Preferred Stock as if it had been classified as permanent
shareholders' equity.
<PAGE>
No dealer, salesperson or any other person has
been authorized to give any information or to
make any representations in connection with
the Offering other than those contained in
this Prospectus and, if given or made, such
information or representations must not be
relied upon as having been authorized by the
Company or any Selling Shareholder. This 2,150,000 SHARES
Prospectus does not constitute an offer to
sell, or a solicitation of an offer to purchase,
any securities other than the securities to
which it relates or an offer to sell or the Network Imaging Corporation
solicitation of an offer to buy the Common
Stock in any circumstances in which such offer
or solicitation is unlawful. Neither the de- COMMON STOCK
livery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create
any implication that there has been no change in
the facts set forth in the Prospectus or in the
affairs of the Company since the date hereof or
that the information contained herein is correct
as of any time subsequent to the date hereof.
______________________
PROSPECTUS
----------------------- ______________________
TABLE OF CONTENTS
Page
Prospectus Summary...................................
Certain Forward Looking Statements...................
Risk Factors.........................................
Use of Proceeds......................................
Dividend and Market Price Information................
Capitalization.......................................
Selected Financial Data..............................
Management's Discussion and Analysis of
Financial Condition and Results of Operations......
Business.............................................
Management...........................................
Ownership of Network Imaging
Corporation Stock..................................
Certain Transactions.................................
Selling Stockholders.................................
Plan of Distribution.................................
Description of Capital Stock.........................
Shares Eligible for Future Sale......................
Independent Accountants..............................
Legal Matters........................................
Experts..............................................
Additional Information...............................
Index to Financial Statements.....................F-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses expected to be
incurred by the Registrant in connection with the sale and distribution of the
securities being registered hereby. All amounts are estimated except the
Securities and Exchange Commission registration fee.
SEC registration fee.................................... $ 1,010.00
Listing fees............................................ 17,500.00
Accounting fees and expenses............................ 50,000.00
Legal fees and expenses................................. 70,000.00
Printing and engraving expenses......................... 5,000.00
Miscellaneous fees and expenses......................... 5,000.00
-----------
Total............................................... $148,510.00
===========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law, as amended
("DGCL"), provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding, if
the person acted in good faith and in a manner the person reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. Section 145 further provides that a corporation
similarly may indemnify any such person serving in any such capacity who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor, against expenses actually and reasonably incurred in
connection with the defense or settlement of such action or suit if the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses that the Court of Chancery or such other court shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchases and redemptions) or
(iv) for any transaction from which the director derived an improper personal
benefit. Article SEVENTH of the Registrant's Amended and Restated Certificate of
Incorporation contains a provision that so eliminates the personal liability of
the Registrant's directors.
Article IX of the Registrant's Bylaws provides for indemnification by
the Registrant of its directors and officers ("Indemnifiable Party") if such
Indemnifiable Party acted in good faith and in a manner the Indemnifiable Party
reasonably believed to be in or not opposed to the best interests of the Company
(and with respect to any criminal action or proceeding had not reasonable cause
to believe his or her conduct was unlawful) and except that no indemnification
shall be made in respect of any claim, issue or matter as to which such
Indemnifiable Party shall have been adjudged to be liable to the Company unless
and only to the extent that the Court of Chancery of the State of Delaware or
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
ITEM 15. Recent Sales of Unregistered Securities
In July 1995, the Company issued 1,791 shares of Series D Convertible
Preferred Stock ("Series D Stock") to 22 non-U.S. investors pursuant to
Regulation S for an aggregate of $17,910,000. In October 1995, the Company
rescinded the sale of 74 shares of Series D Stock for $766,000, which amount
included $16,000 of interest at 8%. As thus adjusted, the aggregate number of
Series D Stock issued by the Company was 1,716. In connection with this
issuance, the Company issued to its placement agent, Swartz Investments, Inc., a
warrant to purchase 227,069 shares of Common Stock at an initial exercise price
of $7.57 per share.
In July 1995, the Company issued 250 shares of Series E Convertible
Preferred Stock to 13 non-U.S. investors pursuant to Regulation S for an
aggregate price of $2,500,000. In connection with this issuance, the Company
issued to its placement agent, Oakes, Fitzwilliams & Co. SA, a warrant to
purchase 34,400 shares of Common Stock at an initial exercise price of $7.20 per
share.
In November 1995, in connection with asset-based financing arrange-
ments, the Company issued to Ed Feldman a warrant to purchase 25,000 shares of
Common Stock at an initial exercise price of $3.63 per share. This warrant was
issued pursuant to Section 4(2) of the Securities Act.
In December 1995, the Company issued to each of Jarl McDonald and
Christian Stackhouse a warrant to purchase 4,000 shares of Common Stock at an
initial exercise price of $6.82 per share. These warrants were issued pursuant
to Section 4(2) of the Securities Act.
In December 1995, the Company issued 200 shares of Series G Convertible
Preferred Stock and warrants to purchase an aggregate of 40,000 shares of Common
Stock at an initial exercise price of $1.88 per share to two non-U.S. investors
pursuant to Regulation S for an aggregate price of $2,000,000.
In November and December 1995, the Company issued 2,467,857 shares of
Common Stock and warrants to purchase 179,400 shares of Common Stock at initial
exercise prices ranging from $3.50 per share to $4.00 per share for an aggregate
price of approximately $9 million.
In March 1996, the Company issued 934,634 shares of Common Stock and a
warrant to purchase an additional 64,000 shares to an accredited investor
pursuant to Regulation D at an initial exercise price of $4.5375 per share.
In March 1996, the Company issued 421,040 shares of Common Stock to two
non-U.S. investors pursuant to Regulation S for an aggregate price of
approximately $1.7 million.
In March 1996, the Company issued 1,792,186 shares of Series F
Convertible Preferred Stock in exchange for 1,792 shares of Series C Convertible
Preferred Stock of the Company.
In June 1996, the Company issued 300 shares of Series H Convertible
Preferred Stock and warrants to purchase 80,000 shares of Common Stock at an
initial exercise price of $3.75 per share pursuant to Regulation S for an
aggregate price of approximately $3 million.
In June 1996, the Company issued 300 shares of Series I Convertible
Preferred Stock pursuant to Regulation D for an aggregate price of approximately
$3 million.
In June 1996, the Company issued 500 shares of Series J Convertible
Preferred Stock pursuant to Regulation D for an aggregate price of approximately
$5 million.
In December 1996, the Company issued a warrant to purchase 25,000
shares of Common Stock at an initial exercise price of $3.06 per share to Damon
Testaverde. This warrant was issued pursuant to Section 4(2) of the Securities
Act.
In December 1996, pursuant to Regulation D under the Securities Act,
the Company issued warrants to purchase 4,000 shares of Common Stock at an
initial exercise price of $3.0625 per share to Susan G. Kaufman, in connection
with a $5 million loan from Fred Kassner to the Company.
In December 1996, pursuant to Section 4(2) of the Securities Act, the
Company issued warrants to purchase 100,000 shares of Common Stock at an
exercise price of $3.06 per share ("$3.06 Warrants") to a stockholder of the
Company in connection with a $5 million loan from the stockholder to the
Company.
In July 1997, the Company issued 3,300 shares of Series K Convertible
Preferred Stock and warrants to purchase 247,500 shares of Common Stock at an
exercise price of $2.40 per share to two investors pursuant to Regulation D of
the Securities Act for an aggregate of $3,300,000. The Company also issued
warrants to purchase 162,462 shares of Common Stock at an exercise price of
$1.625 per share, valued at $264,000, to a placement agent in connection with
the above described offering in reliance on Regulation D of the Securities Act.
During July and August 1997, the Company issued, pursuant to Section
4(2) of the Securities Act, 8% Convertible Notes in the aggregate principal
amount of $2.0 million and warrants to purchase an aggregate of 40,000 shares of
Common Stock, at an exercise price of $1.875 per share with respect to 36,000
warrants and at an exercise price of $1.50 per share with respect to 4,000
warrants. $1.8 million of the notes are convertible into shares of Common Stock
at an initial conversion price of $1.875 per share and $200,000 of the notes are
convertible into shares of Common Stock at an initial conversion price of $1.50
per share.
In October and November 1997, the Company, under the terms of certain
termination agreements (See "Management -- Compensation Committee Interlocks and
Insider Participation" and "Certain Transactions" in the Prospectus) issued
warrants issuable for (i) 100,000 shares of Common Stock at an exercise price of
$1.50 per share, (ii) 66,667 shares of Common Stock an exercise price of at
$1.50 per share, and (iii) 50,000 shares of Common Stock at an exercise price of
$1.50 per share. These warrants were issued pursuant to Section 4(2) of the
Securities Act.
During 1997, the Company has issued warrants to (i) the Poretz Group
for 3,094 shares of Common Stock at an exercise price of $3.38 per share, (ii)
Fred Kassner for 70,000 shares of Common Stock at an exercise price of $3.06 per
share, (iii) Damon TestaverdeTestiverdi for 17,500 shares at an exercise price
of $2.66 per share, (iv) the Poretz Group for 5,495 shares of Common Stock at an
exercise price of $1.81 per share, (iv) Fred Kassner for 30,000 shares at an
exercise price of $2.09 per share, (v) Damon Testiverdi for 7,500 shares at an
exercise price of $2.09 per share, (vi) the Poretz Group for 4,464 shares of
Common Stock at an exercise price of $1.38 per share, and (vii) the Poretz Group
for 5,495 shares at an exercise price of $1.66 per share. These warrants were
issued pursuant to Section 4(2) of the Securities Act.
On August 28, 1997, the Board of Directors approved the Director Stock
Option Plan (the "Plan"), subject to shareholder approval, to provide stock
option grants in the amount of 30,000 shares at each annual meeting of the Board
for those directors who are not executive officers of the Company. Persons
appointed to the Board of Directors at any time after the annual grant would
receive pro-rata shares of the option grant. Options vest 25% each quarter and
become fully vested on the first anniversary of their grant. The Plan was
effective as of July 1, 1997. On July 1, 1997, options to purchase 30,000 shares
of Common Stock at an exercise price of $2.03 per share were granted to each of
Robert Ripp, C. Alan Peyser, Robert P. Bernardi and John F. Burton. These
options were issued pursuant to Section 4(2) of the Securities Act.
In August 1997, the Company entered into an agreement with Alex. Brown
& Sons, Incorporated whereby Alex. Brown would act as the sole and exclusive
financial advisor to provide the Company with general restructuring advice. In
connection with this agreement, the Company issued a warrant for 33,951 shares
of Common Stock at an exercise price of $1.56 per share. This warrant was issued
pursuant to Section 4(2) of the Securities Act.
On December 8, 1997, the Company issued 3,250 shares of Series L
Convertible Preferred Stock and warrants to purchase 243,750 shares of Common
Stock at an exercise price of $1.65 per share to three investors pursuant to
Regulation D of the Securities Act for an aggregate purchase price of
$3,250,000. The Company also issued warrants to purchase 160,000 shares of
Common Stock at an exercise price of $1.625 per share to a placement agent in
connection with the above described offering in reliance on Regulation D of the
Securities Act.
ITEM 16. EXHIBITS.
The exhibits listed in the Exhibit Index are filed as part of or
incorporated by reference in this Registration Statement:
Exhibit No. Description
2.1 Agreement and Plan of Reorganization by and among the Company,
Dorotech France SA and the stockholders of Dorotech France SA
dated August 30, 1993 with the amendments thereto dated September
29, 1993 and October 1, 1993. (Incorporated by reference to
Exhibit 1 to Company's Report on Form 8-K relating to such
Agreement and Plan of Reorganization filed October 13, 1993.)
2.2 Agreement for the Purchase and Sale of Assets of Symmetrical
Technologies, Inc. as of September 30, 1996. (Incorporated by
reference to Exhibit 10.a to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1996.)
3.1 Restated Certificate of Incorporation as of November 19, 1997
(Incorporated by reference to Exhibit 3.1 to Amendment No. 1 to
the Company's registration statement on Form S-4 (Registration
No. 333-36517) filed December 4, 1997.)
3.2 Restated Bylaws as of May 17, 1996 (Incorporated by reference to
Exhibit 3.11 to Amendment No. 1 to the Company's Form 10-Q for
the quarterly period ended June 30, 1997).
3.3 Certificate of Designations for Series A Cumulative Convertible
Preferred Stock filed with the Secretary of State of the State of
Delaware on December 7, 1993. (Incorporated by reference to
Exhibit 3.1c to the Company's registration statement on Form SB-2
(Registration No. 33-73164) filed December 20, 1993.)
3.4 Certificates of Designations for Series F-1, F-2, F-3 and F-4
Convertible Preferred Stock filed with the Secretary of State of
the State of Delaware on March 29, 1996. (Incorporated by
reference to Exhibit 3.(i).i to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.)
3.5 Certificate of Designation of Series K Convertible Preferred
Stock of the Company filed in Delaware on July 28, 1997.
(Incorporated by reference to Exhibit 3.12 to the Company's Form
10-Q for the quarterly period ended June 30, 1997.)
4.1 Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4.2 to Amendment No. 1 to the Company's registration
statement on Form S-1 (Registration No. 33-45721) filed April 10,
1992.)
5 Opinion of Kirkpatrick & Lockhart LLP.
10.1 Warrant Agreement between the Company and American Stock Transfer
& Trust Co. dated as of February 1, 1993. (Incorporated by
reference to Exhibit 1 to Post-Effective Amendment No. 1 to
Company's registration statement on Form S-1 (Registration No.
33-45721) filed April 1, 1993.)
10.2 Amendment No. 1 dated as of April 15, 1993 to the Warrant
Agreement between the Company and American Stock Trust & Transfer
Co. (Incorporated by reference to Exhibit 2 to Post-Effective
Amendment No. 1 to Company's registration statement on Form S-1
(Registration No. 33-45721) filed April 1, 1993.)
10.3 Warrant Agreement between the Company and American Stock Transfer
& Trust Co. dated as of April 28, 1993. (Incorporated by
reference to Exhibit 4.4 to Company's registration statement on
Form SB-2 (Registration No. 33-64046) filed June 8, 1993.)
10.4 Specimen Warrant Certificate (Public Warrants). (Incorporated by
reference to Exhibit 4.3 to Amendment No. 1 to the Company's
registration statement on Form S-1 (Registration No. 33-45721)
filed April 10, 1992.)
10.5 Specimen Warrant Certificate (International/Oakes Fitzwilliams
Series). (Incorporated by reference to Exhibit 4.6 to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1992.)
10.6 Specimen Warrant Certificate (International/Thomas James Series).
(Incorporated by reference to Exhibit 4.7 to Company's
registration statement on Form SB-2 (Registration No. 33-64046)
filed June 8, 1993.)
10.7 Warrant to purchase 20,700 units issued to Oakes, Fitzwilliams &
Co. Limited. (Incorporated by reference to Exhibit 4.8 to
Company's registration statement on Form SB-2 (Registration No.
33-64046) filed June 8, 1993.)
10.8 Warrant to purchase 33,214 units issued to Oakes, Fitzwilliams &
Co. Limited. (Incorporated by reference to Exhibit 4.9 to
Company's registration statement on Form SB-2 (Registration No.
33-64046) filed June 8, 1993.)
10.9 Placement Agent's Warrant to purchase 8,150 units issued to
Thomas James Associates, Inc. (Incorporated by reference to
Exhibit 4.10 to Company's registration statement on Form SB-2
(Registration No. 33-64046) filed June 8, 1993.)
10.10 Representative's Warrant issued to Thomas James Associates, Inc.
(Incorporated by reference to Exhibit 4.11 to Company's
registration statement on Form SB-2 (Registration No. 33-64046)
filed June 8, 1993.)
10.11 Warrant Agreement among the Company, American Stock Transfer &
Trust Co. and Thomas James Associates, Inc. dated as of May 8,
1992. (Incorporated by reference to Exhibit 4.12 to the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1992.)
10.12 Form of Amendment to Warrant Agreement among the Company,
American Stock Transfer & Trust Co. and Thomas James Associates,
Inc. dated as of May 8, 1992. (Incorporated by reference to
Exhibit 4.12.a to Amendment No. 1 to the Company's registration
statement on Form SB-2 (Registration No. 33-64046) filed January
5, 1994.)
10.13 Warrant to purchase 50,000 shares of Common Stock to Oakes,
Fitzwilliams & Co. Limited. (Incorporated by reference to Exhibit
4.13 to Amendment No. 1 to the Company's registration statement
on Form SB-2 (Registration No. 33-64046) filed January 5, 1994.)
10.14 Warrants to purchase an aggregate of 45,000 shares of Common
Stock issued to American Wealth Management, Inc., Edsel Anderson,
Harris Anderson and Eric Swartz. (Incorporated by reference to
Exhibit 4.14 to Amendment No. 1 to the Company's registration
statement on Form SB-2 (Registration No. 33-64046) filed January
5, 1994.)
10.15 Form of Warrant issued in connection with February 1992 debt
financing. (Incorporated by reference to Exhibit 4.6.B to the
Company's registration statement on Form S-1. (Registration No.
33-45721) filed February 13, 1992.)
10.16 Warrant to purchase 227,068 shares of Common Stock issued to
Swartz Investments Inc. (Incorporated by reference to Exhibit
4.17 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995.)
10.17 Warrant to purchase 34,400 shares of Common Stock issued to
Oakes, Fitzwilliams & Co. Limited. (Incorporated by reference to
Exhibit 4.18 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.)
10.18 Form of Warrants issued in connection with December 1995 Series G
Convertible Preferred Stock offering. (Incorporated by reference
to Exhibit 4.19 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.)
10.19 Form of Warrants issued in connection with November/December 1995
Private Placement of Common Stock. (Incorporated by reference to
Exhibit 4.20 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.)
10.20 Warrant to purchase 25,000 shares of Common Stock issued to Ed
Feldman dated November 7, 1995. (Incorporated by reference to
Exhibit 4.21 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.)
10.21 Warrant to purchase 4,000 shares of Common Stock issued to Jarl
McDonald dated December 20, 1995. (Incorporated by reference to
Exhibit 4.22 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.)
10.22 Warrant to purchase 4,000 shares of Common Stock issued to
Christian Stackhouse dated December 20, 1995. (Incorporated by
reference to Exhibit 4.23 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.)
10.23 Exchange Agreement between CDR Enterprises the Company dated
March 29, 1996. (Incorporated by reference to Exhibit 4.35 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.)
10.24 Warrant to purchase 100,000 shares of Common Stock to Fred E.
Kassner dated December 31, 1996. (Incorporated by reference to
Exhibit 4.36 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.)
10.25 Warrant to purchase up to 25,000 shares of Common Stock to Damon
Testaverde dated January 31, 1997. (Incorporated by reference to
Exhibit 4.37 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.)
10.26 Warrant to purchase 4,000 shares of Common Stock to Susan G.
Kaufman dated December 31, 1996. (Incorporated by reference to
Exhibit 4.38 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.)
10.27 Eight Percent (8%) Convertible Note between Network Imaging
Corporation and Wood Gundy in trust for RRSP 550 98866 19 and
Gundyco in trust for RRSP 550 99119 12 as of July 9, 1997 and
attached Schedule. (Incorporated by reference to Exhibit 10.22 to
the Company's Form 10-Q for the quarterly period ended June 30,
1997.)
10.28 Securities Purchase Agreement between Network Imaging Corporation
and Capital Ventures International and Zanett Lombardier, Ltd. as
of July 28, 1997. (Incorporated by reference to Exhibit 10.23 to
the Company's Form 10-Q for the quarterly period ended June 30,
1997.)
10.29 Registration Rights Agreement between Network Imaging Corporation
and Capital Ventures International and Zanett Lombardier, Ltd. as
of July 28, 1997. (Incorporated by reference to Exhibit 10.24 to
the Company's Form 10-Q for the quarterly period ended June 30,
1997.)
10.30 Warrant to purchase 20,000 shares of Common Stock issued to Wood
Gundy in trust for RRSP 550 98866 19 dated July 9, 1997.
(Incorporated by reference to Exhibit 10.25 to the Company's Form
10-Q for the quarterly period ended June 30, 1997.)
10.31 Warrant to purchase 16,000 shares of Common Stock issued to
Gundyco in trust for RRSP 550 99119 12 dated July 9, 1997.
(Incorporated by reference to Exhibit 10.26 to the Company's Form
10-Q for the quarterly period ended June 30, 1997.)
10.32 Warrant to purchase 112,500 shares of Common Stock issued to
Capital Ventures International dated July 28, 1997. (Incorporated
by reference to Exhibit 10.27 to the Company's Form 10-Q for the
quarterly period ended June 30, 1997.)
10.33 Warrant to purchase 135,000 shares of Common Stock issued to
Zanett Lombardier, Ltd. dated July 28, 1997. (Incorporated by
reference to Exhibit 10.28 to the Company's Form 10-Q for the
quarterly period ended June 30, 1997.)
10.34 Warrant to purchase 162,462 shares of Common Stock issued to the
Zanett Securities Corporation dated July 28, 1997. (Incorporated
by reference to Exhibit 10.29 to the Company's Form 10-Q for the
quarterly period ended June 30, 1997.)
10.35 Placement Agency Agreement dated July 2, 1997 between Network
Imaging Corporation and The Zanett Securities Corporation.
(Incorporated by reference to Exhibit 10.30 to the Company's Form
10-Q for the quarterly period ended June 30, 1997.)
10.36 Security Agreement dated as of December 31, 1996 between Network
Imaging Corporation and Fred Kassner. (Incorporated by reference
to Exhibit 10.31 to the Company's Form 10-Q for the quarterly
period ended June 30, 1997.)
10.37 Amendment No. 1 to Loan Agreement dated as of June 8, 1997
between Network Imaging Corporation and Fred Kassner.
(Incorporated by reference to Exhibit 10.32 to the Company's Form
10-Q for the quarterly period ended June 30, 1997.)
10.38 Amendment No. 1 to Security Agreement dated as of June 8, 1997
between Network Imaging Corporation and Fred Kassner.
(Incorporated by reference to Exhibit 10.33 to the Company's Form
10-Q for the quarterly period ended June 30, 1997.)
10.39 Consulting Agreement by and between the Company, BCG, Inc. and
Robert P. Bernardi dated May 28, 1996. Incorporated by reference
to Exhibit 10.a to the Company's report on Form 8-K filed August
2, 1996.
10.40 Form of Consulting Agreement by and between the Company, Sterling
Capital Group, Inc. and Robert M. Sterling, Jr. effective
February 1, 1994. (Incorporated by reference to Exhibit 10.4.b to
Post-Effective Amendment No. 1 to the Company's registration
statement on Form SB-2 (Registration No. 33-73164) filed January
14, 1994.)
10.41 Amendment dated October 1, 1995 by and between the Company,
Sterling Capital Group, Inc., and Robert M. Sterling, Jr.
(Incorporated by reference to Exhibit 10.4.c to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995.)
10.42 Purchase Agreement by and between the Company and CDR Enterprises
for the repurchase of the Company's Series F Preferred Stock
dated December 31, 1996. (Incorporated by reference to Exhibit
10.20 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.)
10.43 Loan Agreement by and between the Company and Fred E. Kassner for
a line of credit of $5,000,000 dated December 31, 1996.
(Incorporated by reference to Exhibit 10.21 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996.)
10.44 Amendment dated January 1, 1996 among Network Imaging
Corporation, Sterling Capital Group and Robert M. Sterling, Jr. *
10.45 Amendment dated January 1, 1996 among Network Imaging
Corporation, BCG, Inc. and Robert P. Bernardi. *
10.46 Amendment to Purchase Agreement effective May 30, 1997 between
Network Imaging Corporation and CDR Enterprises. (Incorporated by
reference to Exhibit 10.46 to Amendment No. 1 to the Company's
registration statement on Form S-4 (Registration No. 333-36517)
filed December 4, 1997.)
10.47 Registration Rights Agreement between the Company and CDR
Enterprises dated as of December 31, 1996. (Incorporated by
reference to Exhibit 10.47 to Amendment No. 1 to the Company's
registration statement on Form S-4 (Registration No. 333-36517)
filed December 4, 1997.)
10.48 Warrant to purchase 40,000 shares of Common Stock issued to Mark
Shoom dated as of June 25, 1996. (Incorporated by reference to
Exhibit 10.48 to Amendment No. 1 to the Company's registration
statement on Form S-4 (Registration No. 333-36517) filed December
4, 1997.)
10.49 Warrant to purchase 40,000 shares of Common Stock issued to
Charles Kucey dated as of June 25, 1996. (Incorporated by
reference to Exhibit 10.49 to Amendment No. 1 to the Company's
registration statement on Form S-4 (Registration No. 333-36517)
filed December 4, 1997.)
10.50 Form of Registration Rights Agreement between Network Imaging
Corporation and GFL Performance Ltd., dated as of March 15, 1996.
(Incorporated by reference to Exhibit 10.50 to Amendment No. 1 to
the Company's registration statement on Form S-4 (Registration
No. 333-36517) filed December 4, 1997.)
10.51 Warrant to purchase 5,000 shares of Common Stock issued to
Redington, Inc. dated October 21, 1993 and Form of Registration
Rights Agreement between Network Imaging Corporation and
Redington, Inc. (Incorporated by reference to Exhibit 10.51 to
Amendment No. 1 to Company's registration statement on Form S-4
(Registration No. 333-36517) filed December 4, 1997.)
10.52 Form of Registration Rights Agreement between Network Imaging
Corporation and Fred Kassner dated as of December 31, 1996.
(Incorporated by reference to Exhibit 10.52 to Amendment No. 1 to
the Company's registration statement on Form S-4 (Registration
No. 333-36517) filed December 4, 1997.)
10.53 Form of Warrant Agreement between Network Imaging Corporation and
American Stock Transfer and Trust Company to issue shares of
Common Stock dated as of December 31, 1996. (Incorporated by
reference to Exhibit 10.53 to Amendment No. 1 to the Company's
registration statement on Form S-4 (Registration No. 333-36517)
filed December 4, 1997.)
10.54 Representative's Warrant issued to Thomas James Associates, Inc.
to purchase 150,000 shares of Common Stock dated May 18, 1992.
(Incorporated by reference to Exhibit 4.11 to the Company's
registration statement on Form SB-2 (Registration No. 33-64046)
filed June 9, 1993.)
10.55 (Intentionally omitted).
10.56 (Intentionally omitted).
10.57 Warrant to purchase in aggregate (i) up to 140,000 shares of
Series A Preferred Stock, or (ii) up to 253,624 shares of Common
Stock, or (iii) any combination of such securities issued to (a)
RAS Securities Corp. and (b) R.A. Schneider dated December 7,
1993. (Incorporated by reference to Exhibit 10.57 to Amendment
No. 1 to the Company's registration statement on Form S-4
(Registration No. 333-36517) filed December 4, 1997.)
10.58 Eight Percent (8%) Convertible Notes in the aggregate principal
amount of $200,000 dated August 20, 1997 and issued to Gundyco in
trust for RRSP 550 99119 12. (Incorporated by reference to
Exhibit 10.34 to the Company's Form 10-Q for the three months
ended September 30, 1997.)
10.59 Form of Warrant dated August 21, 1997 to purchase 4,000 shares of
Common Stock issued to Gundyco in trust for RRSP 550 99119 12.
(Incorporated by reference to Exhibit 10.35 to the Company's Form
10-Q for the three months ended September 30, 1997.)
10.60 Termination of Consulting Agreement among Network Imaging
Corporation, Sterling Capital Group, Inc., and Robert M.
Sterling, Jr., dated October 13, 1997. (Incorporated by reference
to Exhibit 10.60 to Amendment No. 1 to the Company's registration
statement on Form S-4 (Registration No. 333-36517) filed December
4, 1997.)
10.61 Termination of Consulting Agreement among Network Imaging
Corporation, Mann Enterprises, Inc., and John B. Mann dated
October 17, 1997. (Incorporated by reference to Exhibit 10.61 to
Amendment No. 1 to the Company's registration statement on Form
S-4 (Registration No. 333-36517) filed December 4, 1997.)
10.62 Termination of Consulting Agreement among Network Imaging
Corporation, BCG, Inc., and Robert P. Bernardi, dated October 30,
1997. (Incorporated by reference to Exhibit 10.62 to Amendment
No. 1 to the Company's registration statement on Form S-4
(Registration No. 333-36517) filed December 4, 1997.)
10.63 Form of Warrant to purchase (i) 100,000 shares of Common Stock
issued to Robert M. Sterling, Jr., dated October 1, 1997, (ii)
66,667 shares of Common Stock issued to Mann Enterprises, Inc.,
dated October 1, 1997, (iii) 50,000 shares of Common Stock issued
to Robert P. Bernardi dated October 1, 1997, (iv) 4,464 shares of
Common Stock issued to the Poretz Group dated August 1, 1997, (v)
5,495 shares of Common Stock issued to the Poretz Group dated
November 1, 1997 and (vi) 33,951 shares of Common Stock issued to
Alex Brown & Sons Incorporated dated August 5, 1997.
(Incorporated by reference to Exhibit 10.63 to Amendment No. 1 to
the Company's registration statement on Form S-4 (Registration
No. 333-36517) filed December 4, 1997.)
10.64 Form of Registration Rights Agreement among Network Imaging
Corporation and the purchasers of the Series D Preferred Stock.
(Incorporated by reference to Exhibit 10.64 to Amendment No. 1 to
the Company's registration statement on Form S-4 (Registration
No. 333-36517) filed December 4, 1997.)
10.65 Form of Registration Rights Agreement among Network Imaging
Corporation and the purchasers of the Series E Preferred Stock.
(Incorporated by reference to Exhibit 10.65 to Amendment No. 1 to
the Company's registration statement on Form S-4 (Registration
No. 333-36517) filed December 4, 1997.)
10.66 Letter of Agreement between Network Imaging Corporation and Alex
Brown & Sons Incorporated dated August 13, 1997. (Incorporated by
reference to Exhibit 10.66 to Amendment No. 1 to the Company's
registration statement on Form S-4 (Registration No. 333-36517)
filed December 4, 1997.)
10.67 Form of Warrant to purchase (i) 3,094 shares of Common Stock
issued to the Poretz Group dated February 1, 1997, (ii) 70,000
shares of Common Stock issued to Fred Kassner dated March 27,
1997, (iii) 17,500 shares of Common Stock issued to Damon
Testaverde dated March 27, 1997, (iv) 5,495 shares of Common
Stock issued to the Poretz Group dated May 1, 1997, (v) 30,000
shares of Common Stock issued to Fred Kassner dated June 9, 1997,
and (vi) 7,500 shares of Common Stock issued to Damon Testaverde
dated June 9, 1997. (Incorporated by reference to Exhibit 10.67
to Amendment No. 1 to the Company's registration statement on
Form S-4 (Registration No. 333-36517) filed December 4, 1997.)
10.68 Form of Securities Purchase Agreement between Network Imaging
Corporation and Genesee Fund Limited dated March 15, 1996.
(Incorporated by reference to Exhibit 10.68 to Amendment No. 1 to
the Company's registration statement on Form S-4 (Registration
No. 333-36517) filed December 4, 1997.)
10.69 Form of Securities Purchase Agreement between Network Imaging
Corporation and (i) Bank Ehinger & CIE AG, and (ii) Privatinvest
Bank, respectively, dated in February and March 1996.
(Incorporated by reference to Exhibit 10.69 to Amendment No. 1 to
the Company's registration statement on Form S-4 (Registration
No. 333-36517) filed December 4, 1997.)
10.70 Letter of Employment Agreement between Network Imaging
Corporation and James Leto dated May 9, 1996. (Incorporated by
reference to Exhibit 10.70 to Amendment No. 1 to the Company's
registration statement on Form S-4 (Registration No. 333-36517)
filed December 4, 1997.)
10.71 Form of Convertible Preferred Stock Purchase Agreement between
Network Imaging Corporation and Purchaser dated June 28, 1996.
(Incorporated by reference to Exhibit 4.a to the Company's
Quarterly Report on Form 10-Q for the period ending June 30,
1996.)
10.72 Form of Convertible Preferred Stock Purchase Agreement between
Network Imaging Corporation and Southbrook International
Investments, Ltd., dated September 30, 1996. (Incorporated by
reference to Exhibit 4.a to the Company's Quarterly Report of
Form 10-Q for the period ending September 30, 1996.)
10.73 Form of Agreement among Network Imaging Corporation, Zanett
Lombardier Ltd., and Capital Ventures International dated as of
November 30, 1997.
21 Subsudiaries. (Incorporated by reference to Exhibit 21 to
Amendment No. 1 to the Company's registration statement on Form
S-4 (Registration No. 333-365517) filed December 4, 1997.)
23.1 Consent of Ernst & Young LLP, Independent Accountants.
23.2 Consent of Price Waterhouse LLP, Independent Accountants.
23.3 Consent of Kirkpatrick & Lockhart LLP (Contained in Exhibit 5.)
24 Power of Attorney (see page ___).
27.1 Financial data schedule for the year ended December 31, 1994. *
27.2 Financial data schedule for the year ended December 31, 1995. *
- ----------------------
* Previously filed.
The 1996 Valuation Allowance Schedule was not included in this
Registration Statement. Such schedule was omitted from this Registration
Statement but the information required to be contained therein is included in
the financial statements and notes included herein.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Se-
urities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Herndon, Commonwealth of Virginia, on this 8th day of December, 1997.
NETWORK IMAGING CORPORATION
By: /s/ James J. Leto
James J. Leto
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
/s/ James J. Leto
- --------------------
James J. Leto President, Chief Executive Officer December 8, 1997
and Chairman of the Board
/s/ Jorge R. Forgues
- --------------------
Jorge R. Forgues Senior Vice President of Finance December 8, 1997
and Administration, Chief Financial
Officer
/s/ Robert P. Bernardi*
- -----------------------
Robert P. Bernardi Director and Secretary December 8, 1997
/s/ John F. Burton*
- -------------------
John F. Burton Director December 8, 1997
/s/ C. Alan Peyser*
- -------------------
C. Alan Peyser Director December 8, 1997
/s/ Robert Ripp*
- ----------------
Robert Ripp Director December 8, 1997
*By: /s/ James J. Leto
James J. Leto,
Attorney-in-fact
-------------------------------------------------
KIRKPATRICK & LOCKHART LLP
-------------------------------------------------
1800 MASSACHUSETTS AVENUE, N.W.
2ND FLOOR
WASHINGTON, D.C. 20036-1800
TELEPHONE (202) 778-9000
FACSIMILE (202) 778-9100
Exhibit 5
December 5, 1997
Network Imaging Corporation
500 Huntmar Park Drive
Herndon, Virginia 20170
Re: Network Imaging Corporation
Registration Statement on Form S-1
Registration Number 333-36385
Ladies/Gentlemen:
We have acted as counsel to Network Imaging Corporation, a Delaware
corporation ("Corporation"), in connection with the preparation and filing of
the above-captioned Registration Statement on Form S-1, Registration Number
333-36385 ("Registration Statement"), under the Securities Act of 1933, as
amended, covering 2,150,000 shares of Common Stock, $0.0001 par value per share
("Common Stock"), of the Corporation issuable in connection with (a) the Eight
Percent (8%) Convertible Notes ("July Notes") dated as of July 9, 1997 in the
aggregate principal amount of $1,800,000 issued to Wood Gundy in trust for RRSP
550 98866 19 and Gundyco in trust for RRSP 550 9919 12 (collectively referred to
as the "Selling Shareholders") and (b) the Eight Percent (8%) Convertible Notes
("August Notes") dated August 20, 1997 in the aggregate principal amount of
$200,000 issued to Gundyco in trust for RRSP 550 99119 12, and the resale of
such shares of Common Stock by such Selling Shareholders.
We have examined copies of the Registration Statement, the Prospectus
forming a part thereof, the Certificate of Incorporation and Bylaws of the
Corporation, each as amended to date, the minutes of various meetings and
unanimous written consents of the Board of Directors and the shareholders of the
Corporation, and original, reproduced or certified copies of such records of the
Corporation and such agreements, certificates of public officials, certificates
of officers and representatives of the Corporation and others, and such other
documents, papers, statutes and authorities as we deem necessary to form the
basis of the opinions hereinafter expressed. In such examination, we have
assumed the genuineness of all signatures and the conformity to original
documents of all documents supplied to us as copies. As to various questions of
fact material to such opinions, we have relied upon statements and certificates
of officers and representatives of the Corporation and others.
Based on the foregoing, we are of the opinion that each of the
2,150,000 shares of Common Stock, when issued in accordance with the terms of
the July Notes and the August Notes, as the case may be, will be duly and
validly issued by the Corporation, fully paid and nonassessable.
We hereby consent to the reference to our firm under the caption "Legal
Matters" in the Prospectus forming part of the Registration Statement and to
your filing a copy of this Opinion as an exhibit to said Registration Statement.
Very truly yours,
/s/ Kirkpatrick & Lockhart LLP
KIRKPATRICK & LOCKHART LLP
AGREEMENT
AGREEMENT (this "Agreement"), dated as of November 30, 1997, by and
among NETWORK IMAGING CORPORATION, a corporation organized under the laws of the
State of Delaware (the "Company"), and the undersigned (together with
affiliates, the "Initial Investors").
WHEREAS:
A. In connection with that certain Securities Purchase Agreement,
dated as of July 28, 1997, by and among the Company and the Initial Investors
(the "Securities Purchase Agreement"), the Company issued and sold to the
Initial Investors 3,300 shares of the Company's Series K Convertible Preferred
Stock, par value $.0001 per share (the "Preferred Stock"). The rights,
preferences and privileges of the Preferred Stock are set forth in the C
Certificate of Designations Preferences and Rights of the Preferred Stock in the
form attached hereto as Exhibit A (the "Certificate of Designation").
Capitalized terms used and not otherwise defined herein shall have the meaning
ascribed thereto in the Certificate of Designation.
B. Pursuant to the Certificate of Designation, the Initial Investors
have the right to require the Company to redeem the shares of Preferred Stock
held by such Initial Investors in certain circumstances set forth in the
Certificate of Designation (the "Redemption Rights").
C. The Company desires to induce the Initial Investors to agree not to
exercise certain of their Redemption Rights as described herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investors hereby agree as follows:
1. The Initial Investors agree not to exercise their right to require
the Company to effect a redemption of their outstanding shares of Preferred
Stock upon a Redemption Event specified in Article VIII.A.(i) of the Certificate
of Designation so long as the Company pays to each of the Initial Investors
within five (5) business days of the occurrence of such Redemption Event, as
liquidated damages for the decrease in the value of the Preferred stock (and the
shares of the Company's Common Stock issuable upon conversion thereof) which
will result from the occurrence of such Redemption Event, an amount (the
"Damages Amount") equal to twenty-five percent (25%) of the aggregate Face
Amount of the shares of Preferred Stock then held by each such Initial Investor.
The Damages Amount shall be payable, at the Company's option, in cash or shares
of Common Stock that have been registered by the Company under the Securities
Act for resale by the Initial Investors (based upon a price per share of Common
Stock equal to fifty percent (50%) of the lowest Closing Price of the Common
Stock on any single trading day during the ten (10) consecutive trading day
period ending on the trading day immediately preceding the date of such
Redemption Event). The Company represents and warrants that it has reserved, and
agrees to keep reserved, 3,000,000 shares of Common Stock to satisfy its
obligation with respect to the Damages Amount. In the event that the number of
shares required to be issued by the Company with respect to the Damages Amount
exceeds 3,000,000 shares of Common Stock and the Company does not have a
sufficient number of shares of Common Stock authorized and available for
issuance to satisfy its obligation with respect to the Damages Amount, the
Company shall issue and deliver to the Initial Investors all 3,000,000 shares of
Common Stock so reserved for such purpose and, upon such issuance, the Initial
Investors shall have no right of redemption upon a Redemption Event specified in
Article VIII.A.(i) of the Certificate of Designation, but shall retain all other
remedies to which they may be entitled at law or inequity (which remedies shall
not include the right of redemption).
2. The Initial Investors agree not to exercise their right under
Article V.B. of the Certificate of Designation to require the Company to effect
a redemption of their outstanding shares of Preferred Stock so long as (i) the
Company has not, at any time, decreased the Reserved Amount below 12,500,000
shares of Common Stock; (ii) the Company shall have taken immediate action
following the applicable Authorization Trigger Date (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 Preferred Stock;
and (iii) the Company continues to use its good faith best efforts (including
the resolicitation of 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 Preferred Stock. The parties hereby agree that the Company will be
deemed to be using "its good faith best efforts" to increase the Reserved Amount
so long as it solicits shareholder approval to authorize the issuance of
additional shares of Common Stock not less than three (3) times during each
twelve month period following the applicable Authorization Trigger Date during
which any shares of Preferred Stock remain outstanding.
3. The parties agree that the Initial Investors shall have no right to
require the Company to effect a redemption of their outstanding shares of
Preferred Stock upon a Redemption Event specified in Article VIII.A.(ii) of the
Certificate of Designation (each, a "Registration Redemption Event"), but that,
in lieu of such right, Section 2(c) of the Registration Rights Agreement is
hereby amended to provide that, upon the occurrence of a Registration Redemption
Event and while such Registration Redemption Event continues, the permanent
reductions to the Conversion Percentages set forth in such Section 2(c) shall
accrue at the rate of two hundredths (.02) per week instead of two hundredths
(.02) per month. The parties agree that there shall be no limit on the aggregate
reductions which can be made to each of the Conversion Percentages pursuant to
this Section 3.
4. The Initial Investors agree not to exercise their right to require
the Company to effect a redemption of their outstanding shares of Preferred
Stock upon a Redemption Event specified in Article VIII.A.(v)(c) of the
Certificate of Designation so long as the company has not approved, recommended
or otherwise consented to the transaction which triggered such Redemption Event.
5. (a) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(b) This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts made
and to be performed in the State of Delaware. The Company irrevocably consents
to the jurisdiction of the United States federal courts and the state courts
located in the City of New York in the State of New York in any suit or
proceeding based on or arising under this Agreement and irrevocably agrees that
all claims in respect of such suit or proceeding may be determined in such
courts. The Company irrevocably waives the defense of an inconvenient forum to
the maintenance of such suit or proceeding. The Company further agrees that
service of process upon the Company, mailed by first class mail shall be deemed
in every respect effective service of process upon the Company in any such suit
or proceeding. Nothing herein shall affect the Initial Investors' right to serve
process in any other manner permitted by law. The Company agrees that a final
non-appealable judgment in any such suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.
(c) Except as expressly provided herein, all of the terms and
provisions of the Certificate of Designation shall continue in full force and
effect and nothing contained herein shall be deemed to constitute a waiver by
the Initial Investors of any of their rights under the Certificate of
Designation, the Securities Purchase Agreement, the Registration Rights
Agreement or any other agreement among the Company and the Initial Investors.
(d) This Agreement shall inure to the benefit of and be
binding upon the successors and assigns of each of the parties hereto. In
addition, the Initial Investors (and any transferees of the Initial Investors)
shall be prohibited from transferring any shares of Preferred Stock unless,
prior to any such proposed transfer, (i) the Company is furnished with written
notice of the name and address of such transferee, (ii) at or before the time
the Company receives the written notice contemplated by clause (i) of this
sentence, the transferee agrees in writing for the benefit of the Company to be
bound by all of the provisions contained herein following such transfer, (iii)
such transfer shall have been made in accordance with the applicable
requirements of the Securities Purchase Agreement, the Certificate of
Designation, the Securities Act and applicable state securities laws, and (iv)
the further transfer or disposition of such Preferred Stock by the transferee
(and any subsequent transferees) is restricted pursuant to the provisions
hereof.
(e) This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed by a party,
may be delivered to the other party hereto by facsimile transmission of a copy
of this Agreement bearing the signature of the party so delivering this
Agreement.
[REMAINED OF PAGE INTENTIONALLY BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
NETWORK IMAGING CORPORATION
By:________________________
Name:______________________
Title:_____________________
INITIAL INVESTORS:
ZANETT LOMBARDIER, LTD.
By:_________________________
Name:_______________________
Title:______________________
CAPITAL VENTURES INTERNATIONAL
By:_________________________
Name:_______________________
Title:______________________
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 14, 1997 included in Amendment No. 1 to the
Registration Statement (Form S-1 dated on or about December 3, 1997) and
related Prospectus of Network Imaging Corporation for the registration of
2,150,000 shares of its Common Stock.
Vienna, Virginia
December 3, 1997 /S/ Ernst & Young LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of Network Imaging Corporation of our report
dated March 29, 1996 relating to the financial statements of Network Imaging
Corporation, which appears in such Prospectus. We also consent to the references
to us under the headings "Experts" and "Independent Accountants" in such
Prospectus.
PRICE WATERHOUSE LLP
Falls Church, Virginia
December 2, 1997
