SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A
INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Network Imaging Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules
14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing by
registration statement number, or the form or schedule and the date
of its filing.
(1) Amount previously paid:
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(2) Form, schedule or registration statement no.:
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(3) Filing party:
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(4) Date filed:
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<PAGE>
[NETWORK IMAGING CORPORATION LOGO]
NETWORK IMAGING CORPORATION
500 Huntmar Park Drive
Herndon, Virginia 20170
April 20, 1998
Dear Stockholders:
It is my pleasure to invite you to the Annual Meeting of Stockholders of
Network Imaging Corporation to be held on Thursday, June 11, 1998 at 9:00 a.m.,
at the Company's headquarters at 500 Huntmar Park Drive, Herndon, Virginia 20170
(the "Annual Meeting").
Whether or not you plan to attend, and regardless of the number of shares
you own, it is important that your shares be represented at the Annual Meeting.
You are accordingly urged to complete, sign, date and return your proxy promptly
in the enclosed envelope. Your return of a proxy in advance will not affect your
right to vote in person at the Annual Meeting.
The officers and directors of the Company look forward to seeing you at the
Annual Meeting.
Very truly yours,
/s/ JAMES J. LETO
JAMES J. LETO
President and Chief Executive Officer
<PAGE>
[NETWORK IMAGING CORPORATION LOGO]
NETWORK IMAGING CORPORATION
500 Huntmar Park Drive
Herndon, Virginia 20170
---------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Thursday, June 11, 1998
---------------
Notice is hereby given that the Annual Meeting of Stockholders (the
"Meeting") of Network Imaging Corporation (the "Company") will be held on
Thursday, June 11, 1998 at 9:00 a.m. at the Company's headquarters located at
500 Huntmar Park Drive, Herndon, Virginia for the following purposes:
1. To elect five directors;
2. To approve the issuance of shares of the Company's Common Stock, $0.0001
par value per share ("Common Stock"), issuable in connection with the
Company's Series L Convertible Preferred Stock ("Series L Stock"), on
exercise of warrants to purchase shares of Common Stock at an exercise
price of $1.00 per share ("Investor Warrants") and on exercise of
warrants to purchase shares of Common Stock at an exercise price of
$1.00 per share ("Agent Warrants") under Nasdaq Rule 4460(i)(1)(D);
3. To consider and vote upon a proposal to adopt the Network Imaging
Corporation Amended and Restated 1997 Director Stock Option Plan;
4 To consider and vote upon a proposal to amend the 1994 Key Employee
Incentive Stock Option Plan that increases the total number of shares
for which options may be granted under the plan from 6,000,000 to
7,000,000;
5. To ratify the selection of Ernst & Young LLP as independent accountants
for the year ending December 31, 1998; and
6. To transact such other business as may properly come before the Meeting
or any adjournment thereof.
Stockholders of record at the close of business on April 13, 1998 are
entitled to receive notice of and to vote at the Meeting. You are invited to
attend the Meeting. Please carefully read the attached Proxy Statement for
information regarding the matters to be considered and acted upon at the
Meeting.
By Order of the Board of Directors
/s/ JULIA A. BOWEN
JULIA A. BOWEN
Vice President, General Counsel
and Assistant Secretary
Herndon, Virginia
April 20, 1998
IMPORTANT
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING IN PERSON, YOU ARE URGED
TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
RETURN POSTAGE-PAID ENVELOPE. No postage need be affixed to the return envelope
if mailed in the United States. If you attend the Meeting, you may withdraw your
proxy and vote in person by ballot.
<PAGE>
NETWORK IMAGING CORPORATION
500 Huntmar Park Drive
Herndon, Virginia 20170
---------------
PROXY STATEMENT
This Proxy Statement and the accompanying Notice of Annual Meeting of
Stockholders and Proxy Card are being furnished in connection with the
solicitation by the Board of Directors of Network Imaging Corporation (the
"Company") of proxies to be voted at the Annual Meeting of Stockholders to be
held on Thursday, June 11, 1998 at 9:00 a.m. or at any adjournment or
postponement thereof. This Proxy Statement and the enclosed Proxy Card are being
furnished on or about April 23, 1998, to all holders of record of the Company's
Common Stock (the "Common Stock") as of April 13, 1998. A copy of the Company's
Form 10-K for the year ended December 31, 1997, including consolidated financial
statements for that year, accompanies this Proxy Statement.
At the Meeting, stockholders will vote on proposals to elect five directors,
to approve the issuance of shares of Common Stock issuable in connection with
the Company's Series L Convertible Preferred Stock ("Series L Stock"), on
exercise of warrants to purchase shares of Common Stock at an exercise price of
$1.00 per share ("Investor Warrants") and on exercise of warrants to purchase
shares of Common Stock at an exercise price of $1.00 per share ("Agent
Warrants") under Nasdaq Rule 4460(i)(1)(D), to approve the adoption of the
Company's Amended and Restated 1997 Director Stock Option Plan, to increase the
number of shares available for issuance under the 1994 Key Employee Incentive
Stock Option Plan, and to ratify the selection of Ernst & Young as the Company's
independent auditors for 1998.
VOTING SECURITIES AND RECORD DATE
The Board of Directors has fixed the close of business on April 13, 1998 as
the record date (the "Record Date") for determination of stockholders entitled
to notice of and to vote at the Meeting. As of the Record Date, there were
28,784,985 shares of Common Stock issued and outstanding and there were no other
voting securities of the Company outstanding. Each outstanding share of Common
Stock entitles the record holder thereof to one vote. Under Delaware law, shares
represented at the Meeting (either by properly executed proxy or in person) that
reflect abstentions or "broker non-votes" (i.e., shares held by a broker or
nominee which are represented at the Meeting, but with respect to which such
broker or nominee is not empowered to vote on a particular proposal) will be
counted as shares that are present and entitled to vote for purposes of
determining the presence of a quorum. Abstentions as to each Proposal will have
the same effect as votes against the respective proposals. Broker non-votes,
however, will be treated as unvoted for purposes of determining approval of such
proposals (and therefore will reduce the absolute number -- although not the
percentage -- of votes needed for approval) and will not be counted as votes for
or against the proposals. Under the New York Stock Exchange Rules, brokers will
not have discretionary voting authority for Proposal 2, and may not vote for
Proposal 2 without receiving instructions from the beneficial owners of shares;
however, brokers will have discretionary voting authority for Proposals 1, 3, 4
and 5.
VOTING RIGHTS AND SOLICITATION OF PROXIES
Stockholders of record on the Record Date may vote at the Meeting in person
or by means of the enclosed Proxy Card. You may specify your voting choices by
marking the appropriate boxes on the Proxy Card. The proxy solicited hereby, if
properly signed and returned to the Company and not revoked prior to or at the
Meeting, will be voted in accordance with the instructions specified thereon. If
you properly sign and return your Proxy Card, but do not specify your choices,
your shares will be voted by the proxy holders as recommended by the Board of
Directors.
The Board of Directors encourages you to complete and return the Proxy Card
even if you expect to attend the Meeting. You may revoke your proxy at any time
before it is voted at the Meeting by giving written notice of revocation to the
Secretary of the Company, by submission of a proxy bearing a later date or by
attending the Meeting and casting a ballot.
<PAGE>
The proxy holders, James J. Leto and Jorge R. Forgues, will vote all shares
of Common Stock represented by Proxy Cards that are properly signed and returned
by stockholders. The Proxy Card also authorizes the proxy holders to vote the
shares represented with respect to any matters not known at the time this Proxy
Statement was printed that may properly be presented for consideration at the
Meeting. You must return a signed Proxy Card if you want the proxy holders to
vote your shares of Common Stock.
The cost of preparing, assembling and mailing this proxy soliciting material
and Notice of Annual Meeting of Stockholders will be paid by the Company.
Following the mailing of proxy solicitation materials, proxies may be solicited
by directors, officers and regular employees of the Company and its subsidiaries
personally, by mail, telephone, telecopier or by personal solicitation, for
which they will receive no additional compensation. In addition, the Company
will reimburse brokers, custodians, nominees and other persons holding shares of
Common Stock for others for their reasonable expenses in sending proxy materials
to the beneficial owners of such shares and in obtaining their proxies.
Additional solicitation by Brokerage houses and other nominees, fiduciaries, and
custodians nominally holding shares of the Company's stock as of the record date
will be requested to forward proxy soliciting material to the beneficial owners
of such shares, and will be reimbursed by the Company for their reasonable
expenses.
PROPOSAL 1 -- ELECTION OF DIRECTORS
A Board of five directors is to be elected at the annual meeting. The
Board of Directors proposes that the five nominees named below be elected as
directors of the Company to hold office until the next annual meeting of
stockholders and until their successors are elected and qualified. The nominees
for director are:
James J. Leto John F. Burton Robert Ripp
C. Alan Peyser Robert P. Bernardi
Director candidates are nominated by the Board of Directors.
At the Meeting, the five directors are to be elected. Each nominee has
consented to being named as a nominee for director of the Company and has agreed
to serve if elected. The directors will be elected to serve for their respective
terms and until their successors have been elected and have qualified. The Board
of Directors has no reason to believe that any of the nominees will be
unavailable or that any other vacancy on the Board will occur; however, should
any nominee become unavailable or unable to serve as a director, the persons
named as proxies on the proxy card will vote for the person(s) the Board of
Directors recommends.
Set forth below is certain information regarding each director, each of
whose term of office will continue after the Meeting.
James J. Leto, 53, 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 and Federal Sources.
John F. Burton, 46, was appointed to the Board of Directors in September
1995. Mr. Burton is Managing Director of Updata Capital, Inc., a mergers and
acquisitions investment bank, a position he has held since 1997. From October
1996 to February 1997, he was President of Burton Technology Partners. From
August 1995 to September 1996, he was President and Chief Executive Officer of
<PAGE>
Nat Systems, Inc. From 1984 to 1995, Mr. Burton served in various executive
capacities at Legent Corporation including President, Chief Executive Officer
and Director.
Robert Ripp, 56, has served as a Director since October 1994. Mr. Ripp is
Executive Vice President, Global Businesses, of AMP, Inc., an electronics
manufacturer. He previously served as its Chief Financial Officer. 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.
C. Alan Peyser, 63, 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 P. Bernardi, 46, has been a Director of the Company (and its
predecessor) since its inception. He was a co-founder of the Company. Mr.
Bernardi is the founder and Chief Executive Officer of the Music Connection. Mr.
Bernardi served as President of the Company from inception to February 1995, as
Chief Executive Officer from inception to May 1996, and Chairman of the Board of
Directors from September 1995 to June 1997. 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.
The nominees receiving the vote of a plurality of the outstanding
shares of Common Stock present, in person or represented by proxy at the Meeting
and entitled to vote on the election of directors will be elected as Directors.
The Board of Directors recommends that stockholders vote FOR the election of
each of the nominated Directors.
Compensation of Directors
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"). The Director Stock Option Plan was amended and restated on
March 5, 1998. Under the Director Stock Option Plan, each director who is not an
executive officer of the Company will receive an option to purchase 7,500 shares
of Common Stock at each quarterly board meeting, and such option shall become
fully vested at the end of that calendar quarter following the date of grant.
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 options
for 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 and have received grants at each quarterly meeting thereafter.
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 telephone. 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
<PAGE>
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 "Description of Network Imaging -
Executive and Director Compensation - 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.
Board of Directors' Meetings and Committees
The Board of Directors held seven meetings during 1997. The Board of
Directors has established standing Audit and Compensation committees, each of
which is composed of non-employee members of the Board of Directors. The
membership of each of these standing committees is determined from time to time
by the Board. The Board of Directors has not established a nominating committee;
the entire Board of Directors votes on nominations of directors for the Company.
The Audit Committee, which presently consists of John F. Burton and Robert
Ripp, held two meetings during 1997. The committee selects, subject to the
approval of the Board of Directors, a firm of independent certified public
accountants to audit the books and accounts of the Company and its subsidiaries
for the year for which they are appointed. In addition, the committee reviews
and approves the scope and cost of all services (including nonaudit services)
provided by the firm selected to conduct the audit. The committee also monitors
the effectiveness of the audit effort and the Company's financial and operating
controls.
The Compensation Committee, which presently consists of Robert P. Bernardi,
Robert Ripp, and James J. Leto held two meetings during 1997. The committee is
responsible for the approval and administration of the compensation program for
James J. Leto, the Company's President and Chief Executive Officer. The
committee also reviews and approves compensation programs for the other officers
of the Company as recommended by Mr. Leto. The committee is also responsible for
the grant of options to the Company's employees under the Company's various
stock option plans and administers the plans. Mr. Leto does not participate in
discussions or decisions regarding his compensation package.
During the fiscal year ended December 31, 1997, each incumbent director
attended all of the meetings of the Board of Directors and meetings of the
committees of the Board of Directors on which he served.
<PAGE>
OWNERSHIP OF NETWORK IMAGING CORPORATION STOCK
The following table sets forth certain information, as of April 1, 1998,
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 executive officer named in the Summary Compensation
Table appearing below under "Executive Compensation"; 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 which they respectively own beneficially.
The address of each person who is an executive officer or director of the
Company is 500 Huntmar Park Drive, Herndon, Virginia 20170.
<TABLE>
<CAPTION>
Number of Shares Percent of
Name and Address of Beneficial Owner Beneficially Owned (1) Class
------------------------------------ ---------------------- -----
<S> <C> <C>
Fred E. Kassner(2)................................................. 6,264,097 21
Robert P. Bernardi(3).............................................. 447,500 1.5
James J. Leto(4)................................................... 40,744 0.1
Jorge R. Forgues(5)................................................ 7,521 *
John M. Flowers, Jr.(6)............................................ 3,000 *
John F. Burton (7)................................................. 130,000 0.5
C. Alan Peyser(8).................................................. 64,000 0.1
Robert Ripp(9)..................................................... 81,675 *
David E. MacWhorter(10) 5,807 *
Brian H. Hajost(11)................................................ 9,668 *
Directors and executive officers as a group (10) persons 791,436 2.7
- --------------------
</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 1,222,857 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 and 4,000,000 shares are issuable upon the conversion of the
Series M Convertible Preferred Stock.
(3) Does not include 755,747 shares issuable upon exercise of options of
which all are subject to a holding period that expires on August 28,
1998.
(4) Does not include 262,195 shares issuable upon exercise of options of
which all are subject to a holding period that expires on August 28,
1998.
(5) Does not include 74,695 shares issuable upon exercise of options of which
all are subject to a holding period that expires on August 28, 1998.
(6) Does not include 46,951 shares issuable upon exercise of options of which
all are subject to a holding period that expires on August 28, 1998.
<PAGE>
(7) All shares are issuable upon exercise of options.
(8) Includes 55,000 shares issuable upon exercise of options.
(9) Includes 76,675 shares issuable upon exercise of options.
(10) Does not include 28,659 shares issuable upon exercise of options of which
all are subject to a holding period that expires on August 28, 1998.
(11) Does not include 28,049 shares issuable upon exercise of options of which
all are subject to a holding period that expires on August 28, 1998.
EXECUTIVE COMPENSATION
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 1997 and their compensation for services in
1997, 1996 and 1995.
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
Annual Compensation ------------
------------------------------------------ Securities All Other
Name and Principal Other Annual Underlying Compen-
Position Year Salary($) Bonus($) Compensation($) Options(#) sation($)
- ---------------------- ----- ---------- ------------ ----------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
James J. Leto......... 1997 305,000 70,000 500,000
Chairman, President 1996 118,974(1) 34,066 262,195
& Chief Executive
Officer
Jorge R. Forgues...... 1997 156,417 55,000 150,000
Chief Financial 1996 93,635(2) 31,500 74,695
Officer & Senior Vice
President
John M. Flowers, Jr... 1997 154,167 45,000 150,000
Senior Vice President, 1996 104,038(3) 25,000 63,415
Engineering
David E. MacWhorter... 1997 144,167 32,500 150,000
Senior Vice President, 1996 140,000 16,000 0
Sales
Brian H. Hajost....... 1997 135,967 29,500 150,000
Senior Vice President, 1996 102,000(4) 26,978 60,976 42,697(5)
Marketing
- ----------
</TABLE>
(1) Mr. Leto joined the Company as its Chief Executive Officer in May 1996.
(2) Mr. Forgues joined the Company as its Chief Financial Officer in April 1996.
(3) Mr. Flowers joined the Company as its Senior Vice President, Engineering in
April 1996.
(4) Mr. Hajost joined the Company as an officer in March 1996.
(5) The amount shown constitutes temporary housing benefits and moving expenses
paid for Mr. Hajost in 1996.
<PAGE>
Stock Options
The following table sets forth certain information concerning the grant of
options to the Chief Executive Officer and the Named Executives in 1997. The
Company has not granted any stock appreciation rights ("SARs").
<TABLE>
Option Grants in Last Year
<CAPTION>
Individual Grants
------------------------------------- Potential Realizable
Percent of Value at Assumed
Number of Total Annual Rates of Stock
Securities Options Price Appreciation
Underlying Granted to Exercise for Option Term
Options Employees in or Base Expiration ------------------------
Name Granted(#) Year Price($/sh) Date 5% 10%
---------------- ----------- ------------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
James J. Leto... 500,000(1) 20% $ 2.50 9/25/07 $ 800,000 $1,995,000
Jorge R. Forgues 50,000(1) 2% $ 1.38 8/01/07 $ 43,500 $ 110,000
100,000(1) 4% $ 2.50 9/25/07 $ 160,000 $ 399,000
John M. Flowers, 50,000(1 2% $ 1.38 8/01/07 $ 43,500 $ 110,000
Jr.............. 100,000(1) 4% $ 2.50 9/25/07 $ 160,000 $ 399,000
David E. 100,000(1) 4% $ 2.50 9/25/07 $ 160,000 $ 399,000
MacWhorter...... 75,000(1) 3.5% $ 1.38 8/01/07 $ 65,250 $ 165,000
Brian H. Hajost. 50,000(1) 2% $ 1.50 8/01/07 $ 43,500 $ 110,000
100,000(1) 4% $ 2.50 9/25/07 $ 160,000 $ 399,000
- ----------
</TABLE>
(1) Each of the indicated options was granted pursuant to the Company's Employee
Incentive Stock Option Plan and vests in equal annual installments over two
years from the date of grant, or, for the options held by the Chief
Executive Officer and the Named Executives, upon the acquisition of the
Company.
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.
<TABLE>
Aggregated Option Exercises in Last Year and
Year-End Option Values
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Shares Year-End(#) at Fiscal-Year End($)(1)
Acquired on Value --------------------------- ----------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James J. Leto.... 0 0 0 762,195 $ 0 $ 0
Jorge R. Forgues. 0 0 0 274,695 0 0
John M. Flowers, 0 0 0 263,415 0 0
Jr...............
David E. 0 0 0 261,890 0 0
MacWhorter.......
Brian H. Hajost.. 0 0 0 260,976 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 12/31/97 and (ii) the
exercise price per share.
The information set forth in the following Report and Performance Graph
shall not be deemed incorporated by reference by anything incorporating by
reference this Proxy Statement, future filings or generally into any filings
under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended, except to the extent that the Company specifically
incorporates such information by reference.
<PAGE>
Report of the Board of Directors on Executive Compensation
The Compensation Committee of the Board of Directors is directly responsible
for the approval and administration of the compensation program for James J.
Leto, the Company's President and Chief Executive Officer. The Compensation
Committee is also responsible for the grant of options to the Company's
employees under the Company's various stock option plans and administers the
plans. In 1997, the Compensation Committee consisted of two outside directors of
the Company, Robert P. Bernardi and Robert Ripp and James J. Leto, who did not
participate in the administration of the compensation program related to his
employment with the Company.
Mr. Leto is responsible for the approval and administration of compensation
programs for the other executive officers of the Company, including those named
in the Summary Compensation Table, subject to review and approval by the
Compensation Committee and the Board of Directors.
Executive Compensation Philosophy
The Company's executive compensation program is designed to meet the
following objectives:
o To attract and retain highly qualified executives to lead and manage the
Company by providing competitive total compensation packages;
o To reward executives based on the business performance of the Company;
o To provide executives with incentives designed to maximize the long-term
performance of the Company; and
o To assure that objectives for corporate and individual performance are
established and measured.
For 1997, the components of the Company's executive compensation program
included annual base salary and short-term incentive bonus plans. In 1997, stock
options to purchase shares of the Company's Common Stock were awarded as a
long-term incentive to executive officers of the Company as follows: James J.
Leto, 500,000 shares; and each of Jorge R. Forgues, John M. Flowers, Jr., and
Brian Hajost, 150,000 shares and David E. MacWhorter, 175,000 shares.
Base Salaries and Short Term Incentive Plans
Base salaries for executive officers (including the Chief Executive Officer)
are determined by evaluating the responsibilities associated with their
respective positions and the experience of the officers and by reference to
salaries paid in the competitive marketplace to executive officers with
comparable ability and experience within the same industry following review of
compensation information available in certain widely-known surveys and
databases. Bonuses and annual salary adjustments, if any, are determined by
evaluating performance taking into account such factors as achievement of the
Company's strategic goals, assumption of additional responsibilities and
attainment of specific individual objectives. The Board believes that stock
ownership by management is especially beneficial in aligning management's and
stockholders' interests in the Company.
Base salaries are set by Mr. Leto for the other executive officers. No
specific weight of relative importance is assigned to the various factors and
compensation information considered. Accordingly, the Company's executive
compensation policies and practices may be deemed informal and subjective,
although they are based on such factors and detailed investigation.
Long-Term Incentive Plans
The Company historically has provided long-term incentive compensation to
attract, motivate and retain executive officers and other employees through
grants of stock options under the Company's Employee Incentive Stock Option
Plan. The Compensation Committee believes that this form of compensation closely
<PAGE>
aligns the interests of executive officers with those of the Company's
shareholders and provides a major incentive in building shareholder value. The
Compensation Committee designates the employees who shall be granted options and
the amount and terms of the options granted. The number of stock options granted
to each individual is based on his or her salary range, position, level of
responsibility, and performance during the relevant year. All grants are made
with an exercise price not less than the fair market value of the Common Stock
on the date of grant.
Section 162(m) of the Code imposes a limitation on the deductibility of
nonperformance-based compensation in excess of $1 million paid to the Named
Executives. The cash compensation of each of the Company's executive officers is
substantially below the $1 million threshold. The options granted under the
Company's stock option plans to date may not meet the requirement of being
performance-based as that term is used in the section and consequently their
exercise could reduce the compensation tax deduction that would otherwise be
available to the Company if the spread between the exercise price and the then
fair market value of the common stock should cause a specified executive's
compensation to exceed $1 million. The Board of Directors currently believes
that it should be able to continue to manage the executive compensation paid to
the Named Executives so as to preserve the related federal income tax
deductions.
Compensation Committee
Robert P. Bernardi
Robert Ripp
Employment Contracts, Termination of Employment Arrangements and Change of
Control Agreements
The Company has agreements with its officers that provide for their
continued employment with the Company. The officers are eligible to receive
severance equal to one-half of his or her annual compensation and the
continuation of health and life insurance benefits in the event any of the
officers is terminated without cause.
The Company has entered into "change of control" agreement with the
Company's officers and certain key employees. Pursuant to these agreements with
the Company's officers, each such officer is eligible to receive, in the event
that his or her employment is terminated within two years following a change of
control of the Company, other than for just cause (as defined), death,
disability (as defined), retirement or resignation other than for good reason
(as defined), an amount equal to one and one-third times his or her annual
compensation, continuation of health benefits and life insurance, and the
acceleration of vesting for all options held. Certain key employees are eligible
to receive, under the same terms as described herein, three-fourths of his or
her annual compensation. For purposes hereof, "annual compensation" means wages,
salary and incentive compensation for the calendar year immediately preceding
the year in which the above-described severance payment becomes payable. In
addition, pursuant to the terms of these agreements, a "change of control"
includes a merger or acquisition of the Company resulting in a 50% or greater
change in the total voting power of the Company immediately following such
transaction.
Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 1997, the Company's Compensation
Committee was composed of outside directors Robert P. Bernardi and Robert Ripp,
and James Leto.
The Company entered into consulting agreements with Mr. Bernardi and
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 Assistant 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
<PAGE>
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 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 annual 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.
Stock Performance Graph
The following graph compares the yearly percentage change in the cumulative
total stockholder return on the Company's Common Stock for the period beginning
with the Company's initial public offering on May 8, 1992 through December 31,
1997 with cumulative total return for the Nasdaq Stock Market (US) and for
Nasdaq Computer & Data Processing Stocks (SIC code 737). The comparison assumes
$100 was invested on May 8, 1992 in the Company's Common Stock at the $4.00
initial offering price and in each of the foregoing indices and assumes
reinvestment of dividends, if any.
Measurement Period
(Fiscal Year Covered) NIC-Common Stock NASDAQ COMPOSITE NASDAQ C&DPS
5/8/92 100 100 100
12/31/92 115.63 116.38 110.58
12/31/93 262.50 133.59 117.02
12/31/94 115.63 130.59 142.07
12/31/95 93.75 184.68 216.36
12/31/96 76.55 227.14 267.07
12/31/97
<TABLE>
<CAPTION>
Indexed/Cumulative Returns
Base Period -------------------------------------------------------
Company/Index Name 5/8/92 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
- ------------------------ ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NIC-Common Stock........ $ 100 $ 115.63 $ 262.50 $ 115.63 $ 93.75 $ 76.55
NASDAQ COMPOSITE........ 100 116.38 133.59 130.59 184.68 227.14
NASDAQ Computer &
Data Processing Services 100 110.58 117.02 142.07 216.36 267.07
</TABLE>
Certain Business Relationships and Related Transactions
In December 1996, the Company entered into an agreement for a line of credit
for up to $5,000,000 with Fred E. Kassner at an interest rate of 2% above a
commercial lender's fluctuating prime rate. The line of credit is secured by a
lien against all of the accounts receivables of the Company. In connection with
the Kassner financing, the Company issued to Mr. Kassner warrants to acquire
100,000 shares of Common Stock, exercisable at $3.06 per share, and the Company
is further obligated to issue to Mr. Kassner warrants to purchase 5,000 shares
of Common Stock, exercisable at the market rate upon the date of borrowing under
the line of credit, for each $500,000 the Company borrows under the line of
<PAGE>
credit. Mr. Kassner is the beneficial owner of more than five percent of the
outstanding stock of the Company. On December 27, 1997, Mr. Kassner converted
$4.0 million of the $5.0 million line of credit into equity. The Company issued
4,000 shares of Series M Convertible Preferred Stock. The Series M Convertible
Preferred Stock is convertible into 4,000,000 shares of Common Stock at a price
of $1.00 per share. As of April 1, 1998, none of the shares of the Series M
Convertible Preferred Stock had been converted into Common Stock.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the
"Exchange Act") requires the Company's executive officers, directors and persons
who own more than ten percent of the Common Stock (collectively, "Reporting
Persons") to file initial reports of ownership and changes of ownership of the
Common Stock with the SEC and the Nasdaq Stock Market. Reporting Persons are
required to furnish the Company with copies of all forms that they file under
Section 16(a). Based solely upon a review of the copies of such forms received
by the Company or written representations from Reporting Persons, the Company
believes that, with respect to year 1996, all reports required of Reporting
Persons pursuant to Section 16(a) were timely filed except that: late filings on
Forms 4 were made for Messrs. Leto, Forgues and Hajost due to administrative
errors on the part of the Company.
PROPOSAL 2 -- APPROVAL TO ELIMINATE
THE RESTRICTION ON THE NUMBER OF COMMON SHARES
ISSUABLE IN CONNECTION WITH THE SERIES L STOCK
AND ON EXERCISE OF THE INVESTOR WARRANTS
AND THE AGENT WARRANTS
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 $1.00 per share. Accordingly, on
December 8, 1997, the Company issued 3,250 shares of Series L Stock and 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, Agent Warrants to purchase
160,000 shares of Common Stock at an exercise price of $1.00 per share. The
Investor Warrants and the Agent Warrants expire on December 8, 2002. The rights,
preferences and privileges of the Series L Stock are set forth in a Certificate
of Designations, Preferences and Rights of Series L Convertible Preferred Stock
(the "Series L Certificate"), as filed with the Secretary of State of the State
of Delaware. The Series L Certificate is annexed as Appendix A to this Proxy
Statement and the following summary of the terms of the Series L Stock is
qualified in its entirety by reference to the Series L Certificate. The terms of
the Series L 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
December 8, 1997 (the "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 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 Investor Warrants issued to
the Purchasers at such additional closings by $1.00. The initial exercise price
of the Agent Warrants is $1.00 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.
<PAGE>
Under the Registration Rights Agreement dated as of December 8, 1997
among the Company, the Purchasers and Zanett (the "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 Investor
Warrants and the 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 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. On April 9, 1998
registration statement has been declared effective by the SEC.
The Investor Warrants and the Agent Warrants expire on December 7,
2002. The terms of the Series L Stock, the Investor Warrants and the Agent
Warrants were determined by the Board.
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 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 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 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
<PAGE>
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 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 Certificate of Designations, Preferences, and Rights of
Series L Convertible Preferred Stock ("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 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 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
<PAGE>
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 Convertible Preferred
Stock and the Series M Convertible Preferred 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 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
<PAGE>
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 Securities Purchase Agreement or the 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 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 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.
<PAGE>
Nasdaq Rule
Rule 4460 of Nasdaq, which is applicable to the Company because the
Company's shares of Common Stock are presently included for quotation on the
Nasdaq National Market sets forth the corporate governance standards for such
securities. Section (i) of Rule 4460 provides:
(1) Each NNM [Nasdaq National Market] issuer shall require
shareholder approval of a plan or arrangement under subparagraph (A)
below or, prior to the issuance of designated securities under
subparagraph (B), (C) or (D) below:
. . . (D) in connection with a transaction other than
a public offering involving:
(i) the sale or issuance by the issuer of common
stock (or securities convertible into or exercisable for
common stock) at a price less than the greater of book or
market value which together with sales by officers, directors
or substantial shareholders of the company equals 20% or more
of common stock or 20% or more of the voting power outstanding
before the issuance; or
(ii) the sale or issuance by the company of common
stock (or securities convertible into or exercisable for
common stock) equal to 20% or more of the common stock or 20%
or more of the voting power outstanding before the issuance
for less than the greater of book or market value of the
stock.
(2) Exceptions may be made upon application to the Association
when:
(A) the delay in securing stockholder approval would
seriously jeopardize the financial viability of the
enterprise; and
(B) reliance by the company on this exception is
expressly approved by the Audit Committee of the Board or a
comparable body.
A company relying on this exception must mail to all
shareholders not later than ten days before issuance of the securities
a letter alerting them to its omission to seek the shareholder approval
that would otherwise be required and indicating that the Audit
Committee of the Board or a comparable body has expressly approved the
exception.
Nasdaq Rule 4460(i)(1) provides that the limit set forth in
subparagraph (D) does not apply if a company's stockholders approve the issuance
of the securities subject to the rule. In the event stockholder approval is not
obtained, the Company will be required to redeem the excess shares of Series L
Stock as described above.
Stockholder Approval
The Board desires to be able to issue shares of Common Stock in
connection with the Series L Stock and on exercise of the Investor Warrants and
the Agent Warrants (including, without limitation, shares of Common Stock
issuable on conversion of and as Premium on Series L Stock and on exercise of
Investor Warrants and Agent Warrants that have not been issued as of the date of
this Proxy Statement) without regard to the 20% limits of Nasdaq Rule
4460(i)(1)(D). The Board believes it would be in the best interests of the
Company if the Company could issue such shares of Common Stock to the Holders
rather than being required to redeem the Series L Stock at the required
redemption price. See "Redemption Rights" above. The Board believes this
provision could result in a forced redemption at a time when the Company might
not have, and could not raise, the cash necessary to redeem the shares of Series
L Stock. The Board desires to have the ability to retain cash for the use of the
Company for other purposes. In addition, the Board believes it is in the best
interests of the Company to receive this approval so that it can issue
additional Units as required by the terms of the Securities Purchase Agreement
and so that it retains the ability to obtain additional financing for the
Company when necessary and upon such terms as the Board determines to be
<PAGE>
advisable. The actual number of shares issuable upon conversion of and as
Premium on the Series L Stock and on exercise of the Investor Warrants and the
Agent Warrants cannot be determined until the conversion or exercise takes
place.
To date, only 3,250 shares of Series L Stock have been issued. However,
under the Securities Purchase Agreement, the Company is obligated to issue an
additional 3,000 shares of Series L Stock in certain circumstances. As of March
25, 1998, the Conversion Price was $.86 per share and the 3,250 shares of Series
L Stock (including the Premium accrued through such date) were convertible into
approximately 2,800,000 shares of Common Stock. If such additional 3,000 shares
of Series L Stock had been outstanding on March 25, 1998, such shares of Series
L Stock (including the Premium accrued through such date) would have been
convertible into approximately 2,400,000 shares of Common Stock at a Conversion
Price of $.86 per share. If stockholder approval is not obtained (and assuming a
Conversion Price of $.86 per share), the Company would be required to redeem
1,400,000 shares of Common Stock at a redemption price with a discount equal to
four to 19% of the current market price if 6,250 shares of Series L Stock were
outstanding.
Vote Required
The affirmative vote of the holders of a majority of the Common Stock
present or represented and entitled to vote at the Meeting is required to
approve the proposal to eliminate the restriction on the number of shares of
Common Stock issuable in connection with the Series L Stock and on exercise the
Investor Warrants and the Agent Warrants. An abstention from voting by a
stockholder present in person or represented by proxy at the Meeting has the
same effect as a vote against the matter.
The Board recommends a vote FOR the approval to eliminate the
restriction on the number of shares issuable in connection with the Series L
Stock and on exercise of the Investor Warrants and the Agent Warrants.
PROPOSAL 3 - TO CONSIDER AND VOTE UPON A PROPOSAL TO ADOPT THE NETWORK IMAGING
CORPORATION AMENDED AND RESTATED 1997 DIRECTOR STOCK OPTION PLAN
At the Meeting, the shareholders are being asked to approve the adoption of
the Network Imaging Corporation Amended and Restated 1997 Director Stock Option
Plan (the "DSOP"), as adopted by the Board of Directors, and the reservation of
360,000 shares of Common Stock for issuance thereunder. The DSOP shall become
effective upon shareholder approval.
The description that follows is an overview of the material provisions of
the DSOP and is qualified in its entirety by references to the DSOP. A copy of
the complete DSOP is attached hereto as Appendix B.
Description of the DSOP
Purpose. The purpose of the DSOP is to encourage ownership in the Company by
outside directors of the Company, whose continued services are considered
essential to the Company's future progress and to provide them with a further
incentive to remain as directors of the Company.
Administration. The DSOP shall be administered by the Board of Directors
("Board of Directors"). The interpretation and construction by the Board of
Directors, to the full extent permitted by law, final.
Eligibility. Directors of the Company who are not executive officers of the
Company or any subsidiary of the Company and are not serving on the Board of
Directors as a representative of any institutional investor ("outside
Directors") shall be eligible to participate in the DSOP.
Shares Subject to the DSOP. The maximum number of shares of the Company's
Common Stock that may be issued under the DSOP shall be 360,000, subject to
adjustment as provided in the DSOP.
<PAGE>
Terms, Conditions and Form of Options. Each option granted under the Plan
shall be evidenced by a written agreement in such form as the Board of Directors
shall from time to time approve, which agreements shall comply with and be
subject to the following terms and conditions:
(a) Option Grant Dates. Subject to the terms of the DSOP, an option to
purchase Common Stock shall be granted automatically to each outside director
elected to the Board of Directors after the effective date of this DSOP, at the
end of each calendar quarter.
(b) Share Subject to Option. The number of shares covered by the option
is 7,500 per each calendar quarter.
(c) Option Exercise Price. The option exercise price per share for
each option granted under the Plan shall equal to (i) the closing sales price
per share of the Company's Common Stock on the Nasdaq National Market (or, if
the company is traded on a nationally recognized securities exchange on the date
of grant, the reported closing sales price per share of the Company's Common
Stock by such exchange) on the lowest day during the last month of each calendar
quarter (i.e., March, June, September, and December). The date of grant, for
purposes of the option and its vesting schedule, shall be the date that option
is granted or (ii) if the Common Stock is not traded on Nasdaq National Market
or an exchange, the fair market value per share on the lowest closing sale price
for the last calendar month of a quarter.
(d) Vesting and Exercise Period. Each Option granted to a Full-Term
Director shall vest ninety (90) days following the date of grant if such
Full-Time Director is still serving as a director of the Company at such time.
Each Option may be exercised on a cumulative basis as to be the vested number of
shares at any time or from time to time, in whole or in part; provided that,
subject to the provisions of Section 5 (f), no Option may be exercised more that
one year after the optionee ceases to serve as a director of the Company or for
a number of shares greater than that which was vested at the time the optionee
ceased to serve as a director of the Company. No Option shall be exercisable
after the expiration of ten years from the date of grant.
Amendment of the DSOP. The Company, insofar as permitted by law, may at any
time amend, suspend or discontinue the DSOP except that no revision or amendment
may increase the number of shares of Common Stock under the DSOP, materially
increase the benefits accruing to participants under the DSOP or otherwise
materially modify the requirements for eligibility without the approval of the
shareholders of the Company.
Tax Consequences. The DSOP is intended to qualify as an "employee stock
purchase plan" within the meaning of Section 423 of the Code. Participants will
not recognize income for federal income tax purposes either upon enrollment in
the DSOP or upon purchase of shares thereunder. All tax consequences of
purchasing shares under the DSOP are deferred until the participant sells or
otherwise disposes of the shares or dies. The Company will be entitled to a
deduction for federal income tax purposes to the extent that a participant
recognizes ordinary income on a disqualifying disposition of the shares in the
year of the disqualification, but not if a participant meets the holding
requirements. The foregoing is intended to be a brief summary of the tax
consequences of transactions under the DSOP based on federal tax laws in effect
on April 1, 1997. As federal and state tax laws may change, the federal, state
and local tax consequences for any participant will depend upon his or her
individual circumstances.
The affirmative vote of a majority of the outstanding shares of Common Stock
present or represented and entitled to vote at the Meeting is required to
approve the adoption of the Employee Stock Purchase Plan.
The Board of Directors unanimously recommends a vote for the adoption of
the Director Stock Option Plan.
<PAGE>
PROPOSAL 4 -- APPROVAL OF AMENDMENT TO THE 1994 KEY EMPLOYEE INCENTIVE STOCK
OPTION PLAN
The Company believes that stock options are an important incentive in
attracting, retaining and motivating key personnel who can contribute to the
successful conduct of its business and affairs. In order to provide such
incentive, the Board of Directors has adopted, and the Company's stockholders
have approved, among other plans, the 1994 Key Employee Incentive Stock Option
Plan (the "1994 Plan").
Through January 1994, when considering the grant of a number of options for
which there were not enough shares available under an existing plan, the Board
of Directors followed the practice of adopting a new plan instead of amending an
existing plan to increase the number of shares available for grant thereunder.
Since that time, the Board of Directors has followed the practice of increasing
the number of shares available for grant under the 1994 Plan and on March 5,
1998 approved an increase under that Plan from 6,000,000 to 7,000,000 shares. At
the time of the Board's action, only 1,100,000 shares remained available for the
grant of options under all the Plans. The Board of Directors believes that the
adoption of this amendment will allow the Company to continue to utilize stock
options as an incentive in attracting, retaining and motivating key personnel
who can contribute to the successful conduct of its business and affairs.
Whether additional plans or increases in the number of available shares under
existing plans are necessary in the future will depend on the Board's continuing
assessment of the arrangements necessary to attract, retain and motivate key
personnel. Stockholders are being asked to approve this increase so that options
granted with respect to the increased shares may qualify as Incentive Stock
Options under the Code. The amendment is being implemented by changing the
number of shares referred to in Section 4 of the Plan to 7,000,000 shares.
The affirmative vote of a majority of the shares of common stock present in
person or represented by proxy and entitled to vote at the meeting is required
to approve an increase in the number of shares available for issuance under the
1994 Plan.
The Board of Directors recommends that stockholders vote FOR the proposed
amendment to increase the number of shares available for issuance under the 1994
Key Employee Incentive Stock Option Plan.
General Description of the 1994 Plan
The 1994 Plan is intended to provide incentive to eligible participants by
affording them opportunities to purchase shares under (a) incentive stock
options ("Incentive Stock Options") as that term is defined under Section 422(b)
of the Internal Revenue Code of 1986, as amended (the "Code") and (b) other
stock options ("Non-Qualified Stock Options"). To the extent that the aggregate
fair market value (determined at the time of grant) of the shares for which
Incentive Stock Options are exercisable for the first time by a person during
any calendar year under all incentive stock option plans of the Company exceeds
$100,000, such options are treated as options which are not Incentive Stock
Options.
The 1994 Plan is administered by the Company's Board of Directors or a
committee of directors appointed by the Board. See "Board Committees and
Meetings." Subject to the terms of the 1994 Plan, the Board has the authority:
(a) to determine the individual persons to whom options shall be granted, the
number of shares to be subject to each option, the purchase price of the shares
under each option, the times at which options shall be granted and shall vest,
and the provisions of the instruments by which options shall be evidenced; (b)
to interpret the 1994 Plan; and (c) to make all determinations necessary or
advisable for the administration of the 1994 Plan.
The 1994 Plan will terminate no later than ten years after the date of its
adoption by the Board of Directors. Options granted pursuant to the Plans will
terminate at a date fixed by the Board, but no later than ten years after the
date the options are granted. Each Incentive Stock Option granted to a person
who owns, directly or indirectly, shares possessing more than ten percent of the
total combined voting power of all classes of stock of the Company, as
contemplated by Code Sections 422(b)(6) and 424(d) ("Ten-Percent Shareholder"),
will expire no later than five years after the date of the grant of the option.
The Board is authorized to grant options for up 7,000,000 shares under the
1994 Plan. When an option expires or terminates prior to the end of the period
during which options may be granted under the 1994 Plan, new options may be
<PAGE>
granted under the 1994 Plan to purchase any shares not purchased pursuant to the
expired or terminated option.
Options granted under the 1994 Plan become exercisable at one time or in two
or more installments as determined by the Board and provided in the agreement
evidencing the option. Options generally become exercisable on a cumulative
basis in two equal installments on each of the first two anniversaries of the
date of grant.
Under the terms of the Plan, each Incentive Stock Option granted must have
an exercise price of at least 100% of the fair market value of a share at the
time of the grant (at least 110% of such value in the case of an Incentive Stock
Option granted to a Ten-Percent Shareholder pursuant to Plan) and, during the
lifetime of the optionee, be exercisable only by the optionee. Accepted forms of
payment of the exercise price include cash or check and, in addition, for
options issued on and after March 14, 1995: shares of common stock previously
owned by the optionee, with certain qualifications; in the case of registered
option shares and subject to certain limitations, exercise through a broker's
sale of the option shares with proceeds covering the option price remitted to
the Company; or a combination of the foregoing. Option agreements issued on and
after March 14, 1995 also allow tax withholding of shares where shares are to be
delivered to or retained by the Company in connection with an exercise of an
option.
Certain options may be exercised, after an optionee's employment terminates,
for the number of shares then vested (or may be exercised in full in the case of
death) for a period of three months, subject in each case to the stated term of
the option. In other cases, an Option continues to be exercisable for the number
of shares as to which it was exercisable at the date of termination of the
optionee's association with the Company and, generally, terminates on the date
which is three months thereafter in the case of an Incentive Stock Option or one
year thereafter in the case of any other option or, if earlier, the expiration
date of the option; provided however, that if such termination of association is
by reason of the optionee's death or disability (within the meaning of Section
122 (c)(6) of the Code), then the option immediately becomes exercisable in full
and terminates on the date which is one year thereafter or, if earlier, the
expiration date of the option. In May 1996 the period of post employment
exercise was generally extended to three years in the case of Non-Qualified
Stock Options and where termination is by reason of the optionee's death or
disability.
The number of shares subject to the 1994 Plan, and the number and price of
shares subject to any option then outstanding thereunder, will be
proportionately adjusted to reflect, as deemed equitable and appropriate by the
Company's Board of Directors, any stock dividend, stock split or share
combination of the common stock or any recapitalization of the Company. In the
event of certain business combinations and reorganizations (such as a merger,
consolidation, sale of substantially all the assets, reorganization, dissolution
or liquidation of the Company) in connection with which all the outstanding
shares of common stock are converted into or exchangeable for other securities
or other property, each outstanding option shall terminate, but the optionee
shall have the right, immediately prior to such event, to exercise the option in
full without regard to the otherwise applicable vesting schedule; provided that,
under certain circumstances, the optionee shall not have such immediate exercise
right, but in that case the option, to the extent not previously exercised,
shall continue in effect and subject to the applicable vesting schedule, but
shall pertain not to shares but to the securities or other property into or for
which the remaining shares would have been convertible or exchangeable had they
been outstanding at the effective time of the transaction. For example, in the
case of a merger of the Company into another company, if each share of common
stock is to be converted into two shares of preferred stock of the acquiring
company, the optionee shall be entitled to acquire, upon exercise of an option,
two shares of that preferred stock.
Amended Plan Benefits
The following table shows the number of shares subject to outstanding
options under the 1994 Plan as of April 1, 1998 for each of the Company's Chief
Executive Officer and the Named Executives at December 31, 1997, all seven
current executive officers as a group, all current directors who are not, and at
December 31, 1997 were not, executive officers as a group and all non-executive
officer employees as a group. The number of shares reflect reductions resulting
from the Company's Option Repricing Program.
<PAGE>
Number of
Name and Position Options(1)
- ------------------------------------------- ---------
James J. Leto.............................. 762,195
Chairman of the Board, Chief Executive
Officer and President
Jorge R. Forgues........................... 274,695
Chief Financial Officer and Senior Vice
President 263,415
John M. Flowers, Jr........................
Senior Vice President, Engineering
David E. MacWhorter........................ 263,415
Senior Vice President, Sales
Brian H. Hajost............................ 260,976
Senior Vice President, Marketing
Current Executive Officers as a Group
(6 persons)................................ 2,034,451
All Non-Executive Directors as a Group (4
persons)................................... 378,000
All Non-Executive Officer Employees as a
Group (167 persons)........................ 2,787,549
- ----------
(1) All options were granted at exercise prices equal to or greater than the
fair market value of the common stock at the date of grant. Because
optionees must pay the exercise price to the Company to acquire shares upon
exercise of an option, the dollar value of benefits received by or allocated
to the optionees on the grant date was zero. The per share exercise prices
range from $1.38 to $2.50. On March 25, 1998, the last sale price for the
Common Stock as reported by NASDAQ was $1 1/16 per share.
The following table provides information concerning the values of
exercisable and unexercisable options under all of the Company's stock
option plans as of April 1, 1998. The values shown in the table are based on
the spread between the exercise prices of in-the-money options and $1 1/16,
the last sale price for the common stock on March 25, 1998 as reported by
NASDAQ. The values assume that the shares could be sold at current market
prices and do not reflect restrictions on the sale of the shares as to which
certain of the executive officers may be subject as affiliates of the
Company. The numbers and values of options in the following table reflect
the Company's Option Repricing Program.
<TABLE>
Outstanding Options
<CAPTION>
Total Options Option Value
Name of Individual, Group and --------------------------- ---------------------------
Number of Persons in Group Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
James J. Leto....................... 0 762,195 0 0
Jorge R. Forgues.................... 0 274,695 0 0
John M. Flowers, Jr................. 0 263,415 0 0
David E. MacWhorter................. 0 261,890 0 0
Brian H. Hajost..................... 0 260,976 0 0
Current Executive Officers as a Group
(6 persons)........................ 0 2,034,451 0 0
Current Non-Executive Directors as a
Group (4 persons).................. 378,000 126,000 0 0
All Non-Executive Employees as a
Group (164 persons)................ 0 0
</TABLE>
Certain Federal Income Tax Consequences
The following discussion summarizes the federal income tax consequences to
Plan participants who may receive awards under the Plans. This summary is based
upon the provisions of the Code in effect as of September 30, 1995, and
regulations and interpretations with respect to the applicable provisions of the
Code as of that date.
<PAGE>
A participant who is granted an Incentive Stock Option will not recognize
income and the Company will not be allowed a deduction at the time such an
option is granted. When a participant exercises an Incentive Stock Option while
employed by the Company or within the three-month period after termination of
employment, no ordinary income will be recognized by the participant at that
time but the excess of the fair market value of the shares acquired by such
exercise over the option price will be a tax adjustment item for purposes of the
federal alternative minimum tax applicable to individuals. If the shares
acquired upon exercise are not disposed of until more than two years after the
date of grant and one year after the date of transfer of the shares to the
participant (statutory holding periods), the excess of the sale proceeds over
the aggregate option price of such shares will be long-term capital gain. Except
in the event of death, if the shares are disposed of prior to the expiration of
the statutory holding periods (a "Disqualifying Disposition"), the excess of the
fair market value of such shares at the time of exercise over the aggregate
option price (but not more than the gain on the disposition if the disposition
is a transaction on which a loss, if sustained, would be recognized) will be
ordinary income at the time of such Disqualifying Disposition (and the Company
will be entitled to a federal tax deduction in a like amount).
A participant who receives a Non-Qualified Stock Option grant will not
recognize income and the Company will not be allowed a deduction at the time
such an option is granted. Except as discussed below, when a participant
exercises a Non-Qualified Stock Option, the difference between the option price
and any higher market value of the stock on the date of exercise will be
ordinary income to the participant and will be allowed as a deduction for
federal income tax purposes to the Company. The capital gain holding period of
the shares acquired will begin one day after the date the Non-Qualified Stock
Option is exercised. When a participant disposes of shares acquired by the
exercise of the option, any amount received in excess of the fair market value
of the shares on the date of exercise will be treated as short-term or long-term
capital gain, depending upon the holding period of the shares. If the amount
received is less than the market value of the shares on the date of exercise,
the loss will be treated as short-term or long-term capital loss, depending upon
the holding period of the shares.
If payment of the option price of a Non-Qualified Stock Option is made by
delivery of shares, the transaction is considered to be a tax-free exchange on a
share-for-share basis of the previously owned shares at their then fair market
value for the Non-Qualified Stock Option shares at the option price. Any
Non-Qualified Stock Option shares received by the optionee in excess of the
number of shares surrendered will be taxed at ordinary income tax rates on their
fair market value. Payment of the option price of an Incentive Stock Option by
means of Incentive Stock Option shares will be subject to the rules regarding
Disqualifying Dispositions.
If a participant who is subject to the insider trading rules of Section
16(b) of the 1934 Act receives shares by reason of the exercise of a
Non-Qualified Stock Option, the participant will recognize ordinary income equal
to the excess of the fair market value of the shares received over the amount
paid for the shares, if any, on the earlier of (i) the first day the sale of
such shares at a profit is no longer subject to Section 16(b) of the 1934 Act
(which may be the date of exercise), or (ii) six months less one day from the
date of exercise of the option (the "Recognition Date"), and the Company will be
entitled to a deduction of a like amount for federal income tax purposes at that
time. The income when recognized will include any appreciation in the value of
the stock realized on the Recognition Date, and the capital gain holding period
will not begin until the Recognition Date. However, if the Recognition Date is
not the date of exercise, such a participant may elect to have the normal rules
described with respect to Non-Qualified Stock Options apply by filing a Section
83(b) election with the Internal Revenue Service within 30 days after the
exercise of the Non-Qualified Stock Option.
PROPOSAL 5 -- RATIFICATION OF THE APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors, upon the recommendation of the Audit Committee, has
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 its subsidiaries for the year ending on December 31, 1998.
Ernst & Young LLP currently serves as the Company's independent accountants.
Representatives of Ernst & Young LLP will be present at the Meeting and will be
given an opportunity to make a statement. They also will be available to respond
to appropriate questions from stockholders.
<PAGE>
Although ratification of the appointment of Ernst & Young LLP is not
required, the Board of Directors requests that the stockholders ratify the
appointment. If ratification is not obtained, the Board will reconsider the
matter of appointment of independent accountants for the Company.
The Company engaged Ernst & Young LLP effective June 25, 1996 as independent
accountants to examine the consolidated financial statements of the Company for
the year ending December 31, 1996. Ernst & Young LLP replaced Price Waterhouse
LLP. The Company's decision to retain Ernst & Young LLP and discontinue the
engagement of Price Waterhouse LLP as the Company's principal independent
accountants was approved by the Board of Directors of the Company. There have
been no disagreements with Price Waterhouse LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to the satisfaction of Price Waterhouse LLP,
would have caused it to make reference to the subject matter of the disagreement
in connection with its report for the years ended December 31, 1995 and December
31, 1994.
The affirmative vote of a majority of the outstanding shares of Common Stock
present or represented and entitled to vote at the Meeting is required to ratify
the appointment of Ernst & Young LLP.
The Board of Directors recommends that the stockholders vote FOR the
ratification of the appointment of Ernst & Young as the Company's independent
accountants for year 1998.
SHAREHOLDER PROPOSALS
The Company anticipates that its 1999 annual meeting of stockholders will be
held in June, 1999. In order to be considered for that meeting, shareholder
proposals must be received by the Company no later than December 24, 1998.
Stockholders should send their proposals to the Company's corporate headquarters
address and must be submitted in accordance with Rule 14a-8 of the Exchange Act
on or before December 24, 1998.
OTHER BUSINESS
The Board of Directors does not intend to bring any other matter before the
Meeting and does not know of any other business which others will present for
consideration at the Meeting. Except as the Board of Directors may otherwise
permit, only the business set forth and discussed in the Notice of Annual
Meeting of Stockholders and this Proxy Statement may be acted on at the Meeting.
If any other business does properly come before the Meeting the proxy holders
will vote on such matters according to their discretion.
By Order of the Board of Directors
/s/ JULIA A. BOWEN
JULIA A. BOWEN
Vice President, General Counsel
and Assistant Secretary
All stockholders are urged to complete, sign, date, and return the
accompanying proxy card in the enclosed postage-paid envelope. Thank you for
your prompt attention to this matter.
<PAGE>
APPENDIX A
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS
of
SERIES L CONVERTIBLE PREFERRED STOCK
of
NETWORK IMAGING CORPORATION
(Pursuant to Section 151 of the
Delaware General Corporation Law)
Network Imaging Corporation, a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies that the
following resolutions were adopted by the Board of Directors of the Corporation
pursuant to authority of the Board of Directors as required by Section 151 of
the Delaware General Corporation Law.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "Board of Directors" or the "Board")
in accordance with the provisions of its Certificate of Incorporation and
Bylaws, each as amended and restated through the date hereof, the Board of
Directors hereby authorizes a series of the Corporation's previously authorized
Preferred Stock, par value $.0001 per share (the "Preferred Stock"), and hereby
states the designation and number of shares, and fixes the relative rights,
preferences, privileges, powers and restrictions thereof as follows:
Series L Convertible Preferred Stock:
I. DESIGNATION AND AMOUNT
The designation of this series, which consists of 6,250 shares of
Preferred Stock, is the Series L Convertible Preferred Stock (the "Series L
Preferred Stock") and the face amount shall be One Thousand U.S.
Dollars ($1000.00) per share (the "Face Amount").
II. NO DIVIDENDS
The Series L Preferred Stock will bear no dividends, and the holders of
the Series L Preferred Stock shall not be entitled to receive dividends on the
Series L Preferred Stock.
III. CERTAIN DEFINITIONS
For purposes of this Certificate of Designation, the following terms
shall have the following meanings:
A. "Closing Price" means, for any security as of any date, the last sale price
of such security on the principal securities exchange or trading market where
such security is listed or traded as reported by Bloomberg Financial Markets or
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a comparable reporting service of national reputation selected by the
Corporation and reasonably acceptable to holders of a majority of the then
outstanding shares of Series L Preferred Stock if Bloomberg Financial Markets is
not then reporting Closing Prices of such security (collectively, "Bloomberg"),
or if the foregoing does not apply, the last reported sale price of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no sale price is reported for
such security by Bloomberg, the average of the bid prices of any market makers
for such security as reported in the "pink sheets" by the National Quotation
Bureau, Inc. If the Closing Price cannot be calculated for such security on such
date on any of the foregoing bases, the Closing Price of such security on such
date shall be the fair market value as reasonably determined by an investment
banking firm selected by the Corporation and reasonably acceptable to holders of
a majority of the then outstanding shares of Series L Preferred Stock, with the
costs of such appraisal to be borne by the Corporation.
B. "Conversion Date" means, for any Optional Conversion, the date specified in
the notice of conversion in the form attached hereto (the "Notice of
Conversion"), so long as the copy of the Notice of Conversion is faxed (or
delivered by other means resulting in notice) to the Corporation before
Midnight, New York City time, on the Conversion Date indicated in the Notice of
Conversion. If the Notice of Conversion is not so faxed or otherwise delivered
before such time, then the Conversion Date shall be the date the holder faxes or
otherwise delivers the Notice of Conversion to the Corporation. The Conversion
Date for the Required Conversion at Maturity shall be the Maturity Date (as such
terms are defined in Paragraph D of Article IV).
C. "Conversion Percentage" shall initially have the meaning set forth below
during each of the periods set forth below. In the event, the Corporation's
Common Stock is no longer designated for quotation on the Nasdaq National Market
("Nasdaq") and is designated for quotation on the Nasdaq Small Cap Market, the
Conversion Percentage for each of the periods set forth below shall be
permanently reduced by two percent (2%) to 83% and 79%, respectively. In
addition, in the event that the second closing and third closing under the
Securities Purchase Agreement (as defined herein) do not occur by virtue of the
Corporation's failure to obtain the Stockholder Approval contemplated by Section
4(n) of the Securities Purchase Agreement, the Conversion Percentage for each of
the periods set forth below shall be permanently reduced by ten percent (10%) to
75% and 71%, respectively. The Conversion Percentages also shall be subject to
adjustment as provided herein and as provided in Section 2(c) of the
Registration Rights Agreement (as defined herein):
If the Conversion Date is: Then the Conversion Percentage is:
Prior to the 48th day following 85%
the First Closing Date
On or after the 48th day following 81%
the First Closing Date
D. "Conversion Price" means the lower of the Fixed Conversion Price and the
Variable Conversion Price, each in effect as of such date and subject to
adjustment as provided herein.
E. "First Closing Date" means the date of the first closing under that certain
Securities Purchase Agreement by and among the Corporation and the purchasers
named therein with respect to the initial issuance of the Series L Preferred
Stock (the "Securities Purchase Agreement").
F. "Fixed Conversion Price" means $1.375 and shall be subject to adjustment as
provided herein.
"N" means the number of days from, but excluding, the date of original issuance
of such share of Series L Preferred Stock.
G. "Premium" means an amount equal to (.07)x(N/365)x(1,000).
H. "Variable Conversion Price" means, as of any date of determination, the
amount obtained by multiplying the Conversion Percentage then in effect by the
lowest Closing Price for the Corporation's Common Stock, par value $.0001 per
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share ("Common Stock"), on any single trading day during the ten (10)
consecutive trading days ending on the trading day immediately preceding such
date of determination (subject to equitable adjustment for any stock splits,
stock dividends, reclassifications or similar events during such ten (10)
trading day period), and shall be subject to adjustment as provided herein.
IV. CONVERSION
A. Conversion at the Option of the Holder. (i) Subject to the limitations on
conversions contained in Paragraph C of this Article IV, each holder of shares
of Series L Preferred Stock may, at any time and from time to time, convert (an
"Optional Conversion") each of its shares of Series L Preferred Stock into a
number of fully paid and nonassessable shares of Common Stock determined in
accordance with the following formula if the Corporation timely redeems the
Premium thereon in cash in accordance with subparagraph (ii) below:
1,000
- -----
Conversion Price
or in accordance with the following formula if the Corporation does not timely
redeem the Premium thereon in accordance with subparagraph (ii) below:
1,000 + the Premium
- -------------------
Conversion Price
(ii) (a) The Corporation shall have the right, in its sole discretion, upon
receipt of a Notice of Conversion or in the event of a Required Conversion at
Maturity, to redeem any portion of the Premium subject to such conversion for a
sum of cash equal to the amount of the Premium being so redeemed. All cash
redemption payments hereunder shall be paid in lawful money of the United States
of America at such address for the holder as appears on the record books of the
Corporation (or at such other address as such holder shall hereafter give to the
Corporation by written notice). In the event the Corporation so elects to redeem
all or any portion of the Premium in cash and fails to pay such holder the
applicable redemption amount to which such holder is entitled by depositing a
check in the U.S. Mail to such holder within three (3) business days of receipt
by the Corporation of a notice of Conversion (in the case of a redemption in
connection with an Optional Conversion) or the Maturity Date (in the case of a
redemption in connection with a Required Conversion at Maturity), the
Corporation shall thereafter forfeit its right to redeem such Premium in cash
and such Premium shall thereafter be converted into shares of Common Stock in
accordance with Article IV.A(i).
(b) Each holder of Series L Preferred Stock shall have the right to require the
Corporation to provide advance notice to such holder stating whether the
Corporation will elect to redeem all or any portion of the Premium in cash
pursuant to the Corporation's redemption rights discussed in subparagraph (a) of
this Article IV.A(ii). A holder may exercise such right from time to time by
sending notice (an "Election Notice") to the Corporation, by facsimile,
requesting that the Corporation disclose to such holder whether the Corporation
would elect to redeem any portion of the Premium for cash in lieu of issuing
Common Stock therefor if such holder were to exercise its right of conversion
pursuant to this Article IV.A. The Corporation shall, no later than the close of
business on the next business day following receipt of an Election Notice,
disclose to such holder whether the Corporation would elect to redeem any
portion of a Premium in connection with a conversion pursuant to a Notice of
Conversion delivered over the subsequent five (5) business day period. If the
Corporation does not respond to such holder within such one (1) business day
period via facsimile, the Corporation shall, with respect to any conversion
pursuant to a Conversion Notice delivered within the subsequent five (5)
business day period, forfeit its right to redeem such Premium in accordance with
subparagraph (a) of this Article IV.A(ii) and shall be required to convert such
Premium into shares of Common Stock.
B. Mechanics of Conversion. In order to effect an Optional Conversion, a holder
shall: (x) fax (or otherwise deliver) a copy of the fully executed Notice of
Conversion to the Corporation or the transfer agent for the Common Stock and (y)
surrender or cause to be surrendered the original certificates representing the
Series L Preferred Stock being converted (the "Preferred Stock Certificates"),
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duly endorsed, along with a copy of the Notice of Conversion as soon as
practicable thereafter to the Corporation or the transfer agent. Upon receipt by
the Corporation of a facsimile copy of a Notice of Conversion from a holder, the
Corporation shall immediately send, via facsimile, a confirmation to such holder
stating that the Notice of Conversion has been received, the date upon which the
Corporation expects to deliver the Common Stock issuable upon such conversion
and the name and telephone number of a contact person at the Corporation
regarding the conversion. The Corporation shall not be obligated to issue shares
of Common Stock upon a conversion unless either the Preferred Stock Certificates
are delivered to the Corporation or the transfer agent as provided above, or the
holder notifies the Corporation or the transfer agent that such certificates
have been lost, stolen or destroyed (subject to the requirements of Article
XIV.B).
Delivery of Common Stock Upon Conversion. Upon the surrender of Preferred Stock
Certificates from a holder of Series L Preferred Stock accompanied by a Notice
of Conversion, the Corporation shall, no later than the second business day
following the later of (a) the Conversion Date and (b) the date of such
surrender (or, in the case of lost, stolen or destroyed certificates, after
provision of indemnity pursuant to Article XIV.B) (the "Delivery Period"), issue
and deliver to the holder (x) that number of shares of Common Stock issuable
upon conversion of such shares of Series L Preferred Stock being converted and
(y) a certificate representing the number of shares of Series L Preferred Stock
not being converted, if any. In lieu of delivering physical certificates
representing the Common Stock issuable upon conversion, provided the Borrower's
transfer agent is participating in the Depository Trust Company ("DTC") Fast
Automated Securities Transfer program, upon request of the holder and its
compliance with the provisions contained in this paragraph, so long as the
certificates therefor do not bear a legend and the holder thereof is not
obligated to return such certificate for the placement of a legend thereon, the
Corporation shall use its best efforts to cause its transfer agent to
electronically transmit the Common Stock issuable upon conversion to the holder
by crediting the account of holder's Prime Broker with DTC through its Deposit
Withdrawal Agent Commission system.
Taxes. The Corporation shall pay any and all taxes which may be imposed upon it
with respect to the issuance and delivery of the shares of Common Stock upon the
conversion of the Series L Preferred Stock.
No Fractional Shares. If any conversion of Series L Preferred Stock would result
in the issuance of a fractional share of Common Stock, such fractional share
shall be disregarded and the number of shares of Common Stock issuable upon
conversion of the Series L Preferred Stock shall be the next higher whole number
of shares.
Conversion Disputes. In the case of any dispute with respect to a conversion,
the Corporation shall promptly issue such number of shares of Common Stock as
are not disputed in accordance with subparagraph (i) above. If such dispute
involves the calculation of the Conversion Price, the Corporation shall submit
the disputed calculations to its outside accountant via facsimile within two (2)
business days of receipt of the Notice of Conversion. The accountant shall audit
the calculations and notify the Corporation and the holder of the results no
later than two (2) business days from the date it receives the disputed
calculations. The accountant's calculation shall be deemed conclusive, absent
manifest error. The Corporation shall then issue the appropriate number of
shares of Common Stock in accordance with subparagraph (i) above.
C. Limitations on Conversions. The conversion of shares of Series L Preferred
Stock shall be subject to the following limitations (each of which limitations
shall be applied independently):
Cap Amount. Unless permitted by the applicable rules and regulations of the
principal securities market on which the Common Stock is listed or traded, in no
event shall the total number of shares of Common Stock issued upon conversion of
the Series L Preferred Stock exceed the maximum number of shares of Common Stock
that the Corporation can so issue pursuant to Rule 4460(i) of the Nasdaq (or any
successor rule) (the "Cap Amount"), which, as of the First Closing Date, shall
be 5,190,000 shares of Common Stock. The Cap Amount shall be allocated pro-rata
to the holders of Series L Preferred Stock as provided in Article XIV.C. In the
event the Corporation is prohibited from issuing shares of Common Stock as a
result of the operation of this subparagraph (i), the Corporation shall comply
with Article VII.
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No Five Percent Holders. Except in a Required Conversion at Maturity, in no
event shall a holder of shares of Series L Preferred Stock be entitled to
receive shares of Common Stock upon a conversion to the extent that the sum of
(x) the number of shares of Common Stock beneficially owned by the holder and
its affiliates (exclusive of shares issuable upon conversion of the unconverted
portion of the shares of Series L Preferred Stock or the unexercised or
unconverted portion of any other securities of the Corporation subject to a
limitation on conversion or exercise analogous to the limitations contained
herein) and (y) the number of shares of Common Stock issuable upon the
conversion of the shares of Series L Preferred Stock with respect to which the
determination of this subparagraph is being made, would result in beneficial
ownership by the holder and its affiliates of more than 4.99% of the outstanding
shares of Common Stock. For purposes of this subparagraph, beneficial ownership
shall be determined in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended, and Regulation 13 D-G thereunder, except as otherwise
provided in clause (x) above. The restriction contained in this subparagraph
(ii) shall not be altered, amended, deleted or changed in any manner whatsoever
unless the holders of a majority of the Common Stock and each holder of Series L
Preferred Stock shall approve such alteration, amendment, deletion or change.
D. Required Conversion at Maturity. Subject to the limitations set forth in
Paragraph C(i) of this Article IV and provided all shares of Common Stock
issuable upon conversion of all outstanding shares of Series L Preferred Stock
are then (i) authorized and reserved for issuance, (ii) registered under the
Securities Act of 1933, as amended (the "Securities Act"), for resale by the
holders of such shares of Series L Preferred Stock and (iii) eligible to be
traded on either the Nasdaq, the New York Stock Exchange or the American Stock
Exchange, each share of Series L Preferred Stock issued and outstanding on the
fourth anniversary of the First Closing Date (the "Maturity Date"),
automatically shall be converted into shares of Common Stock on such date in
accordance with the conversion formulas set forth in Paragraph A of this Article
IV (the "Required Conversion at Maturity"). If the Required Conversion at
Maturity occurs, the Corporation and the holders of Series L Preferred Stock
shall follow the applicable conversion procedures set forth in Paragraph B of
this Article IV; provided, however, that the holders of Series L Preferred Stock
are not required to deliver a Notice of Conversion to the Corporation or its
transfer agent.
V. RESERVATION OF SHARES OF COMMON STOCK
A. Reserved Amount. Upon the initial issuance of the shares of Series L
Preferred Stock, the Corporation shall reserve 12,500,000 shares of the
authorized but unissued shares of Common Stock for issuance upon conversion of
the Series L Preferred Stock and thereafter the number of authorized but
unissued shares of Common Stock so reserved (the "Reserved Amount") shall not be
decreased and shall at all times be sufficient to provide for the conversion of
the Series L Preferred Stock outstanding at the then current Conversion Price.
The Reserved Amount shall be allocated to the holders of Series L Preferred
Stock as provided in Article XIV.C.
B. Increases to Reserved Amount. If the Reserved Amount for any three (3)
consecutive trading days (the last of such three (3) trading days being the
"Authorization Trigger Date") shall be less than 135% of the number of shares of
Common Stock then issuable upon conversion of the outstanding Series L Preferred
Stock on such trading days, the Corporation shall immediately notify the holders
of Series L Preferred Stock of such occurrence and shall take immediate action
(including, if necessary, seeking shareholder approval to authorize the issuance
of additional shares of Common Stock) to increase the Reserved Amount to 200% of
the number of shares of Common Stock then issuable upon conversion of the
outstanding Series L Preferred Stock. Subject to Paragraph C of this Article V,
in the event the Corporation fails to so increase the Reserved Amount within
ninety (90) days after an Authorization Trigger Date, each holder of Series L
Preferred Stock shall thereafter have the option, exercisable in whole or in
part at any time and from time to time by delivery of a Redemption Notice (as
defined in Article VIII.C) to the Corporation, to require the Corporation to
purchase for cash, at an amount per share equal to the Redemption Amount (as
defined in Article VIII.B), a portion of the holder's Series L Preferred Stock
such that, after giving effect to such purchase, the holder's allocated portion
of the Reserved Amount exceeds 135% of the total number of shares of Common
Stock issuable to such holder upon conversion of its Series L Preferred Stock.
If the Corporation fails to redeem any of such shares within ten (10) business
days after its receipt of a Redemption Notice, then such holder shall be
entitled to the remedies provided in Article VIII.C.
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C. Limitations on Redemption Right. Notwithstanding the provisions of Paragraph
B of this Article V, the holders of Series L Preferred Stock shall have no right
to require the Corporation to effect a redemption of their outstanding shares of
Series L Preferred Stock as provided in Paragraph B of this Article V so long as
(i) the Corporation has not, at any time, decreased the Reserved Amount below
12,500,000 shares of Common Stock; (ii) the Corporation shall have taken
immediate action following the applicable Authorization Trigger Date (including,
if necessary, seeking stockholder approval to authorize the issuance of
additional shares of Common Stock) to increase the Reserved Amount to 200% of
the number of shares of Common Stock then issuable upon conversion of the
outstanding Series L Preferred Stock; and (iii) the Corporation continues to use
its good faith best efforts (including the resolicitation of stockholder
approval to authorize the issuance of additional shares of Common Stock) to
increase the Reserved Amount to 200% of the number of shares of Common Stock
then issuable upon conversion of the outstanding Series L Preferred Stock. The
Corporation will be deemed to be using "its good faith best efforts" to increase
the Reserved Amount so long as it solicits stockholder 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 Series L Preferred Stock remain outstanding.
VI. FAILURE TO SATISFY CONVERSIONS
A. Conversion Default Payments. If, at any time, (x) a holder of shares of
Series L Preferred Stock submits a Notice of Conversion and the Corporation
fails for any reason (other than because such issuance would exceed such
holder's allocated portion of the Reserved Amount or Cap Amount, for which
failures the holders shall have the remedies set forth in Articles V and VII) to
deliver, on or prior to the fourth business day following the expiration of the
Delivery Period for such conversion, such number of freely tradeable shares of
Common Stock to which such holder is entitled upon such conversion, or (y) the
Corporation provides notice to any holder of Series L Preferred Stock at any
time of its intention not to issue freely tradeable shares of Common Stock upon
exercise by any holder of its conversion rights in accordance with the terms of
this Certificate of Designation (other than because such issuance would exceed
such holder's allocated portion of the Reserved Amount or Cap Amount) (each of
(x) and (y) being a "Conversion Default"), then the Corporation shall pay to the
affected holder, in the case of a Conversion Default described in clause (x)
above, and to all holders, in the case of a Conversion Default described in
clause (y) above, payments for the first ten (10) business days following the
expiration of the Delivery Period, in the case of a Conversion Default described
in clause (x), and for the first ten (10) business days following a Conversion
Default described in clause (y), an amount equal to $500 per day.
Notwithstanding the foregoing, in no event shall the Company be deemed to have
committed a Conversion Default at any time prior to the Registration Deadline or
during an Excluded Period (as such terms are defined in the Registration Rights
Agreement (as defined herein)) solely because the shares of Common Stock issued
upon a conversion of Series L Preferred Stock were not freely tradeable. In the
event any Conversion Default continues beyond such ten (10) business day period,
the Corporation shall pay to the holder an additional amount equal to:
(.24) x (D/365) x (the Default Amount)
where:
"D" means the number of days after the expiration of the ten (10) business day
period described above through and including the Default Cure Date;
"Default Amount" means (i) the total Face Amount of all shares of Series L
Preferred Stock held by such holder plus (ii) the total accrued Premium as of
the first day of the Conversion Default on all shares of Series L Preferred
Stock included in clause (i) of this definition; and
"Default Cure Date" means (i) with respect to a Conversion Default described in
clause (x) of its definition, the date the Corporation effects the conversion of
the full number of shares of Series L Preferred Stock and (ii) with respect to a
Conversion Default described in clause (y) of its definition, the date the
Corporation begins to issue freely tradeable Common Stock in satisfaction of all
conversions of Series L Preferred Stock in accordance with Article IV.A.
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The payments to which a holder shall be entitled pursuant to this Paragraph A
are referred to herein as "Conversion Default Payments." A holder may elect to
receive accrued Conversion Default Payments in cash or to convert all or any
portion of such accrued Conversion Default Payments, at any time, into Common
Stock at the lowest Conversion Price in effect during the period beginning on
the date of the Conversion Default through the Conversion Date for such
conversion. In the event a holder elects to receive any Conversion Default
Payments in cash, it shall so notify the Corporation in writing. Such payment
shall be made in accordance with and be subject to the provisions of Article
XIV.E. In the event a holder elects to convert all or any portion of the
Conversion Default Payments into Common Stock, the holder shall indicate on a
Notice of Conversion such portion of the Conversion Default Payments which such
holder elects to so convert and such conversion shall otherwise be effected in
accordance with the provisions of Article IV.
B. Adjustment to Conversion Price. If a holder has not received certificates for
all shares of Common Stock prior to the tenth (10th) business day after the
expiration of the Delivery Period with respect to a conversion of Series L
Preferred Stock for any reason (other than because such issuance would exceed
such holder's allocated portion of the Reserved Amount or Cap Amount, for which
failures the holders shall have the remedies set forth in Articles V and VII),
then the Fixed Conversion Price in respect of any shares of Series L Preferred
Stock held by such holder shall thereafter be the lesser of (i) the Fixed
Conversion Price on the Conversion Date specified in the Notice of Conversion
which resulted in the Conversion Default and (ii) the lowest Conversion Price in
effect during the period beginning on, and including, such Conversion Date
through and including the day such shares of Common Stock are delivered to the
holder. If there shall occur a Conversion Default of the type described in
clause (y) of Article VI.A, then the Fixed Conversion Price with respect to any
conversion thereafter shall be the lowest Conversion Price in effect at any time
during the period beginning on, and including, the date of the occurrence of
such Conversion Default through and including the Default Cure Date. The Fixed
Conversion Price shall thereafter be subject to further adjustment for any
events described in Article XI.
C. Buy-In Cure. Unless the Corporation has notified the applicable holder in
writing prior to the delivery by such holder of a Notice of Conversion that the
Corporation is unable to honor conversions, if (i) the Corporation fails for any
reason to deliver during the Delivery Period shares of Common Stock to a holder
upon a conversion of shares of Series L Preferred Stock and (ii) after the
applicable Delivery Period with respect to such conversion, such holder
purchases (in an open market transaction or otherwise) shares of Common Stock to
make delivery in satisfaction of a sale by such holder of the shares of Common
Stock (the "Sold Shares") which such holder anticipated receiving upon such
conversion (a "Buy-In"), the Corporation shall pay such holder (in addition to
any other remedies available to the holder) the amount by which (x) such
holder's total purchase price (including brokerage commissions, if any) for the
shares of Common Stock so purchased exceeds (y) the net proceeds received by
such holder from the sale of the Sold Shares. For example, if a holder purchases
shares of Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to shares of Common Stock it sold for $10,000, the
Corporation will be required to pay the holder $1,000. A holder shall provide
the Corporation written notification indicating any amounts payable to such
holder pursuant to this Paragraph C. The Corporation shall make any payments
required pursuant to this Paragraph C in accordance with and subject to the
provisions of Article XIV.E.
D. Redemption Right. If the Corporation fails, and such failure continues
uncured for five (5) business days after the Corporation has been notified
thereof in writing by the holder, for any reason (other than because such
issuance would exceed such holder's allocated portion of the Reserved Amount or
Cap Amount, for which failures the holders shall have the remedies set forth in
Articles V and VII) to issue shares of Common Stock within ten (10) business
days after the expiration of the Delivery Period with respect to any conversion
of Series L Preferred Stock, then the holder may elect at any time and from time
to time prior to the Default Cure Date for such Conversion Default, by delivery
of a Redemption Notice (as defined in Article VIII.C) to the Corporation, to
have all or any portion of such holder's outstanding shares of Series L
Preferred Stock purchased by the Corporation for cash, at an amount per share
equal to the Redemption Amount (as defined in Article VIII.B). If the
Corporation fails to redeem any of such shares within five (5) business days
after its receipt of a Redemption Notice, then such holder shall be entitled to
the remedies provided in Article VIII.C.
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VII. INABILITY TO CONVERT SHARES OF SERIES L PREFERRED STOCK DUE TO CAP AMOUNT
A. Obligation to Cure. If at any time the then unissued portion of any holder's
Cap Amount is less than 135% of the number of shares of Common Stock then
issuable upon conversion of such holder's shares of Series L Preferred Stock (a
"Trading Market Trigger Event"), the Corporation shall immediately notify the
holders of Series L Preferred Stock of such occurrence and shall take immediate
action (including, if necessary, seeking the approval of its shareholders to
authorize the issuance of the full number of shares of Common Stock which would
be issuable upon the conversion of Series L Preferred Stock but for the Cap
Amount) to eliminate any prohibitions under applicable law or the rules or
regulations of any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Corporation or any of
its securities on the Corporation's ability to issue shares of Common Stock in
excess of the Cap Amount. In the event the Corporation fails to eliminate all
such prohibitions within ninety (90) days after the Trading Market Trigger
Event, each holder of Series L Preferred Stock shall thereafter have the option,
exercisable in whole or in part at any time and from time to time by delivery of
a Redemption Notice (as defined in Article VIII.C) to the Corporation, to
require the Corporation to purchase for cash, at an amount per share equal to
the Redemption Amount (as defined in Article VIII.B), a portion of the holder's
Series L Preferred Stock such that, after giving effect to such purchase, the
then unissued portion of such holder's Cap Amount on the date of such Redemption
Notice exceeds 135% of the total number of shares of Common Stock then issuable
to such holder upon conversion of its Series L Preferred Stock. If the
Corporation fails to redeem any of such shares within five (5) business days
after its receipt of a Redemption Notice, then such holder shall be entitled to
the remedies provided in Article VIII.C.
B. Remedies. If the Corporation fails to eliminate the applicable prohibitions
within the ninety (90) day cure period referred to in Paragraph A of this
Article VII and thereafter the Corporation is prohibited, at any time, from
issuing shares of Common Stock upon conversion of Series L Preferred Stock to
any holder because such issuance would exceed the then unissued portion of such
holder's Cap Amount because of applicable law or the rules or regulations of any
stock exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Corporation or its securities, any
holder who is so prohibited from converting its Series L Preferred Stock may
elect any or both of the following additional remedies:
to require, with the consent of holders of at least fifty percent (50%) of the
outstanding shares of Series L Preferred Stock (including any shares of Series L
Preferred Stock held by the requesting holder), the Corporation to terminate the
listing of its Common Stock on the Nasdaq (or any other stock exchange,
interdealer quotation system or trading market) and to cause its Common Stock to
be eligible for trading on the Nasdaq SmallCap Market or on the over-the-counter
electronic bulletin board, at the option of the requesting holder; or
to require the Corporation to issue shares of Common Stock in accordance with
such holder's Notice of Conversion at a conversion price equal to the average of
the Closing Prices of the Common Stock for the five (5) consecutive trading days
(subject to equitable adjustment for any stock splits, stock dividends,
reclassifications or similar events during such five (5) trading day period)
preceding the date of the holder's written notice to the Corporation of its
election to receive shares of Common Stock pursuant to this subparagraph (ii).
VIII. REDEMPTION DUE TO CERTAIN EVENTS
A. Redemption by Holder. In the event (each of the events described in clauses
(i)-(iv) below after expiration of the applicable cure period (if any) being a
"Redemption Event"):
the Common Stock (including any of the shares of Common Stock issuable upon
conversion of the Series L Preferred Stock) is suspended from trading on any of,
or is not listed (and authorized) for trading on at least one of, the New York
Stock Exchange, the American Stock Exchange, the Nasdaq Small Cap Market or
Nasdaq for an aggregate of ten (10) trading days in any nine (9) month period;
the Corporation fails, and any such failure continues uncured for five (5)
business days after the Corporation has been notified thereof in writing by the
<PAGE>
holder, to remove any restrictive legend on any certificate or any shares of
Common Stock issued to the holders of Series L Preferred Stock upon conversion
of the Series L Preferred Stock as and when required by the Securities Purchase
Agreement or the Registration Rights Agreement;
the Corporation provides notice to any holder of Series L Preferred Stock,
including by way of public announcement, at any time, of its intention not to
issue shares of Common Stock to any holder of Series L Preferred Stock upon
conversion in accordance with the terms of this Certificate of Designation
(other than due to the circumstances contemplated by Articles V or VII for which
the holders shall have the remedies set forth in such Articles);
the Corporation shall:
sell, convey or dispose of all or substantially all of its assets;
merge, consolidate or engage in any other business combination with any other
entity (other than pursuant to a migratory merger effected solely for the
purpose of changing the jurisdiction of incorporation of the Corporation); or
have approved, recommended or otherwise consented to any transaction or series
of related transactions which result in fifty percent (50%) or more of the
voting power of the Corporation's capital stock being owned beneficially by one
person, entity or "group" (as such term is used under Section 13(d) of the
Securities Exchange Act of 1934, as amended);
then, upon the occurrence of any such Redemption Event, each holder of shares of
Series L Preferred Stock shall thereafter have the option, exercisable in whole
or in part at any time and from time to time by delivery of a Redemption Notice
(as defined in Paragraph C below) to the Corporation while such Redemption Event
continues, to require the Corporation to purchase for cash any or all of the
then outstanding shares of Series L Preferred Stock held by such holder for an
amount per share equal to the Redemption Amount (as defined in Paragraph B
below) in effect at the time of the redemption hereunder. For the avoidance of
doubt, the occurrence of any event described in clauses (i), (iii) or (iv) above
shall immediately constitute a Redemption Event and there shall be no cure
period; provided, however, that the holders of Series L Preferred Stock shall
have no right to deliver a Redemption Notice following the occurrence of a
Redemption Event specified in clause (i) above if the Corporation pays to each
holder within five (5) business days after the occurrence of such Redemption
Event, as liquidated damages for the decrease in the value of the Series L
Preferred Stock (and the shares of the Corporation'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 Series L Preferred Stock then held by
each such holder. The Damages Amount shall be payable, at the Corporation's
option, in cash or shares of Common Stock that have been registered by the
Corporation under the Securities Act for resale by the holders (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). Upon the initial issuance of shares of
Series L Preferred Stock, the Corporation shall reserve 3,000,000 shares of
Common Stock to satisfy its obligation with respect to the Damages Amount and
thereafter the number of authorized but unissued shares of Common Stock so
reserved shall not be decreased. In the event that the number of shares required
to be issued by the Corporation with respect to the Damages Amount exceeds
3,000,000 shares of Common Stock and the Corporation 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 Corporation shall
issue and deliver to the holders, on a pro-rata basis based on the number of
shares of Series L Preferred Stock then held by each such holder, a number of
shares of Common Stock equal to the greater of (i) the number of shares
authorized and available for issuance by the Corporation to satisfy such
obligation and (ii) all 3,000,000 shares of Common Stock so reserved for such
purpose and, upon such issuance, the holders shall have no right of redemption
with respect to such Redemption Event, 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).
<PAGE>
B. Definition of Redemption Amount. The "Redemption Amount" with respect to a
share of Series L Preferred Stock means an amount equal to:
V X M
----
C P
where:
"V" means the face amount thereof plus the accrued Premium thereon and all
Conversion Default Payments (if any) with respect thereto through the date of
redemption;
"CP" means the Conversion Price in effect on the date of the Redemption Notice;
and
"M" means the highest Closing Price of the Corporation's Common Stock during the
period beginning on the date of the Redemption Notice and ending on the date of
the redemption.
C. Redemption Defaults. If the Corporation fails to pay any holder the
Redemption Amount with respect to any share of Series L Preferred Stock within
ten (10) business days of its receipt of a notice requiring such redemption (a
"Redemption Notice"), then the holder of Series L Preferred Stock delivering
such Redemption Notice (i) shall be entitled to interest on the Redemption
Amount at a per annum rate equal to the lower of twenty-four percent (24%) and
the highest interest rate permitted by applicable law from the date of the
Redemption Notice until the date of redemption hereunder, and (ii) shall have
the right, at any time and from time to time, to require the Corporation, upon
written notice, to immediately convert (in accordance with the terms of
Paragraph A of Article IV) all or any portion of the Redemption Amount, plus
interest as aforesaid, into shares of Common Stock at the lowest Conversion
Price in effect during the period beginning on the date of the Redemption Notice
and ending on the Conversion Date with respect to the conversion of such
Redemption Amount. In the event the Corporation is not able to redeem all of the
shares of Series L Preferred Stock subject to Redemption Notices, the
Corporation shall redeem shares of Series L Preferred Stock from each holder pro
rata, based on the total number of shares of Series L Preferred Stock included
by such holder in the Redemption Notice relative to the total number of shares
of Series L Preferred Stock in all of the Redemption Notices.
D. Redemption by Corporation.
The Corporation shall have the right, at any time and provided the Corporation
is not in material violation of any of its obligations under this Certificate of
Designation, the Securities Purchase Agreement or the Registration Rights
Agreement, to redeem (an "Optional Redemption") all (but not less than all) of
the then outstanding Series L Preferred Stock (other than Series L Preferred
Stock which is the subject of a Notice of Conversion delivered prior to the
delivery date of the Optional Redemption Notice (as defined in subparagraph
(iii) below)) for a price per share equal to the Optional Redemption Amount (as
defined below) which right shall be exercisable only one time while any Series L
Preferred Stock is outstanding by the Corporation in its sole discretion by
delivery of an Optional Redemption Notice in accordance with the redemption
procedures set forth below. Holders of Series L Preferred Stock may not convert
any shares of Series L Preferred Stock selected for redemption hereunder into
Common Stock at any time on or prior to the Effective Date of Redemption
designated by the Corporation in the Optimal Redemption Notice pursuant to
subparagraph (iii). The "Optional Redemption Amount" with respect to each share
of Series L Preferred Stock means the greater of (a) 100% multiplied by the sum
of (I) the Face Amount thereof plus (II) the accrued Premium thereon and all
Conversion Default Payments (if any) with respect thereto through the date of
redemption, and (b) the Benefit of the Bargain (as defined below).
The "Benefit of the Bargain" with respect to a share of Series L Preferred Stock
means an amount equal to:
V X M
----
C P
where:
<PAGE>
"V" means the face amount thereof plus the accrued Premium thereon and all
Conversion Default Payments (if any) with respect thereto through the date of
redemption;
"CP" means the Conversion Price in effect on the date of the Optional Redemption
Notice; and
"M" means the volume weighted average sales price of the Corporation's Common
Stock on the trading day immediately preceding the date of the Optional
Redemption Notice.
The Corporation shall effect each redemption under this Section VIII.D by giving
at least five (5) business days but not more than ten (10) business days prior
written notice (the "Optional Redemption Notice") of the date which such
redemption is to become effective (the "Effective Date of Redemption"), the
shares of Series L Preferred Stock selected for redemption and the Optional
Redemption Amount to (i) the holders of Series L Preferred Stock selected for
redemption at the address and facsimile number of such holder appearing in the
Corporation's register for the Series L Preferred Stock and (ii) the transfer
agent for the Common Stock, which Optional Redemption Notice shall be deemed to
have been delivered on the business day after the Corporation's fax (with a copy
sent by overnight courier to the holders of Series L Preferred Stock) of such
notice to the holders of Series L Preferred Stock.
The Optional Redemption Amount shall be paid to the holder of the Series L
Preferred Stock being redeemed within three (3) business days of the Effective
Date of Redemption; provided, however, that the Corporation shall not be
obligated to deliver any portion of the Optional Redemption Amount until either
the certificates evidencing the Series L Preferred Stock being redeemed are
delivered to the office of the Corporation or the transfer agent, or the holder
notifies the Corporation or the transfer agent that such certificates have been
lost, stolen or destroyed and delivers the documentation in accordance with
Article XIV.B hereof. Notwithstanding anything herein to the contrary, in the
event that the certificates evidencing the Series L Preferred Stock being
redeemed are not delivered to the Corporation or the transfer agent prior to the
third business day following the Effective Date of Redemption, the redemption of
the Series L Preferred Stock pursuant to this Article VIII.D shall still be
deemed effective as of the Effective Date of Redemption and the Optional
Redemption Amount shall be paid to the holder of Series L Preferred Stock being
redeemed within five (5) business days of the date the certificates evidencing
the Series L Preferred Stock being redeemed are actually delivered to the
Corporation or the transfer agent.
If the Corporation fails to pay, when due and owing, any Optional Redemption
Amount, then the holder of Series L Preferred Stock entitled to receive such
Optional Redemption Amount shall have the right, at any time and from time to
time during the twenty (20) trading day period following the Effective Date of
Redemption (the "Optional Redemption Amount Conversion Period"), to require the
Corporation, upon written notice, to immediately convert (in accordance with the
terms of paragraph A of Article IV) any or all of the shares of Series L
Preferred Stock which are the subject of such redemption, into shares of Common
Stock at the lowest Conversion Price in effect during the period beginning on
the date the Corporation elected to redeem such shares of Series L Preferred
Stock and ending on expiration of the Optional Redemption Amount Conversion
Period. From and after the expiration of the Optional Redemption Amount
Conversion Period, the holders may convert Series L Preferred Stock at the
Conversion Price then in effect and in accordance with Article IV. In addition,
if the Corporation fails to pay an Optional Redemption Amount when due and
owing, the Corporation shall pay the holder interest on such Optional Redemption
Amount at a per annum rate equal to the lower of twenty-four percent (24%) and
the highest interest rate permitted by applicable law from the date the
Corporation elected to redeem such shares of Series L Preferred Stock until the
later of the Effective Date of Redemption or the date the Corporation notifies
the holder that it will not redeem the shares the Series L Preferred Stock
selected for redemption by the Corporation. If a holder is entitled to interest
pursuant to this subparagraph (v), the holder will not be entitled to interest
under Article XIV.E for the Corporation's failure to timely pay any Optional
Redemption Amount hereunder.
IX. RANK
All shares of the Series L Preferred Stock shall rank (i) prior to the
Corporation's Common Stock; (ii) prior to any class or series of capital stock
of the Corporation hereafter created (unless, with the consent of the holders of
Series L Preferred Stock obtained in accordance with Article XIII hereof, such
<PAGE>
class or series of capital stock specifically, by its terms, ranks senior to or
pari passu with the Series L Preferred Stock) (collectively with the Common
Stock, "Junior Securities"); (iii) pari passu with the Corporation's Series L
Convertible Preferred Stock, par value $.0001 per share, and any class or series
of capital stock of the Corporation hereafter created (with the consent of the
holders of Series L Preferred Stock obtained in accordance with Article XIII
hereof) specifically ranking, by its terms, on parity with the Series L
Preferred Stock (collectively, the "Pari Passu Securities"); (iv) junior to the
Corporation's Series A Cumulative Convertible Preferred Stock, par value $.0001
per share, the Series F-1, F-2, F-3 and F-4 Convertible Preferred Stock, par
value $.0001 per share, and the Corporation's Series H Convertible Preferred
Stock, par value $.0001 per share (collectively the "Existing Preferred Stock");
and (v) junior to any class or series of capital stock of the Corporation
hereafter created (with the consent of the holders of Series L Preferred Stock
obtained in accordance with Article XIII hereof) specifically ranking, by its
terms, senior to the Series L Preferred Stock (collectively, with the Existing
Preferred Stock, the "Senior Securities"), in each case as to distribution of
assets upon liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary.
X. LIQUIDATION PREFERENCE
A. If the Corporation shall commence a voluntary case under the U.S. Federal
bankruptcy laws or any other applicable bankruptcy, insolvency or similar law,
or consent to the entry of an order for relief in an involuntary case under any
law or to the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or make an assignment for the benefit of its
creditors, or admit in writing its inability to pay its debts generally as they
become due, or if a decree or order for relief in respect of the Corporation
shall be entered by a court having jurisdiction in the premises in an
involuntary case under the U.S. Federal bankruptcy laws or any other applicable
bankruptcy, insolvency or similar law resulting in the appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of sixty (60) consecutive
days and, on account of any such event, the Corporation shall liquidate,
dissolve or wind up, or if the Corporation shall otherwise liquidate, dissolve
or wind up (a "Liquidation Event"), no distribution shall be made to the holders
of any shares of capital stock of the Corporation (other than Senior Securities)
upon liquidation, dissolution or winding up unless prior thereto the holders of
shares of Series L Preferred Stock shall have received the Liquidation
Preference with respect to each share. If, upon the occurrence of a Liquidation
Event, the assets and funds available for distribution among the holders of the
Series L Preferred Stock and holders of Pari Passu Securities shall be
insufficient to permit the payment to such holders of the preferential amounts
payable thereon, then the entire assets and funds of the Corporation legally
available for distribution to the Series L Preferred Stock and the Pari Passu
Securities shall be distributed ratably among such shares in proportion to the
ratio that the Liquidation Preference payable on each such share bears to the
aggregate Liquidation Preference payable on all such shares.
B. The purchase or redemption by the Corporation of stock of any class, in any
manner permitted by law, shall not, for the purposes hereof, be regarded as a
liquidation, dissolution or winding up of the Corporation. Neither the
consolidation or merger of the Corporation with or into any other entity nor the
sale or transfer by the Corporation of less than substantially all of its assets
shall, for the purposes hereof, be deemed to be a liquidation, dissolution or
winding up of the Corporation.
C. The "Liquidation Preference" with respect to a share of Series L Preferred
Stock means an amount equal to the Face Amount thereof plus the accrued Premium
thereon through the date of final distribution. The Liquidation Preference with
respect to any Pari Passu Securities shall be as set forth in the Certificate of
Designation filed in respect thereof.
XI. ADJUSTMENTS TO THE CONVERSION PRICE
The Conversion Price shall be subject to adjustment from time to time as
follows:
<PAGE>
A. Stock Splits, Stock Dividends, Etc. If at any time on or after the First
Closing Date, the number of outstanding shares of Common Stock is increased by a
stock split, stock dividend, combination, reclassification or other similar
event, the Fixed Conversion Price shall be proportionately reduced, or if the
number of outstanding shares of Common Stock is decreased by a reverse stock
split, combination or reclassification of shares, or other similar event, the
Fixed Conversion Price shall be proportionately increased. In such event, the
Corporation shall notify the Corporation's transfer agent of such change on or
before the effective date thereof.
B. Adjustment Due to Merger, Consolidation, Etc. If, at any time after the First
Closing Date, there shall be (i) any reclassification or change of the
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination), (ii) any consolidation or merger of the
Corporation with any other entity (other than a merger in which the Corporation
is the surviving or continuing entity and its capital stock is unchanged), (iii)
any sale or transfer of all or substantially all of the assets of the
Corporation or (iv) any share exchange pursuant to which all of the outstanding
shares of Common Stock are converted into other securities or property (each of
(i) - (iv) above being a "Fundamental Change"), then the holders of Series L
Preferred Stock shall thereafter have the right to receive upon conversion, in
lieu of the shares of Common Stock otherwise issuable, such shares of stock,
securities and/or other property as would have been issued or payable in such
Fundamental Change with respect to or in exchange for the number of shares of
Common Stock which would have been issuable upon conversion (without giving
effect to the limitations contained in Article IV.C) had such Fundamental Change
not taken place, and in any such case, appropriate provisions shall be made with
respect to the rights and interests of the holders of the Series L Preferred
Stock to the end that the provisions hereof (including, without limitation,
provisions for adjustment of the Conversion Price and of the number of shares of
Common Stock issuable upon conversion of the Series L Preferred Stock) shall
thereafter be applicable, as nearly as may be practicable in relation to any
shares of stock or securities thereafter deliverable upon the conversion
thereof. The Corporation shall not effect any transaction described in this
Paragraph B unless (i) each holder of Series L Preferred Stock has received
written notice of such transaction at least thirty (30) days prior thereto, but
in no event later than ten (10) days prior to the record date for the
determination of shareholders entitled to vote with respect thereto, and (ii)
the resulting successor or acquiring entity (if not the Corporation) assumes by
written instrument the obligations of this Paragraph B. The above provisions
shall apply regardless of whether or not there would have been a sufficient
number of shares of Common Stock authorized and available for issuance upon
conversion of the shares of Series L Preferred Stock outstanding as of the date
of such transaction, and shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges. For purposes of
this Paragraph B, the sale of the capital stock or assets of Dorotech, S.A. as
contemplated by that certain Purchase Agreement dated December 31, 1996 by and
between the Company and CDR Enterprises shall not constitute a sale of all or
substantially all of the Company's assets.
C. Adjustment Due to Distribution. If at any time after the First Closing Date
the Corporation shall declare or make any distribution of its assets (or rights
to acquire its assets) to holders of Common Stock as a partial liquidating
dividend, by way of return of capital or otherwise (including any dividend or
distribution to the Corporation's shareholders in cash or shares (or rights to
acquire shares) of capital stock of a subsidiary (i.e. a spin-off)) (a
"Distribution"), then the holders of Series L Preferred Stock shall be entitled,
upon any conversion of shares of Series L Preferred Stock after the date of
record for determining shareholders entitled to such Distribution, to receive
the amount of such assets which would have been payable to the holder with
respect to the shares of Common Stock issuable upon such conversion (without
giving effect to the limitations contained in Article IV.C) had such holder been
the holder of such shares of Common Stock on the record date for the
determination of shareholders entitled to such Distribution.
D. Purchase Rights. If at any time after the First Closing Date, the Corporation
issues any Convertible Securities or rights to purchase stock, warrants,
securities or other property (the "Purchase Rights") pro rata to the record
holders of any class of Common Stock, then the holders of Series L Preferred
Stock will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which such holder could have acquired if
such holder had held the number of shares of Common Stock acquirable upon
complete conversion of the Series L Preferred Stock (without giving effect to
the limitations contained in Article IV.C) immediately before the date on which
a record is taken for the grant, issuance or sale of such Purchase Rights, or,
<PAGE>
if no such record is taken, the date as of which the record holders of Common
Stock are to be determined for the grant, issue or sale of such Purchase Rights.
E. Notice of Adjustments. Upon the occurrence of each adjustment or readjustment
of the Conversion Price pursuant to this Article XI, the Corporation, at its
expense, shall promptly compute such adjustment or readjustment and prepare and
furnish to each holder of Series L Preferred Stock a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series L Preferred Stock, furnish to such
holder a like certificate setting forth (i) such adjustment or readjustment,
(ii) the Conversion Price at the time in effect and (iii) the number of shares
of Common Stock and the amount, if any, of other securities or property which at
the time would be received upon conversion of a share of Series L Preferred
Stock.
XII. VOTING RIGHTS
The holders of the Series L Preferred Stock have no voting power whatsoever,
except as otherwise provided by the Delaware General Corporation Law (the
"Business Corporation Law"), in this Article XII and in Article XIII below.
Notwithstanding the above, the Corporation shall provide each holder of Series L
Preferred Stock with prior notification of any meeting of the shareholders (and
copies of proxy materials and other information sent to shareholders). If the
Corporation takes a record of its shareholders for the purpose of determining
shareholders entitled to (a) receive payment of any dividend or other
distribution, any right to subscribe for, purchase or otherwise acquire
(including by way of merger, consolidation or recapitalization) any share of any
class or any other securities or property, or to receive any other right, or (b)
to vote in connection with any proposed sale, lease or conveyance of all or
substantially all of the assets of the Corporation, or any proposed merger,
consolidation, liquidation, dissolution or winding up of the Corporation, the
Corporation shall mail a notice to each holder, at least twenty (20) days prior
to the record date specified therein (or thirty (30) days prior to the
consummation of the transaction or event, whichever is earlier, but in no event
earlier than public announcement of such proposed transaction), of the date on
which any such record is to be taken for the purpose of such vote, dividend,
distribution, right or other event, and a brief statement regarding the amount
and character of such vote, dividend, distribution, right or other event to the
extent known at such time.
To the extent that under the Business Corporation Law the vote of the holders of
the Series L Preferred Stock, voting separately as a class or series, as
applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the shares
of the Series L Preferred Stock represented at a duly held meeting at which a
quorum is present or by written consent of a majority of the shares of Series L
Preferred Stock (except as otherwise may be required under the Business
Corporation Law) shall constitute the approval of such action by the class. To
the extent that under the Business Corporation Law holders of the Series L
Preferred Stock are entitled to vote on a matter with holders of Common Stock,
voting together as one class, each share of Series L Preferred Stock shall be
entitled to a number of votes equal to the number of shares of Common Stock into
which it is then convertible (without giving effect to the limitations contained
in Article IV.C) using the record date for the taking of such vote of
shareholders as the date as of which the Conversion Price is calculated.
XIII. PROTECTION PROVISIONS
So long as any shares of Series L Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by the Business Corporation Law) of the holders of at least
a majority of the then outstanding shares of Series L Preferred Stock:
alter or change the rights, preferences or privileges of the Series L Preferred
Stock;
<PAGE>
alter or change the rights, preferences or privileges of any capital stock of
the Corporation so as to affect adversely the Series L Preferred Stock;
create any new class or series of capital stock having a preference over the
Series L Preferred Stock as to distribution of assets upon liquidation,
dissolution or winding up of the Corporation (as previously defined in Article
IX hereof, "Senior Securities");
create any new class or series of capital stock ranking pari passu with the
Series L Preferred Stock as to distribution of assets upon liquidation,
dissolution or winding up of the Corporation (as previously defined in Article
IX hereof, "Pari Passu Securities");
increase the authorized number of shares of Series L Preferred Stock;
issue any shares of Series L Preferred Stock other than pursuant to the
Securities Purchase Agreement;
issue any additional shares of Senior Securities; or
redeem, or declare or pay any cash dividend or distribution on, any Junior
Securities.
If holders of at least a majority of the then outstanding shares of Series L
Preferred Stock agree to allow the Corporation to alter or change the rights,
preferences or privileges of the shares of Series L Preferred Stock pursuant to
subsection (a) above, then the Corporation shall deliver notice of such approved
change to the holders of the Series L Preferred Stock that did not agree to such
alteration or change (the "Dissenting Holders") and the Dissenting Holders shall
have the right, for a period of thirty (30) days, to convert pursuant to the
terms of this Certificate of Designation as they existed prior to such
alteration or change or to continue to hold their shares of Series L Preferred
Stock.
XIV. MISCELLANEOUS
A. Cancellation of Series L Preferred Stock. If any shares of Series L Preferred
Stock are converted pursuant to Article IV, the shares so converted shall be
canceled, shall return to the status of authorized, but unissued preferred stock
of no designated series, and shall not be issuable by the Corporation as Series
L Preferred Stock.
B. Lost or Stolen Certificates. Upon receipt by the Corporation of (i) evidence
of the loss, theft, destruction or mutilation of any Preferred Stock
Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of
indemnity reasonably satisfactory to the Corporation, or (z) in the case of
mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Corporation shall execute and deliver new Preferred Stock
Certificate(s) of like tenor and date. However, the Corporation shall not be
obligated to reissue such lost or stolen Preferred Stock Certificate(s) if the
holder contemporaneously requests the Corporation to convert such Series L
Preferred Stock.
C. Allocations of Cap Amount and Reserved Amount. The initial Cap Amount and
Reserved Amount shall be allocated pro rata among the holders of Series L
Preferred Stock based on the number of shares of Series L Preferred Stock issued
to each holder. Each increase to the Cap Amount and Reserved Amount shall be
allocated pro rata among the holders of Series L Preferred Stock based on the
number of shares of Series L Preferred Stock held by each holder at the time of
the increase in the Cap Amount or Reserved Amount, as the case may be. In the
event a holder shall sell or otherwise transfer any of such holder's shares of
Series L Preferred Stock, each transferee shall be allocated a pro rata portion
of such transferor's Cap Amount and Reserved Amount. Any portion of the Cap
Amount or Reserved Amount which remains allocated to any person or entity which
does not hold any Series L Preferred Stock shall be allocated to the remaining
holders of shares of Series L Preferred Stock, pro rata based on the number of
shares of Series L Preferred Stock then held by such holders.
[Intentionally Omitted]
D. Payment of Cash; Defaults. Whenever the Corporation is required to make any
cash payment to a holder under this Certificate of Designation (as a Conversion
Default Payment, upon redemption or otherwise), such cash payment shall be made
to the holder within five (5) business days after delivery by such holder of a
notice specifying that the holder elects to receive such payment in cash and the
<PAGE>
method (e.g., by check, wire transfer) in which such payment should be made. If
such payment is not delivered within such five (5) business day period, such
holder shall thereafter be entitled to interest on the unpaid amount at a per
annum rate equal to the lower of twenty-four percent (24%) and the highest
interest rate permitted by applicable law until such amount is paid in full to
the holder.
E. Status as Stockholder. Upon submission of a Notice of Conversion by a holder
of Series L Preferred Stock, the shares covered thereby shall be deemed
converted into shares of Common Stock and the holder's rights as a holder of
such converted shares of Series L Preferred Stock shall cease and terminate,
excepting only the right to receive certificates for such shares of Common Stock
and to any remedies provided herein or otherwise available at law or in equity
to such holder because of a failure by the Corporation to comply with the terms
of this Certificate of Designation. Notwithstanding the foregoing, if a holder
has not received certificates for all shares of Common Stock prior to the tenth
(10th) business day after the expiration of the Delivery Period with respect to
a conversion of Series L Preferred Stock for any reason, then (unless the holder
otherwise elects to retain its status as a holder of Common Stock) the holder
shall regain the rights of a holder of Series L Preferred Stock with respect to
such unconverted shares of Series L Preferred Stock and the Corporation shall,
as soon as practicable, return such unconverted shares to the holder. In all
cases, the holder shall retain all of its rights and remedies (including,
without limitation, (i) the right to receive Conversion Default Payments
pursuant to Article VI.A to the extent required thereby for such Conversion
Default and any subsequent Conversion Default and (ii) the right to have the
Conversion Price with respect to subsequent conversions determined in accordance
with Article VI.B) for the Corporation's failure to convert Series L Preferred
Stock.
F. Remedies Cumulative. The remedies provided in this Certificate of Designation
shall be cumulative and in addition to all other remedies available under this
Certificate of Designation, at law or in equity (including a decree of specific
performance and/or other injunctive relief), and nothing herein shall limit a
holder's right to pursue actual damages for any failure by the Corporation to
comply with the terms of this Certificate of Designation. The Corporation
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the holders of Series L Preferred Stock and that the remedy
at law for any such breach may be inadequate. The Corporation therefore agrees,
in the event of any such breach or threatened breach, the holders of Series L
Preferred Stock shall be entitled, in addition to all other available remedies,
to an injunction restraining any breach, without the necessity of showing
economic loss and without any bond or other security being required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, this Certificate of Designation is executed on
behalf of the Corporation this 8th day of December, 1997.
NETWORK IMAGING CORPORATION
By:
<PAGE>
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series L Preferred Stock)
The undersigned hereby irrevocably elects to convert ____________ shares of
Series L Preferred Stock (the "Conversion"), represented by stock certificate
Nos(s). ___________ (the "Preferred Stock Certificates") into shares of common
stock ("Common Stock") of Network Imaging Corporation (the "Corporation")
according to the conditions of the Certificate of Designations, Preferences and
Rights of Series L Convertible Preferred Stock (the "Certificate of
Designation"), as of the date written below. If securities are to be issued in
the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. No fee will be charged to the
holder for any conversion, except for transfer taxes, if any. A copy of each
Preferred Stock Certificate is attached hereto (or evidence of loss, theft or
destruction thereof).
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Series L Preferred Stock shall be made pursuant to registration of the Common
Stock under the Securities Act of 1933, as amended (the "Act"), or pursuant to
an exemption from registration under the Act.
[ ] The undersigned hereby requests that the Corporation electronically
transmit the Common Stock issuable pursuant to this Notice of
Conversion to the account of the undersigned's Prime Broker (which is
__________) with DTC through its Deposit Withdrawal Agent Commission
System.
Date of Conversion:_____________________________
Applicable Conversion Price:____________________
Amount of Conversion Default Payments
to be Converted, if any:________________________
Number of Shares of
Common Stock to be Issued:______________________
Signature:______________________________________
Name:___________________________________________
Address:________________________________________
* The Corporation is not required to issue shares of Common Stock until the
original Preferred Stock Certificate(s) (or evidence of loss, theft or
destruction thereof) to be converted are received by the Corporation or its
transfer agent. The Corporation shall issue and deliver shares of Common Stock
to an overnight courier not later than the later of (a) two (2) business days
following receipt of this Notice of Conversion and (b) delivery of the original
Preferred Stock Certificates (or evidence of loss, theft or destruction thereof)
and shall make payments pursuant to the Certificate of Designation for the
failure to make timely delivery.
<PAGE>
APPENDIX B
NETWORK IMAGING CORPORATION
AMENDED AND RESTATED
1997 DIRECTOR STOCK OPTION PLAN
1. PURPOSE
The purpose of this 1997 Director Stock Option Plan (the "Plan") of
Network Imaging Corporation, Inc. (the "Company") is to encourage ownership in
the Company by outside directors of the Company, whose continued services are
considered essential to the Company's future progress and to provide them with a
further incentive to remain as directors of the Company.
2. ADMINISTRATION
The Board of Directors of the Company (the "Board of Directors") shall
supervise and administer the Plan. Grants of stock options under the Plan and
the amount and nature of the awards to be granted shall be automatic in
accordance with Section 5. However, all questions of interpretations of the Plan
or of any options issued under it shall be determined by the Board of Directors
and such determination shall be final and binding upon all persons having an
interest in the Plan.
3. PARTICIPATION IN THE PLAN
Directors of the Company who are not executive officers of the Company
or any subsidiary of the Company and are not serving on the Board of Directors
as a representative of any institutional investor ("outside directors") shall be
eligible to participate in the Plan.
4. STOCK SUBJECT TO THE PLAN
(a) The maximum number of shares of the Company's Common Stock, no par
value per share ("Common Stock"), that may be issued under the plan shall be
360,000, subject to adjustment as provided in Section 9 of the Plan.
(b) If any outstanding option under the Plan for any reason expires or
is terminated without having been exercised in full, the shares allocable to the
unexercised portion of such option shall again become available for grant
pursuant to the Plan.
( c) All options granted under the Plan shall be non-statutory options
not entitled to special tax treatment under Section 422 of the Internal Revenue
Code of 1986, as amended to date and as it may be amended from time to time (the
"Code").
5. TERMS, CONDITIONS AND FORM OF OPTIONS
Each option granted under the Plan shall be evidenced by a written
agreement in such form as the Board of Directors shall from time to time
approve, which agreements shall comply with and be subject to the following
terms and conditions:
(a) Option Grant Dates. Subject to Section 7 of this Plan, an option to
purchase Common Stock shall be granted automatically to each outside director
elected to the Board of Directors after the effective date of this Plan, at the
end of each calendar quarter.
<PAGE>
(b) Share Subject to Option. The number of shares covered by the option
(i) in the case of an outside director elected at the commencement of a term (a
"Full -Term Director"), shall be 7,500 per each calendar quarter and (ii) in the
case of an outside director elected during the course of a term (for example, to
fill a vacancy) an ("Interim Director"), shall be equal to 7,500 per each
calendar quarter in which he serves as a member of the Board.
( c) Option Exercise Price. The option exercise price per share for
each option granted under the Plan shall equal to (i) the closing sales price
per share of the Company's Common Stock on the Nasdaq National Market (or, if
the company is traded on a nationally recognized securities exchange on the date
of grant, the reported closing sales price per share of the Company's Common
Stock by such exchange) on the lowest day during the last month of each calendar
quarter (i.e., March, June, September, and December). The date of grant, for
purposes of the option and its vesting schedule, shall be the date that option
is granted or (ii) if the Common Stock is not traded on Nasdaq National Market
or an exchange, the fair market value per share on the lowest closing sale price
for the last calendar month of a quarter.
(d) Option Non-Transferable. Each option granted under the Plan by its
terms shall not be transferable by the optionee otherwise than by will, or by
the laws of descent and distribution, and shall be exercised during the lifetime
of the optionee only by him. No option or interest therein may be transferred,
assigned, pledged or hypothecated by the optionee during his lifetime, whether
by operation of law or otherwise, or be made subject to execution, attachment or
similar process.
(e) Vesting and Exercise Period. Each Option granted to a Full-Term
Director shall vest ninety (90) days following the date of grant if such
Full-Time Director is still serving as a director of the Company at such time.
Each Option may be exercised on a cumulative basis as to be the vested number of
shares at any time or from time to time, in whole or in part; provided that,
subject to the provisions of Section 5 (f), no Option may be exercised more that
one year after the optionee ceases to serve as a director of the Company or for
a number of shares greater than that which was vested at the time the optionee
ceased to serve as a director of the Company. No Option shall be exercisable
after the expiration of ten years from the date of grant.
(f) Exercise Period Upon Disability or Death. Notwithstanding the
provisions of Section 5(e), any option granted under the Plan may be exercised,
to the extent then vested an exercisable, by an optionee who becomes disabled
(within the meaning of Section 22 (e) (3) of the Code or any successor provision
thereto) while acting as a director of the Company, or may be exercised, to the
extend then exercisable, upon the death of such optionee while a director of the
Company by the person to whom it is transferred by will, by the laws of descent
and distribution, or by written notice filed pursuant to Section 5 (h), in each
case within the period of one year after the date the optionee ceases to be such
a director or reason of such disability or death; provided that no option shall
be exercisable after the expiration of nine years from the date of grant.
(g) Exercise Procedure. Options may be exercised only by written notice
to the Company at its principal office accompanied by payment in cash of the
full consideration for the shares as to which they are exercised.
(h) Exercise by Representative Following Death of Director. A director,
by written notice to the Company, may designate one or more persons (and from
time to time change such designation) including his legal representative, who,
by reason of the director's death, shall acquire the right to exercise all or a
portion of the option. If the person or persons so designated wish to exercise
any portion of the option, they must do so within the term of the option as
provided herein. Any exercise by a representative shall be subject to the
provisions of the Plan
6. ASSIGNMENTS
The rights and benefits under the Plan may not be assigned except for
the designation of a beneficiary as provided in Section 5.
<PAGE>
7. EFFECTIVE DATE AND TIME FOR GRANTING OPTIONS
(a) The Plan shall become effective on July 1, 1997 as adopted by the
Board of Directors.
(b) All options for shares subject to the Plan shall be granted, if at
all, not later than ten years after the approval of the Plan by the Company's
shareholders.
8. LIMITATIONS OF RIGHTS
(a) No Right to Continue as a Director. Neither the Plan, nor the
granting of an option nor any other action taken pursuant to the Plan, shall
constitute or be evidence of any agreement or understanding, express or implied,
that the Company will retain a director for any period of time.
(b) No Shareholders' Rights for Options. An optionee shall have no
rights as a shareholder with respect to the shares covered by his options until
the date of the issuance to him of a stock certificate therefor, and no
adjustment will be made for dividends or other rights (except as provided in
Section 9) for which the record date is prior to the date such certificate is
issued.
9. CHANGES IN COMMON STOCK
(a) If the outstanding shares of Common Stock are increased, decreased
or exchanged for a different number of kind of shares or other securities (other
than the stock split approved by the Board on the same date as the initial
adoption of this Plan), or if additional shares or new or different shares or
other securities, through merger, consolidation, sale of all or substantially
all of the assets of the Company, reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split or other
distribution with respect to such shares of Common Stock, or other securities,
an appropriate and proportionate adjustment will be made in (i) the maximum
number and kind of shares reserved for issuance under the Plan, (ii) the number
and kind of shares or other securities subject to then outstanding options under
the Plan and (iii) the price for each share subject to any then outstanding
options under the Plan, without changing the aggregate purchase price as to
which such options remain exercisable. No fractional shares will be issued under
the Plan on account of any such adjustments.
(b) In the event that the Company is merged or consolidated into or
with another corporation (in which consolidation or merger the shareholders of
the Company receive distributions of cash or securities of another issuer as a
result thereof), or in the event that all or substantially all of the assets of
the Company is acquired by any other person or entity, or in the event of a
reorganization or liquidation of they Company, all stock options granted under
this Plan to the Director shall become immediately vested and exercisable and
shall continue to be exercisable for a period of one (1) year
10. AMENDMENT OF THE PLAN
The Board of Directors may suspend or discontinue the Plan or review or
amend it in any respect whatsoever; provided, however, that without approval of
the shareholders of the Company no revision or amendment shall change the number
of shares subject to the Plan (except as provided in Section 9), change the
designation of the class of directors eligible to receive options, or materially
increase the benefits accruing to participants under the Plan.
11. NOTICE
Any written notice to the Company required by any of the provisions of
the Plan shall be addressed to the Treasurer of the Company and shall become
effective when it is received.
12. GOVERNING LAW
The Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the Commonwealth of Virginia.
<PAGE>
REVOCABLE PROXY
NETWORK IMAGING CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints James J. Leto and Jorge R. Forgues, and
each of them individually, each with full power of substitution, as the lawful
proxies of the undersigned and hereby authorizes them to represent and to vote
as designated below all shares of common stock, $0.0001 par value per share
("Common Stock"), of Network Imaging Corporation ("Company") that the
undersigned would be entitled to vote if personally present at the Annual
Meeting of Stockholders of the Company ("Annual Meeting") to be held on
Thursday, June 11, 1998, at 9:00 a.m. at the Company's headquarters at 500
Huntmar Park Drive, Herndon, Virginia 20170, and at any adjournment or
postponement thereof.
The undersigned acknowledges the receipt of the Notice of Annual Meeting
of Stockholders and Proxy Statement for the Annual Meeting. All other proxies
heretofore given by the undersigned to vote shares of Common Stock are expressly
revoked.
NETWORK IMAGING CORPORATION
500 HUNTMAR PARK DRIVE
HERNDON, VIRGINIA 20170
1. Election of Directors:
Nominees: John F. Burton James J. Leto
C. Alan Peyser Robert P. Bernardi
Robert Ripp
FOR [ ] WITHHOLD AUTHORITY [ ]
(Instruction: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name to the list at right.)
2. Approve the issuance of shares of the Company's Common Stock issuable in
connection with the Company's Series L Convertible Preferred Stock, on exercise
of warrants to purchase shares of Common Stock at an exercise price of $1.00 per
share and on exercise of warrants to purchase shares of Common Stock at an
exercise price of $1.00 per share under Nasdaq Rule 4460(i)(1)(D).
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. Approval of the adoption of the Network Imaging Corporation Amended and
Restated 1997 Director Stock Option Plan.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. Approval of an amendment to the 1994 Key Employee Incentive Stock Option Plan
to increase the number of shares subject to the Plan.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. Ratification of the selection of Ernst & Young LLP as the Company's
independent auditors for 1998.
6. To transact such other business as may properly come before the meeting.
The undersigned acknowledges the receipt of the notice of the meeting of
stockholders and of the related proxy statement.
Signature________________________________ Date__________________________
Signature________________________________ Date__________________________
